REG-Capita PLC: Half Year Results 2019
01/08/2019 07:05
Capita plc
Half-Year Results 2019
Summary
2019 half-year results in line with our expectations
• Revenue(1) £1,851.6m; profit before tax(1) £126.1m
• Order intake £830m; order book £6,650.6m.
2019 full-year guidance maintained
• Profit before tax(1) expected to be between £265m and £295m(2)
• On plan to deliver cumulative cost competitiveness savings of £175m by
end 2019
• £525m Defence Fire & Rescue Project and £145m DWP PIP extension wins in
Q3.
2020 targets reiterated
• Achieve double-digit operating profit margins(1)
• At least £200m of sustainable free cash flow(3).
Capita's transformation is on track
• Second year of multi-year transformation
• Investment in people yielding benefits - reduced employee turnover and
higher employee satisfaction
• Corporate governance strengthened, with two employee directors appointed
to the Board
• Strengthened client relationships
• Further progress made on improving the performance of contracts
• Increased investment in growth, systems and digital capability
• Foundations for growth now in place.
Jon Lewis, Chief Executive Officer, said:
"Capita is now in the second year of a multi-year transformation and we remain
on track to hit the targets we set in 2018.
"Having addressed the balance sheet and made disposals last year, we have
continued to strengthen the business in 2019. We are beginning to see the
benefits from: strengthening our functions; changing the culture and enhancing
governance; improving relationships with our clients; recruiting significant
talent to key roles; and investing in people and new client propositions.
"We have made significant progress in a short period of time. There is still
much work to do but the foundations we are laying now will put us in a
position to succeed and grow. There is huge potential for our business as
companies invest more in digital transformation. With Capita’s credentials
and client-base, the long-term opportunity for growth is significant."
Financial outlook
Capita's financial outlook remains unchanged.
Capita is in the second year of a multi-year transformation and the successful
delivery of this programme remains a key focus area for the Group. We continue
to expect profit before tax(1) to be between £265m and £295m and net finance
costs to be in the region of £40m in 2019, before the adoption of IFRS 16(2).
We expect our net debt to EBITDA ratio to be in the top half of our stated
range of 1.0 times to 2.0 times before adoption of IFRS 16.
We are on track to deliver our 2020 targets of £175m cost savings,
double-digit operating profit margins(1) and at least £200m of sustainable
annual free cash flow, before exceptional and restructuring charges,
additional pension contributions and the adoption of IFRS 16.
1 Adjusted - refer to alternative performance measures in Appendix 1.
2 Before the adoption of IFRS 16, which is expected to result in a £26.0m to
£28.0m increase in net finance costs and a £12.0m to £14.0m decrease in
profit before tax in the full-year to 31 December 2019. Refer to note 21 to
the condensed consolidated interim financial statements for details.
3 Before exceptional and restructuring charges, additional actuarial pension
deficit contributions and the adoption of IFRS 16 (refer to Financial Review).
Financial highlights
Capita reports profits on an adjusted basis to aid understanding of business
performance. In 2019, IFRS 16, which has a material impact, has been adopted.
However, to aid comparison with the prior year, the primary adjusted measures
used by the Board for evaluating performance are before the impact of IFRS 16.
Six months ended 30 June 2019
Financial highlights - continuing operations Reported Reported Adjusted (1) Adjusted (1) Adjusted (1) YOY change
2019 2018 2019 2018
Revenue £1,852.0m £2,012.6m £1,851.6m £1,976.8m (6.3)%
Operating profit £60.8m £66.7m £142.1m £158.4m (10.3)%
Profit before tax £31.2m £42.3m £126.1m £130.8m (3.6)%
Earnings per share 1.36p 4.86p 5.86p 10.22p (42.7)%
Free cash flow £(85.9)m £(173.4)m £(20.2)m £(109.0)m (81.5)%
The following table sets out the main differences between reported and
adjusted profit for half-year 2019:
Six months ended 30 June 2019
Profit bridges Operating profit Profit before tax
2019 2018 2019 2018
£m £m £m £m
Adjusted profit (1) 142.1 158.4 126.1 130.8
Amortisation and impairment of acquired intangibles (28.7) (47.8) (28.7) (47.8)
Business exit (1.7) 8.8 (1.7) 21.4
Significant restructuring (56.5) (49.1) (56.5) (49.1)
Impact of IFRS 16 6.4 — (5.9) —
Other (0.8) (3.6) (2.1) (13.0)
Reported profit 60.8 66.7 31.2 42.3
1 Refer to alternative performance measures in Appendix 1.
2 IFRS 16 is expected to result in a £26.0m to £28.0m increase in net
finance costs and a £12.0m to £14.0m decrease in profit before tax in the
full-year to 31 December 2019. Refer to note 21 to the condensed consolidated
interim financial statements for details.
Investor presentation
A presentation for institutional investors and analysts hosted by Jon Lewis,
CEO, and Patrick Butcher, CFO, will be held today, starting at 09.30 UK time.
There will be a live audio webcast of the presentation on our website
www.capita.com/investors and subsequently available on demand. A dial-in
facility is also available. The presentation slides will be published on our
web site at 10.00am and a full transcript will be available by midday
tomorrow.
Webcast link (Live and On-demand):
https://webcast.openbriefing.com/capita-half2019/
Conference call
Participant dial-in numbers:
United Kingdom 0800 640 6441
United Kingdom (Local) 020 3059 5841
United States 1 646 787 9445
All other locations +44 20 3059 5841
Access code 199714
Conference Call Viewer (to see attendees and moderate questions asked):
https://www.incommglobalevents.com/viewer/2618/capita-announcement-of-half-year-results-2019/
Enter your name and access code 1087873
For further information
Capita
Andrew Ripper, Head of Investor Relations T +44 (0) 20 7654 0220
Capita press office T +44 (0) 20 7654 2399
Powerscourt
Victoria Palmer-Moore T +44 (0) 20 72501446
This announcement contains inside information for the purposes of article 7 of
EU Regulation 596/2014.
LEI no. CMIGEWPLHL4M7ZV0IZ88.
Chief Executive Officer's Review
Executing our strategy
Capita is in the second year of a multi-year transformation. Our mission is to
become ‘One Capita’, an integrated and refocused business, successful and
sustainable, with stronger client relationships which makes a positive,
responsible contribution to society and is more predictable, profitable and
sustainably cash-generative. We are continuing to execute our strategy – to
simplify, strengthen and succeed – in line with our plan, delivering better
outcomes for all stakeholders – our people, shareholders, clients, suppliers
and the communities we serve.
Responsible business
Capita places a high degree of emphasis on good corporate responsibility,
reflected in our actions to reduce our pension deficit, put employees on the
Board, develop a culture of openness, transparency and accountability and
deliver on our purpose of 'we create better outcomes' for all stakeholders.
Capita values the business relationships it has with suppliers and seeks to
build lasting relationships, treating our suppliers and partners fairly and
paying promptly. We have produced our first ever ‘supplier charter’,
outlining how we operate and work together with our 35,000 suppliers, laying
out the core principles by which the company does business and what Capita
expects from its suppliers in return. The charter covers a range of business
and operational areas from health and safety to human rights, diversity and
inclusion, cyber security, and how any non-compliance with the charter
principles are addressed.
