REG-Capita PLC: Full Year Results 2021
10/03/2022 07:15
Capita plc
Full Year Results 2021
Summary
A year of significant change with the transformation of Capita now complete:
we have established a platform to drive sustainable improving financial
performance whilst continuing to strengthen the balance sheet
New, simpler structure
Delivering benefits from simplicity, focus and efficiency
* Two core divisions focused on public and private sector digital business
process services
* More client-focused to drive revenue; new operating model to drive
efficiency
* Third division of non-core businesses that will be mainly disposed of in
2022
Growth
* Continuing to see the benefits of strong operational delivery and improved
reputation * Won £3.8bn of total contract value in 2021, a 31% increase vs
2020 (£2.9bn)
* Renewal rate of 93%, including contracts with Ministry of Justice, two
European telecoms clients and major UK financial services institution
* Order book increase for the first time since 2017; book to bill at 1.2x
(2020: 0.9x)
* Secured £312m through extensions and incremental scopes of work with
Transport for London, Defence Fire and Rescue, Department for Work and
Pensions
* Strong unweighted pipeline of £9.4bn in 2022; year-to-date we have won
almost £700m TCV
* Good start to 2022 in Experience with £456m five-year BBC TV licensing
extension announced in February
Strengthening the balance sheet and reducing financial obligations
* Disposals programme has exceeded its £700m target, ahead of schedule
* Structurally lower debt: pre-IFRS 16 net debt £431m (2020: £569m);
pre-IFRS 16 net debt: adjusted EBITDA 1.7x (2020: 2.4x)
* Planned material further reduction in debt in 2022
Financial results
* Delivered adjusted revenue(1) growth for the first time in six years.
Revenue increased 0.4% to £3bn * Public Service division had a strong year
and grew by 10.8%, Experience declined by 9.4% reflecting previous contract
losses, Portfolio declined by 0.3%
* Major contract wins and extensions in both core divisions: Royal Navy, Job
Entry Targeted Support scheme, RSPCA
* £88m increase in adjusted profit before tax(1) from stable revenue and
benefit of cost savings, offsetting contract losses and general cost increases
* Reported profit before tax of £286m (2020: loss of £49m) as profits on
disposal offset systems write down and onerous contract provision
* Adjusted free cash flow(1) of £78m (2020: £170m); final year of major
below-the-line cash commitments including £328m related deferred VAT, pension
deficit contributions and restructuring costs
* £197m reduction in net debt to £880m (2020: £1,077m) funded by operating
cash flow and disposals
Year ended 31 December 2021
Financial highlights - continuing operations Reported 2021 Reported 2020 Reported YOY change Adjusted (1)2021 Adjusted (1)2020 Adjusted (1) YOY change
Revenue £3,182.5m £3,324.8m (4.3%) £3,008.5m £2,995.5m 0.4%
Operating profit/(loss) (£86.6m) (£32.0m) 171% £139.1m £51.1m 172%
Profit/(loss) before tax £285.6m (£49.4m) 678% £93.5m £5.4m 1,631%
EBITDA £222.3m £225.6m (1%) £295.1m £228.4m 29%
Cash generated from operations (£121.3m) £434.2m (128%) £185.4m £295.2m (37%)
Earnings/(loss) per share 13.33p (0.41)p 3,351% 1.61p 2.41p (33%)
Free cash flow (£237.1m) £303.8m (178%) £78.1m £170.3m (54%)
Net debt (£879.8m) (£1,077.1m) £197.3m (£879.8m) (£1,077.1m) £197.3m
Outlook
* In 2022 we expect revenue growth built on strong contract performance in
2021, a growing pipeline of new business in both Public Service and Experience
and recovery in transactional businesses from Covid-19
* Profit margins expected to reduce slightly in 2022 reflecting impact of
prior year contract losses and closed book Life & Pensions in Experience,
evolution of Army recruitment contract in Public Service and investment in
recruitment and training offset by profit from revenue growth and cost savings
from the new structure
* Improving cash conversion, reduced one-off payments and recovery in
transactional businesses to drive positive free cash flow; disposals
continuing to strengthen the balance sheet and materially reduce net debt
* Medium term outlook for the core Group of mid-single digit revenue growth,
high single digit EBITDA margins with cash conversion of 70% to 80% to drive
positive sustainable free cash flow; strong balance sheet
Jon Lewis, Chief Executive Officer said:
“It was a year of significant change at Capita as we completed our
transformation by establishing a platform for growth, while continuing to
strengthen the balance sheet.
“We grew our revenue in 2021, reversing six years of declines, and expect
this trend to continue to improve, while we also expect to deliver positive
sustainable free cash flow in 2022.
“Capita now has the foundations in place to deliver sustainable improving
financial performance; our new simplified divisional structure will deliver
significant benefits.
“We also continue to prioritise being a purpose-led, responsible business.
We have made good progress with diversity, will continue to focus on driving
investment in our people, and have committed to a net zero emissions plan.
“None of this would have been possible without our people, whom I would like
to thank for all their hard work, commitment and professionalism.”
(1) Refer to alternative performance measures (APMs) in the Appendix.
Investor presentation
A presentation for institutional investors and analysts hosted by Jon Lewis,
CEO and Tim Weller, CFO, will be held at 65 Gresham Street, London EC2V 7NQ at
09:00am UK time, 10 March 2022. There will also be a live audio webcast (link
below) which 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.
Participant webcast:
https://webcast.openbriefing.com/capita-march22/
For further information:
Capita
Stuart Morgan, Investor Relations Director T +44 (0) 7989 665 484
Capita press office T +44 (0) 20 7654 2399
LEI no. CMIGEWPLHL4M7ZV0IZ8
Chief Executive Officer's review
Summary
2021 was a year of significant change at Capita as we completed our
transformation and established the platform for long-term success. We now have
a foundation in place to deliver sustainable improving financial performance
and look forward to delivering this as we move into 2022 and beyond.
At the same time, we will continue to prioritise being a purpose-led,
responsible business; this is our licence to operate. We are pleased to have
maintained a high customer net promoter score (NPS). However, our employee NPS
was disappointing, reflecting the degree of change in the business and
continued impact of the pandemic, and we have a comprehensive plan in place to
address this. We have also made good progress with diversity and we have
committed to a net zero plan.
In August, we established our new, simplified divisional structure which will
deliver significant benefits in the future: two core divisions that focus on
public and private sector digital transformation and technology outsourcing
services; clarity of focus on our markets and clients; benefits expected from
greater operational efficiency; and a third division of non-core businesses
that will be disposed of. The proceeds from these disposals will be used to
continue to strengthen our balance sheet.
Our contract delivery, which is the foundation for the turnaround and revenue
growth, has remained strong. We fixed the last of our legacy problem
contracts, resolving both Primary Care Support England (PCSE) and Electronic
Monitoring transformation issues in the year. Client trust in us is far better
than when we started the transformation, and we are winning new scopes of work
as a result.
Our ability to deliver sustainable revenue growth is fundamental to our
long-term success. We delivered modest revenue growth in 2021, reversing six
years of declines, and expect this trend to continue to improve. We have high
retention rates, are winning incremental scopes of work with our existing
clients and are starting to win business with new clients. Our weighted
pipeline of opportunities for 2022 is substantial and broad based.
During 2021, we took action to reduce operating and administrative costs by a
further £123m and, over the transformation, the total amount of cost savings
has been more than £425m. The main areas have been in operational excellence
– “doing things better, doing things once” – as well as in more
efficient management structures, property and Group IT and procurement
savings. There is more to come as we focus on the benefits of standardisation
and efficiency in each division and in a lean Group overhead structure.
We continued to strengthen the balance sheet and successfully completed a
number of key disposals exceeding our target of £700m of proceeds which has
enabled us to address our funding commitments in 2021 and 2022. We will
continue to strengthen the balance sheet with further disposals, as well as
improving the pension fund position.
The transformation is now finished. We have a simpler and more focused
structure in place, strong positions in growing markets and a structurally
lower cost base. We are continuing to strengthen the balance sheet. The
platform is in place to grow revenue, increase margins and cash conversion and
to drive positive free cash flow.
Financial results
Adjusted revenue(1) at Capita has grown for the first time in six years,
albeit modestly, to £3,008.5m (2020: £2,995.5m). This was underpinned by
some major contract wins, in particular the Royal Navy training contract and
in the Public Service division as a whole. These offset the impact of contract
losses, mainly from 2020, in the Experience division, as well as the net
revenue loss of Covid contracts won in 2020. We also expected further benefits
from a recovery in our Covid-affected businesses, such as Agiito (our travel &
events business), but lockdowns and slow market recovery affected this
significantly.
Adjusted profit before tax(1) increased by £88.1m this year to £93.5m (2020:
£5.4m). This principally reflected the benefit of transformation cost
savings, new revenue and the unwind of the prior year holiday accrual,
offsetting revenue losses and the reinstatement of the employee bonus scheme.
Reported profit of £285.6m (2020 loss: £49.4m) benefited significantly from
profits on disposal of Education Software Solutions (ESS) and AXELOS in
particular, offsetting the write down of our historical finance systems asset
as well as onerous contract provisions in our closed book Life & Pensions
business.
Cash generation is a key metric for the business. Our adjusted free cash
flow(1) was £78.1m (2020: £170.3m) but we also had to fund £328.2m of
additional cash commitments, including £104.1m of VAT deferred from last
year, pension payments of £155.5m and our final year of below the line
restructuring payments of £68.6m. Reported free cash outflow in 2021 of
£237.1m (2020 inflow: £303.8m) reflects these additional payments.
We continued to strengthen the balance sheet during the year, with net debt
reducing to £879.8m (2020: £1,077.1m) funded mainly through our disposal
programme. In early 2022 we reached our total of £700m of target proceeds,
ahead of schedule, enabling us to meet £440m of debt maturities in 2021 and
2022. More broadly we are also targeting a reduction in our other financial
obligations, including further pension deficit contributions and reducing our
lease commitments through our property footprint reduction.
Purpose
Our purpose – to create better outcomes – is our licence to operate in our
markets and therefore a fundamental part of our strategy, with customer NPS
and employee NPS scores linked to remuneration, as well as being a driver of
revenue through the social value and net zero components of government
contracting.
The customer NPS remains high at +29 points, albeit slightly down on last year
(+32), which we believe is more a reflection of the exceptional work done in
2020 to support our clients through the early days of Covid and moving to
remote working. We continue to strive to delight our clients.
Our employee NPS declined this year by 22 points. While we expected some
decline as a result of the scale of the transformation activity in the year,
this was more pronounced than we had anticipated and, in an already
challenging labour market, represents a key challenge in engagement and
retention. While employees felt positive in their immediate surroundings and
activities, there were strong views that we needed to focus more on the
longer-term opportunities at Capita. We are addressing this through plans for
better communication and engagement, clearer investment in training and
development and implementing a more attractive employee value proposition.
This will be a significant area of focus in 2022.
Our plans to increase the diversity of our people recognises the need to
represent the communities that we work in, our desire to attract and retain
high quality talent, and to broaden the range of thinking and innovation in
the business. Our Board has increased its diversity, particularly with the
appointments of Neelam Dhawan and Nneka Abulokwe, and 44% of the Executive
Committee is now female, with 22% Black, Asian and minority ethnic
representation. But there is still more to be done throughout the
organisation.
In 2021 we set out an ambitious plan to take us to net zero by 2035 ahead of
the UK Government’s target of 2050. Underpinned by science-based targets,
our three-phased approach aims to see us reach operational net zero by 2025
and operational and business travel net zero by 2030. This will involve
reducing business travel emissions and transitioning our fleet to electric
vehicles by 2032. We will work closely with our suppliers and over 50% of our
supply chain has now signed up to science-based targets. We reduced our Scope
1 and 2 Emissions by 42% in 2021 compared with our 2019 base line, largely due
to the impact of Covid.
Looking at other stakeholders, our supplier metrics have also improved, with
98% of all suppliers being paid within government guidelines of 60 days, a
three percentage point increase from last year.
Winning business and growing revenue
Our markets
We operate in the outsourced digital transformation, business process services
and technology markets, in the public and private sectors, which are large and
growing. The markets that we address are growing at around 5% per annum, with
niches growing at more than double that rate.
Both core divisions, Public Service and Experience, have strong positions in
their markets, as the UK Government’s largest IT outsourcing supplier and as
the UK’s leading customer service provider respectively. Our ability to win
work at scale and our insight into our clients’ systems, processes and
end-customers after many years of experience is what drives our leading
positions in those markets. We collaborate with some of the world’s leading
providers of technology, such as Microsoft, Salesforce and Amazon Web Services
(AWS), as well as developing our own software and solutions which enable us to
deliver the best customer service outcomes.
Operational delivery supporting contract retention and new business
That our improvement in operational performance is once again a core strength
of the business has been a fundamental part of the transformation,
establishing our clients’ trust and winning new revenue. We now have a
reputation for strong delivery with key growth clients, such as Transport for
London (TfL) for whom we delivered a significant cloud migration and
additional scale of existing platforms.
Our operational KPIs have remained high across the business. Our day-to-day
service level KPIs stayed at c.99% through the year and our IT infrastructure
is now significantly more reliable, with critical incidents down by 88% since
January 2018 and our average resolution time 29% quicker than the industry
benchmark.
We have now finished fixing failing legacy contracts from when we started the
transformation, with PCSE and Electronic Monitoring resolved in the year as
planned.
The return on this investment, apart from the improvement in cash flow and
profit, is that we have won new scopes of work with many of our clients where
we historically had delivery issues: the extension of the British Army
Recruitment (RPP) contract; the Ultra-Low Emission Zone with TfL; the award of
the Turing scheme administration with the Department for Education; and
further work with the Ministry of Justice.
Our win rate on contract renewals remains high at 93%, reflected in the high
customer NPS scores, and we have seen the annual revenue attrition on our
contract base now reach a more normal 3% per annum, compared with almost
double that in recent years. Overall, we have a more solid revenue foundation
on which to build growth opportunities.
Winning revenue
We are now starting to deliver the contract wins that will underpin that
revenue growth, as we leverage scale and client insight, alongside our
re-established operational reliability. The focus of the core divisions into
market verticals means that we can now bring a range of products and
capabilities together to focus on specific client needs, which is a
significant change for us. The benefit of this approach is already evident in
the recent successes at the Ministry of Defence, and within our Financial
Services and Telecoms verticals.
In 2021 we won £3.8bn of total contract value (TCV), an increase of 31% on
2020's £2.9bn. This included a small number of large contracts (Royal Navy,
two European telecoms contracts and two financial services clients) but just
under 60% of the TCV was won in contracts valued under £50m. The bulk of the
TCV was won in the Public Service division which saw TCV growth of 54% year on
year, while the Experience division was broadly flat. The Portfolio division
grew strongly with an increase of 12% in TCV to £572m (2020: £512m). The
in-year benefit of the total contract wins was £1,208m, 10% higher than 2020
with a comparative decline in Experience due to the one-off Covid work secured
in 2020 offsetting new work in Public Service. Within the divisions, the
Public Service book to bill was 1.7x (2020 1.3x) reflecting the balance of
business won, while Experience was 0.7x (2020 0.7x) partly reflecting the
delay of some major contracts like the BBC.
In the second half we won some important renewals in both divisions, including
Personal Independence Payments (PIP) for the Department for Work and Pensions
(DWP), an extension to the Standards and Testing Agency (STA) contract with
the Department for Education, and contracts with the RSPCA, Thames Water and a
global FMCG client. We also secured new scopes of business with existing
clients such as in the Defence Fire and Rescue (DFRP) contract, surface
transportation for TfL and an extension to our successful Job Entry Targeted
Support (JETS) programme in Scotland. Our focus on new clients started to
produce promising results towards the end of the year, with a recent contract
award from the Fintech company, Trade Republic, with more in the pipeline for
2022. Since the year-end we have also won a £456m TV licensing contract
extension with the BBC.
Our order book grew to £6.1bn (2020: £5.9bn). Group book to bill at the
year-end was 1.2x, slightly less than we expected after the BBC extension
moved into 2022, but still indicating a strong base for future revenue growth.
Building a pipeline for future revenue growth
Looking forward, we are now better structured to continue to grow revenue,
bringing together our strong market positions, new client-facing structure and
improving client offerings. As we drive greater efficiency from our new
divisional and Group structure, we will also become more competitive. Finally,
we will continue to leverage the ‘consult, transform and deliver’ model
that is expected to secure more opportunities for the Group, as well as
improving the margin mix of the business we execute.
We have continued to build our pipeline of new opportunities. The 2022
unweighted pipeline is £9.4bn, a 7% increase on 2021 when adjusted for the
Royal Navy training contract, which was signed on 11th January 2021. The 2022
weighted TCV pipeline for the year is £2,501m, 42% higher than at the same
point in 2021 (2020: £1,758m) excluding the Royal Navy training contract.
This is split broadly equally between Experience (£1,320m) and Public Service
(£1,130m), showing that significant opportunities exist in both divisions
and, based on our conversion rate last year, gives us an encouraging outlook
for 2022.
Post year-end we have closed a number of contracts that we had expected in
2021, including the BBC TV licensing extension. Other significant bids
expected in the first half of 2022 are for a financial services company, NHS
England and the DWP.
Operational excellence, efficiency and scale to drive margins
Reducing cost
Over the course of the transformation, we have made cost savings of more than
£425m to bring the cost base in line with a smaller, more efficient and more
focused business. Savings in 2021 totalled £123m, which were again focused on
operational excellence, taking out spans and layers of management as we
integrated businesses and operations, and savings in the overhead and Group
functions. These cost savings were a major driver of our profit improvement in
2021.
Our operational excellence programme is focused on process and productivity
improvement and will be enhanced by benefits derived from our new structure,
including standardisation and best practice experience from around the Group,
as well as deployment of digital services and robotic process automation.
We made procurement and IT savings of £28m through consolidation and
benchmarking suppliers, negotiating improved terms, leveraging scale benefits
and using more data-driven decision-making.
Reducing the size of our property portfolio continues to be a major driver of
cost savings in the business. During the year, we realised £26m of cost
savings as we closed 55 properties, on top of the 49 that were closed in 2020,
reducing the associated lease obligations by £49m. Capita has now reduced its
property footprint by 25% over the two years.
Completing the transformation and implementing our new leaner structure
allowed for savings in the Group overhead and functions to be delivered in
2021. Ongoing savings are planned through increased productivity and reducing
internal structural inefficiencies, for example through further property
rationalisations and materially reducing the number of legal entities in the
Group.
Managing inflation
As for most other businesses in the UK, inflationary pressures increased in
2021, alongside increasing levels of staff attrition. This was experienced
across all our businesses but in particular for IT professionals in India,
consultants and for our call centre staff in the UK.
Our first priority has been to invest in our people. A fully staffed, engaged
workforce delivers better service quality, additional revenue opportunities
and lower staff turnover. This means investment in recruiting, training and
development as well as better employee engagement and wage increases.
As a contracting business we are used to dealing with inflation and two thirds
of our client contracts include terms that allow us to pass on inflationary
costs. Taking into account transactional revenue (c.12% of our group revenue,
66% of which will be disposed through the Portfolio division), as well as
contracts that will end or be renegotiated in the next 18 months, the unhedged
exposure to inflation remains relatively small.
As a result, we are confident that the profit impact of inflation can be
mitigated over time, with no material impact to profit expected in 2022.
Longer term, we see employee wage pressures at our clients as a potential
driver for further outsourcing and use of digital technology.
Strengthening our balance sheet and delivering positive free cash flow
Reducing debt
One of the biggest priorities in the transformation was to reduce our
financial obligations to a more sustainable level.
In the past four years we have reduced gross debt by £1.1bn, made over £300m
in pension deficit funding contributions and addressed our organisational
deficit, including expenditure on IT equipment and structure, fixing legacy
contracts, and investing in systems.
Last year we announced a business disposal programme targeting to raise £700m
to meet the significant additional cash commitments in 2021 of deferred VAT,
restructuring and pension deficit payments, and to ensure sufficient liquidity
to pay debt maturities in 2021 and 2022. That target has now been achieved
ahead of schedule with the agreed sale of Trustmarque, within the Technology
pillar, on 28 January 2022 meaning we have realised total disposal programme
proceeds of around £750m.
We will continue our plan to reduce debt through the disposal of the non-core
Portfolio division. Excluding the Technology pillar, the division now has
around £338m of revenue, £27m of profit, before Group overhead allocation,
and £30m of operating cash flow on a 2021 proforma basis. This includes the
Agiito business that in 2021 was still loss-making and cash-negative as a
result of the impact of Covid.
Since the beginning of 2022 we have launched processes to dispose of two
further pillars within the Portfolio division, representing around £188m of
revenue and £20m of profit, before Group overhead allocation on a 2021
proforma basis.
We also continue to ensure our other stakeholders are fairly treated. As a
result of our pension deficit payments and investment returns, our pension
scheme funding target is slightly ahead of where we expected. Some of the
disposal proceeds will be used to accelerate future funding payments so that
we expect the Group’s pension scheme to be self-sufficient as part of the
next actuarial review.
Finally, as noted above, our property portfolio rationalisation has also led
to the reduction in our lease liability which at 31 December 2021 was £424m,
a 10% reduction in the year (2020: £473m). This is expected to fall further
as we reduce and renegotiate lease durations and dispose of Portfolio
properties.
Targeting sustainable free cash flow
Now that we have completed the transformation, we are targeting the delivery
of growing, positive sustainable free cash flow, starting in 2022.
Cash conversion in the divisions is targeted to improve as deferred income
balances on our legacy transformational contracts roll-off and we continue to
improve our cash management processes.
Our adjusted free cash flow(1) in 2021 reflected the unwind of 2020 cash
preservation initiatives to protect the business from the impact of Covid-19
and reported free cash in the period reflected expenditure on the final year
of the transformation and the repayment of VAT deferred from 2020. These
below-the-line commitments will substantially disappear in 2022.
Over the next couple of years, we also expect the pension deficit payments to
reduce materially, as the pension scheme transitions to self-sufficiency.
Our lease payments, net of receipts, are also expected to decrease in line
with our property footprint, having already reduced from £95.2m in 2020 to
£82.1m in 2021.
Outlook
Year ending 31 December 2022
In 2022 we expect to deliver revenue growth, positive sustainable free cash
flow and to continue to strengthen the balance sheet.
Our revenue growth target is built on strong contract performance in 2021, our
order book, lower attrition, a growing pipeline of new business in both Public
Service and Experience, as well as ongoing recovery from Covid-affected
businesses.
Notwithstanding the margin benefit from revenue growth and the flow through of
the cost benefits from the divisional restructure implemented in 2021, we
expect profit margins to reduce slightly in 2022. This reflects the full year
impact of prior year contract losses and the structural decline in closed book
Life & Pensions in Experience, operational changes in the Army recruitment
contract in Public Service, as well as the cost of recruiting and training
staff to support our growth.
Next year we will include restructuring costs, pension deficit contributions
and VAT payments within our adjusted free cash flow(1). With higher
cash-backed profit and the significant decrease in the payments noted above,
we expect to deliver positive sustainable adjusted free cash flow(1) in 2022.
As we continue to make disposals we expect net debt to decrease materially.
Medium term
Beyond 2022, we expect core Capita to continue to build on the platform we
have established today.
We will target revenue growth at least in line with the mid-single digit range
of our core markets and to deliver high single digit Group EBITDA margins. We
expect to grow free cash flow as cash conversion increases to between 70% and
80% and additional cash commitments fall away.
We will maintain a prudent approach to our capital structure and will target a
leverage ratio of around 1x net debt:EBITDA on a pre-IFRS 16 basis.
(1) Refer to alternative performance measures (APMs) in the Appendix.
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.
Public Service
Public Service is the number one strategic supplier of business process
services (BPS) and technology services to the UK Government.
We are a socially responsible supplier to government that uses applied digital
transformation and BPS to improve the productivity of government operations
and the citizen experience of public services.
We believe that innovative, purpose-driven, quality public services are
critical to delivering safer, greener and healthier communities.
Public Service is structured across five market verticals: Education &
Learning; Local Public Services; Health and Welfare; Defence, Fire & Security;
Local Public Services and Justice, Central Government & Transport; as well the
non-consolidated Smart DCC subsidiary.
We use a ‘consult-transform-deliver’ matrix operating model underpinned by
a strong digital capability.
Our markets and growth drivers
Government spending in the UK with private sector organisations is
c.£110bn(2) and it is estimated(3) that the Software and IT Services market
is valued at c.£13.3bn. Our current core addressable market is around
c.£12.5bn. The BPS element of that, comprising both the business process
outsourcing (BPO) and digital BPS sub-segments, is growing at c.5% per
annum.
The BPS market is shifting quickly towards being more digitally and
data-enabled and cloud-based as the UK Government is increasingly looking to
leverage technology, digital products and emerging capabilities.
Data analytics, predictive and artificial intelligence, robotic process
automation, cloud and cyber protection are all being deployed to deliver
improved service through technology transformation and delivery, using
repeatable standardised technology and methodologies, technology stacks,
partner eco-systems, tools and intellectual property.
As a result, BPS that is heavily dependent upon technology enabled
transformation (namely digital BPS) is growing at over 10% per annum.
Public Service has a market share of around 15%(2) in software & IT Services
(SITS) and around 30%(2) in the UK Government BPS.
Public Service competes against a number of providers across the spectrum of
services that we provide, including Atos, Sopra Steria, CGI, TCS, Cognizant,
Accenture, DXC Technology, BJSS, Cap Gemini, Kainos, Serco and Maximus.
Our strategy
Our strategy is to be a purpose-led, socially responsible business that uses
applied digital transformation and BPS to improve the productivity of
government operations and the citizen experience of public services.
Our near-term aim is to consolidate Public Service’s position as market
leader in UK public sector BPS through selectively addressing attractive
opportunities in BPO (eg DFRP, PIP, RPP) and digital BPS (JETS, TfL,
Department for International Trade).
The Public Service division is well positioned for growth, benefiting from its
breadth of coverage, domain understanding, scale, and sales and delivery
capability in our respective verticals, each of which presents significant
opportunity. This is already evident in our strong recent track record of
contract wins, scope increases on our current contract base and high renewal
rates.
Our digital capability includes design experience, data mastery, a modern
software engine and an automation toolkit that is combined with technology
partners such as Microsoft Azure where it makes sense to use them. We are
building a standardised platform, where we can use our process insight to
present a ‘digital first’ solution for our clients’ needs. Recently we
built our Grantis solution on this proposition, developing a platform that has
been successfully integrated on a contract with the Department for
International Trade and we believe there are a number of further applications
for the product.
Investing in growth
Capita’s strong competitive edge comes through our deep knowledge of the
public sector and an ability to deliver complex service and technology
transformation and integration projects.
By bringing together all our public sector activities into the new Public
Service division, we are better able to sell the full range of our services
via an integrated strategic account management approach; for example, better
combining our Capita One software solution with our strong presence in local
government.
We have an effective team that can leverage our insight with an increasingly
standardised approach to growing pipeline and disciplined bidding. We continue
to use our consulting capability to identify major market opportunities and to
broaden Capita’s client partnering model.
Alongside large one-off contracts we are beginning to access more regular
pools of revenue through our access to government frameworks, using a single
team and better account management, consulting and partnership. Over the past
18 months we have successfully been included on over 30 frameworks worth
£25bn over the next five years.
At 31 December 2021, the total unweighted pipeline was £8,149m, a decrease of
£3,855m from December 2020, with £2,422m of TCV won, including the Royal
Navy training contract, so the book to bill at year end was 1.7x (2020: 1.3x).
Weighted pipeline was £1,305m (2020: £2,272m, £1,347m excluding the Royal
Navy training contract). We renewed 89% of contracts that we bid for, while
our win rate on new opportunities was 54%. The order book at the year-end was
£3,286.3m an increase of £549.7m since 31 December 2020.
Post year-end we secured a new scope of work with the Royal Navy. Significant
upcoming bids in 2022 are for work with NHS England, the DWP and the London
Borough of Barnet.
Cost and operational excellence
We see good margin and profit opportunity in the division over the next few
years.
We successfully embedded the Public Service delivery model in August 2021 and
since then we have maintained consistently high levels of client service,
improving contract financial performance and creating additional opportunities
on contracts.
As well as the revenue benefits noted above, there are also significant
efficiencies from our divisional standardised processes and use of the
Technology and Software Solutions (TSS) shared service function within Capita.
Operational excellence and efficiency have continued to improve profitability
in the division.
We also continued to take structural cost out of the division, with £32m
saved in 2021. This was from eliminating duplication within the new structure,
lower divisional overhead, and property savings due to a review of office
usage, with reductions in footprint across two major sites.
Throughout the year there was continued emphasis on our remaining historically
problematic contracts:
* In May we completed the last legacy transformation element of the Primary
Care Support England (PCSE) contract. The GP payments and pensions
transformation successfully went live, enhancing efficiency and consistent
operational delivery.
* We continue to deliver the day-to-day monitor service on our Electronic
Monitoring Services (EMS) contract with the Ministry of Justice and during the
year we mutually agreed a conclusion to the EMS transformation project.
* On the Recruiting Partnering Project (RPP), extended in December 2020, we
achieved 100% of the recruitment target for regular soldiers and officers for
the year and expect to reach full operating capability with our cloud
conversion project in 2022.
As a result we have now finished fixing the previously failing legacy
contracts.
The major contracts within the division delivered an overall cash inflow in
the year, which shows our continual progress and strong management of contract
delivery.
We have also executed on expectations with new major transformational
contracts, with key service commencement dates met on the newly won Royal Navy
training contract with no service credit deductions incurred. We continue to
win additional expansions of our services on the DFRP contract due to our
strong contract delivery. In addition, the ultra-low emission zone contract
(ULEZ) with Transport for London (TfL) went live on schedule in October 2021.
Financial Performance
Divisional financial summary 2021 2020 % change
Adjusted revenue (1)(£m) 1,410.4 1,273.0 10.8%
Adjusted operating profit (1)(£m) 98.3 12.9 662.0%
Adjusted operating margin (1)(%) 7.0% 1.0%
Adjusted EBITDA (1)(£m) 148.3 87.7 69.1%
Adjusted cash generated from operations (1)(£m) 120.0 95.6 25.5%
Order book (£m) 3,286.3 2,736.6 20.1%
Adjusted revenue(1) increased by 10.8% to £1,410.4m following significant
contract wins including the Royal Navy training contract, our first full year
of DFRP and commencement of the JETS scheme. There was recovery in some of the
transactional parts of Local Government and Capita One, as Covid restrictions
eased and activity levels increased. We also benefited from Covid-related
projects in our Intelligent Communications business and the one-off deferred
income release from the conclusion of the EMS transformation project. The
impact of contract losses significantly reduced in 2021, mostly relating to
the local government sector.
Adjusted operating profit(1) improved by 662.0% to £98.3m, reflecting the
year-on-year uplift from 2020 impacts such as the first-year loss on DFRP and
contract-related provisions and impairments. There was significant improvement
in contract financial performance, mainly from tight contract cost control.
There have been continued savings from successful cost out programmes within
operational efficiency and procurement as well as from the new structure and
service delivery model.
Adjusted cash generated from operations(1) increased by 25.5% to £120.0m
reflecting the improved EBITDA performance of the division, partially offset
by the unwind of prior year advanced receipts on DFRP and contract investment
following the commencement of the Royal Navy training contract.
Outlook
We expect the revenue growth rate in Public Service to normalise as the Royal
Navy training contract annualises towards mid-single digits in line with the
market, delivered by a strong pipeline of opportunities, winning more from
current and new frameworks and major contract renewals.
In the medium term, we expect to target high single digit to low double digit
EBITDA margins as we continue to win work at appropriate rates of return and
as we drive ongoing operational, structural and overhead efficiency.
1 Refer to alternative performance measures (APMs) in the Appendix
2 Tussell
3 TechMarketView
Experience
Experience is one of Western Europe’s leading customer experience
businesses. It is the market leader in the UK and ranks third in EMEA.
We are experts in designing, transforming and delivering frictionless
experiences for our clients and their customers. Our services include
omni-channel contact centre management, speech analytics, social media
analytics, data and insight, application development and robotics process
automation. We also have a strong position in regulated financial services
which requires robust systems and governance.
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
The global customer experience market is valued at more than £244bn(2) and is
expected to grow at around 5% between 2020 and 2024. Around 27% of the
customer experience market is currently outsourced, with half of that focused
in Telecoms, Media & Technology and Financial Services. Growth opportunities
still exist in these verticals, with further opportunities in other markets
and segments that we serve.
We are the largest provider of customer experience services in the UK and
Ireland with a market share of around 13%.
Our competitors in the customer experience segment are mostly global and
include peers such as Teleperformance, Webhelp, Concentrix and Majorel.
The Covid pandemic accelerated the rise in customer propensity towards
self-service and automation and in turn drove our clients’ strategies to
further digitise service offerings, as well as commit to the structural
benefits of agents working remotely.
Our strategy
Our experience in delivering customer experience services in certain
industries and geographies gives us the ability to understand our clients’
challenges and put together solutions based on our technology, insight and
digital platforms.
During the year we restructured Experience around market verticals and
horizontal value-add capabilities, to move to client-centricity in all
offerings. To drive our revenue opportunity, we have a new leadership team in
the verticals with significant experience in those markets, improving our
sales and marketing strategy and granularity of client offerings.
We deliver our services on both an on-shore and near-shore basis, with
delivery centres in the UK, Europe, the Middle East, India and South Africa.
This gives us access to specific skills and expertise (such as in languages or
IT skills) that can be delivered 24 hours a day at a competitive rate to our
clients. Significant leverage is available from this cost base as we grow our
revenues.
Our ambition is to provide best-in-class capabilities within an advanced tool
kit of services which can be tailored to client needs. This will use both
in-house and third-party technology, such as the assisted customer
conversation and augmented conversation technology which is now utilised on a
variety of contracts. Partnering with AWS, we have also developed a natural
language platform which improves tailored customer experiences and reduces
call handling times.
We are also focused on resolving the structural challenges facing the closed
book Life & Pensions business, which has declining revenue in a few
long-duration legacy contracts, on a high-cost platform. To mitigate the
impact we are focusing on service modernisation and identifying efficiencies
in our provision of services. The unit had revenues in 2021 of £199m,
adjusted profit before tax of £13m and negative free cash flow of £19m. We
continue to focus on our regulated businesses and growth areas in insurance,
finance, pensions and mortgages.
Investing in growth
The main focus of our investment continues to be in our consulting and
technology capability, providing advanced data and insight to support our
customer service agents, which we are starting to deploy for clients. We
continue to invest to ensure that our platforms are reliable, cyber-secure and
capable of flexing with surges in volume. We generated £100m of revenue from
contact centre support during the Covid pandemic as a result of our
reliability and scale.
Our strong day-to-day operational partnerships with our clients drove high
retention rates on contract renewal of 97%. However, we are targeting new
scopes of work with existing clients as well as working with new clients in
new areas such as FinTech where we recently signed a contract with Trade
Republic.
At 31 December 2021, the total unweighted pipeline was £5,510m, an increase
of £761m since 31 December 2020, with £842m of TCV won. A significant part
of the work won was for renewals and new scopes of work for existing clients.
Weighted pipeline at 31 December 2021 was £1,582m (2020: £932m).
The order book at year end was £2,271.8m, a decrease of £156.9m since 31
December 2020 as some sizeable deals moved to 2022, such as TV Licensing. As
noted above renewal rates remained strong at 97% on opportunities bid but
conversion of new opportunities was low at 14%. Winning work from new scopes
of work and new clients is a key area of focus.
Significant upcoming bids in 2022 are for a financial services motor financing
opportunity, a telecoms renewal and an insurance client renewal. Since the
year-end we have been awarded a renewal of the TV Licensing contract with the
BBC worth up to £456m over five years.
Cost and operational excellence
With the divisional structure now in place, we have opportunities to drive the
efficiencies that will make our offering more competitive in the market and
increase profit and cash flow in the division.
In 2021 we secured cost savings of £43m. During the year, we opened a single
shared service centre in the UK, which drove cost savings and efficiency
improvements. As we extend this work under the new structure, we expect to
derive additional benefits from consistency of planning processes and
resourcing, which is driving high-quality delivery.
Our operational delivery remains strong and, across 2021, we focused on
delivering a secure, stable and reliable service for our clients despite
challenges around Covid and lockdown arrangements in key geographies.
The pandemic resulted in high staff sickness levels in some geographies where
we had to develop robust plans to maintain service levels for the areas worst
affected. In South Africa we expanded our geographical footprint, opening a
new office in Durban to mitigate delivery challenges and strengthen new
skill-sets. We are now exploring opportunities in our existing geographies to
future-proof consistent delivery.
Financial performance
Divisional financial summary 2021 2020 % change
Adjusted revenue (1)(£m) 1,184.7 1,307.7 (9.4)%
Adjusted operating profit (1)(£m) 69.1 80.9 (14.6)%
Adjusted operating margin (1)(%) 5.8% 6.2%
Adjusted EBITDA (1)(£m) 141.5 142.2 (0.5)%
Adjusted cash generated from operations (1)(£m) 55.8 145.0 (61.5)%
Order book (£m) 2,271.8 2,428.7 (6.5)%
Adjusted revenue(1) declined by 9.4% to £1,184.7m as a result of attrition
from contract expiries and losses including Tesco Bank, Phoenix, VW Group and
First Group. There were continued planned volume decreases within the closed
book Life & Pensions business, and reductions in revenue following completion
of a number of Covid-19 and other projects. Wins in the period included
successes with a major telecoms company in Germany and our first full year
with Irish Water.
Adjusted operating profit(1) reduced by 14.6% to £69.1m, reflecting the
reduction in revenue and prior year one-off Covid-19 savings. This was offset
by continued successful transformational cost savings on our wider cost-saving
programme, as well as the year-on-year uplift from the 2020 mobilcom-debitel
contract asset impairment.
We received termination notices on our Co-operative Bank and Carphone
Warehouse contracts during the year, following both clients’ decision to
change their corporate strategy. The associated deferred income and contract
assets are now being released over the termination period; compared with the
previously assumed contract end dates on both contracts. There was a one-off
benefit from the net deferred income release and exit fees, to compensate the
Group for exit costs and future profit.
Adjusted cash generated from operations(1) reduced by 61.5% to £55.8m
following the unwind of cash preservation measures and timing of invoicing on
a telecoms contract in 2021.
Outlook
As we have previously highlighted, the Experience division is around 18 months
behind Public Service in its business improvement journey. Investment in
revenue growth allied to operational productivity and efficiency and
eliminating cash drag will drive profit and cash flow improvements in the
longer term.
We expect revenue to stabilise in 2022. Our revenue growth objective in the
medium term is to replicate that of our addressable markets, which will be
driven by our more client-centric business model. We will also look to target
higher-growth markets.
In the medium term, we expect to target high single digit to low double digit
EBITDA margins in the division. This reflects the near-term building of
revenue, delivering efficiencies in the operating cost base and reducing the
overhead, all while investing in our people and technology. As revenue growth
becomes more established, operating leverage will drive further margin
improvement.
1 Refer to alternative performance measures (APMs) in the Appendix
2 Everest
Portfolio
Portfolio comprises all our non-core businesses that are intended for
disposal. This includes businesses from our historical Specialist Services
division, as well as businesses transferred from other divisions in our
previous divisional structure.
Our markets and growth drivers
Portfolio includes a range of businesses serving public and private clients
across multiple markets and sectors, which are generally mature.
We enjoy strong market positions in many of the market vertical sectors we
operate in, with strong brands and positive client perception of our services.
Our strategy
The division comprises an enlarged portfolio of valuable but non-core
businesses for which Capita is not the best owner and which we intend to sell
at the appropriate time.
We have organised the division into ‘pillars’ comprising businesses with
similar characteristics which allows us to effect disposals more efficiently
and makes it easier to manage them in the interim. These pillars are
Technology, Property, People, Software, Business Solutions, Travel and the
FERA joint venture.