We have met the requirements of the Government prompt payment code, paying
over 95% of our suppliers within 60 days in aggregate over the last year, and
have set ourselves more challenging targets. We have made a further scheduled
payment to reduce our pension deficit and are seeking accreditation from the
Fair Tax Mark this year.
Investment in our people
Capita is a people-focused business and the leadership team is committed to
putting our people at the very centre of how we operate, and to respecting and
valuing all of them. This will change the way we attract, develop, reward and
retain our talented employees and they will start to experience the positive
changes taking place within the business. We want our people to feel part of
the company’s success, and to be excited and motivated to work hard to help
achieve it. There is tangible evidence that our employee value proposition is
improving, in that the average tenure of our people is increasing and that
they are more satisfied as measured by our own employee net promoter score and
external Glassdoor rating.
We have appointed two employees as non-executive directors, becoming the first
FTSE 250 company since the late 1980s to appoint employees to its Board. In
their new non-executive roles, they provide an employee’s perspective and
expertise, and input into strategic decision-making with the same level of
authority as other directors. At a leadership level, we have further
strengthened the executive committee to support the next phase of delivering
our strategy, with the appointment of new heads of Government Services,
Customer Management and People Solutions.
We remain very focused on increasing diversity and inclusion at Capita, and
for the second year in a row, have submitted improved gender diversity
statistics to the Hampton-Alexander review.
Managing our contracts
We have made further encouraging progress fixing the performance of
challenging contracts and improved the delivery of their key performance
indicators.
Having rebuilt Capita's relationship with the British Army, we have continued
to work in partnership with them to improve our Recruiting Partnering Project
(RPP) contract. In the first half of 2019, we organised a highly successful
advertising campaign and, with further operational and partnership changes,
subsequently delivered the highest level of regular soldier training starts
for recruits since we took responsibility for the contract in 2012.
Operational service delivery on our Primary Care Support England (PCSE)
contract with NHS England continues to be stable. The administration of
cervical screening, a small proportion of the contract, is to be transferred
to NHS England in August 2019. We expect to commence the roll out of our
transformed solutions for Ophthalmic Payments, Pharmacy Market Entry and
Performer List in the second half of 2019.
The transformation of our customer services contract with mobilcom-debitel
continues to progress well. We have continued to enhance customer experience,
through the introduction of new WhatsApp and web-based chat channels and
web/app-based customer journeys, and reduced average customer waiting time by
one third in the half-year. We are also automating processes to reduce our
cost to serve.
We continue to plan to generate a small profit in aggregate on these contracts
in 2020, including reaching break even on PCSE and mobilcom-debitel by the end
of 2020.
Cost competitiveness
Capita is on track to improve cost competitiveness, making us more efficient
and productive and realising £175m of cumulative savings by the end of 2019,
including:
• Reductions in general and administration, IT and property expenses.
• Centralising more of our procurement and driving value from our ~£1bn
external spend with suppliers.
• Operational excellence, improving the consistency of our operations,
increasing the use of offshoring and automation, adopting lean methodologies
and being smarter in terms of how we work.
We have continued to increase the use of our offshore delivery centres in
India and South Africa and have made a good start in our ambition to increase
the pace of automation across the company into 2020 and beyond. During the
half year, we have entered into a partnership with UiPath, a global leader,
and established an automation centre of excellence to provide the expertise
and infrastructure to identify and deliver on robotic process automation
projects across Capita. We have recently automated processes in our PCSE and
Transport for London (TfL) contracts and are nearing the end of the
development cycle for processes in Capita Travel and Events.
The cost of achieving the savings is still expected to be £95m in 2019,
included as part of the total restructuring costs.
We are investing some of these savings in building our corporate functions,
such as Human Resources, and in the resources and propositions needed to drive
growth.
Sales and growth
We increased investment in sales capacity and capability through the
re-igniting growth programme by £5m in the first half. This is an area where
we need to make significant progress in 2019 to deliver an acceptable level of
revenue growth.
Capita is building its consulting capability, as a means of generating more
pull through revenue for the rest of the business. We are pleased with the
progress that we have made in the half year: we have created a consulting team
by re-organising existing capability in data analytics and digital experience
consulting and the recruitment of talented professionals with industry
knowledge across sectors such as financial services, defence, government,
telecommunications and utilities.
We intend to increase the amount of work we win through consultative selling
by bringing industry segment expertise and solutions to our clients. Key to
this model is the development of service propositions that address the
challenges faced by our clients. Work on these is well underway and discussed
below.
We have invested in an account management structure, initially for our most
strategic clients. Experienced partner level individuals are engaging with
these clients, to build stronger, long-term partnerships and provide the best
of Capita to create better outcomes for them and realise growth opportunities.
A good example of us doing more for an existing client is Southern Water, for
which Capita has recently further expanded the scope of its customer services,
billing and correspondence contract to include handling of clean water and
waste water calls, home moves, social media interaction, early stage
collections and complaints, almost doubling the size of the contract.
We are investing in sales capability and training, to ensure that we have the
right competencies across our growth function to best serve our clients, and
650 front line sales people undertook training in the half year.
Order intake in the half year was £830m, including the extension and/or
expansion of our Customer Management contracts with Carphone Warehouse and
Southern Water and a number of notable wins in Software, which increased the
size of its order book by 6.5%. Capita's order book at 30 June 2019 stood at
£6.7bn, compared with £7.1bn at 31 December 2018, reflecting that order
intake was lower than revenue recognised in the half year.
Since the end of the half year, we have won:
• A £525m contract to modernise and support improvement to the operational
effectiveness of the Ministry of Defence’s fire and rescue service. This is
a measure of the confidence and trust government has in Capita’s ability to
deliver critical public services.
• An extension of our contracts with the Department for Work and Pensions
and the Department of Communities in Northern Ireland to deliver Personal
Independence Payment (PIP) assessments, which is expected to be worth £145m.
PIP is not included in our order book, as each assessment is treated as its
own contract.
Getting back onto a growth trajectory is part of our multi-year transformation
and Capita continues to plan for a return to year-on-year organic growth in
2020, driven by consulting, digitally-enabled services and software.
Digital capabilities
The lion’s share of the contracts we have today involve a deep understanding
of the business processes of a client and the use of technology to provide
insight, reduce risk, drive productivity and produce a superior experience for
clients’ customers. Digitally-enabled transformation is an increasingly
common thread running through all this and the Capita of the future will be
based increasingly around our digital capabilities.
We have continued to increase the capacity of our Digital Development Centre
in Pune, India, which now employs more than 1,300 people developing
standardised software, alongside more than 500 colleagues in IT & Networks.
We are investing in repeatable digital products and services, including:
• People Solutions
- Two new digital products are due to go live in the second half of 2019.
- Security Watchdog - we have invested in a next generation, digital version
of our market leading provider of pre-employment screening services which will
significantly reduce candidate assessment times and improve candidate
experience.
- Digital onboarding – we have developed a new onboarding product to improve
a new employee’s experience when they join an organisation, helping new
starters to become productive more quickly and increasing retention. This is
an adjacent market solution that complements Security Watchdog and our broader
‘hire to retire’ suite of services.
• Software
- Continued investment in new generations of our software products including
the next version of SIMS (School Information Management System), a
multi-agency version of our emergency services products, a cloud based SaaS
version of our One Housing product for housing associations and a lite version
of our Retain resource management product.