During 2021 we successfully completed the disposals of ESS, Capita Life &
Pensions (Ireland) and AXELOS. We also announced the disposals of Secure
Solutions and Services (SSS), our Speciality Insurance business and AMT-Sybex.
SSS and AMT-Sybex completed early in the new year.
Following the year end, we agreed the sale of Trustmarque (comprising the
businesses in our Technology pillar) for cash proceeds of c.£115m. In Q1, we
launched the disposals of the two further pillars. Combined these two pillars
generated £188m of revenue and £20m of profit before tax, before allocation
of Group overheads, in 2021.
The majority of the remaining businesses are expected to be disposed of in
2022, depending on Covid recovery and general market conditions.
Cost and operational excellence
Over the past two years, our businesses focused on maintaining excellent
service levels, despite the ongoing impact of the pandemic on a number of
pillars within the division. As a result, the division’s client NPS improved
for the third consecutive year.
In areas which continued to face challenging market conditions, we undertook
work to position the businesses better for new market conditions. Within
Agiito (our rebranded travel & events business), we focused on the efficiency
of the long-term operating model and in Enforcement we supported clients to
clear backlogs, which built up in the pandemic to ensure focus on future
volumes and local council needs.
We continued with our successful cost saving programme, delivering £18m of
cost reduction in the year.
Financial performance
Divisional financial summary 2021 2020 % change
Adjusted revenue (1)(£m) 413.4 414.8 (0.3)%
Adjusted operating profit (1)(£m) 23.8 14.2 67.6%
Adjusted operating margin (1)(%) 5.8% 3.4%
Adjusted EBITDA (1)(£m) 56.0 51.3 9.2%
Adjusted cash generated from operations (1)(£m) 59.8 104.2 (42.6)%
Order book (£m) 557.3 685.4 (18.7)%
Adjusted revenue(1) decreased slightly by 0.3% to £413.4m; while some
businesses saw revenue improvement with markets recovering from the impact of
Covid, including Capita Resourcing and our Technology businesses this did not
offset the impact of significant projects ending. Some markets continued to be
severely impacted by Covid, with recovery slower than anticipated. This
particularly affected our Travel businesses (Agiito and Evolvi) as well as
Enforcement and Optima, our re-mortgaging business.
Adjusted operating profit(1) increased by 67.6% to £23.8m as the revenue
margin mix improved. Actions taken in 2020 to right-size the division and
benefits from successful cost saving initiatives continue to drive profit.
Adjusted cash generated from operations(1) decreased by 42.6% to £59.8m
mainly due to the unwind of 2020 events, as volumes increased and the working
capital benefit in the prior year from volume reductions and cash preservation
reversed.
Outlook
High single digit revenue growth is expected, particularly supported by
recovery in the Covid-affected businesses, based on assumptions of no further
lockdowns.
We expect profit improvement to reflect the increase in revenue and to see the
benefit of high operational leverage fall through to profit.
This outlook is based on the proforma scope of the division at year-end.
1 Refer to alternative performance measures (APMs) in the Appendix.
Chief Financial Officer's review
This preliminary announcement is extracted from Capita's financial statements
for the year ended 31 December 2021 and the basis of its preparation can be
found in the notes to the financial statements in this announcement.
Overview
Adjusted revenue(1) was broadly in line with the prior year. Contract losses
halved compared with 2020 benefiting from our sustained focus on retention and
service delivery. Contract wins reflect the commencement of the Royal Navy
training contract, Job Entry Targeted Support (JETS) contract and the
annualised impact of the Defence Fire and Rescue Project (DFRP) contract.
The increase in adjusted profit before tax(1) reflects the benefit of stable
revenues, cost savings from our transformation programme and the reduction in
the holiday pay accrual in 2021 compared with 2020, offset by other cost
increases, including the impact of the reinstatement of the employee bonus
scheme. The adjusted profit before tax(1) in 2021 excludes the financial
impact of a closed book Life & Pensions contract termination, which by virtue
of size has been excluded from adjusted results as later described in this
report. The Group continued to participate in the job retention scheme made
available by the Government to help ease the employment impact of Covid-19,
and furlough related income of £4.9m (2020: £21.3m) was recorded in the
period which was offset against the associated payroll costs.
Adjusted cash generated from operations(1) reduced by £109.8m to £185.4m
reflecting the increase in adjusted operating profit(1) offset by movements in
working capital.
Adjusted free cash flow(1) reduced by 54% in the period as the reduction in
adjusted cash generated from operations(1) was partially offset by lower
capital expenditure and interest payments.
As part of our drive for simplification of the business, and strengthening the
balance sheet, we continue to seek to dispose of a number of non-core
businesses. During 2021 we completed the disposal of the Education Software
Solutions (ESS) business and of AXELOS realising cash proceeds of c.£343.5m
and £182.2m respectively. We also announced the disposal of our Speciality
Insurance business, subject to certain consents; the disposal of the AMT Sybex
software business, for initial cash consideration of £23.0m, and potential
additional consideration of up to £17.0m, subject to certain conditions; and
the disposal of our Secure Solutions and Services (SSS) business for cash
proceeds of £72.0m. The sale of both AMT Sybex and SSS completed in January
2022.
On 28 January 2022, we announced the disposal of the Trustmarque business for
£111m on a cash free, debt free basis, and the Group expects to receive net
proceeds of c.£115m at completion. Additional consideration of c.£3m is
payable to Capita contingent on certain future events. The sale is subject to
certain consents. The proceeds from this sale, subject to successful
completion, means we will exceed the target we set of £700m in total disposal
proceeds to be delivered by June 2022.
These disposals form part of the Board approved disposal programme and the
preparation for a number of further disposals has commenced where there are
opportunities to maximise the value from exiting non-core businesses. The
Group expects to use the proceeds from this disposal programme to repay
maturing debt, to make further deficit reduction contributions to the
Group’s defined benefit pension scheme and to invest in driving growth in
the remaining core businesses. In 2021, we repaid £232.3m of private
placement notes and made pension deficit contributions of £155.5m.
In the second half of 2021, the Group moved to a new, three division,
organisation structure, creating a platform for revenue growth, increasing
opportunities for savings from shared support services and a leaner Group
overhead all of which is expected to drive a richer contract margin mix and
further efficiency.
Liquidity as at 31 December 2021 was £392.4m, made up of £345.7m of the
undrawn element of our committed revolving credit facility (RCF) and £46.7m
of unrestricted cash and cash equivalents net of overdrafts. The existing RCF
expires on 31 August 2022, and in June we entered into a new £300m RCF
covering the period from 31 August 2022 to 31 August 2023. The two RCFs
incorporate provisions such that the amounts available under the facilities
will be partially reduced when proceeds are realised from future business
disposals. For full details refer to the Capital and financial risk management
section later in this review.
The 31 March 2020 triennial valuation of the Capita Pension and Life
Assurance Scheme (the Scheme) was concluded during the year and identified a
deficit for funding purposes of £182.2m which is expected to be recovered
through agreed deficit contributions of £105m across 2022-2026 on top of the
regular pension deficit contribution of £59m paid in 2021. The valuation of
the Scheme liabilities for funding purposes differs to the valuation for
accounting purposes mainly as a result of the different assumption principles
required for funding and accounting purposes. At 31 December 2021, the Scheme
showed a small surplus for accounting purposes of £7m on an accounting basis
(2020: deficit £242m) which has been reflected in the Group’s balance sheet
as at that date. Management estimates that, at 31 December 2021 the net asset
of the Scheme on a funding basis consistent with the 2020 triennial valuation
was approximately £40m (2020: net liability £155m). The Trustee of the
Scheme has also agreed a more prudent secondary funding target which will
enable the Scheme to reduce its reliance the Scheme has on the covenant of the
Group. On this basis, at 31 December 2021, the funding level was around 91%
(or a net liability of £165m) which is expected to be met by a mixture of the
remaining deficit contributions of £105m and asset outperformance.
Summary of financial performance
Financial highlights
Reported results – continuing operations Adjusted (1)results – continuing operations
Reported 2021 Reported 2020 Reported YOY change Adjusted (1)2021 Adjusted (1)2020 Adjusted (1) YOY change
Revenue £3,182.5m £3,324.8m (4)% £3,008.5m £2,995.5m 0.4%
Operating profit/(loss) £(86.6)m £(32.0)m (171)% £139.1m £51.1m 172%
Profit/(loss) before tax £285.6m £(49.4)m 678% £93.5m £5.4m 1,631%
EBITDA £222.3m £225.6m (1)% £295.1m £228.4m 29%
Cash generated from operations £(121.3)m £434.2m (128)% £185.4m £295.2m (37)%
Earnings/(loss) per share 13.33p (0.41)p 3,351% 1.61p 2.41p (33)%
Free cash flow £(237.1)m £303.8m (178)% £78.1m £170.3m (54)%
Net debt £(879.8)m £(1,077.1)m £197.3m £(879.8)m £(1,077.1)m £197.3m
Adjusted results
Capita reports results on an adjusted basis to aid understanding of business
performance. The Board has adopted a policy of disclosing 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 internally. In the directors’ judgement, these items need to be
disclosed separately by virtue of their nature, size and/or incidence for
users of the financial statements to obtain an understanding of the financial
information and the underlying in-period performance of the business.
In accordance with the above policy, the trading results of business exits,
along with the non-trading expenses and gain or loss on disposals, have been
excluded from adjusted results. To enable a like-for-like comparison of
adjusted results, the 2020 comparatives have been re-presented to exclude 2021
business exits. As at 31 December 2021, the following businesses met this
threshold and were classified as business exits and therefore excluded from
adjusted results in both 2021 and 2020: ESS, AXELOS, Life Insurance and
Pensions Servicing business in Ireland, AMT Sybex software, SSS, the
Speciality Insurance business, and a software business.
Reconciliations between adjusted and reported operating profit, profit before
tax and free cash flow are provided on the following pages and in the notes to
the financial statements.
Adjusted revenue
Adjusted revenue (1)bridge by key driver £m
Year ended 31 December 2020 2,995.5
One-offs in 2020 (14.7)
Year ended 31 December 2020 rebased 2,980.8
Contract losses (104.3)
Ongoing contract scope and volume changes (66.6)
Transactional revenue growth* 25.3
Contract wins 139.1
One-offs in 2021 34.2
Year ended 31 December 2021 3,008.5
*Excludes DWP PIP contract modification from transactional to contractual
Adjusted revenue(1) was broadly in-line with the prior year. The adjusted
revenue(1) movements were as follows:
* one-off contract related items in 2020, 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;
* contract losses halving year-on-year reflecting sustained focus on retention
and service delivery;
* ongoing contract scope and volume reduction reflecting pandemic related work
in 2020 and projects in Experience which did not repeat in 2021;
* unplanned contractual one-offs in 2021, including the release of deferred
income and termination gains arising from contract terminations and
modifications, including on the Electronic Monitoring Services contract with
the Ministry of Justice in Public Service and The Co-operative Bank contract
and a contract with a telecoms client in Experience.
* transactional revenue growth mainly driven by Public Service and to a lesser
extent Portfolio;
* the benefit of a number of notable contract wins including the commencement
of the Royal Navy training contract and the JETS contract which commenced in
February combined with the annualised impact of the DFRP contract in Public
Service and smaller wins within Experience.
Order book
The Group’s consolidated order book was £6,115m at 31 December 2021 (2020:
£5,851m as additions from contract wins and extensions in 2021 (£2,901m),
including the Royal Navy training contract and contract extensions with two
major European telecoms providers, exceeded the reduction from revenue
recognised in the year (£2,297m) and contract terminations, business
disposals and scope changes (£339m).
Adjusted profit before tax
Adjusted profit before tax (1)bridge by key driver £m
Year ended 31 December 2020 5.4
One-offs in 2020 – contract-related 23.9
Year ended 31 December 2020 rebased 29.3
Contract losses (44.4)
Ongoing contract scope and volume changes (19.1)
Transactional revenue growth 8.5
Contract wins 28.1
One-offs in 2021 – contract-related 12.2
Cost savings 123.3
Other cost movements (11.7)
Bonus (47.7)
Holiday pay 15.0
Year ended 31 December 2021 93.5
Adjusted profit before tax(1) increased in 2021. The adjusted profit before
tax(1) bridge above reflects the following items:
* to ensure a like-with-like starting point, the 2020 one-offs, which included
contract asset impairments and contract provisions, are adjusted for;
* the margin effect of contract losses, scope and volume, transactional
changes and contract wins were a net £26.9m negative, with new wins not yet
offsetting the impact of contract losses and scope and volume reductions;
* unplanned contractual one-offs in 2021, including the release of deferred
income and write-off of contract assets arising from contract terminations,
settlements and modifications, and provisions recognised on onerous contracts.
These resulted in net gains of £7.5m in Public Service and £4.7m in
Experience which have not been excluded from adjusted results because they are
considered to be in the normal course of business;
* the transformation programme continued to deliver substantial savings in
2021 with a £123.3m year-on-year benefit;
* other cost movements primarily from general inflation; and
* the year-on-year impact of the reinstatement of the employee bonus scheme
this year with £31.2m expensed during 2021 including £17.3m accrued at
31 December 2021 compared with the release of the 2019's £16.5m accrual in
the first half of 2020, was partially off-set by a reduction in holiday pay
accrual.
Moving forward, we expect to see the reward from the investment in cost
transformation over the last few years with revenue growth and operating
leverage driving the bottom line, albeit this is expected to be partially
offset in the short-term in 2022 by the impact of cost inflation and staff
attrition as the UK economy enters a high inflation, high employment period.
Adjusted profit before tax(1) excludes contract-related provisions and
impairments of £43.1m in the closed book Life & Pensions business in
Experience. These have been excluded from adjusted results due to their
materiality and are detailed in the Reported results section.
Adjusted free cash flow
Adjusted operating profit to adjusted free cash flow (1) 2021 £m 2020 £m
Adjusted operating profit (1) 139.1 51.1
Add: depreciation/amortisation and impairment property, plant and equipment and intangible assets 156.0 177.3
Adjusted EBITDA 295.1 228.4
Working capital (123.5) 34.3
Other 13.8 32.5
Adjusted cash generated from operations (1) 185.4 295.2
Net capital expenditure (51.3) (68.3)
Interest / tax paid (56.0) (56.6)
Adjusted free cash flow (1) 78.1 170.3
Adjusted free cash flow(1) in the year ended 31 December 2021 was an inflow
of £78.1m (2020: inflow £170.3m). The decrease compared with the prior
period is driven by a reduction in adjusted cash generated from operations(1),
capital expenditure and interest payments.
Adjusted cash generated from operations(1) benefited from the improvement in
adjusted profit before tax(1) explained above, offset by a material working
capital outflow compared with an inflow in 2020. In 2020, the Group’s cash
flow benefited from shorter public sector payment cycles as part of the
Covid-19 response and advanced payments from a small number of major clients
at 31 December 2020. As expected, 2021 has been impacted by the unwind of
these advanced receipts together with the natural expansion in working capital
as the Group transitions to growth.
Capital investment reduced year on year following the 2020 completion of a
number of transformation-related projects.
Reported results
Adjusted to reported profit
As noted above, to aid understanding of our underlying performance, adjusted
operating profit(1) and adjusted profit before tax(1) exclude a number of
specific items, including significant restructuring, the amortisation and
impairment of acquired intangibles, including goodwill, and the impact of
business exits.
Adjusted (1)to reported profit bridge Operating profit/(loss) Profit/(loss) before tax
2021 £m 2020 £m 2021 £m 2020 £m
Adjusted (1) 139.1 51.1 93.5 5.4
Amortisation and impairment of acquired intangibles (12.0) (26.4) (12.0) (26.4)
Impairment of goodwill (11.5) — (11.5) —
Litigation and claims 9.3 (0.7) 9.3 (0.7)
Net finance costs — — (1.4) (1.5)
Business exit (20.1) 60.5 399.1 90.3
Business exit - on-hold disposal costs — (7.5) — (7.5)
Contract-related provisions and impairments (43.1) — (43.1) —
Significant restructuring (148.3) (109.0) (148.3) (109.0)
Reported (86.6) (32.0) 285.6 (49.4)
Impairment of goodwill
Following the corporate re-organisation in the second half of 2021, the Group
reviewed the historical assessment of cash generating units (CGUs) and the
allocation of goodwill. Reflecting the way management now exercises oversight
and monitors the Group’s performance, the Board concluded that the lowest
level at which goodwill is monitored is at the divisional level for Public
Service and Experience, and at a sub-divisional level for Portfolio, and
goodwill has been reallocated to these new CGUs or group of CGUs as
appropriate. At 31 December 2021, this resulted in an impairment of goodwill
in the Travel CGU within the Portfolio division, as the travel industry
continues to be impacted by Covid-19 which is reflected in the projected
near-term cash flows as well as the increase in comparable companies' discount
rates.
Refer to note 12 for further details.
Business exits
Business exits include the effects of businesses that have been disposed of or
exited during the period and the results of businesses held-for-sale at the
reporting date. Individual businesses within the Portfolio division under the
new corporate structure will be treated as held-for-sale where their disposal
is seen to be highly probable and is expected to complete within the following
12 months. At 31 December 2021 business exits comprised:
* the ESS business whose disposal was completed on 1 February 2021;
* the Life Insurance and Pensions Servicing business in Ireland whose disposal
was completed on 1 March 2021;
* the AXELOS joint venture with the UK Government whose disposal was completed
on 29 July 2021;
* the AMT Sybex software, SSS and Speciality Insurance businesses which were
in the process of being sold and which met the held-for-sale criteria.
Accordingly, these businesses were treated as disposal groups held-for-sale at
this date. The disposal of the AMT Sybex software and SSS businesses completed
subsequently in 2022 (refer to note 16 of the consolidated financial
statements for further details);
* a software business in the Portfolio division that the Group has decided to
exit; and
* the exit costs, including professional fees, salary costs and separation
planning costs, relating to further planned disposals for which the
held-for-sale and business exit criteria were not met at 31 December 2021.
In accordance with our policy, the trading results of these businesses, along
with the non-trading expenses and gain on disposal, were classified as
business exits and therefore excluded from adjusted results. To enable a
like-for-like comparison of adjusted results, the 2020 comparatives have been
restated to exclude the 2021 business exits.
Further businesses are planned for disposal as part of the Group's
simplification strategy. However, given the status of the relevant disposal
processes, the businesses did not meet the criteria to be classified as assets
held-for-sale at 31 December 2021 and, accordingly their trading results are
included within adjusted results. This includes the Trustmarque business whose
disposal was announced on 28 January 2022 (refer to note 16 of the
consolidated financial statements for further details).
Significant restructuring
In 2018, the Board launched a multi-year transformation programme to support
the objectives of simplifying and strengthening Capita. The programme was
extended to property rationalisation, procurement centralisation,
transformation of support functions, including investment in growth, and
operational excellence initiatives, including investment in automation. These
activities were designed to improve the cost competitiveness of the Group and
secure Capita’s position in the markets it serves and strengthen governance
and control.
The transformation programme included planned improvements to the Group’s
financial reporting systems. New financial systems were due to go live in the
second half of 2019, and while progress was made, a decision was taken to
defer the go-live because more work was required on the core processes and
procedures before the system could be effectively implemented. Several interim
activities were progressed during both 2020 and 2021 and the technical asset
including the IT infrastructure, software and codebase were preserved.
The new system was deemed necessary to provide effective functionality across
the then six reporting divisions, supported by the central functions and
covering a multifaceted legal entity structure. In addition, the decision to
invest in new financial reporting systems was predicated on the fact that the
Group’s existing ERP platform would not be supported by the relevant
supplier beyond 2025.
During 2021, the Group simplified its divisional and management organisation
structure with ongoing programmes to streamline the legal entity structure of
the Group. As a result, the Board concluded in late 2021 that continued
investment in a new system was not critical to support the finance
transformation. This coincided with confirmation from the supplier that the
Group’s existing ERP platform will be supported until at least 2030.