• Customer Management
- A new digital, multi-channel contact platform, initially a like-for-like
chat operation based in Pune and Mumbai, followed by the introduction of
messaging, in-chat payments and automated services.
The way ahead
Capita is now in the second year of a multi-year transformation and we remain
on track to hit the targets we set in 2018.
Having addressed the balance sheet and made disposals last year, we have
continued to strengthen the business in 2019. We are beginning to see the
benefits from: strengthening our functions, culture and governance; improving
relationships with our clients; recruiting significant talent to key roles;
and investing in people and new client propositions.
We have made significant progress in a short period of time. There is still
much work to do but the foundations we are laying now will put us in a
position to succeed and grow. There is huge potential for our business as
companies invest in digital transformation. With Capita’s credentials and
client-base, the long-term opportunity for growth is significant.
Divisional performance review
The following divisional financial performance is presented on an adjusted
revenue and operating profit basis. Reported profit is not included, as the
Board assesses divisional performance on adjusted results. The calculation of
adjusted figures and our KPIs are contained in the APMs in the appendix to
this statement.
Software
Our specialist enterprise software products serve sector specific and
cross-sector markets in the UK and overseas. We develop and deliver
application software and wider solutions for education, local government,
public safety, utilities and transport, consulting and legal, and payments. As
a software products provider, our deep industry expertise and functional IP
supports critical public services and business processes. Our software and
technology expertise forms a differentiating component of Capita’s wider
digitally-enabled services offering.
Strategy and markets
We are a top-five provider of enterprise software products in the UK, a market
with circa £17bn of revenues per annum, within which we address sub-markets
of around £3bn, which are expected to grow at around 4-5% CAGR to 2020
(source: 3rd party data and internal estimates). We have market-leading
positions in sectors such as education and emergency services and are a top 3
provider in local government, typically competing against other specialist
product software providers.
The division is transforming what was once a grouping of 29 siloed businesses
into a single software business. Our strategic priorities are to invest in our
core products with distinctive offerings, using reusable components and
standard architectures, supported by scaled, integrated, shared service
functions and our best-in-class Digital Delivery Centre in India. We are
investing in both our existing and new products and markets to defend and grow
the business, with the aim of achieving mid to high single digit revenue
growth in 2020 whilst at least maintaining margins.
Sales and operational performance
Our order book increased by 6.5% to £595.7m in the half year. There were a
number of notable contract wins, including the provision of new Secure
Solutions software and services to the Metropolitan Police, Police Scotland,
West Sussex Fire and Rescue Services, South Wales Police, Gwent Police and a
customer in North Africa. We extended our contract to support UK ambulance
radio terminals, communication and mobile data solutions from 2020 for a
period of three years and had a number of successful go-lives for our
ControlWorks Emergency Control Room product. AMT Sybex renewed its contract
with Network Rail for enterprise asset management and affinity mobile software
and won a new contract with SSE Business Energy to support the delivery of the
next generation of smart meters. Our marketing and sales operation in the US
has built an encouraging pipeline of opportunities, particularly for AMT Sybex
and Retain, and 6 police forces have gone live on 911eye.
We have continued to invest in our Digital Development Centre in India, which
now employs more than 1,300 people. This will enable us to accelerate product
development cycles, critical to supporting our future sales pipeline. It also
undertakes development and supports the rest of Capita. For example, the
development of our digital solution for the Department for Education’s
Standards and Testing Agency (STA) contract, which is due to go live in the
second half of the year, has been done in Pune.
Financial performance
Adjusted revenue fell by 4.1%. Growth in our cross sector products, including
Payments and financial services, was outweighed by a decline in AMT-Sybex, a
function of lower orders in 2018 and a large active licence in the energy
sector coming to an end, and modest declines in Secure Solutions and Education
Software. AMT Sybex license sales have already improved and we expect to grow
division revenue in the second half of this year, with a further acceleration
in 2020.
Adjusted operating profit was flat, due to the aforementioned changes in
revenue, investments in sales and cost benefits from transformation actions.
Software financial summary 2019 2018 YOY change
Adjusted revenue £192.3m £200.5m (4.1)%
Adjusted operating profit £49.2m £48.8m 0.8%
Margin 25.6% 24.3%
Order book (comparative at 31 December 2018) £595.7m £559.6m 6.5%
People Solutions
People Solutions provides a full suite of HR offerings across the employment
life cycle.
They include leading market positions in recruitment process outsourcing
(RPO), learning process outsourcing, HR service (including payroll), and
pensions and benefits administration, which are supported by our proprietary
digital platforms, Orbit, Hartlink and Tessello.
We also provide attraction, screening and performance management services, and
best-in-class fire prevention and protection training facilities from the Fire
Service College.
Strategy and markets
The UK market for people services was £6bn revenue in 2018 and is expected to
grow at an annual growth rate of 5% through to 2022. The market is being
driven by a customer propensity to buy digital self-service and a move away
from large-scale contracts to modular product buying, where customers require
expert advisory support as they transition to digitally-enabled operating
models.
People Solutions was formed in April 2018. This brought together our existing
HR businesses together under a single leadership team for the first time. We
have made steady progress on the integration of these businesses over the past
15 months, although it is taking us longer than we first thought and we have
had to invest more in service delivery in the first half. The proportion of
our existing clients taking more than one service has increased in the last
year but there remains a significant opportunity for us to sell more of our
services to them. We remain confident that we will derive benefits from the
new structure over time.
We are investing in our core products and platforms and developing a suite of
new digital solutions, which are scalable and repeatable, lever our unique
data and analytics and differentiate us from our competitors.
Sales and operational performance
We signed a number of new contracts in the half year, including the provision
of resourcing services for the Home Office, learning services for Network
Rail, the department of HM Revenue and Customs and Barclays, pensions
administration for a leading pensions insurer, screening services for Nestle
and employer branding services for Atkins.
We have also invested in the development of our services and products. We
created a unique data and analytics platform in the cloud to collect, process
and store data from multiple sources and allow models and algorithms to be
created and used within our applications. This supports the modernisation of
existing and launch of new digital solutions, including our new pre employment
screening and onboarding services which are due to be rolled out in the second
half of 2019.
Having rebuilt Capita's relationship with the British Army, we have continued
to work in partnership with them to improve our Recruitment Partnering Project
(RPP) contract. In the first half of 2019, we organised a highly successful
advertising campaign and, with further operational and partnership changes,
subsequently delivered the highest level of regular soldier training starts
for recruits since we took responsibility for the contract in 2012.
Financial performance
Adjusted revenue was flat. There was good growth in Learning Services, which
has benefited from a significant increase in volume and less competition in
our apprenticeships business. This was offset by a decline in Capita
Resourcing, due to the transfer of the Contingent Labour One (CL1) public
sector resourcing contract to a new provider in the second half of the prior
year. Pensions and benefits was flat.
Adjusted operating profit decreased, reflecting the loss of CL1 and increased
short term investment in client service to meet our service level agreements,
which took priority over actions to reduce costs in the half year. The benefit
of cost reduction actions are expected to be weighted to the second half of
the year.