These developments allowed management to reconsider the technical imperative
to move to a new ERP platform and to assess the extent to which the Group
would be better served by continuing to use its existing platform. It has
become clear that it is feasible to use the existing platform and, in doing
so, avoid the disruption, additional cost and risk of a transition to a new
platform. The simplified operating model makes possible a continuation of the
systems already available with more limited investment to achieve the required
functionalities that will deliver the prime objectives of standardisation,
automation and improved quality of information.
Therefore, the Board approved a revised approach at the end of 2021 to focus
on optimising the current financial reporting systems and not migrate to an
entirely new finance system. As such, an impairment of £53.5m was recognised
at 31 December 2021 representing the book value of the elements of the new
finance system which are no longer expected to be utilised.
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. Further enhancements are planned for 2022, that will
take into consideration the Government’s proposed audit and governance
reform, including the potential adoption of a UK-Sarbanes-Oxley regime.
The costs of the transformation programme, including redundancy costs, are
excluded from adjusted operating profit(1) as significant restructuring. 2021
is the final year of major investments in the transformation programme where
the costs are excluded from adjusted results. From 1 January 2022, any
residual restructuring costs will be included within adjusted results.
Contract-related provisions and impairments
The new corporate structure has simplified internal reporting, which has
highlighted those businesses that represent a drag on the Group’s cash
resources. This includes the Life & Pensions business that provides outsourced
administration services for the associated closed pension books which we
maintain on behalf a small number of clients.
The Group has highlighted in prior reporting the structural challenges
associated with the closed book Life & Pensions contracts. These provided for
upfront cash inflows to support initial transformation activities with a much
lower level of cash inflows once the transformation phase was completed. Under
the Group’s long-term contract accounting policy, the cash flow profile of
these contracts has resulted in deferral of profit into future years which is
not backed by net cash flows (because the relevant cash receipts arose in the
early years of contract execution). Additionally, some of the contracts
contain evergreen clauses allowing the customers to extend the contracts
indefinitely until the run-off of the underlying pensions books is complete.
The Life & Pensions business has remained in structural decline as some
customers, with legacy IT systems, have switched to suppliers who can provide
a single digital platform for all their books. The Group has sought to drive
efficiencies to mitigate this fall off in volumes, while supporting customers
who have selected new outsource providers or taken the activities back
in-house.
The closed books and contractual dynamics have led to onerous conditions to
service these contracts. The Board has been required to assess the likely
length of the remaining contracts, given the pattern and experience of
contract terminations while also recognising the evergreen clauses.
Accordingly, management has in prior years provided for the onerous contract
conditions based on the best estimate of the remaining contract terms. The
contingent liability note has highlighted that should the contracts end
earlier or extend for longer this may result in a material reduction or
increase in the provision recorded.
During 2021, the Group has continued to support a major customer on the
transfer of services to another supplier. This is taking significantly longer
than initially expected. Management has reassessed the lifetime estimate to
include not only the onerous contract terms but also the period and likely
costs to support the final handover of services. This assessment has extended
across all contracts that contain evergreen clauses, including those where
there are ongoing discussions regarding either termination or transfer of
services. This reassessment, reflecting the development in the latter half of
2021, provides cover for contracts to extend out to 2026. This has resulted in
an increase to the contract provision and impairment of contract assets
totalling £43.1m which has been reported as an adjusting item (see note 4).
In prior years the financial impacts of such contract judgements have not been
shown as adjusting items because they were considered to be normal course of
business, not material in the context of the Group’s results and not
associated with the transformation plan. However, due to the quantum of the
charge arising from the 2021 reassessment, the Board consider it appropriate
to separately disclose this as an adjusted item to highlight the impact on the
results in the period.
Further detail of the specific items charged in arriving at reported operating
profit for 2021 is provided in note 4.
Adjusted to reported free cash flow
Adjusted to reported free cash flow 2021 £m 2020 £m
Adjusted (1) 78.1 170.3
Pension deficit contributions (155.5) (29.5)
Significant restructuring (68.6) (64.1)
Litigation and claims (18.5) —
Business exits 41.2 102.2
Business exits - on hold disposal costs — (7.5)
Non-recourse trade receivables financing (9.7) 13.6
VAT deferral (104.1) 118.8
Reported (237.1) 303.8
Reported free cash flow was lower than adjusted free cash flow(1) principally
reflecting pension deficit contributions (which the directors consider to be
debt-like in nature) and the cash costs of the significant restructuring
programme, partially offset by cash inflows on business exits.
In addition, in both 2021 and 2020, the benefit from the Covid-19-related
Government VAT deferral measures and utilisation of a non-recourse trade
receivables financing facility were also excluded from adjusted free cash
flow(1). The VAT deferral benefit has largely reversed during 2021. The
non-recourse trade receivables financing facility was put in place in the
early stage of the Covid-19 pandemic to mitigate the risk of customer receipts
slippage.
Cash flow headwinds
As previously reported, in 2021 the Group was impacted by material cash
outflows arising from reversal of the VAT deferral noted above, pension
deficit contributions and significant restructuring. The actual cash outflows
in 2021 together with forecast outflows for 2022 in respect of these items is
set out in the table below.
Cash flow headwinds Actual 2021 £m Forecast 2022 £m
VAT deferral 104.1 16.0
Pension deficit contributions 155.5 30.0
Below-the-line restructuring 68.6 —
Total 328.2 46.0
One of the largest outflows in 2021 was the repayment of deferred VAT under
the Government's Covid-19 support measures.
There have been substantial catch-up pension deficit contributions in the
year. Following agreement reached in June with the pension Trustees in respect
of the 2020 triennial valuation, we expect to make a further regular deficit
contribution of around £30m in 2022.
Moving into 2022 restructuring costs are expected to be materially lower and
it is not planned that these costs will be excluded from adjusted results
beyond the current financial year.
The material reduction in the cash outflows in 2022 arising from these items,
is one of the key factors underpinning the expected transition to sustainable
free cash flow(2) from that year onwards.
Impact on net debt
Net debt at 31 December 2021 was £879.8m (31 December 2020: £1,077.1m).
The reduction in net debt largely reflects the proceeds from the ESS and
AXELOS disposals.
Net debt 2021 £m 2020 £m
Opening net debt (1,077.1) (1,356.7)
Cash movement in net debt 208.5 344.1
Non-cash movements (11.2) (64.5)
Closing net debt (879.8) (1,077.1)
Remove closing IFRS 16 impact 448.4 508.1
Headline net debt (pre-IFRS 16) (431.4) (569.0)
Cash and cash equivalents net of overdrafts 101.5 141.1
Debt net of swaps (532.9) (710.1)
Headline net debt (pre-IFRS 16)/adjusted EBITDA (1) 1.7x 2.4x
Headline net debt (post-IFRS 16)/adjusted EBITDA (1) 2.7x 3.1x
Over the medium term, following the completion of our Portfolio divestment
programme, we will be targeting a pre-IFRS 16 headline leverage ratio for
Capita of around 1.0 times headline net debt to adjusted EBITDA(1).
The calculations of the net debt to adjusted EBITDA(1) and interest cover
ratios for covenant purposes in respect to the Group's US private placement
loan notes and other financing arrangements are set out in the APM appendix to
the consolidated financial statements.(1)
At 31 December 2021, the US private placement loan notes net debt to
adjusted EBITDA(1) covenant ratio was 1.5 times (31 December 2020: 1.8 times)
and was 2.0 times for all other financing agreements (31 December 2020: 2.5
times) compared with maximum permitted levels of 3.0 times and 3.5 times
respectively.
At 31 December 2021, the interest cover(1) covenant ratio was 9.9 times for
the US private placement loan notes and 9.6 times for other financing
arrangements (31 December 2020: 8.5 times and 7.8 times respectively)
compared with minimum permitted levels of 4.0 times for all debt instruments.
The Group was compliant with all debt covenants at 31 December 2021.
Capital and financial risk management
Liquidity remains a key area of focus for the Group. Financial instruments
used to fund operations and to manage liquidity comprise US private placement
loan notes, Euro fixed-rate bearer notes, a Schuldschein loan, RCFs, leases
and overdrafts.
Liquidity 2021 £m 2020 £m
Revolving credit facility (RCF) 385.7 452.0
Backstop liquidity facilities — 150.0
Less: drawing on facilities (40.0) —
Undrawn committed facilities 345.7 602.0
Net cash, cash equivalents net of overdrafts 101.5 141.1
Less: restricted cash (1) (54.8) (34.5)
Liquidity 392.4 708.6
The Group’s RCF provides flexible liquidity available to fund operations and
£40m was drawn under this facility at 31 December 2021 (2020: undrawn).
The Group's RCF expires on 31 August 2022 and in June 2021 the Group entered
into a new RCF for £300m covering the period from 31 August 2022 to
31 August 2023. The two RCFs incorporate provisions such that they will
partially reduce in quantum as a consequence of specified transactions, and
subsequent to the year end, the first RCF reduced to £377.5m following the
receipt of disposal proceeds. Further details of these facilities can be found
in section 4 to the consolidated financial statements.
The Group secured a committed backstop liquidity facility 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. 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 2021 was £3.9m (31 December 2020:
£13.6m).
At 31 December 2021, the Group had £101.5m of cash and cash equivalents net
of overdrafts, and £512.9m of private placement loan notes, fixed-rate bearer
notes, and Schuldschein loan. These debt instruments mature over the period to
2027, with repayment of £217.7m and £66.3m, in 2022 and 2023 respectively.
The 2022 and 2023 maturities are expected to be funded through the Group’s
existing facilities, cash and cash equivalents and from the proceeds of the
Group’s ongoing portfolio divestment programme without the need to obtain
new financing. As such, a measured approach will be taken to any potential
refinancing with time taken to implement a longer-term debt solution at the
appropriate moment.
In March 2022, the Group executed with one of its relationship banks a
committed backstop bridge facility. The facility provides £70m of additional
liquidity and it incorporates provisions such that it will be cancelled or
will partially reduce in quantum as a consequence of specified transactions,
including on the completion of the announced disposal of Trustmarque. The
committed facility has an expiry date of 31 August 2023 with an option, by
the lender, for a further one-year extension. The facility is subject to
covenants, which are the same as the RCF.
Going concern assumption
The Board closely monitors the Group’s funding position throughout the year,
including compliance with covenants and available facilities to ensure it has
sufficient headroom to fund operations. In addition, to support the going
concern assumption the Board conducts a robust assessment of the projections,
considering also the committed facilities available to the Group.
In carrying out the going concern assessment, the Board has recognised that,
in a severe but plausible downside scenario, the mitigants to the possibility
of insufficient liquidity in the going concern assessment period will require
third party agreements and approvals which represent events that are outside
the direct control of the Company. Accordingly, there are material
uncertainties, as defined in auditing and accounting standards applicable to
going concern assessments, related to events or conditions that may cast
significant doubt on the Group’s ability to continue as a going concern
Nevertheless, reflecting the Board’s confidence in the benefits expected
from completion of the transformation programme and execution of the approved
disposal programme coupled with the potential to obtain further financing
beyond its existing committed funding facilities, the Group and Parent Company
continue to adopt the going concern basis in preparing these consolidated
financial statements as set out in note 2.
Viability assessment
The Board's assessment of viability over the Group’s three-year business
planning time horizon is summarised in the viability statement later in this
announcement.
Pensions
The 31 March 2020 triennial valuation of the Capita Pension and Life
Assurance Scheme (the Scheme) was concluded during the year and identified a
deficit for funding purposes of £182.2m which is expected to be recovered
through deficit recovery contributions of £30m in each of the years ending
31 December 2022 and 2023, in addition to the contributions totalling £59m
already paid by the Group at 31 December 2021. As part of the triennial
valuation, the Group also agreed to pay an additional £15m a year between
2024 and 2026 in order to enable the Scheme to target a lower-risk investment
strategy facilitating lower reliance on the covenant provided by the Group.
In addition to the above, £35.7m of deficit contributions in respect of the
previous funding agreement, plus a special contribution of £50.1m to buyback
the intellectual property rights as part of the ESS disposal, were paid to the
Scheme in 2021. At 31 December 2021, £5.0m was held in escrow and will be
released to the Scheme in 2022.
The total net defined benefit pension position for accounting purposes moved
from a net liability at the start of the year (liability: £252.1m) to a small
net asset by 31 December 2021 (asset: £5.8m). The main reasons for this
movement were the £155.5m of deficit funding contributions (including the
£5m held in escrow) paid into the Group’s schemes, along with favourable
market conditions (particularly the material increase in the yields available
on good quality, long term corporate bonds offset to some degree by an
increase in future inflationary expectations) that are used to derive the
assumptions, and higher than expected asset returns. This was also partly
offset by experience over the year (with actual inflation being higher than
expected).
The valuation of the Scheme liabilities for funding purposes (the actuarial
valuation) differs from the valuation for accounting purposes (which are shown
in these financial statements) mainly due to different assumption principles
being used based on the different regulatory requirements of the valuations.
Management estimate that at 31 December 2021 the net asset of the Scheme on a
funding basis (ie the funding assumption principles adopted for the full
actuarial valuation at 31 March 2020 updated for market conditions at 31
December 2021) was approximately £40m (31 December 2020: net liability
£155m). The Trustee of the Scheme has also agreed a secondary more prudent
funding target to enable it to reduce the reliance the Scheme has on the
covenant of the Group. On this basis, at 31 December 2021, the funding level
was around 91% (or a net liability of £165m). The deficit of £165m, is
expected to be met by a mixture of the remaining deficit contributions of
£105m and asset outperformance. The Trustee of the Scheme has agreed with the
Company to accelerate the payment of some of the deficit contributions on a £
for £ basis in the event of disposal proceeds being used to fund mandatory
prepayments of debt.
Consolidated balance sheet
At 31 December 2021 the consolidated net assets were £296.5m (2020: net
liabilities £81.1m).
The movement from net liabilities to net assets is predominantly driven by the
expiry of the put option to acquire the non-controlling interest in AXELOS,
the Group's joint venture with the UK Government, and the gains realised on
the disposal of both ESS and AXELOS in the year.
(1) Refer to the alternative performance measures (APMs) in the Appendix.
(2) Sustainable free cash flow = reported free cash flow excluding the impact
of disposals.
Viability statement
In accordance with provision 31 of the UK Corporate Governance Code 2018, the
Board has assessed the viability of the Group and Parent Company over the
three-year period to 31 December 2024, aligned with the period of the
Group’s bottom-up business planning process. The Board believes that a
three-year period provides sufficient clarity to consider the Group and Parent
Company’s prospects and facilitates the development of a robust base case
set of financial projections against which severe but plausible downside
scenario stress testing can be conducted.
The completion of the Group’s multi-year transformation programme during
2021 has created the platform for sustainable improving financial performance
which underpins the viability of the Group and Parent Company. The Board
particularly notes the following deliverables from the transformation
programme:
* The simplification and strengthening of the Group’s organisation design
establishing two core divisions focused on public and private sector markets
providing a platform for a return to revenue growth and delivery of efficiency
savings.
* A significant reduction in the Group’s cost base, with continued in-year
savings in 2021 of £123.3m which takes the cumulative savings during the
transformation programme to £428m. This has successfully addressed the cost
competitive objective which was a core element of the transformation
programme.
* The ongoing successful execution of the Portfolio business disposal
programme which has realised net cash proceeds totalling, c.£900m since 1
January 2018, used to repay maturing debt, to make further deficit reduction
contributions to the Group’s main defined pension scheme and to invest in
driving growth in the remaining core businesses.
* The repayment of £1.4bn of debt, including lease liabilities, since 1
January 2018.
* The successful extension during 2021 of the Group’s revolving credit
facility (RCF) to 31 August 2023.
* The payment of c.£300m of deficit reduction contributions to the Group’s
main defined benefit pension scheme since 1 January 2018, and the commitment
to a further £105m of deficit reduction contributions across 2022-2026, which
should enable the scheme to reduce its reliance on the covenant of the Group.
The foregoing elements of the transformation programme provide the backdrop to
the three-year business plan approved by the Board in February 2022 and are
key factors in the Directors’ viability assessment. The main assumptions
underpinning the base case financial projections in the Group’s business
plan are set out below:
* Return to organic revenue growth broadly in line with market trends in each
of the two core divisions.
* Operating profit margin expansion over the business plan period reflecting
the benefit of operating leverage coupled with ongoing efficiency delivery.
* Improving operating cash conversion as the structural working capital drag
from a small number of large legacy transformation contracts diminishes.
* Completion of the portfolio disposal programme during 2022 and 2023.
* The refinancing of the Group’s £300m RCF following its maturity in August
2023.
The most material assumptions from a viability assessment perspective, which
are also identified as material uncertainties in the severe but plausible
downside scenario in the going concern assessment provided in note 2 to the
consolidated financial statements, relate to the completion of the portfolio
disposal programme and the refinancing of the RCF. Capita has a strong track
record of executing major planned disposals and has been successful in
obtaining new and extended financing facilities over the last few years. As
such, in concluding on viability the Board believes that it is reasonable to
assume that the Group will be successful in executing the disposal programme
and in refinancing the RCF in line with the assumptions underpinning the base
case financial projections.
The three-year base case financial projections were used to assess covenant
compliance and liquidity headroom under different scenarios. This analysis
included assessing the sensitivity of the financial performance of the Group
to changes in trading conditions including reduced rates of revenue growth and
efficiency delivery. In addition, the viability stress tests considered severe
but plausible downside impacts on covenant and liquidity headroom from the
crystallisation of specific risks including those set out in the principal
risks section of the 2021 Annual Report and Accounts. The stress tests covered
potential contract claims and performance issues, data breaches, cyber-attacks
and delays in execution of the disposal programme.
The risks applied have not been probability weighted but rather consider the
impact should each risk materialise by applying a ‘more likely than not’
test. These wide-ranging risks are highly unlikely to crystallise
simultaneously and there are mitigations under the direct control of the Group
that can be actioned to address a combination of risk crystallisations that
may occur under a severe but plausible downside. These have been considered in
the Board’s viability assessment.
Based on this assessment and reflecting the Board’s confidence in the
platform for improving financial performance resulting from completion of the
transformation plan, the Group’s ability to refinance and to execute the
approved disposal programme, the Board has a reasonable expectation that the
Group and Parent Company will be able to continue in operation and meet their
liabilities as they fall due over the period of the viability assessment.