People Solutions financial summary 2019 2018 YOY change
Adjusted revenue £253.4m £252.5m 0.4%
Adjusted operating profit £12.5m £16.4m (23.8)%
Margin 4.9% 6.5%
Order book (comparative at 31 December 2018) £609.9m £715.3m (14.7)%
Customer Management
Capita is a leading provider of multi-channel customer engagement services, in
the UK, Switzerland and Germany. We primarily serve customers in the
telecommunications, retail and utility sectors, from a mix of locations in the
UK, Continental Europe, India, South Africa and Argentina. The division also
provides remediation, complaints management and collections services,
including TV Licensing.
Strategy and markets
We are the largest provider of customer management services in the UK with a
14% market share. The UK market is estimated to be worth £4bn a year and is
expected to grow at approximately 4% per annum through 2022 (source: Nelson
Hall). The German and Swiss customer management markets are estimated to be
valued at £4bn per annum and are expected to grow at around 5% per annum
through to 2022.
Capita has a differentiated strategy in our markets; our approach is to build
shared outcome partnerships, increasingly based on partnering for value, not
transactional supply, and our core value proposition is that we ‘make great
customer experience happen’. The value we bring to our clients is
increasingly built around transforming the customer experience through the
application of data insight and analytics. These enable us to manage complex,
high-value interactions, drive positive quality improvement, and improve
financial benefits for clients. Our commercial model increasingly includes a
commitment to client outcomes such as improvements in the net promoter score,
revenue generation, customer acquisition and cost-to-serve, deploying a range
of operational, technology and process capabilities from within both Customer
Management and the wider Capita group.
Sales and operational performance
Our growth remains dependent upon the retention of existing clients and award
of new work. We extended and expanded a number of new contracts to deliver
high-quality services for a number of leading clients, including:
• Expanded end-to-end customer services contract with Southern Water to
include handling of clean water and waste water calls, home moves, social
media interaction, early stage collections and complaints. This increases the
value of the contract by £25m to £55m over five years from July 2018.
• Extension of our contract with Carphone Warehouse to provide multi-channel
customer support, sales and customer acquisition, debt collection, customer
retention and revenue growth, and technical support, worth £92m over five
years to 2028.
• Extension of our contract with British Gas, worth £19m to November 2020.
The market for customer management in the UK retail sector remained
challenging.
The transformation of our customer services contract with mobilcom-debitel
continues to progress well. We have continued to enhance customer experience,
through the introduction of new WhatsApp and web based chat channels and
web/app based customer journeys, and reduced average customer waiting time by
one third in the half year. We are also automating processes to reduce our
cost to serve.
Our people are fundamental to our success and our culture change and
management training programmes have contributed to a significant improvement
in employee retention year-on-year. We continue to invest in customer
experience and our new messaging platform is due to be rolled out to clients
from the second half of 2019, initially a like-for-like chat operation based
in Pune and Mumbai, followed by the introduction of messaging, in-chat
payments and automated services.
Financial performance
Adjusted revenue fell by 1.3%, due to contract scope changes and lower volume
in the UK retail and energy sectors and a negative impact from foreign
exchange movements, which were partially offset by the expansion of our
contract with Germany's largest telecommunications provider (won in the second
half of 2018). Adjusted operating profit increased due to cost savings from
operational excellence, automation and offshoring and the improvement in
performance and reduced losses on our contract with mobilcom-debitel.
Customer Management financial summary 2019 2018 YOY change
Adjusted revenue £399.2m £404.6m (1.3)%
Adjusted operating profit £26.0m £17.2m 51.2%
Margin 6.5% 4.3%
Order book (comparative at 31 December 2018) £1,879.4m £2,027.4m (7.3)%
Government Services
Capita is a trusted strategic partner to central government for the delivery
and transformation of technology-enabled business services. It includes the
operation of large, complex contracts that underpin the achievement of policy
outcomes.
We are also a leading provider of support services such as revenues, benefits
and back-office processing, IT, HR, and finance to local authorities, and
education and health organisations.
Strategy and markets
Capita is one of the largest providers to government in the UK. Our strategy
is to focus on the quality of our partnerships and to develop repeatable
solutions in areas where Capita has core expertise, including collections,
funds disbursement, regulatory and planning services, customer and digital
services. We are also investing in our transformation, technology and
operational capabilities, driving operational excellence and improving the
performance of challenging contracts, packaging more of our services making
them simpler to procure and implementing structured client account management.
The UK market for central and local government services is valued at £7bn a
year and estimated to be growing at approximately 3% per annum (source: Nelson
Hall). Brexit is still affecting the volume of new policy initiatives by
Government departments, but may present new opportunities for private sector
contractors in the long term.
The local government market for large outsourced contracts is declining and
some existing clients are choosing to end contracts early and take services
back in-house.
Sales and operational performance
We have won, renewed and extended a number of contracts in the year to date,
including:
• In July, a £525m contract to modernise and support improvement to the
operational effectiveness of the Ministry of Defence’s fire and rescue
service. This is a measure of the confidence and trust government has in
Capita’s ability to deliver critical public services.
• In July, a £145m extension of our contracts with the Department for Work
and Pensions and the Department of Communities in Northern Ireland to deliver
Personal Independence Payment (PIP) assessments.
• A number of smaller contracts with Charnwood, Bexley, Rossendale and the
Ministry of Justice Technology Transition Programme.
Service delivery has improved across the division, with >95% key performance
indicators green, and we improved our relationship with the Cabinet Office.
We introduced the Ultra Low Emissions Zone for TfL, including vehicular image
capture and processing, billing and a mobile payments app, data management,
printing/scanning/archiving, enforcement and customer call centre operations,
and set up the help desk to support Key Stage 1 and 2 on our STA contract.
Operational service delivery on our Primary Care Support England (PCSE)
contract with NHS England continues to be stable. The administration of
cervical screening, a small proportion of the contract, is to be transferred
to NHS England in August 2019. We expect to commence the roll out of our
transformed solutions for Ophthalmic Payments, Pharmacy Market Entry and
Performer List in the second half of 2019.
We have separated local government into growth and legacy/transition
businesses and we are working closely with some of our council partners to
agree and manage a smooth transfer of services back to local authority
management where appropriate. Future growth will come from scalable and
repeatable solutions.
Financial performance
Adjusted revenue increased by 1.4%. Good growth from Smart DCC smart metering
and our expanded contract with TfL was largely offset by a decline in central
government services, due to our Escorting and Detention and Defence
Infrastructure Organisation contracts which ended in the prior year. Local
government was flat but is expected to decline in the second half of 2019.
Adjusted operating profit increased due to the aforementioned changes in
revenue and a small reduction in loss on Primary Care Support England (PCSE).
Government Services financial summary 2019 2018 YOY change
Adjusted revenue £413.6m £407.9m 1.4%
Adjusted operating profit £20.4m £18.6m 9.7%
Margin 4.9% 4.6%
Order book (comparative at 31 December 2018) £1,971.1m £2,187.5m (9.9)%
IT & Networks
Capita is one of the top 10 suppliers of IT Services and networks in the UK,
focused on the mid-sized market and critical national infrastructure.
Our IT services business acts as a technology enabler across all of Capita’s
services both internally and externally. We provide enterprise IT services
focused around four key areas: digital transformation and innovation; core
platforms – cloud, hosted and on-premise and services; networks - LAN and
WAN connectivity solutions; and professional services – advising and running
IT solutions for our customers, testing, data consulting and cybersecurity.