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 2021
Notes 2021 £m 2020 £m
Continuing operations:
Revenue 7 3,182.5 3,324.8
Cost of sales (2,506.7) (2,640.6)
Gross profit 675.8 684.2
Administrative expenses (762.4) (716.2)
Operating loss 7 (86.6) (32.0)
Share of results in associates and investment gains (0.6) 0.8
Net finance expense 8 (46.9) (49.6)
Gain on business disposal 5 419.7 31.4
Profit/(loss) before tax 285.6 (49.4)
Income tax (charge)/credit (61.5) 47.6
Profit/(loss) for the year from continuing operations 224.1 (1.8)
Discontinued operations:
Profit for the year 5 3.1 20.8
Total profit for the year 227.2 19.0
Attributable to:
Owners of the Company 224.7 14.0
Non-controlling interests 2.5 5.0
227.2 19.0
Earnings/(loss) per share 9
Continuing: – basic 13.33p (0.41)p
– diluted 13.15p (0.41)p
Total operations: – basic 13.52p 0.85p
– diluted 13.33p 0.85p
Adjusted operating profit 4 139.1 51.1
Adjusted profit before tax 4 93.5 5.4
Adjusted earnings per share 9 1.61p 2.41p
Adjusted and diluted earnings per share 9 1.59p 2.41p
Consolidated statement of comprehensive income
For the year ended 31 December 2021
2021 £m 2020 £m
Total profit for the year 227.2 19.0
Other comprehensive expense
Items that will not be reclassified subsequently to the income statement
Actuarial gain/(loss) on defined benefit pension schemes 109.4 (32.1)
Tax effect on defined benefit pension schemes (18.1) 10.9
Gain/(loss) on fair value of investments 0.1 (0.7)
Items that will or may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations 3.0 (9.0)
Exchange differences realised on business disposals (2.8) —
Gain/(loss) on cash flow hedges 1.3 (1.6)
Cash flow hedges recycled to the income statement 0.6 (4.5)
Tax effect on cash flow hedges 2.2 1.1
Other comprehensive income/(expense) for the year net of tax 95.7 (35.9)
Total comprehensive income/(expense) for the year net of tax 322.9 (16.9)
Attributable to:
Owners of the Company 320.5 (21.9)
Non-controlling interests 2.4 5.0
322.9 (16.9)
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated balance sheet At 31 December 2021
Notes 2021 £m 2020 £m
Non-current assets
Property, plant and equipment 10 129.0 157.2
Intangible assets 11 147.3 265.0
Goodwill 12 951.7 1,120.5
Right-of-use assets 287.9 342.1
Investments in associates and joint ventures 0.7 5.1
Contract fulfilment assets 286.7 294.8
Financial assets 107.2 117.0
Deferred tax assets 176.0 242.8
Employee benefits 13.3 3.1
Trade and other receivables 15.7 22.1
2,115.5 2,569.7
Current assets
Financial assets 17.5 32.1
Disposal group assets held-for-sale 5 138.8 114.6
Trade and other receivables 547.1 551.0
Cash 317.6 460.9
Income tax receivable 5.9 2.9
1,026.9 1,161.5
Total assets 3,142.4 3,731.2
Current liabilities
Trade and other payables 542.2 635.0
Deferred income 669.8 822.2
Overdrafts 231.9 332.7
Lease liabilities 61.6 77.5
Disposal group liabilities held-for-sale 5 81.1 53.9
Finance liabilities 286.3 347.8
Provisions 13 126.6 107.0
1,999.5 2,376.1
Non-current liabilities
Trade and other payables 15.4 23.6
Deferred income 124.9 153.0
Lease liabilities 386.8 426.0
Financial liabilities 291.9 554.3
Deferred tax liabilities 5.9 6.7
Provisions 13 14.0 17.4
Employee benefits 7.5 255.2
846.4 1,436.2
Total liabilities 2,845.9 3,812.3
Net assets/(liabilities) 296.5 (81.1)
Capital and reserves
Share capital 34.8 34.5
Share premium 1,145.5 1,143.3
Employee benefit trust and treasury shares (8.0) (11.2)
Capital redemption reserve 1.8 1.8
Other reserves (9.0) (13.4)
Retained deficit (890.6) (1,289.5)
Equity/(deficit) attributable to owners of the Company 274.5 (134.5)
Non-controlling interests 22.0 53.4
Total equity/(deficit) 296.5 (81.1)
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated statement of changes in equity For the year ended 31 December 2021
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 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 tax effects — — — — 5.2 — 5.2 — 5.2
Dividends paid (1) — — — — — — — (14.4) (14.4)
Movement in put-options held by non-controlling interests — — — — 9.0 — 9.0 — 9.0
At 1 January 2021 34.5 1,143.3 (11.2) 1.8 (1,289.5) (13.4) (134.5) 53.4 (81.1)
Profit for the year — — — — 224.7 — 224.7 2.5 227.2
Other comprehensive income/(expense) — — — — 91.4 4.4 95.8 (0.1) 95.7
Total comprehensive (expense)/income for the year — — — — 316.1 4.4 320.5 2.4 322.9
Share-based payment net of tax effects — — — — 1.6 — 1.6 — 1.6
Reclassification — — — — (6.4) — (6.4) 6.4 —
Elimination of non-controlling interest at disposal (note 5) — — — — — — — (3.4) (3.4)
Exercise of share options under employee long term incentive plans — — 3.5 — (3.5) — — — —
Shares issued 0.3 — (0.3) — — — — — —
VAT refund on rights issue issuance costs — 2.2 — — — — 2.2 — 2.2
Dividends paid (1) — — — — — — — (36.8) (36.8)
Movement in put-options held by non-controlling interests (2) — — — — 91.1 — 91.1 — 91.1
At 31 December 2021 34.8 1,145.5 (8.0) 1.8 (890.6) (9.0) 274.5 22.0 296.5
1. Of the dividends to non-controlling interests totalling £36.8m (2020:
£14.4m), the majority were from AXELOS Limited (2021: £36.6m; 2020: £14.1m)
who paid £10.7m (2020: £14.1m) in cash with the remainder settled by the
purchaser when AXELOS Limited was sold (see note 5). No dividends were
declared, paid or proposed in 2021 or 2020 on the Parent Company’s ordinary
shares.
2. The option to acquire the non-controlling interest in AXELOS Limited
expired without being exercised on 28 February 2021, and the related
liability of £96.5m was de-recognised.
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 the foreign currency translation reserve
deficit of £8.3m (2020: £8.6m deficit) and the cash flow hedging reserve
deficit of £0.7m (2020: £4.8m deficit).
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 2021
Notes 2021 £m 2020 £m
Cash generated from operations 14 (121.3) 434.2
Cash generated from discontinued operations — 18.6
Income tax paid (17.7) (8.8)
Net interest paid (40.1) (47.7)
Net cash (outflow)/inflow from operating activities (179.1) 396.3
Cash flows from investing activities
Purchase of property, plant and equipment 10 (25.6) (40.8)
Purchase of intangible assets 11 (32.5) (46.6)
Proceeds from sale of property, plant and equipment/intangible assets 10, 11 0.1 13.5
Additions to investments in associates — (0.6)
Additions to investments held at fair value through profit and loss (0.1) (0.3)
Capital repayment from investments at fair value through other comprehensive income 0.3 —
Proceeds from sale of investments held at fair value through profit and loss — 3.9
Contingent consideration paid — (4.9)
Subsidiary partnership payment (4.7) (9.4)
Capital element of lease rental receipts 0.5 2.8
Net proceeds on disposal of subsidiary undertakings 5 483.1 51.3
Cash disposed of with subsidiary undertakings 5 (25.9) (3.2)
Net cash inflow/(outflow) from investing activities 395.2 (34.3)
Cash flows from financing activities
Dividends paid to non-controlling interests (10.8) (14.4)
Capital element of lease rental payments (82.6) (98.0)
Proceeds from issue of share capital (net of issuance costs) 2.2 —
Repayment of private placement loan notes (232.3) (242.9)
Proceeds from credit facilities 46.0 —
Proceeds from cross-currency interest rate swaps 19.7 24.5
Debt financing arrangement costs paid (1.9) (0.5)
Net cash outflow from financing activities (259.7) (331.3)
(Decrease)/increase in cash and cash equivalents (43.6) 30.7
Cash and cash equivalents at the beginning of the period 141.1 119.3
Effect of exchange rates on cash and cash equivalents 4.0 (8.9)
Cash and cash equivalents at 31 December 101.5 141.1
Cash and cash equivalents comprise:
Cash 317.6 460.9
Overdrafts (231.9) (332.7)
Cash, net of overdrafts, included in disposal group assets and liabilities held-for-sale 5 15.8 12.9
Total 101.5 141.1
Adjusted cash generated from operations 14 185.4 295.2
Adjusted free cash flows 14 78.1 170.3
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to the consolidated financial statements
for the year ended 31 December 2021
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 2021 were authorised for issue in accordance with a resolution of
the directors on 9 March 2022
2 Basis of preparation, judgements and estimates, and going concern
(a) Basis of preparation
These consolidated financial statements have been prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and with UK-adopted International Financial Reporting
Standards (IFRSs) and the Disclosure and Transparency Rules of the UK's
Financial Conduct Authority.
These consolidated financial statements are presented in British pounds
sterling and all values are rounded to the nearest tenth of a million (£m)
except where otherwise indicated.
(b) Adjusted results
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 of disclosing 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
internally. In the directors’ judgement, these items need to be disclosed
separately by virtue of their nature, size and/or incidence for users of the
financial statements to obtain an 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 activities remain
within adjusted profit and adjusted cash flow.
(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; and, utilisation of the Government’s
Coronavirus Job Retention 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 were advanced and adapted in response to
Covid-19. The Board has also considered the impact on the provisions recorded
at 31 December 2021, 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,
customer and onerous contract provisions.
(d) Going concern
In determining the appropriate basis of preparation of the financial
statements for the year ended 31 December 2021, the Board is 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.
Accounting standards require that ‘the foreseeable future’ for going
concern assessment covers a period of at least twelve months from the date of
approval of these financial statements, although those standards do not
specify how far beyond twelve months a Board should consider. In its going
concern assessment, the Board has considered the period from the date of
approval of these financial statements to 31 August 2023, which is just less
than eighteen months from the date of approval of these financial statements
('the going concern period') and which aligns with the expiry of the revolving
credit facility (RCF). The Board has also considered any material committed
outflows beyond this period in forming their assessment, including the
extension of the RCF which is a key consideration as set out below.
The base case financial forecasts used in the going concern assessment are
derived from the 2022-2023 business plans as approved by the Board in February
2022.
The going concern assessment considers the Group’s sources and uses of
liquidity and covenant compliance throughout the period under review. The
value of the Group’s existing committed RCF was £385.7m at 31 December
2021 and it expires on 31 August 2022. In June 2021 the Group entered into a
second RCF of £300m covering the period from 31 August 2022 to 31 August
2023 with certain lenders party to the existing RCF. The second RCF will
replace the existing RCF when the latter expires. The two RCFs incorporate
provisions such that they will partially reduce in quantum as a consequence of
specified transactions, and subsequent to the year end, the first RCF reduced
to £377.5m following the receipt of disposal proceeds. In March 2022, the
Group executed with one of its relationship banks a committed backstop bridge
facility. The facility provides £70m of additional liquidity and it
incorporates provisions such that it will be cancelled or will partially
reduce in quantum as a consequence of specified transactions, including
completion of the disposal of Trustmarque announced on 28 January 2022. The
committed facility has an expiry date of 31 August 2023 with an option, by
the lender, for a further one year extension. The facility is subject to
covenants, which are the same as the RCF.
Financial position at 31 December 2021
The Group had net debt of £879.8m at 31 December 2021 (2020: £1,077.1m))
and adjusted net debt of £502.0m (2020: £616.4m). Adjusted EBITDA was
£295.1m at 31 December 2021 (2020: £228.4m). The Group was in compliance
with all debt covenants at 31 December 2021. The Group had liquidity of
£392.4m at 31 December 2021 as detailed further in the Chief Financial
Officer’s review.
2 Basis of preparation judgements and estimates, and going concern continued
(d) Going concern continued
Board assessment
Base case scenario
Under the base case scenario, completion of the Group’s transformation
programme has simplified and strengthened the business and facilitates further
efficiency savings enabling sustainable growth in revenue, profit and cash
flow over the medium term. This enables the generation of positive free cash
flows, and when combined with available committed facilities allows the Group
to manage scheduled debt repayments. The base case financial forecasts
demonstrate liquidity headroom and compliance with all covenant measures
throughout the going concern period to 31 August 2023.
As previously announced, the Board’s plan is to establish an optimal capital
structure to support the execution of the Group’s strategy and to dispose of
businesses that do not align with that strategy. The disposal programme
requires agreement from third parties, and major disposals may be subject to
shareholder and lender approval. Such agreements and approvals, and also any
refinancing, are outside the direct control of the Company and as such, the
inclusion of the effect of any potential future disposals or uncommitted
financing in the Group’s projections is inappropriate for going concern
assessment purposes in accordance with IAS 1 Presentation of Financial
Statements.
The base case projections used for going concern assessment purposes reflect
business disposals completed up to the date of approval of these financial
statements but do not reflect the benefit of any further disposals that are in
the pipeline. The liquidity headroom assessment in the base case projections
reflects the Group’s existing committed financing facilities and debt
redemptions and does not reflect any potential future refinancing,
The base case assumes an improved financial position for the Group as a result
of the realisation of the benefits from completion of the transformation plan.
The key sensitivity to the base case is the execution associated with
delivering revenue growth.
Severe but plausible downside
In considering severe but plausible downside scenarios, the Board has taken
account of trading downside risks, which assume the Group is not successful in
delivering the anticipated levels of revenue growth and sustainable free cash
flows. The downside scenario used for the going concern assessment also
includes potential adverse financial impacts due to additional inflationary
pressure which cannot be passed on to customers, not achieving targeted
margins on new or major contracts, unforeseen operational issues leading to
contract losses and cash outflows, and unexpected potential financial
penalties and losses linked to incidents such as data breaches and/or
cyber-attacks.
Absent any mitigating actions, liquidity headroom shown in the Group’s
financial forecasts under this severe but plausible downside scenario over the
going concern period reduces substantially such that there is a risk of
insufficient liquidity.
There are mitigations, under the direct control of the Group, that could be
implemented to address any immediate shortfalls. These include reductions in
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 sufficient liquidity,
the Board is mindful that such restrictions may be detrimental to the
longer-term success of the Group. In addition, such actions would not
necessarily address potential liquidity requirements beyond the going concern
period should all the downside risks materialise. As noted earlier, a key
consideration for the Board is the expiry of the RCF on 31 August 2023,
immediately following the going concern period.
The principal mitigation to the possibility of insufficient liquidity is the
continuation of the Board approved disposal programme which covers businesses
that do not align with the Group’s longer-term strategy. The Group has a
strong track record of executing major disposals. In 2021, the Board targeted
to achieve £700m of disposal proceeds by 30 June 2022 and will exceed this
target on the completion of the announced disposal of Trustmarque and
Speciality Insurance businesses. The disposal programme continues, with
further disposal processes launched in early 2022. The Board is confident that
the disposal programme will be delivered, thereby introducing substantial net
cash proceeds to the Group, albeit with a corresponding removal of
consolidated profits and cash flows associated with the disposal businesses.
In addition to the ongoing disposal programme, the Group may seek to mitigate
the liquidity risks which might arise in the downside scenario by seeking
further sources of financing beyond its existing committed funding facilities.
The Board has been successful in obtaining new and extended financing
facilities in recent years and an immediate mitigating action includes the
extension of the current RCF which currently expires on 31 August 2023.
Material uncertainties
The Board recognises that the disposal programme requires agreement from third
parties and that major disposals may be subject to shareholder and,
potentially, lender approval. Similarly, any new refinancing, including the
extension of the RCF, requires agreement with lenders. Such agreements and
approvals are outside the direct control of the Company. Therefore, given that
some of the mitigating actions which might be taken to strengthen the Group's
liquidity position in the severe but plausible downside scenario are outside
the control of the Group, this gives rise to material uncertainties, as
defined in accounting standards, relating to events and circumstances which
may cast significant doubt about the Group’s ability to continue as a going
concern and to realise its assets and discharge its liabilities in the normal
course of business.
Adoption of going concern basis
Reflecting the Board’s confidence in the benefits expected from the
completion of the transformation programme and execution of the approved
disposal programme coupled with the potential to obtain further financing
beyond its existing committed funding facilities, the Group continues to adopt
the going concern basis in preparing these financial statements. The Board has
concluded that the Group and Parent Company will be able to continue in
operation and meet their liabilities as they fall due over the period to
31 August 2023. Consequently, these financial statements do not include any
adjustments that would be required if the going concern basis of preparation
were to be inappropriate.
3 Preliminary announcement
A duly appointed and authorised committee of the Board of Directors approved
the preliminary announcement on 9 March 2022.
The financial information set out above does not constitute the Group's
consolidated financial statements for the years ended 31 December 2021 or
2020 but is derived from those accounts.
Statutory accounts for 2020 have been delivered to the Registrar of Companies
and those for 2021 will be delivered in due course. The auditor has reported
on those accounts: their reports were (i) unqualified, (ii) contained 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.
Copies of this 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 2022. 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.
4 Adjusted operating profit and adjusted profit before tax
The items below are excluded from the adjusted results:
Operating profit/(loss) Profit/(loss) before tax
Notes 2021 £m 2020 £m 2021 £m 2020 £m
Reported (86.6) (32.0) 285.6 (49.4)
Amortisation and impairment of acquired intangibles 11 12.0 26.4 12.0 26.4
Impairment of goodwill 12 11.5 — 11.5 —
Litigation and claims (9.3) 0.7 (9.3) 0.7
Net finance costs 8 — — 1.4 1.5
Business exit 5 20.1 (60.5) (399.1) (90.3)
Business exit - on-hold disposal costs — 7.5 — 7.5
Contract-related provisions and impairments 43.1 — 43.1 —
Significant restructuring 148.3 109.0 148.3 109.0
Adjusted 139.1 51.1 93.5 5.4
1. Adjusted operating profit increased by 172.2% (2020: decreased 56.4%) and
adjusted profit before tax increased by 1,631.5% (2020: decreased 67.0%).
Adjusted operating profit of £139.1m (2020: profit £51.1m) was generated on
adjusted revenue of £3,008.5m (2020: £2,995.5m) resulting in an adjusted
operating margin of 4.6% (2020: 1.7%).
2. The tax charge on adjusted profit before tax is £64.8m (2020: £25.3m
credit) resulting in adjusted profit after tax of £28.7m (2020: £30.7m
profit).
3. The adjusted operating profit and adjusted profit before tax for 2020 have
been restated for the impact of business exits during 2021. This has resulted
in adjusted operating profit decreasing from £111.0m to £51.1m and adjusted
profit before tax decreasing from £65.2m to £5.4m.
Amortisation and impairment of acquired intangible assets: the Group
recognised acquired intangible amortisation of £12.0m (2020: £26.4m and
impairment of £nil (2020: £1.6m).
Impairment of goodwill: goodwill is subject to annual impairment testing and
any impairment charges are reported separately.
Litigation and claims: the Group received an insurance settlement of £5.0m in
respect of an historical legal claim that was settled in the period. The legal
claim, which was fully provided at 31 December 2020, was excluded from
adjusted results when provided due to its historical nature and size, and
accordingly the insurance receipt has also been excluded from adjusted
results. Further, the Group has recognised a gain of £3.2m from net movements
in historical provisions that were excluded from adjusted results when
provided.
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 disposals are excluded from the Group's
adjusted results. Individual businesses within the Portfolio Division will be
treated as held-for-sale (and therefore a business exit) when the disposal is
highly probable and expected to complete within twelve months of the balance
sheet date. 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.
Contract-related provisions and impairments: the new corporate structure has
simplified internal reporting, which has highlighted those businesses that
represent a drag on the Group cash resources. This includes the Life &
Pensions business that provides outsourced administration services for the
associated closed pension books which we maintain on behalf of a small number
of clients.
The Group has highlighted in prior reporting the structural challenges
associated with the closed book Life & Pensions contracts. These provided for
upfront cash inflows to support initial transformation activities with a much
lower level of cash inflows once the transformation phase was completed. Under
the Group’s long-term contract accounting policy, the cash flow profile of
these contracts has resulted in deferral of profit into future years which is
not backed by net cash flows (because the relevant cash receipts arose in the
early years of contract execution). Additionally, some of the contracts
contain evergreen clauses allowing the customers to extend the contracts
indefinitely until the run-off of the underlying pension books is complete.
The Life & Pensions business has remained in structural decline as some
customers, with legacy IT systems, have switched to suppliers who can provide
a single digital platform for all their books. The Group has sought to drive
efficiencies to mitigate this fall off in volumes, while supporting customers
who have selected new outsource providers or taken the activities back
in-house.
The closed books and contractual dynamics have led to onerous conditions to
service these contracts. The Board has been required to assess the likely
length of the remaining contracts, given the pattern and experience of
contract terminations while also recognising the evergreen clauses.
Accordingly, management has in prior years provided for the onerous contract
conditions based on the best estimate of the remaining contract terms. The
contingent liability note has highlighted that should the contracts end
earlier or extend for longer this may result in a material reduction or
increase in the provision recorded.
During 2021, the Group has continued to support a major customer on the
transfer of services to another supplier. This is taking significantly longer
than initially expected. Management has reassessed the lifetime estimate to
include not only the onerous contract terms but also the period and likely
costs to support the final handover of services. This assessment has extended
across all contracts that contain evergreen clauses, including those where
there are ongoing discussions regarding either termination or transfer of
services. This reassessment, reflecting by the developments in the latter half
of 2021, provides cover for contracts to extend out to 2026. This has resulted
in an increase to the contract provision and impairment of contract assets
totalling £43.1m which has been reported as an adjusting item. In prior years
the financial impacts of such contract judgements have not been shown as
adjusting items they were considered to be normal course of business, not
material in the context of the Group results and not associated with the
transformation plan. However, due to the quantum of the charge arising from
the 2021 reassessment, the Board consider it appropriate to separately
disclose this as an adjusted item to highlight the impact on the results in
the period.