We operate across the UK and from our operations in India, supporting clients
at a local and national level. We have strategic partnerships with leading
global IT vendors, have invested in our own portfolio of hosted platforms and
operate our own UK-wide network and data centres.
Strategy and markets
The IT infrastructure services (IT&N) market in the UK was estimated to be
worth £28bn in 2018. The overall market is expected to grow at 2% a year to
2021 (source: TechMarketView). However, this is highly polarised with good
growth in cloud services and shrinking client device support.
Our strategy is to simplify our organisational structure and optimize the
operating model, managing our division as one business with shared service
centres and common processes, to be a technology enabler for our customers,
improving customer experience for them, and to modernise our offering,
providing relevant scalable products to the IT&N market. We also aim to be the
partner of choice for IT elements of Capita business process outsourcing
contracts.
Sales and operational performance
IT & Networks has made good progress in bringing together the separate
operating businesses, consolidating service desks and making further
investments in our data centre network to simplify and consolidate the
existing environment and improve performance and consistency. We are now
beginning to pivot toward growth, building our sales capability, developing
new products and becoming more innovative. Since the end of last year, we have
begun to see the first evidence of improving sales trajectory in our pipeline.
We have begun to transform TfL's network estate. We won additional work to
design, build and operate a pilot mobile service on the Jubilee Line, to
deploy a cellular infrastructure in London Underground stations and tunnels
and to facilitate the delivery of dedicated mobile connectivity to the
emergency services as part of the Emergency Services Mobile Communication
Project.
Other contracts won and extended in the year to date include:
Extensions of our managed network services contract with the Education
Authority Northern Ireland, worth £53m over two years, and our managed
desktop and hosting services contract with Liberata, worth £30m over five
years.
A new seven year contract to provide managed IT services to energia worth
£21m.
We have been also appointed to a four year framework for the supply of IT
services to the Northern Ireland health sector.
Financial performance
Adjusted revenue was flat, reflecting that the benefit of new work with TfL
and growth at Trustmarque was offset by a decline in LAN and voice networking
solutions. IT services stabilised, after being impacted by lower volumes and
contract losses last year. Adjusted operating profit fell slightly, due to
lower margins in networking solutions.
IT & Networks financial summary 2019 2018 YOY change
Adjusted revenue £213.5m £213.4m —%
Adjusted operating profit £23.8m £25.5m (6.7)%
Margin 11.1% 11.9%
Order book (comparative at 31 December 2018) £389.2m £390.4m (0.3)%
Specialist Services
Our Specialist Services division comprises a portfolio of 16 businesses,
delivering a range of service offerings through joint ventures, trading
businesses and traditional IT-enabled BPO contracts. These businesses are
mostly stand-alone operations and are actively managed on a portfolio basis in
order to maximise value and include Life Insurance, Insurance Services,
Mortgage Services & Collections, Optima, Travel & Events, Evolvi, Real Estate
& Infrastructure, AXELOS, Fera, Managed Print, and Enforcement.
Strategy and markets
We have strong positions in generally mature markets, with strong brands and
positive client perception of our services. The focus across the portfolio is
on operational excellence, cost-optimisation and leveraging Capita-wide
infrastructure, clients and capabilities where possible.
Due to the varied nature of the activities in the division, each business has
its own strategy uniquely tailored to their service offerings and the needs of
their clients which has been defined through an ongoing ‘optimisation’
programme which identifies strategic and tactical opportunities to improve
value generation from them.
Sales and operational performance
Capita is committed to serving the financial services sector and, in Life
Insurance, we have implemented material transformations that have driven
efficiency and improved customer outcomes. In the half year, we further
developed our partnership with Zurich by bringing all of their UK customer
service operations together with Capita and taking responsibility for
administering their new Life Protection proposition, a market leading set of
products and digital services platform, which is key to Zurich UKs growth
plans.
Some of our closed book contracts, where we are responsible for expensive
legacy IT systems, are generating negative cash flow. Where this is the case,
we are exploring options with clients to seek better long term solutions for
both parties, including actions to turn around the contract’s performance
and handing them back to the customer or an alternative provider. This may
result in associated costs, acceleration in the recognition of deferred income
and/or the impairment of contract related assets. We expect these actions to
improve our cash flow between 2019 and 2021.
Capita Translation & Interpreting extended its reach securing a new contract
with JCB to provide a global translation service and announcing it will be
opening an office in New York. Capita Workplace Technology won a new contract
with Taylor Wimpey to provide multi functional devices across the UK.
Financial performance
Adjusted revenue decreased by 23.7%, reflecting the end of our contracts with
Prudential UK (life) and Marsh (general insurance) last year and more modest
declines in Real Estate & Infrastructure, Travel & Events and Enforcement.
Adjusted operating profit fell by 16.5%, as a result of the aforementioned
contract losses, including the dropping out of a £9m one-off benefit from the
prior year on the end of Marsh, which were partly offset by cost actions,
resulting in a modest increase in our operating margin.
Specialist Services financial summary 2019 2018 YOY change
Adjusted revenue £376.1m £493.2m (23.7)%
Adjusted operating profit £67.7m £81.1m (16.5)%
Margin 18.0% 16.4%
Order book (comparative at 31 December 2018) £1,205.3m £1,215.8m (0.9)%
Financial review
Non-statutory reporting
Capita reports profits on an adjusted basis to aid understanding of business
performance. In 2019, IFRS 16, which has a material impact, has been adopted.
However, to aid comparison with the prior year, the primary adjusted measures
used by the Board for evaluating performance are before the impact of IFRS 16.
Revenue
Adjusted revenue(1), excluding results from businesses exited in both years,
was £1,851.6m (2018: £1,976.8m), a decline of 6.3%. We continue to face
headwinds from structurally challenged contracts in local government and life
insurance but revenue from digitally-enabled services and software has
stabilised.
The benefit from contract wins, including TfL and a number of smaller gains,
was outweighed by contract losses, many of which occurred in 2018, including
Prudential and Marsh in Specialist Services and Home Office escorting in
Government Services, which we chose not to re-bid. There was also a decline in
the scope and volume of contracts and transactional revenue in Specialist
Services and IT & Networks, which was partly off-set by growth in Government
Services from the Smart Metering contract.
Adjusted revenue (1)year-on-year £m
2018 1,976.8
Contract wins 50.6
Contract losses (137.9)
Scope and volume changes (26.5)
Transactional business (11.4)
2019 1,851.6
Reported revenue decreased by 8.0% to £1,852.0m (2018: £2,012.6m).
Operating profit
Adjusted operating profit(1) decreased by 10.3% to £142.1m (2018: £158.4m),
as a consequence of the revenue decline year-on-year explained above. The cost
competitiveness programme delivered £38m of savings, which were used to
increase investment in strengthening corporate functions (£23m) and build
platforms for growth (£5m) and to partially off-set the decline in revenue.
During 2018, Capita implemented a more disciplined approach to evaluating bids
for contracts. This has led to some contracts, such as the Home Office
escorting contract, not being bid for, and has focused on a more appropriate
risk and reward balance, which is driving operating profit margins towards
double digits on new work.
Adjusted operating margin(1) was 7.7% (2018: 8.0%).
Adjusted operating profit(1) is before charging a number of specific items
detailed further below. The table below provides a reconciliation for 2019 and
2018 between adjusted profit(1) and reported profit.
Adjusted (1)to reported profit bridge Operating profit Profit before tax
30 June 2019 30 June 2018 £m 30 June 2019 30 June 2018 £m
£m £m
Adjusted (1) 142.1 158.4 126.1 130.8
Amortisation and impairment of acquired intangibles (28.7) (47.8) (28.7) (47.8)
Business exit (1.7) 8.8 (1.7) 21.4
Significant restructuring (56.5) (49.1) (56.5) (49.1)
Impact of IFRS 16 6.4 — (5.9) —
Other (0.8) (3.6) (2.1) (13.0)
Reported 60.8 66.7 31.2 42.3
Reported operating profit for the half year was £60.8m (2018: £66.7m).
Further detail of the specific items charged in arriving at reported operating
profit for 2019 is provided in note 3 to the condensed consolidated interim
financial statements.
The Group’s policy is to exclude significant restructuring costs from
adjusted operating profit so users of the financial statements can more
clearly understand the financial performance of the business. As announced in
2018, the Board has launched a multi-year transformation plan to support the
objectives of simplifying and strengthening Capita. The plan includes
restructuring, property rationalisation, procurement centralisation,
transformation of support functions and operational excellence. These
activities are designed to improve the cost competitiveness of the Group and
secure Capita’s position in the markets it serves and strengthen governance
and control.
This policy will remain under review by the Audit and Risk Committee and the
costs will be reported over the life of the plan. The costs incurred in 2019
so far totalled £56.5m.
The amortisation of acquired intangibles amounted to £28.7m (2018: £47.8m).
The amortisation of acquired intangibles are reported separately, due to the
size of the annual charges and because the performance of the acquired
businesses is assessed through the adjusted operating profit(1) which, for
internal purposes, excludes any amounts associated with the acquired
intangible assets.
The Board has considered the appropriate guidance and FRC thematic review on
alternative performance measures and concluded that it is appropriate to
exclude the above items in arriving at adjusted profit before tax(1).
Finance costs
The adjusted interest charge(1) in 2019, excluding the fair value movement on
mark-to-market fixed rate swaps, was £15.4m (2018: £27.6m), reflecting the
benefit from the repayment of debt following the rights issue and disposals in
2018.
Profit before tax
Adjusted profit before tax(1) decreased by 3.6% to £126.1m (2018: £130.8m).
Reported profit before tax decreased by 26.2% to £31.2m (2018: £42.3m).
Taxation
The income tax charge of £23.7m on adjusted profit before tax(1) resulted in
an adjusted tax rate of 18.8% (2018: income tax credit of £4.8m and negative
adjusted tax rate 3.7%).
The income tax charge of £5.6m on reported profit before tax resulted in a
tax rate of 17.9% (2018: income tax credit of £23.8m and negative tax rate
56.3%). The reported tax rate will generally vary from the adjusted tax rate
year-on-year due to the items excluded from adjusted profit(1) in a period,
for example non-taxable profits/losses on disposals or non-deductible
impairment of certain acquired intangible assets.
Earnings per share
Adjusted basic earnings per share(1) for continuing operations decreased by
42.7% to 5.86p (2018: 10.22p) as a result of the performance explained above.
The reported basic earnings per share for continuing operations was 1.36p
(2018: 4.86p).
Dividend
The Board is not recommending the payment of an interim dividend (2018:
£nil). However, the Board recognises the importance of regular dividend
payments to investors in forming part of their total shareholder return and
will consider the payment of dividends when the Group is generating sufficient
sustainable free cash flow.
Cash flow
Adjusted free cash flow(1) for continuing operations was an outflow of £20.2m
(2018: outflow £109.0m).
The Group’s adjusted free cash flow(1) was affected by a decline in EBITDA,
which has been explained above. The net outflow of working capital of £129.8m
was significantly (£127.6m) lower than the prior year, following investment
in 2018 of £146.0m to normalise period end cash management. This is off-set
by an increased outflow in deferred and accrued income and trade receivables
reflecting the net impact of advanced billing in Software and IT & Networks,
off-set by reduced deferred income on Local and Central Government contracts
due to timing of milestone payments on transformation contracts and customer
hand-backs. Additionally, there was an increased outflow in trade payables
reflecting the investment made in improving supplier payment terms as well as
payment timing differences at period end.
Net capital expenditure on continuing operations was £64.3m (2018: £55.5m),
mainly attributable to an increase in investments in IT systems and
infrastructure.
Adjusted operating profit to adjusted free cash flow (1,2) 30 June 2019 30 June 2018 £m
£m
Adjusted operating profit (1) 142.1 158.4
Add back: Depreciation 29.9 28.5
Add back: Amortisation of intangible assets 14.7 12.9
Adjusted EBITDA 186.7 199.8
Working capital: (129.8) (257.4)
Normalisation of period-end cash management (including non-recourse receivables financing) — (146.0)
Deferred and accrued income, and trade receivables (100.8) (92.5)
Trade payables, accruals and prepayments (19.9) 17.7
Other movements in working capital (9.1) (36.6)
Interest (13.6) (16.7)
Taxation (2.2) 14.8
Capital expenditure (64.3) (55.5)
Provision movements and non-cash items 3.0 6.0
Adjusted free cash flow (1,2) (20.2) (109.0)
We continue to expect to deliver at least £200m of sustainable free cash flow
in 2020, before exceptional and restructuring charges, the pension deficit
recovery payments set out below and the adoption of IFRS 16.
Reported free cash flow was an outflow of £85.9m (2018: outflow £173.4m).
This reflected spend in relation to known commitments, including pension
contributions (which the Directors consider to be debt like in nature),
restructuring costs, professional fees, contingent and deferred consideration,
litigation and other items. In 2019, this is off-set by the adoption of IFRS
16 as detailed below.
Adjusted (2)to reported free cash flow 30 June 2019 30 June 2018 £m
£m
Adjusted free cash flow (2) (20.2) (109.0)
Pension deficit contributions (57.1) (4.5)
Significant restructuring (57.7) (37.3)
Business exits (5.5) (6.0)
Impact of IFRS 16 56.0 —
Other (1.4) (16.6)
Reported free cash flow (85.9) (173.4)
Net debt
Net debt at 30 June 2019 was £1,215.1m (31 December 2018: £466.1m),
reflecting the cash outflow in the six months and the lease liabilities
recognised on adoption of IFRS 16 (30 June 2019: £591.6m; 1 January 2019:
£643.9m).
At 30 June 2019, the Group had £376.9m of cash and cash equivalents net of
overdrafts, and £1,116.0m of private placement loan notes which mature over
the period up to 2027. In addition, the Group has an undrawn £600m revolving
credit facility of which £81m matures in August 2020 and £519m in August
2021.
The Board’s view is that the appropriate leverage ratio for Capita over the
medium term should be between 1.0 and 2.0 times adjusted net debt to adjusted
EBITDA(1) (prior to the adoption of IFRS 16). At 30 June 2019, the ratio was
1.7 times (31 December 2018: 1.2 times).