4 Adjusted operating profit and adjusted profit before tax continued
Significant restructuring: in January 2018, the Group announced a multi-year
transformation plan. In 2021 a charge of £148.3m (2020: £109.0m) was
recognised in relation to the cost of the transformation plan. The costs
include the following:
• Cost to realise cost savings and efficiencies from the transformation plan
£74m (2020: £65m): 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.
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, are captured and
presented as part of the transformation adjustments.
• Professional fees £8m (2020: £3m): including in 2021 fees paid to
consultants in relation to the development and delivery of the corporate
reorganisation.
• Transformation of central Group functions £66m (2020: £15m): 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.
The transformation programme included planned improvements to the Group’s
financial reporting systems. New financial systems were due to go live in the
second half of 2019, and while progress was made, a decision was taken to
defer the go-live as more work was required on the core processes and
procedures before the system could be effectively implemented. Several interim
activities were progressed during both 2020 and 2021 and the technical asset
including the IT infrastructure, software and codebase were preserved.
The new system was deemed necessary to provide effective functionality across
the then six reporting divisions, supported by the central functions and
covering a multifaceted legal entity structure. In addition, the decision to
invest in a new financial reporting systems was predicated on the fact that
the Group’s existing ERP platform would not be supported by the relevant
supplier beyond 2025.
During 2021, the Group simplified its divisional and management organisation
structure with ongoing programmes to streamline the legal entity structure of
the Group. As a result, the Board concluded in late 2021 that continued
investment in a new system was not critical to support the finance
transformation. This coincided with confirmation from the supplier that the
Group’s existing ERP platform will be supported until at least 2030.
These developments allowed management to reconsider the technical imperative
to move onto a new ERP platform and to assess the extent to which the Group
would be better served continuing to use its existing platform. It has become
clear that it is feasible to use the existing platform and, in doing so, avoid
the disruption, additional cost and risk of a transition to a new platform.
The simplified operating model makes possible a continuation of the systems
already available with more limited investment to achieve the required
functionalities that will deliver the prime objectives of standardisation,
automation and improved quality of information.
Therefore, the Board approved a revised approach at the end of 2021 to focus
on optimising the current finance reporting systems and not migrating to an
entirely new finance system. As such, an impairment of £53.5m was recognised
at 31 December 2021 representing the book value of the elements of the new
finance system which are no longer expected to be utilised.
• Cost of accelerating savings to mitigate the financial impact of Covid-19
£nil (2020: £26m): these are incremental to those planned to be incurred as
part of the transformation plan and include accelerated property estate
rationalisation and severance costs.
The cumulative significant restructuring expense recognised since the
commencement of the group-wide transformation in 2018 is £526.7m. 2021 is the
final year of major investments in the transformation plan where the costs are
excluded from adjusted results. From 1 January 2022, any residual
restructuring will be recorded within adjusted results.
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 business 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 2020 comparatives have
been re-presented to exclude the business exits that occurred during 2021.
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. Consequently, individual businesses within
the Portfolio Division will only be treated as held-for-sale where the
disposal is highly probable and expected to complete within twelve months of
the balance sheet date.
2021 business exits
Business exits during the year ended 31 December 2021 comprised:
* the ESS business whose disposal was completed on 1 February 2021;
* the Life Insurance and Pensions Servicing business in Ireland whose disposal
was completed on 1 March 2021;
* the AXELOS joint venture with the UK Government whose disposal was completed
on 29 July 2021;
* the AMT Sybex software, Secure Solutions and Services (SSS) and Speciality
Insurance businesses which were in the process of being sold and which met the
held-for-sale criteria. Accordingly, these businesses were treated as disposal
groups held-for-sale at this date. The disposal of both the AMT Sybex software
and SSS businesses completed subsequently in 2022 (refer to note 16 for
further details);
* a software business in Capita Portfolio that the Group has decided to exit;
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 meet the definition of business exits or assets
held-for-sale at 31 December 2021, their trading results were included within
adjusted results. This includes the Trustmarque business whose disposal was
announced on 28 January 2022 and is subject to certain consents (refer to
note 16 for further details).
Income statement impact 2021 2020
Trading £m Non-trading £m Total £m Trading £m Non-trading £m Total £m
Revenue 174.0 — 174.0 329.3 — 329.3
Cost of sales (92.7) — (92.7) (163.5) — (163.5)
Gross profit 81.3 — 81.3 165.8 — 165.8
Administrative expenses (30.5) (70.9) (101.4) (54.8) (50.5) (105.3)
Operating profit/(loss) 50.8 (70.9) (20.1) 111.0 (50.5) 60.5
Net finance costs (0.4) (0.1) (0.5) (0.1) (1.5) (1.6)
Gain on business disposal — 419.7 419.7 — 31.4 31.4
Profit/(loss) before tax 50.4 348.7 399.1 110.9 (20.6) 90.3
Taxation (9.5) (25.4) (34.9) (21.0) 17.7 (3.3)
Profit/(loss) after tax 40.9 323.3 364.2 89.9 (2.9) 87.0
Trading revenue and costs represent the current year trading performance of
those businesses up to the point of being disposed or exited. Trading expenses
primarily comprise payroll costs of £79.3m (2020: £139.6m) and IT costs of
£24.9m (2020: £48.6m).
Included within non-trading administrative expenses is £4.9m (2020: £7.5m)
of amortisation of acquired intangibles which, in accordance with the
Group’s policy, were excluded from the Group’s adjusted results in both
the current and prior periods and have been reclassified to Business exits
because they relate to businesses disposed of or being exited. Other
non-trading administrative expenses include: asset impairments of £53.1m
(2020: £10.1m); disposal project costs of £8.9m (2020: £31.9m); and other
costs of £4.1m (2020: £3.3m), which are offset by provision releases of
£nil (2020: £2.3m).
5 Business exits, assets held for sale and discontinued operations continued
2021 disposals
During 2021 the Group disposed of three businesses: ESS; Life Insurance and
Pensions Servicing in Ireland; and the AXELOS joint venture with the UK
Government.
During 2020 the Group disposed of three businesses: Eclipse Legal Services;
Capita Workplace Technology; and Employee Benefits.
The assets and liabilities disposed of and the related gain on disposal are as
follows.
2021 £m 2020 £m
Property, plant and equipment 0.2 0.6
Intangible assets 19.9 3.2
Goodwill 65.7 12.1
Contract fulfilment assets 0.1 —
Trade and other receivables 2.6 2.3
Prepayments 0.1 —
Cash and cash equivalents 8.2 3.2
Disposal group assets held-for-sale 120.2 4.3
Income and deferred tax (4.3) (0.3)
Trade and other payables (28.8) (6.5)
Accruals (5.1) —
Deferred income (2.9) (0.4)
Deferred consideration payable (22.8) —
Loans payable (2) (26.0) —
Disposal group liabilities held-for-sale (57.5) (1.2)
Net identifiable assets/(liabilities) disposed of 69.6 17.3
Non-controlling interests (3.4) —
66.2 17.3
Cash consideration received 508.6 58.1
Less: costs of disposal (25.5) (9.4)
Net proceeds 483.1 48.7
Realisation of cumulative currency translation difference 2.8 —
Gain on business disposals 419.7 31.4
Net cash inflow
Net proceeds 483.1 48.7
less: (cash)/overdrafts disposed of (1) (25.9) (3.2)
Total net cash inflow 457.2 45.5
(1 ) (Cash)/overdrafts disposed of comprise (cash)/overdrafts in the balance
sheet of £(8.2)m (2020: £(3.2)m), and (cash)/overdrafts within disposal
group assets and liabilities held-for-sale of £(17.7)m (2020: £nil).
(2 ) The loan payable represents an interest bearing loan payable by AXELOS
Limited to HM Government in connection with a dividend payable by this
company. The loan is subject to interest at 6% and was settled on completion
of the disposal on 29 July 2021.
Disposal costs of £21.2m, relating to businesses disposed of in the year,
were recognised in prior years and are excluded from the above gain on
business disposals.
5 Business exits, assets held for sale and discontinued operations continued
Disposal group assets and liabilities held-for-sale
2021 £m 2020 £m
Property, plant and equipment 0.4 0.1
Intangible assets 14.4 44.4
Goodwill 44.2 45.3
Right-of-use assets — 4.5
Contract fulfilment assets 32.6 3.1
Trade and other receivables 10.7 2.9
Accrued income 5.1 0.6
Prepayments 5.2 0.7
Cash and cash equivalents 15.8 12.9
Income tax receivable and deferred tax assets 10.4 0.1
Disposal group assets held-for-sale 138.8 114.6
Trade and other payables 1.6 1.5
Other taxes and social security 1.6 0.1
Accruals 3.4 3.5
Deferred income 69.8 40.3
Lease liabilities — 4.6
Income tax payable and deferred tax liabilities 2.3 3.5
Provisions 2.4 0.4
Disposal group liabilities held-for-sale 81.1 53.9
Business exit cash flows
Businesses exited and being exited generated net operating cash inflows of
£50.9m (2020: cash inflows of £123.2m).
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.
In 2021 the income of £3.1m related to a reduction in provisions following
reassessments of the likely future costs to be incurred by the Group.
In 2020 the credit of £20.8m related 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. Cash flows generated from
discontinuing operations in 2020 of £18.6m related 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 0.19p (2020:
1.26p) on basic earnings per share and 0.18p (2020: 1.24p) on diluted earnings
per share.
6 Contract accounting
At 31 December 2021, the Group had the following results and balance sheet
items related to long-term contracts:
Notes 2021 £m 2020 £m
Long-term contractual adjusted revenue 7 2,156.9 2,178.6
Non-current and current deferred income 794.7 975.2
Non-current contract fulfilment assets 286.7 294.8
Non-current and current onerous contract provision 45.8 16.5
Background
The Group operates diverse businesses. The majority of the Group’s revenue
is from contracts greater than two years in duration (long-term contractual),
being 72% of Group adjusted revenue in 2021 (2020: 73%).
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 over time
as the target operating model is implemented and efficiencies realised. This
results in lower profits or losses in the early years of contracts and
potentially higher profits in later years as the transformation activities are
successfully completed and the target operating model fully implemented (the
business as usual (BAU) phase). The inflection point is when the contract
becomes profitable.
Contract fulfilment assets are recognised for those costs qualifying for
capitalisation. The utilisation of these assets is recognised over the
contract term. The timing of cash receipts from customers typically matches
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 certifying 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 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. For half and full year
reporting, the Audit and Risk Committee specifically reviews the material
judgements and estimates, and the overall approach in respect of the Group’s
major contracts, 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 £2.0 billion (2020: £1.5 billion) or 68%
(2020: 47%) of Group adjusted revenue. Non-current contract fulfilment assets
at 31 December 2021 were £286.7m, of which £184.1m (2020: £152.7m) 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, £6.6m at 31 December 2021 (2020: £44.5m). The recoverability of
these assets is dependent on no significant adverse change in the key contract
assumptions arising in the next financial year. The deferred income associated
with these contracts was £89.5m at 31 December 2021 (2020: £232.3m) and is
forecast to be recognised as performance obligations continue to be delivered
over the life of the respective contracts. Onerous contract provisions
associated with these contracts were £45.8m at 31 December 2021 (2020:
£15.7m).
Following these reviews, and reviews of smaller contracts across the business,
contract fulfilment asset impairment of £7.3m (2020: £17.5m) were identified
and recognised within adjusted cost of sales, of which £nil (2020: £2.0m)
relate to contract fulfilment assets added during the period, and net onerous
contract provisions of £32.0m (2020: £10.4m) were identified out of which
£3.3m was 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, £184.1m of non-current contract
fulfilment assets relates to major contracts with on-going transformational
activities and £6.6m of non-contract fulfilment assets and £45.8m of onerous
contract provisions relate 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 transformation contracts have key milestones during the
next twelve 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 DFRP and Royal Navy training.
Additional information, which does not form part of these consolidated
financial statements, on the results and performance of the underlying
divisions including the outlook on certain contracts is set out in the
divisional performance review.
7 Revenue and segmental information
The Group’s operations are managed separately according to the nature of the
services provided, with each segment representing a strategic business
division offering a different package of client outcomes across the markets
the Group serves. Capita plc is a reconciling item and not an operating
segment. 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. The new
organisational structure, announced in March 2021, became operational in the
second half of the year and the disclosures below represent the new structure
as reported to the Chief Operating Decision Maker. Under the new structure,
the Group comprises of two core trading divisions - Capita Public Service and
Capita Experience - and a third division - Capita Portfolio - which comprises
of non-core businesses that the Group intends to exit in due course.
Comparative information has been re-presented accordingly.
Adjusted revenue, excluding results from businesses exited in both years
(adjusting items), was £3,008.5m (2020: £2,995.5m), an increase of 0.4%
(2020: decline 9.7%).
Year ended 31 December 2021 Notes Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total adjusted £m Adjusting items £m Total reported £m
Continuing operations
Long-term contractual 1,223.9 894.3 38.7 — 2,156.9 146.3 2,303.2
Short-term contractual 122.2 236.7 143.5 — 502.4 27.6 530.0
Transactional (point-in-time) 64.3 53.7 231.2 — 349.2 0.1 349.3
Total segment revenue 1,410.4 1,184.7 413.4 — 3,008.5 174.0 3,182.5
Trading revenue 1,449.3 1,219.6 557.4 — 3,226.3 — 3,226.3
Inter-segment revenue (38.9) (34.9) (144.0) — (217.8) — (217.8)
Total adjusted segment revenue 1,410.4 1,184.7 413.4 — 3,008.5 — 3,008.5
Business exits – trading 5 — — 174.0 — — 174.0 174.0
Total segment revenue 1,410.4 1,184.7 587.4 — 3,008.5 174.0 3,182.5
Year ended 31 December 2020
Continuing operations
Long-term contractual 1,084.4 1,019.9 74.3 — 2,178.6 264.7 2,443.3
Short-term contractual 29.9 239.2 155.3 — 424.4 65.1 489.5
Transactional (point-in-time) 158.7 48.6 185.2 — 392.5 (0.5) 392.0
Total segment revenue 1,273.0 1,307.7 414.8 — 2,995.5 329.3 3,324.8
Trading revenue 1,306.4 1,361.2 697.4 — 3,365.0 — 3,365.0
Inter-segment revenue (33.4) (53.5) (282.6) — (369.5) — (369.5)
Total adjusted segment revenue 1,273.0 1,307.7 414.8 — 2,995.5 — 2,995.5
Business exits – trading 5 — — 329.3 — — 329.3 329.3
Total segment revenue 1,273.0 1,307.7 744.1 — 2,995.5 329.3 3,324.8
Geographical location
The table below presents revenue by geographical location.
2021 2020
United Kingdom £m Other £m Total £m United Kingdom £m Other £m Total £m
Revenue 2,882.4 300.1 3,182.5 3,011.0 313.8 3,324.8
7 Revenue and segmental information continued
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.
Order book 31 December 2021 Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total £m
Long-term contractual 3,112.7 2,249.3 478.7 — 5,840.7
Short-term contractual 173.6 22.5 78.6 — 274.7
Total 3,286.3 2,271.8 557.3 — 6,115.4
Order book 31 December 2020 Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total £m
Long-term contractual 2,665.3 2,399.4 589.7 — 5,654.4
Short-term contractual 71.3 29.3 95.7 — 196.3
Total 2,736.6 2,428.7 685.4 — 5,850.7
The table below shows the expected timing of revenue to be recognised on
long-term contractual orders at 31 December 2021.
Time bands of expected revenue recognition from long-term contractual orders Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total £m
< 1 year 711.6 799.2 145.4 — 1,656.2
1–5 years 1,610.6 1,150.4 199.7 — 2,960.7
> 5 years 790.5 299.7 133.6 — 1,223.8
Total 3,112.7 2,249.3 478.7 — 5,840.7
Prior year comparative information is not presented for the expected timing of
revenue recognition because it is a forward looking disclosure and therefore
management does not believe that such disclosure provides meaningful
information to a user of the financial statements.
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 above tables because they are not contracted.
Additionally, revenue from contract extensions is 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 £668.0m (2020: £800.7m). 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 £5.8 billion (2020: £5.7 billion) revenue to be earned on long-term
contracts, £4.3 billion (2020: £3.8 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 £2.3 billion (2020: £2.1 billion) of revenue to the Group over
the life of these contracts.
The Group performs various services for a number of UK Government ministerial
departments and considers these individual ministerial departments to be
separate customers due to the limited economic integration between each
ministerial department. 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 £941.1m
(2020: £998.7m).
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 £23.1m on early termination of
contracts in Capita Experience and agreed reduction in scope on a contract in
Capita Public Service (2020: £17.5m in Capita Experience).
7 Revenue and segmental information continued
Segmental profit
The table below presents profit by segment.
Year ended 31 December 2021 Notes Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total adjusted £m Adjusting items £m Total reported £m
Adjusted operating profit 4 98.3 69.1 23.8 (52.1) 139.1 — 139.1
Restructuring 4 (5.1) (12.0) (3.2) (128.0) — (148.3) (148.3)
Business exits – trading 5 — — 50.8 — — 50.8 50.8
Total trading result 93.2 57.1 71.4 (180.1) 139.1 (97.5) 41.6
Non-trading items:
Business exits – non-trading 5 — (70.9) (70.9)
Other adjusting items 4 — (57.3) (57.3)
Operating profit/(loss) 139.1 (225.7) (86.6)
Year ended 31 December 2020 Notes
Adjusted operating profit 4 12.9 80.9 14.2 (56.9) 51.1 — 51.1
Restructuring 4 (8.6) (11.6) (4.4) (84.4) — (109.0) (109.0)
Business exits – trading 5 — — 111.0 — — 111.0 111.0
Total trading result 4.3 69.3 120.8 (141.3) 51.1 2.0 53.1
Non-trading items:
Business exits – non-trading 5 — (50.5) (50.5)
Other adjusting items 4 — (34.6) (34.6)
Operating profit/(loss) 51.1 (83.1) (32.0)
Geographical location
The table below presents the carrying amount of non-current assets (excluding
deferred tax, financial assets and employee benefits) by the geographical
location of those assets.
2021 2020
United Kingdom £m Other £m Total £m United Kingdom £m Other £m Total £m
Non-current assets 1,791.3 27.7 1,819.0 2,168.4 38.4 2,206.8
8 Net finance costs
The table below shows the composition of net finance costs, including those
excluded from adjusted profit:
2021 £m 2020 £m
Interest income
Interest on cash (0.4) (1.6)
Interest on finance lease assets (4.3) (1.2)
Total interest income (4.7) (2.8)
Interest expense
Private placement loan notes (1) 17.9 20.6
Cash flow hedges recycled to the income statement 0.6 (4.5)
Bank loans and overdrafts 5.9 4.9
Interest on finance lease liabilities 23.8 25.1
Net interest cost on defined benefit pension schemes 1.5 3.2
Total interest expense 49.7 49.3
Net finance expense included in adjusted profit 45.0 46.5
Included within business exits
Bank loans and overdrafts 0.4 0.1
Discount unwind on public sector subsidiary partnership payment 0.4 1.1
Other financial income (0.3) —
Fair value hedge ineffectiveness (2) — 0.4
Other items excluded from adjusted profits
Non-designated foreign exchange forward contracts – mark-to-market 1.5 0.9
Fair value hedge ineffectiveness (2) (0.1) 0.6
Net finance expenses excluded from adjusted profit 1.9 3.1
Total net finance expense 46.9 49.6
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 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 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.