The impact of IFRS 16 adoption on the Group’s adjusted net debt to adjusted
EBITDA(1) debt covenant ratio is neutral, as the Group covenants are on frozen
GAAP, with the exception of the US private placement loan notes. The US
private placement loan notes covenant test includes the income statement
impact of IFRS 16 but not the balance sheet impact, and therefore adoption of
IFRS 16 is favourable on this covenant measure. At 30 June 2019, the US
private placement loan notes ratio was 1.4 times.
Interest cover(1) covenant was 7.2 times for the US private placement loan
notes and 9.3 times for other financing arrangements (31 December 2018: 8.2
times).
As the comparatives have not been restated on the adoption of IFRS 16, the
December 2018 ratio is only comparable against the other financing
arrangements and therefore no comparatives are shown for the US private
placement loan notes.
At each reporting date, the calculation of the Group’s debt covenants is
assessed, both for that period and subsequent ones. These covenants are
calculated based on the adjusted performance of the Group, in that they
exclude exceptional items. The Group has been consistent with previous years
in its treatments of these items.
Capital management
The Group’s policy is to hold cash and undrawn committed facilities at a
level sufficient to fund the Group’s operations and its medium-term plans.
The Group holds cash and undrawn committed facilities to enable the Group to
manage its liquidity risk. At 30 June 2019, the Group held cash and cash
equivalents net of overdrafts of £376.9m and had available to it a committed
Revolving Credit Facility of £600m.
IFRS 16 Leases
Replacing IAS 17 Leases (IAS 17), the Group adopted IFRS 16 Leases (IFRS 16)
from 1 January 2019. The standard has had a material impact for Group,
introducing a single lessee accounting model which required assets and
liabilities to be recognised for all leases. Rental costs previously
recognised in operating profit have been replaced by depreciation of the
assets and net finance costs on the liability. The total cash outflow for
lease payments has not changed, however payments related to the principal
liability have been presented as cash outflows from financing activities, as
opposed to cash outflow from operating activities under IAS 17.
The Group holds a significant number of operating leases and therefore
adopting IFRS 16 has had a material impact to the Group’s financial
statements. The main changes of adopting IFRS 16 are as follows:
• Total assets increased with the recognition of right-of-use assets (1
January 2019: £568.2m);
• Total liabilities increased with the recognition of additional lease
liabilities (1 January 2019: £643.9m);
• Recognition of a deferred tax asset, lease receivable assets and
reclassifications of other lease related balance sheet items (1 January 2019:
£48.9m);
• Net assets reduced, resulting in an increase in retained deficit (1
January 2019: £26.8m);
• Operating profit/EBITDA improved as rental costs removed are only
partially replaced by depreciation of lease assets (six months ended 30 June
2019: EBITDA £59.0m; operating profit £6.4m);
• Profit before tax decreased due to the combination of depreciation and
interest being higher than the rental costs they replace (six months ended 30
June 2019: £5.9m); and
• Cash outflows from financing activities increased (six months ended 30
June 2019: £56.0m) while cash outflows from operating activities have
decreased (six months ended 30 June 2019: £56.0m), as a recognition of rental
costs, previously recognised solely as cash outflows from operations are now
apportioned between finance charges and reduction of the of the lease
liability.
Due to the Group's ongoing transformation plan, which includes a
rationalisation of Capita’s properties, the Group’s lease portfolio is
expected to change over the next few years. These changes will be accounted
for as and when they happen.
Balance sheet
Non-current assets
Non-current assets have increased in the six months by £523.6m to £2,869.0m,
the most significant increase being £513.6m of right-of-use assets from the
adoption of IFRS 16 explained above. Of the remaining non-current assets of
£2,355.4m at 30 June 2019, £1,356.8m relates to goodwill and acquired
intangibles, £231.7m relates to purchased intangibles, £208.7m relates to
plant, property and equipment and £255.8m relates to our contract fulfilment
assets.
As discussed in the analysis of adjusted free cash flow, net capital
expenditure was £64.3m, mainly attributable to an increase in investments in
IT systems and infrastructure. There was also investment of £47.2m in
contract fulfilment assets across a number of contracts as we continue to
transform the service we provide for those clients.
The Group undertook a review to identify indicators of impairment of goodwill
and acquired intangible assets. While no impairments were identified as at 30
June 2019, the assessment is dependent on the successful implementation of the
Group's transformation plan, in particular reigniting growth, which as noted
in the strategic review, is an area where we need to make significant progress
in 2019. This is particularly the case for People Solutions and Customer
management.
Current assets
Current assets have decreased in the six months by £86.1m to £1,662.2m, with
cash decreasing by £241.0m reflecting the cash outflow in the period, off-set
by an increase in trade and other receivables of £122.1m.
Current liabilities
Current liabilities have increased in the six months by £252.9m to
£2,616.6m, the most significant increase being £87.9m of lease liabilities
from the adoption of IFRS 16 explained above, the reclassification of £182.0m
of private placement loan notes from non-current liabilities, and an increase
in deferred income of £55.5m, off-set by repayment of the £100m bank loan.
Non-current liabilities
Non-current liabilities have increased in the six months by £216.0m to
£1,842.7m, the most significant increase being £503.7m of lease liabilities
from the adoption of IFRS 16 explained above, off-set by the reclassification
of £182.0m private placement loan notes to current, and £64.6m reduction in
deferred income.
Financial outlook
Capita's financial outlook remains unchanged.
Capita is in the second year of a multi-year transformation and the successful
delivery of this programme remains a key focus area for the Group. We continue
to expect profit before tax(1) to be between £265m and £295m and net finance
costs to be in the region of £40m in 2019, before the adoption of IFRS 16(3).
We expect our net debt to EBITDA ratio to be in the top half of our stated
range of 1.0 times to 2.0 times before adoption of IFRS 16.
Our 2020 targets of £175m initial cost savings, double-digit adjusted(1)
operating profit margins and at least £200m of sustainable annual free cash
flow, before exceptional and restructuring charges, additional pension
contributions and the impact of IFRS 16, remain unchanged.
1 Refer to alternative performance measures in Appendix 1.
2 Refer to note 14 to the condensed consolidated interim financial statements.
3 Before the adoption of IFRS 16, which is expected to result in a £26.0m to
£28.0m increase in net finance costs and a £12.0m to £14.0m decrease in
profit before tax in the full year to 31 December 2019. Refer to note 21 to
the condensed consolidated interim financial statements for details.
Forward looking statements
This half 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.
Principal risks and uncertainties
The Directors have considered the principal risks and uncertainties affecting
the Group’s financial position and prospects. As described on pages 44 to 51
of the Group’s annual report 2018, the Group continues to be exposed to a
number of risks and has well established systems and procedures in place to
identify, assess and mitigate those risks, and is seeking to materially
enhance them as part of its transformation plan.
The principal risks include those arising from: failure of internal systems of
control; failure in information security controls; increased business
complexity; disruption to operational IT; failure to effectively manage our
people; weakness in acquisition and contracting; legal/regulatory actions;
failure to meet financial expectations; lack of corporate financial stability;
failure to innovate; adverse changes in political landscape; reputation; and a
failure to deliver the transformation plan.
The impacts from these risks include reputational damage, financial loss and
adverse outcomes for clients and customers.
As a technology-driven services company, Capita must operate a resilient
technical infrastructure. In recognition of a historic underinvestment in the
resilience of the IT systems, the Board, in 2018, established two major
remediation programmes. One focussed on the resilience of core IT systems and
one on identifying and remediating cyber risk. Both programmes have been and
will remain a key area of focus for the Board. The Board expects the
programmes to have delivered the necessary further risk controls over the next
18 months.