2021 2020
Continuing operations p Total operations p Continuing operations p Total operations p
Basic earnings/(loss) per share – adjusted 1.61 1.61 2.41 2.41
– reported 13.33 13.52 (0.41) 0.85
Diluted earnings/(loss) per share – adjusted 1.59 1.59 2.41 2.37
– reported 13.15 13.33 (0.41) 0.85
The following tables show the earnings and share data used in the basic and
diluted earnings/(loss) per share calculations:
2021 2020
Continuing operations £m Total operations £m Continuing operations £m Total operations £m
Adjusted profit before tax for the period 93.5 93.5 5.4 5.4
Income tax credit/(charge) (64.8) (64.8) 25.3 25.3
Adjusted profit for the period 28.7 28.7 30.7 30.7
Less: Non-controlling interest (1.9) (1.9) 9.2 9.2
Adjusted profit attributable to shareholders 26.8 26.8 39.9 39.9
Reported profit/(loss) before tax for the period 285.6 288.7 (49.4) (28.6)
Income tax credit/(charge) (61.5) (61.5) 47.6 47.6
Reported profit/(loss) for the period 224.1 227.2 (1.8) 19.0
Less: Non-controlling interest (2.5) (2.5) (5.0) (5.0)
Total profit/(loss) attributable to shareholders 221.6 224.7 (6.8) 14.0
2021 m 2020 m
Weighted average number of ordinary shares (excluding trust and treasury shares) for basic earnings per share 1,661.9 1,656.1
Dilutive potential ordinary shares:
Employee share options 23.9 27.4
Weighted average number of ordinary shares (excluding trust and treasury shares) adjusted for the effect of dilution 1,685.8 1,683.5
At 31 December 2021 nil (2020: 27,447,210) options were excluded from the
diluted weighted average number of ordinary shares used in the reported
continuing operations earnings per share 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 exclude
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
2021 2020
Leasehold improvements, 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 103.3 193.2 296.5 118.1 206.6 324.7
Additions 8.1 17.5 25.6 21.0 19.8 40.8
Disposal of business — (0.8) (0.8) (0.7) (0.1) (0.8)
Disposals – included in adjusted profit (1.6) (10.3) (11.9) (5.3) (14.8) (20.1)
Disposals – excluded from adjusted profit (0.8) (0.1) (0.9) (19.9) (14.4) (34.3)
Transfer to assets held-for-sale (0.1) (0.6) (0.7) (1.0) (11.8) (12.8)
Reclassifications — (1.9) (1.9) (1.1) 7.8 6.7
Asset retirements (8.9) (25.8) (34.7) (6.8) (1.4) (8.2)
Exchange movement (0.4) (2.1) (2.5) (1.0) 1.5 0.5
At 31 December 99.6 169.1 268.7 103.3 193.2 296.5
Depreciation and impairment
At 1 January 41.6 97.7 139.3 47.3 83.1 130.4
Depreciation charged in the year - included in adjusted profit 9.4 38.7 48.1 9.0 39.8 48.8
Depreciation charged in the year - included in business exits — 0.5 0.5 — 2.1 2.1
Disposal of business — (0.6) (0.6) (0.2) (0.1) (0.3)
Disposals – included in adjusted profit (1.3) (10.1) (11.4) (4.6) (12.3) (16.9)
Disposals – excluded from adjusted profit (0.8) (0.1) (0.9) (3.9) (14.3) (18.2)
Impairment – included in adjusted profit — 0.8 0.8 1.2 2.2 3.4
Impairment – excluded from adjusted profit 0.6 0.5 1.1 — 6.9 6.9
Transfer to assets held-for-sale (0.1) (0.2) (0.3) (0.7) (8.8) (9.5)
Reclassifications — (0.4) (0.4) — — —
Asset retirements (8.9) (25.8) (34.7) (6.8) (1.4) (8.2)
Exchange movement — (1.8) (1.8) 0.3 0.5 0.8
At 31 December 40.5 99.2 139.7 41.6 97.7 139.3
Net book value
At 1 January 61.7 95.5 157.2 70.8 123.5 194.3
At 31 December 59.1 69.9 129.0 61.7 95.5 157.2
At 31 December 2021, amounts contracted for but not provided in the financial
statements for the acquisition of property, plant and equipment amounted to
£3.6m (2020: £5.3m), relating to building improvements on leased property.
During the year, the Group exited a number of properties and their related
leasehold improvement assets were disposed of for no consideration. Since
these exits were part of the Group wide transformation, the related charge was
excluded from adjusted profit.
11 Intangible assets
2021 2020
Intangible assets acquired in business combinations £m Capitalised/ purchased software £m Total £m Intangible assets acquired in business combinations £m Capitalised/ purchased software £m Total £m
Cost
At 1 January 174.3 314.2 488.5 371.0 363.0 734.0
Business disposal (61.3) (7.6) (68.9) — (3.5) (3.5)
Additions — 32.5 32.5 — 46.6 46.6
Disposals – included in adjusted profit — (3.5) (3.5) — (31.6) (31.6)
Disposals – excluded from adjusted profit — (2.9) (2.9) — (2.0) (2.0)
Transfer to assets held-for-sale (6.8) (16.4) (23.2) — (46.0) (46.0)
Reclassifications — 1.9 1.9 — — —
Asset retirement (50.3) (94.8) (145.1) (202.9) (13.9) (216.8)
Exchange movement (0.5) (0.7) (1.2) 6.2 1.6 7.8
At 31 December 55.4 222.7 278.1 174.3 314.2 488.5
Amortisation and impairment
At 1 January 135.4 88.1 223.5 296.9 82.9 379.8
Amortisation charged in the year - included in adjusted profit — 36.8 36.8 — 36.7 36.7
Amortisation charged in the year - excluded from adjusted profit 12.0 — 12.0 24.8 — 24.8
Amortisation charged in the year - included in business exits 4.9 4.0 8.9 7.5 5.6 13.1
Impairment – included in adjusted profit — 2.1 2.1 — 0.1 0.1
Impairment – excluded from adjusted profit — 54.1 54.1 1.6 0.9 2.5
Impairment – included in business exits — 2.5 2.5 — — —
Business disposal (46.5) (2.4) (48.9) — (0.3) (0.3)
Disposals – included in adjusted profit — (3.2) (3.2) — (21.9) (21.9)
Disposals – excluded from adjusted profit — (2.9) (2.9) — (0.4) (0.4)
Transfer to assets held-for-sale (5.7) (3.1) (8.8) — (1.6) (1.6)
Reclassifications — 0.4 0.4 — — —
Asset retirement (50.3) (94.8) (145.1) (202.9) (13.9) (216.8)
Exchange movement (0.2) (0.4) (0.6) 7.5 — 7.5
At 31 December 49.6 81.2 130.8 135.4 88.1 223.5
Net book value
At 1 January 38.9 226.1 265.0 74.1 280.1 354.2
At 31 December 5.8 141.5 147.3 38.9 226.1 265.0
Intangible assets acquired in business combinations include brands (net book
value 2021: £nil, 2020: £2.6m), Intellectual Property software and licences
(net book value 2021: £nil, 2020: £20.9m), contracts and committed sales
(net book value 2021: £3.3m, 2020: £7.7m) and clients lists and
relationships (net book value 2021: £2.5m, 2020: £7.7m). Intangible assets
capitalised or purchased include capitalised software development (net book
value 2021: £120.7m, 2020: £184.0m) and purchased software (net book value
2021: £20.8m, 2020: £42.1m).
‘Impairment - excluded from adjusted profit’ includes £53.5m in respect
of areas of a new financial reporting system invested in as part of the
finance transformation that are no longer expected to be used. Refer to the
Chief Financial Officer’s review for details.
12 Goodwill
2021 £m 2020 £m
Cost
At 1 January 1,918.5 2,016.1
Business disposal (65.7) (52.4)
Transfer to disposal group assets held-for-sale (177.3) (45.3)
Exchange movement 1.3 0.1
At 31 December 1,676.8 1,918.5
Accumulated impairment
At 1 January 798.0 838.3
Business disposal — (40.3)
Transfer to disposal group assets held-for-sale (89.0) —
Impairment – excluded from adjusted profit 11.5 —
Impairment – included in business exits 4.6 —
At 31 December 725.1 798.0
Net book value
At 1 January 1,120.5 1,177.8
At 31 December 951.7 1,120.5
Cash-generating units
As announced in March 2021, the Group has put in place a new organisational
structure effective from August 2021 comprising two core divisions, Capita
Public Service and Capita Experience, and a third division holding our
non-core assets, Capita Portfolio.
Following this reorganisation, the Group has reviewed the historical
assessment of CGUs and the allocation of goodwill. Reflecting the way
management now exercises oversight and monitors the Group’s performance, the
Board concluded that the lowest level at which goodwill is monitored is at the
divisional level for Capita Public Service and Capita Experience, and at a
sub-divisional level for Capita Portfolio, and goodwill has been reallocated
to these new CGUs or group of CGUs. Where possible, goodwill was reallocated
to the new CGUs by transferring the goodwill balance created on acquisition of
the business to the CGU in which the business now primarily resides under the
new organisational structure. In some cases it was not possible to clearly
determine a single CGU in which the acquired business now primarily resides,
and in these instances the goodwill was apportioned to the new CGUs using an
allocation method that best reflected the goodwill associated with the
reorganised units. As at 31 December 2021 the Group has nine CGUs or groups
of CGUs for the purpose of impairment testing of goodwill. The opening
goodwill balance as at 1 January 2021 has been reallocated for comparable
purposes.
Carrying amount of goodwill allocated to groups of CGUs:
Capita Public Service £m Capita Experience £m Capita Portfolio
CGU People £m Software £m Property £m Business Solutions £m Technology £m Travel £m Other (1) £m Total £m
At 1 January 284.6 218.9 106.5 94.7 82.6 32.6 102.8 80.2 117.6 1,120.5
Business disposals — — — — — — — — (65.7) (65.7)
Transfer to assets held-for-sale — — — (51.4) — — — — (36.9) (88.3)
Impairment — — — — — — — (11.5) — (11.5)
Impairment – business exits — — — (4.6) — — — — — (4.6)
Exchange movement — 1.3 — — — — — — — 1.3
At 31 December 284.6 220.2 106.5 38.7 82.6 32.6 102.8 68.7 15.0 951.7
1. Other group of CGUs includes other businesses that have been disposed of or
transferred to held for sale during the year and the Fera CGU.
Business exits
As set out in note 5, three businesses were fully disposed of during the year.
Goodwill relating to two of these businesses had been reclassified to disposal
group assets held-for-sale at 31 December 2020. Goodwill relating to the third
disposal is included within the Other group of CGUs as at 1 January 2021, and
derecognised as part of business disposals.
Three additional businesses within Capita Portfolio (within the Software CGU
and Other group of CGUs) that the Group has or intends to dispose of in 2022
met the criteria to be treated as held-for-sale at 31 December 2021, with
goodwill relating to these businesses reclassified to disposal group assets
held-for-sale.
One business within the Software CGU met the criteria to be treated as a
business exit at 31 December 2021. Goodwill relating to this business has been
impaired within business exits.
The impairment test
The Group’s impairment test compares the carrying value of each CGU with its
recoverable amount. The recoverable amount of a CGU is the higher of fair
value less cost of disposal, and its value in use. As described in the
strategic report, 2021 marked the culmination of the Group’s multi-year
transformation programme. The recoverable amount of each group of CGUs has
therefore been calculated using value in use (being the present value of
future cash flows for each CGU) with the exception of the Technology CGU
(representing the Trustmarque business) where the fair value less cost to sell
was readily determinable and has instead been used. The fair value of the
Technology CGU is based on the disposal proceeds expected to be received on
completion of the Trustmarque disposal, and is categorised as Level 3 in the
fair value hierarchy of IFRS 13.
In undertaking the annual impairment review, the directors considered both
internal and external sources of information, and any observable indications
that may suggest that the carrying value of goodwill may be impaired. This
included a comparison with the Group’s share price and market
capitalisation.
As at 31 December 2021, the estimated recoverable amount of each CGU exceeded
its respective carrying value, except for the Travel CGU where a goodwill
impairment of £11.5m was recognised. Following the organisational restructure
in 2021 this is the first year that the Group’s Travel business is a
stand-alone CGU for impairment testing purposes. In 2020 it formed part of the
Specialist Services group of CGUs. The goodwill impairment was primarily
driven by the continuing impact of Covid-19 on the travel industry, which is
reflected in the recovery assumptions applied to the CGU’s near-term
business plans, as well as the increase in comparable companies' discount
rates.
12 Goodwill continued
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 2022-2024 business plans (BP) approved by the Board.
Covid-19 and the associated recovery continued to introduce unprecedented
economic uncertainties and has led to increased judgement particularly in
forecasting future financial performance.
Other than for movements in deferred income and contract fulfilment assets,
cash flows are adjusted to exclude working capital movements since the
corresponding balances are not included in the CGU carrying amount.
The Board has considered an appropriate methodology to apply when allocating
central function costs, which is a key sensitivity. The methodology applied
for the 2021 impairment test was aligned to that applied in reporting
segmental performance. The remaining costs of the Capita plc segment are
allocated based on 2022 EBITDA representing the first year of business post
transformation.
The long-term growth rate is based on economic growth forecasts by recognised
bodies and this been applied to forecast cash flows for years four and five
(2025 and 2026) and for the terminal period. The 2021 long-term growth rate is
1.7% (2020: 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
for 2021. The 2020 rates have not been reported due to the CGU restructure in
the second half of 2021.
Capita Public Service Capita Experience Capita Portfolio
People Software Property Business Solutions Technology Travel Other
2021 13.0% 11.6% 12.4% 12.8% 13.2% 13.3% 13.2% 15.7% 11.9%
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. 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.
The table below shows the additional impairment required (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 2022 to 2024, and the long-term growth rate (1.7%)
applied to projected cash flows for 2025, 2026, and the terminal period. We
have also considered the impact of all of the scenarios together, which is
also a reasonable possible alternative.
1% increase in discount rate £m Long-term growth rate decrease by 1% £m Severe but plausible downside £m Combination sensitivity £m
Capita Public Service — — — —
Capita Experience — — (37.5) (88.9)
Capita Portfolio - People — — (22.0) (34.1)
Capita Portfolio - Software — — — —
Capita Portfolio - Property — — (6.4) (16.0)
Capita Portfolio - Business Solutions — — — —
Capita Portfolio - Travel (4.9) (3.1) (12.4) (18.6)
Capita Portfolio - Other — — — —
Total (4.9) (3.1) (78.3) (157.6)
Under the combination sensitivity scenario, an increase in impairment for
Travel and impairments in relation to Experience, People and Property CGUs
have been highlighted. Whereas under the base case impairment test the
recoverable amount exceeded the carrying amount of assets (including goodwill)
relating to these CGUs by £174.9m for Experience, £10.6m for People and
£10.2m for Property.
Management continue to monitor closely the performance of all CGUs and
consider the impact of any changes to the key assumptions. Given trading is
still being affected by the continued recovery from Covid-19, there is a
greater range of potential future outcomes. A number of these downsides would
give rise to an impairment.
13 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 13.5 15.3 41.7 8.7 38.1 7.1 124.4
Reclassifications 0.2 — — 0.8 0.1 (1.1) —
Provisions in the year 24.6 8.3 7.1 4.0 62.5 9.7 116.2
Releases in the year (1.6) (5.4) (6.2) (3.4) (9.1) (1.8) (27.5)
Utilisation (11.1) (16.7) (29.4) (0.4) (6.9) (5.6) (70.1)
Transfer to disposal group liabilities held-for-sale — — — — — (2.4) (2.4)
At 31 December 25.6 1.5 13.2 9.7 84.7 5.9 140.6
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
headcount 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 four 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. 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 two 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 six years.
The customer contract provision includes £54.5m in respect of contracts in
Capita Experience. The new corporate structure has simplified internal
reporting, which has highlighted those businesses that represent a drag on the
Group cash resources. This includes the Life & Pensions business that provides
outsourced administration services for the associated closed pension books
which we main on behalf of clients.
The Group has highlighted in prior reporting the structural challenges
associated with the closed book Life & Pensions contracts. These provided for
upfront cash inflows to support initial transformation activities with a much
lower level of cash inflow once the transformation phase was completed. Under
the Group’s long-term contract accounting policy, the cash flow profile of
these contracts has resulted in deferral of profit into future years which is
not backed by net cash flows (because the relevant cash receipts arose n the
early years of contract execution). Additionally, some of the contracts
contain evergreen clauses allowing the customers to extend the contracts
indefinitely until the run-off of the underlying pension books is complete.
The Life & Pensions business has remained in structural decline as some
customers, with legacy IT systems, have switched to suppliers who can provide
a single digital platform for all their books. The Group has sought to drive
efficiencies to mitigate this fall off in volumes, while supporting customers
who have selected new outsource providers or taken the activities back
in-house.
The closed books and contractual dynamics have led to onerous conditions to
service these contracts. The Board has been required to assess the likely
length of the remaining contracts, given the pattern and experience of
contract terminations while also recognising the evergreen clauses.
Accordingly, management has in prior years provided for the onerous contract
conditions based on the best estimate of the remaining contract terms. The
contingent liability note has highlighted that should the contracts end
earlier or extend for longer this may result in a material reduction or
increase in the provision recorded.
During 2021, the Group has continued to support a major customer on the
transfer of services to another supplier. This is taking significantly longer
than initially expected. Management has reassessed the lifetime estimate to
include not only the onerous contract terms but also the period and likely
costs to support the final handover of services. This assessment has extended
across all contracts that contain evergreen clauses, including those where
there are ongoing discussions regarding either termination or transfer of
services.
This reassessment, reflecting the developments in the latter half of 2021,
provides cover for contracts to extend out to 2026. This has resulted in an
increase to the contract provision of £39.5m which has been reported as an
adjusting item. In prior years the financial impacts of such contract
judgements have not been shown as adjusting items as they were considered to
be normal course of business, not material in the context of the Group results
and not associated with the transformation plan. However, due to the quantum
of the charge arising from the 2021 reassessment, the Board consider it
appropriate to separately disclose this as an adjusted item to highlight the
impact on the results in the period.
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 which are immaterial on an individual basis. This includes provision
for regulatory audits, employee related matters and related professional fees
which are not included within the restructuring provision. These are likely to
unwind over periods of up to five years.
14 Cash flow information
2021 2020
Note Adjusted £m Reported £m Adjusted (1) £m Reported £m
Cash flows from operating activities:
Operating profit/(loss) 4 139.1 (86.6) 51.1 (32.0)
Adjustments for non-cash items:
Depreciation 116.3 117.1 137.0 139.1
Amortisation of intangible assets 11 36.8 57.7 36.8 74.6
Share-based payment expense 1.2 1.2 6.4 6.4
Employee benefits 8.9 8.9 13.1 13.1
Loss on sale of property, plant and equipment / intangible assets 0.7 0.7 2.4 17.1
Impairment of disposal group assets — 44.1 — 11.7
Impairment of non-current assets 2.9 90.0 3.5 32.2
Other adjustments:
Movement in provisions 11.4 21.9 30.1 44.0
Pension deficit contribution — (155.5) — (29.5)
Other contributions into pension schemes (8.4) (8.4) (19.5) (19.5)
Movements in working capital:
Trade and other receivables (7.1) (1.2) 148.4 172.7
Non-recourse trade receivables financing — (9.7) — 13.6
Trade and other payables 16.7 44.2 (56.1) (58.4)
VAT deferral — (104.1) — 118.8
Deferred income (92.8) (116.9) (26.1) (46.8)
Contract fulfilment assets (non-current) (40.3) (24.7) (31.9) (22.9)
Cash generated from operations 185.4 (121.3) 295.2 434.2
Adjustments for free cash flows:
Income tax paid (15.5) (17.7) (8.8) (8.8)
Net interest paid (40.5) (40.1) (47.8) (47.7)
Net cash flows from operating activities 129.4 (179.1) 238.6 377.7
Purchase of property, plant and equipment 10 (18.9) (25.6) (36.1) (40.8)
Purchase of intangible assets 11 (32.5) (32.5) (42.7) (46.6)
Proceeds from sale of property, plant and equipment / intangible assets 0.1 0.1 10.5 13.5
Free cash flow 78.1 (237.1) 170.3 303.8
14 Cash flow information continued
Adjusted free cash flow and cash generated from operations
Free cash flow Cash generated/(used) by operations
2021 £m 2020 £m 2021 £m 2020 £m
Reported (237.1) 303.8 (121.3) 434.2
Pension deficit contributions 155.5 29.5 155.5 29.5
Significant restructuring 68.6 64.1 68.6 64.1
Litigation and claims 18.5 — 18.5 —
Business exits (41.2) (102.2) (49.7) (106.2)
Business exits - on hold disposal costs — 7.5 — 7.5
Non-recourse trade receivables financing 9.7 (13.6) 9.7 (13.6)
VAT deferral 104.1 (118.8) 104.1 (118.8)
Other — — — (1.5)
Adjusted 78.1 170.3 185.4 295.2
Pension deficit contributions: in 2012, the Group established the Capita
Scotland (Pension) Limited Partnership (the ‘Partnership’) with the
Scheme. Under this arrangement, intellectual property rights (IPR) in specific
Group software were transferred to the partnership and the rights to use,
develop and exploit this IPR was licensed back to the Group in return for an
annual fee. The Scheme’s interest in the Partnership entitles it to an
annual distribution of £8.0m for 15 years from inception. However, at 31
December 2020, the Scheme's interest in the Partnership ceased and in return
the Scheme received a special contribution of £50.1m in February 2021 (for 31
December 2020: distributions of £8.0m were received).
In June 2021, the Group agreed a deficit recovery plan with the Trustee of the
Capita Pension and Life Assurance Scheme (the “Scheme”) following
completion of the full actuarial valuation as at 31 March 2020. The payments
under the agreed recovery plan total £124m to be paid between July 2021 and
December 2023. In addition to this, the Group agreed to make additional,
non-statutory, contributions of £15m each year in 2024, 2025 and 2026 to meet
a secondary funding target.
As part of the 2017 funding agreement, additional monthly contributions of
£4.16m were triggered from July 2020 until the 31 March 2020 valuation was
finalised in June 2021. The Trustee Board and the Group agreed that these
contributions would be paid into an escrow account (instead of the scheme),
with the escrow account being released to the scheme later. The amounts held
in escrow at 31 December 2021 (£5.0m) are included in the pension deficit
contributions figures above and are recognised within current other
receivables in the consolidated balance sheet.
During 2021, in addition to the £5.0m held in escrow, the Group paid £145.7m
(this includes the following main items: (i) £59m paid in accordance with the
June 2021 agreement, (ii) the special contribution received from ceasing
interest in the Partnership (£50.1m as above) and (iii) contributions
(£35.7m) agreed in November 2018 following completion of the full actuarial
valuation as at 31 March 2017) to the Scheme (2020: £36.8m including the
distributions received from the Partnership (£8m as above)).
In addition, £4.8m in deficit contributions were paid to other schemes that
Capita participates in during 2021 (2020: £0.5m).
These payments have been excluded from adjusted cash flows because the Group
treats them like debt.
Significant restructuring: in April 2018, the Group announced a multi-year
transformation plan. In the period to 31 December 2021, a cash outflow of
£68.6m (2020: £64.1m) was incurred in relation to the cost of the
transformation plan and restructuring costs relating to Capita’s previously
announced cost reduction plan. The difference between the 2021 income
statement charge of £148.3m and the cash flow of £68.6m is principally the
impairment of the new financial reporting system (£53.5m) and impairment of
right of use assets arising on rationalisation of the Group’s property
portfolio (£13.3m).
The cumulative significant restructuring cash outflows since the commencement
of the group-wide transformation in 2018 is £385.4m. 2021 is the final year
of major investments in the transformation plan where the costs are excluded
from adjusted results. From 1 January 2022, any residual restructuring will be
recorded within adjusted results.
Litigation and claims: the Group settled a legal claim, that had been fully
provided for in a prior year and received an insurance settlement in respect
of the same claim. The claim was excluded from adjusted results when provided
due to its historical nature and size, and accordingly the insurance receipt
has also been excluded from adjusted results. In addition, the Group paid the
cash element of an agreed liability relating to past services received under
supplier software licence agreements which had been fully provided for in the
prior year. This was excluded from adjusted results because it related to
services received in prior periods and is not reflective of current trading.
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 2020 results have been restated for those businesses
exited, or in the process of being exited during 2021 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 Group non-recourse trade
receivables financing facility was put in place to mitigate the risk of
customer receipts slippage resulting from the impact of the Covid-19 pandemic.
The amounts excluded from adjusted cash flows do not include the Group’s
German business trade receivables financing facility as this was entered into
in the normal course of business.
VAT deferral: utilisation of the Government's VAT deferral scheme.
Other: includes the cash flows related to other items excluded from adjusted
profit.
14 Cash flow information continued
Reconciliation of net cash flow to movement in net debt
Year ended 31 December 2021 Net debt at 1 January £m Cash flow movements £m Non-cash movement (2) Net debt at 31 December £m
£m
Cash, cash equivalents and overdrafts 141.1 (43.6) 4.0 101.5
Other loan notes (2.3) 1.0 — (1.3)
Credit facilities — (46.0) — (46.0)
Private placement loan notes (1) (765.1) 234.2 18.0 (512.9)
Cross-currency interest rate swaps (1) 57.5 (19.7) (9.8) 28.0
Interest rate swaps (1) 0.5 — (0.5) —
Lease liabilities (508.1) 82.6 (22.9) (448.4)
Total net liabilities from financing activities (1,217.5) 252.1 (15.2) (980.6)
Deferred consideration (0.7) — — (0.7)
Net debt (1,077.1) 208.5 (11.2) (879.8)
1. The sum of these items equates to the fair value of the Group’s private
placement loan note’s debt of £484.9m (2020: £707.1m). Cash flow movement
in private placement loan notes includes both repayment of private placement
loan notes of £232.3m (2020: £242.9m) and finance arrangement costs of
£1.9m (2020: £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 2020 Net debt at 1 January £m Cash flow movements £m Non-cash movement £m Net debt at 31 December £m
Cash, cash equivalents and overdrafts 119.3 27.2 (5.4) 141.1
Other loan notes (0.5) — (1.8) (2.3)
Private placement loan notes (990.5) 243.4 (18.0) (765.1)
Cross-currency interest rate swaps 77.3 (24.5) 4.7 57.5
Interest rate swaps 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 (1,356.7) 344.1 (64.5) (1,077.1)
15 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 £28.7m (2020: £55.8m).
The Group is in discussions with a number of its closed book Life & Pensions
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.
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.
16 Post balance sheet events
The following events occurred after 31 December 2021, and before the approval
of these consolidated financial statements, but have not resulted in
adjustment to the 2021 financial results:
Disposal of AMT Sybex
The disposal of the AMT Sybex software business to Jonas Computing (UK)
Limited completed on 1 January 2022.
Cash proceeds of £23.0m were received on completion, which included the
settlement of intercompany balances owed by AMT Sybex to the Group of £12.8m.
Following an impairment of assets in 2021 based on the expected fair value
less cost of disposal of the business, net assets of £17.7m were disposed of
on completion. Total costs of disposal are estimated to be £3.4m, of which
£1.7m were recognised at 31 December 2021
Potential additional consideration of up to £17m is payable to Capita over 24
months, subject to certain conditions.
Disposal of Secure Solutions and Services (SSS)
The disposal of the SSS business to NEC Software Solutions UK completed on 3
January 2022.
Cash proceeds of £72.0m were received on completion, which included the
settlement of intercompany balances owed by SSS to the Group of £41.8m. Net
liabilities of £0.3m were disposed of, and total disposal costs are estimated
to be £4.2m (of which £2.9m were recognised at 31 December 2021).
Consequently, we expect to record a total gain on disposal of approximately
£26.3m.
Disposal of Trustmarque
The disposal of the Trustmarque business to One Equity Partners was announced
on 28 January 2022 for £111m on a cash free, debt free basis, and the Group
expects to receive net proceeds of c.£115m at completion. Additional
consideration of c.£3m is payable to Capita contingent on certain future
events. The sale is subject to certain consents.
Appendix - Alternative performance measures
The Group presents various alternative performance measures (APMs) as the
performance of the Group is reported and measured on this basis internally or
reported on externally for covenant purposes. This includes key performance
indicators (KPIs) such as adjusted revenue, adjusted profit before tax,
adjusted earnings per share, adjusted free cash flow, adjusted return on
capital employed, interest cover and gearing ratios.
These APMs should not be viewed as a complete picture of the Group’s
financial performance which is presented in the reported results. The
exclusion of certain items may result in a more favourable view when costs
such as significant restructuring, acquired intangible amortisation and
impairments of goodwill are excluded. These measures may not be comparable
when reviewing similar measures reported by other companies.
APM Closest equivalent IFRS measure Definition, Purpose and Reconciliation
Income statement
Adjusted revenue Revenue Calculated as revenue less any revenue relating to businesses that have been disposed of, or exited during the year or prior year; or, are in the process of being disposed of, or exited.
This headline measure of revenue is used internally to analyse the growth in sales in the Group’s core business (being: the Group’s continuing activities, which exclude business exits) and the directors believe it is a good indication of ongoing performance.
The table below shows a reconciliation between reported and adjusted revenue, as well as adjusted revenue growth/(decline):
2021 2020
Reported revenue per the income statement £3,182.5m £3,324.8m
Deduct: business exit (note 7) (£174.0m) (£329.3m)
Adjusted revenue £3,008.5m £2,995.5m
Adjusted revenue growth/(decline) 0.4% (9.7)%
Adjusted operating profit Operating profit Calculated as reported operating profit excluding items determined by the Board to be outside underlying operations. These items are detailed in note 4.
The directors believe that this measure is useful for investors because it is closely monitored by management to evaluate the Group’s operating performance and to make financial, strategic and operating decisions.
A reconciliation of reported to adjusted operating profit is provided in note 4.
Adjusted operating profit margin Operating profit margin Calculated as the adjusted operating profit divided by adjusted revenue.
This
measu
re is
an
indic
ator
of
the
Group
’s
opera
ting
effic
iency
.
The
table
below
shows
the
compo
nents
, and
calcu
latio
n, of
adjus
ted
opera
ting
profi
t
margi
n:
2021 2020
Adjusted revenue a £3,008.5m £2,995.5m
Adjusted operating profit (note 4) b £139.1m £51.1m
Adjusted operating profit margin b/a 4.6% 1.7%
Adjusted EBITDA EBITDA Calculated as adjusted operating profit for the last twelve months before: depreciation, amortisation and impairment of property, plant and equipment and intangible assets; net finance costs; and, the share of results in associates and investment gains (other than those already excluded from adjusted operating profit).
The directors believe that adjusted EBITDA is a useful measure for investors because it is closely monitored by management to evaluate Group and divisional operating performance and is the basis of the measure agreed with the lenders for the purpose of measuring compliance with covenants.
This measures has been calculated pre and post IFRS 16 to enable investors to understand the impact of the Group’s lease portfolio on adjusted EBITDA.
The table below shows the calculation of adjusted EBITDA:
Post IFRS 16 Pre IFRS 16
2021 2020 2021 2020
Adjusted profit before tax £93.5m £5.4m £104.2m £17.4m
Add back: adjusted net finance costs (note 8) £45.0m £46.5m £25.5m £22.6m
Add back: adjusted depreciation and impairment of property, plant and equipment £48.9m £52.3m £48.9m £52.3m
Add back: depreciation of right-of-use assets £68.2m £88.2m £—m £—m
Add back: adjusted amortisation and impairment of intangibles £38.9m £36.8m £38.9m £36.8m
Remove: Share of results in associates and investment gains (income statement) £0.6m (£0.8m) £0.6m (£0.8m)
Adjusted EBITDA £295.1m £228.4m £218.1m £128.3m
Adjusted EBITDA margin 9.8% 7.6% 7.2% 4.3%
Alternative performance measures continued
APM Closest equivalent IFRS measure Definition, Purpose and Reconciliation
Income statement continued
Adjusted profit before tax Profit before tax Calculated as profit or loss before tax excluding the items detailed in note 4 which include, but are not limited to: significant restructuring; business exits (trading results, non-trading expenses, and any gain/(loss) on business disposal); acquired intangible amortisation; and,
impairment of goodwill and acquired intangibles.
The directors believe that this measure is useful for investors because it is closely monitored by management to evaluate the Group’s operating performance and to make financial, strategic and operating decisions.
A reconciliation of reported to adjusted profit before tax is provided in note 4.
Adjusted profit after tax Profit after tax Calculated as the above adjusted profit or loss before tax, less the tax credit or expense on adjusted profit or loss.
The table below shows a reconciliation:
2021 2020
Adjusted profit before tax (note 4) £93.5m £5.4m
Tax on adjusted profit (£64.8m) £25.3m
Adjusted profit after tax £28.7m £30.7m
Adjusted tax rate Tax rate Calculated as the income tax credit or expense on the adjusted profit or loss before tax divided by the adjusted profit or loss before tax.
The effective tax rate for 31 December 2021 is calculated from the current year elements of corporation (£27.8m) and deferred taxes (£78.8m) (2020: £14.6m and £(16.0)m respectively), which exclude one-off items.
The directors believe that this tax rate provides an indication of the effective average tax rate across the Group on adjusted profit before tax.
Adjusted basic earnings per share Basic earnings per share Calculated as the adjusted profit/(loss) for the year after tax less non-controlling interests divided by the weighted average number of ordinary shares outstanding during the year.
The directors believe that this provides an indication of basic earnings per share of the Group on adjusted profit after tax.
For the calculation of adjusted basic earnings per share refer to note 9.
Adjusted diluted earnings per share Diluted earnings per share Calculated as the adjusted profit/(loss) for the year after tax less non-controlling interests divided by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would have been issued on the conversion of all
the dilutive potential ordinary shares into ordinary shares.
The directors believe that this provides an indication of diluted earnings per share of the Group on adjusted profit after tax.
For the calculation of adjusted diluted earnings per share refer to note 9.
Cash flows and net debt
Adjusted cash flows generated from operations Cash generated from operations Calculated as the cash flows generated from operations excluding the items detailed in note 14 which includes, but are not limited to: significant restructuring; business exits (trading results, non-trading expenses); pension deficit contributions; and, non-recourse trade receivables
financing.
The directors believe that this measure is useful for investors because it is closely monitored by management to evaluate the Group’s operating performance and to make financial, strategic and operating decisions.
A reconciliation of reported to adjusted cash generated/(used) from operations is provided in note 14.
Adjusted free cash flow Net cash flows from operating activities Calculated as adjusted cash generated from operations after: capital expenditure; income tax and interest; and, the proceeds from the sale of property, plant and equipment and intangible assets.
Free cash flow is a measure used to show how efficient the Group is at generating cash and the directors believe it is useful for investors and management to measure whether the Group has enough cash to fund operations, capital expenditure, debt and pension obligations and
dividends.
A reconciliation of net cash flows from operating activities to free cash flow is provided in note 14 and a reconciliation of reported to adjusted free cash flow is provided in note 14.
Alternative performance measures continued
APM Closest equivalent IFRS measure Definition, Purpose and Reconciliation
Cash flows and net debt continued
Net debt Borrowings, cash, derivatives, lease liabilities and deferred consideration Is calculated as the net of the Group’s: cash, cash equivalents and overdrafts; the fair value of the Group’s private placement loan notes debt; other loan notes; lease liabilities; and, deferred consideration.
The
direc
tors
belie
ve
that
net
debt
enabl
es
inves
tors
to
see
the
econo
mic
effec
t of
debt,
relat
ed
hedge
s and
cash
and
cash
equiv
alent
s in
total
and
shows
the
indeb
tedne
ss of
the
Group
and
it’s
liqui
dity.
The calculation of net debt is provided in note 14.
Headline net debt No direct equivalent Is calculated as the sum of the Group’s: cash, cash equivalents and overdrafts; the fair value of the Group’s private placement loan notes debt; other loan notes; and, deferred consideration.
The directors believe that headline net debt allows the investors to see the impact of the Group's lease portfolio on the net debt position.
2021 2020
Net debt (note 14) £879.8m £1,077.1m
Remove: IFRS16 impact (note 14) (£448.4m) (£508.1m)
Headline net debt £431.4m £569.0m
Headline gearing: net debt to adjusted EBITDA ratio No direct equivalent This ratio is calculated as net debt divided by adjusted EBITDA including businesses held-for-sale at the balance sheet date.
The
direc
tors
belie
ve
that
this
ratio
is
usefu
l
becau
se it
shows
how
signi
fican
t net
debt
is
relat
ive
to
adjus
ted
EBITD
A and
how
many
years
it
would
take
for
the
Group
to
pay
back
its
debt
if
headl
ine
net
debt
and
adjus
ted
EBITD
A
were
held
const
ant.
This measure has been calculated including and excluding lease liabilities because the directors believe this provides useful information to enable investors to understand the impact of the Group’s lease portfolio on net debt and headline gearing.
The table below shows the components, and calculation, of the headline net debt to adjusted EBITDA ratio:
Post IFRS 16 Pre IFRS 16
2021 2020 (2) 2021 2020 (2)
Adjusted EBITDA £295.1m £293.0m £218.1m £187.3m
EBITDA in respect of businesses held-for-sale £32.2m £53.0m £32.2m £52.8m
Adjusted EBITDA (including businesses held-for-sale) £327.3m £346.0m £250.3m £240.1m
Headline net debt £879.8m £1,077.1m £431.4m £569.0m
Headline net debt to adjusted EBITDA ratio 2.7x 3.1x 1.7x 2.4x
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.
2. To ensure consistent presentation of the ratios between periods, the 2020
comparatives have not been restated.
Alternative performance measures continued
The below measures are submitted to the Group’s lenders and the directors
believe these measures provide a useful insight to investors. The 31 December
2020 comparatives have not been restated because they are not required to be
restated for covenant purposes.
2021 2020 Source
Covenants (3)
Adjusted operating profit (1) £139.1m £111.0m Line information in note 4
Add: business exit – trading £50.8m £51.0m Line information in note 5
Add: share of earnings in associates £0.6m (£0.8m)
Deduct: non-controlling interest (£2.4m) (£12.6m) Adjusted EBIT attributable to NCI
Add back: share-based payment charge £1.2m £6.4m Line information in note 14
Add back: non-current service pension charge £2.6m £6.9m
Add back: amortisation of purchased intangibles £40.8m £42.3m
Adjusted EBITA a1 £232.7m £204.2m
Less: IFRS 16 impact (£8.9m) (£17.5m)
Adjusted EBITA (excluding IFRS 16) a2 £223.8m £186.7m
Adjusted EBITA £232.7m £204.2m Line item above
Deduct: business exit – trading sold (£22.9m) £2.5m Trading (profit)/loss for businesses sold
Add back: adjusted depreciation and impairment of property, plant & equipment and right of use assets £117.1m £140.9m
Covenant calculation – adjusted EBITDA b1 £326.9m £347.6m
Less: IFRS 16 impact (£77.1m) (£105.7m)
Covenant calculation – adjusted EBITDA (excluding IFRS 16) b2 £249.8m £241.9m
Adjusted interest charge (£45.0m) (£46.6m) Line information in note 8
Interest cost attributable to pensions £1.5m £3.2m Line information in note 8
Cash flow hedges recycled to the income statement £0.6m (£4.5m) Line information in note 8
Borrowing costs c1 (£42.9m) (£47.9m)
Add: IFRS 16 impact £19.5m £23.9m
Borrowing costs (excluding IFRS 16) c2 (£23.4m) (£24.0m)
5.1 Interest cover (US PP covenant) a1/c2 9.9x 8.5x 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 9.6x 7.8x Adjusted EBITA/Borrowing costs with both variables excluding IFRS 16
Net debt £879.8m £1,077.1m Line information in note 14
Lease liabilities included within disposal group liabilities held for sale £—m (£4.6m)
Cash, net of overdrafts, included in disposal group assets and liabilities held for sale £15.8m £12.9m
Restricted cash (2) £54.8m £34.5m Cash that may not be applied against net debt for covenant calculation purposes
Less: IFRS 16 impact (£448.4m) (£503.5m)
Adjusted net debt (excluding IFRS 16) d1 £502.0m £616.4m
6.1 Adjusted net debt to post IFRS 16 adjusted EBITDA ratio (US PP covenant) d1/b1 1.5x 1.8x 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 2.0x 2.5x 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.
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