The risk of data breaches has been a particular focus for the Board. As an
organisation that processes a great deal of personal information, we recognise
the risks that a failure in privacy controls would bring, and the impact and
harm that could be caused to the business both financially and reputationally.
We take steps through the company-wide privacy programme to manage and
mitigate those risks to the business (for example, incident reporting and
investigation, root cause analysis, remedial actions and learning).
As noted in the Group's annual report 2018, Capita has embarked on a financial
transformation which it expects will drive improved data quality,
standardisation of activities performed by the finance community and optimise
the use of offshoring and shared service centre delivery models. These actions
are designed to develop and deliver better processes and controls across the
business.
An evaluation of financial controls has been undertaken by the senior finance
team to review the material financial controls that are in place and to
identify areas where these might only be partially effective or be inefficient
in achievement of their purpose. Any material issues have been dealt with
through mitigating activities. Again, the Board expects the transformation
plan will deliver the necessary improvements over the next 18 months.
The Directors continue to review the principal risks on an ongoing basis and
confirm that no further principal risks have been identified since 13 March
2019. A comprehensive review of the principal risks and the framework for
managing them has commenced and will be reported on at year end.
Statement of Directors’ responsibilities
The Directors confirm, to the best of their knowledge, that this condensed set
of financial statements has been prepared in accordance with IAS 34 as adopted
by the European Union and that the Half Year Management Report includes a fair
review of the information required by Rules 4.2.7 and 4.2.8 of the Disclosure
Guidance and Transparency Rules of the United Kingdom Financial Conduct
Authority.
The names and functions of the Directors of Capita plc are listed on the Group
website, www.capita.com/about-us/about-the-board.
By order of the Board
J Lewis
P Butcher
Chief Executive Officer
Chief Financial Officer
31 July
2019
31 July 2019
Half year condensed consolidated income statement
for the six months ended 30 June 2019
30 June 2019 30 June 2018 (1)
Notes Total Total reported £m
reported
£m
Continuing operations:
Revenue 5 1,852.0 2,012.6
Cost of sales (1,392.4) (1,530.1)
Gross profit 459.6 482.5
Administrative expenses (398.8) (415.8)
Operating profit 5 60.8 66.7
Share of results in associates (0.6) —
Net finance costs 6 (29.0) (37.0)
Gain on business disposal 3 — 12.6
Profit before tax 31.2 42.3
Income tax (expense)/credit 7 (5.6) 23.8
Profit for the period from continuing operations 25.6 66.1
Discontinued operations:
Profit for the period 4 3.7 4.4
Total profit for the period 29.3 70.5
Attributable to:
Owners of the Company 26.3 65.5
Non-controlling interests 3.0 5.0
29.3 70.5
Earnings per share 8
Continuing:
– basic 1.36p 4.86p
– diluted 1.35p 4.82p
Total operations:
– basic 1.59p 5.21p
– diluted 1.57p 5.17p
Adjusted operating profit 3 142.1 158.4
Adjusted profit before tax 3 126.1 130.8
Adjusted earnings per share 8 5.86p 10.22p
Adjusted and diluted earnings per share 8 5.80p 10.13p
1. The Group has initially applied IFRS 16 Leases (IFRS 16) at 1 January
2019, using the modified retrospective approach. Under this approach,
comparative information is not restated and the cumulative effect of initially
applying IFRS 16 is recognised in retained earnings at the date of initial
application. Refer to note 21 for further details.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Half year condensed consolidated statement of comprehensive income
for the six months ended 30 June 2019
30 June 2019 30 June 2018 (1)
Notes £m £m £m £m
Profit for the period 29.3 70.5
Other comprehensive (expense)/income:
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss)/gain on defined benefit pension schemes (52.5) 98.4
Income tax effect 8.9 (16.7)
(43.6) 81.7
(43.6) 81.7
Items that will or may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations 1.5 (2.6)
Gain/(loss) on cash flow hedges 2.3 (4.0)
Reclassification adjustments for expenses/(income) included in the income statement 6 (1.7) 0.4
Income tax effect (0.1) 0.7
0.5 (2.9)
2.0 (5.5)
Other comprehensive (expense)/income for the period net of tax (41.6) 76.2
Total comprehensive (expense)/income for the period net of tax (12.3) 146.7
Attributable to:
Owners of the Company (15.3) 141.7
Non-controlling interests 3.0 5.0
(12.3) 146.7
1. The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 21 for further details.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Half year condensed consolidated balance sheet
at 30 June 2019
Notes 30 June 2019 31 Dec 2018 (1) £m
£m
Non-current assets
Property, plant and equipment 208.7 213.6
Intangible assets 10 1,588.5 1,587.7
Right-of-use assets (1) 513.6 —
Investments in associates 5.9 —
Contract fulfilment assets 11 255.8 264.2
Financial assets (1) 15 106.7 109.1
Deferred taxation (1) 159.4 144.6
Trade and other receivables 30.4 26.2
2,869.0 2,345.4
Current assets
Financial assets (1) 15 49.3 18.2
Trade and other receivables (1) 893.8 771.7
Cash 716.5 957.5
Income tax receivable (2) 2.6 0.9
1,662.2 1,748.3
Total assets 4,531.2 4,093.7
Current liabilities
Trade and other payables (1,2) 652.1 668.7
Deferred income 12 1,035.8 980.3
Overdrafts 339.6 314.8
Lease liabilities (1) 15 87.9 —
Financial liabilities 15 404.9 303.1
Provisions (1) 13 96.3 96.8
2,616.6 2,363.7
Non-current liabilities
Trade and other payables 10.2 11.6
Deferred income 12 212.7 277.3
Lease liabilities (1) 15 503.7 —
Financial liabilities 15 882.0 1,084.2
Deferred taxation 15.2 15.2
Provisions (1) 13 5.7 19.4
Employee benefits 213.2 219.0
1,842.7 1,626.7
Total liabilities 4,459.3 3,990.4
Net assets 71.9 103.3
Capital and reserves
Issued share capital 16 34.5 34.5
Share premium 16 1,143.3 1,143.3
Employee benefit trust and treasury shares 16 (11.2) (11.2)
Capital redemption reserve 1.8 1.8
Foreign currency translation reserve 3.1 1.6
Cash flow hedging reserve 2.0 1.5
Retained deficit (1,2) (1,171.7) (1,135.3)
Surplus attributable to owners of the Company 1.8 36.2
Non-controlling interests 70.1 67.1
Total equity 71.9 103.3
1. The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 21 for further details.
2. The Group has initially applied IFRIC 23 Uncertainty over Income Tax
Treatments at 1 January 2019. The cumulative effect of initially applying
IFRIC 23 has been recognised in retained earnings at the date of initial
application. Comparative information is not restated. Refer to note 7 for
further details.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Half year condensed consolidated statement of changes in equity
for the six months ended 30 June 2019
Share capital £m Share premium £m Employee benefit trust and treasury shares £m Capital redemption reserve £m Retained earnings/ (deficit) £m Foreign currency translation reserve £m Cash flow hedging reserve £m Total £m Non- controlling interests £m Total equity/ (deficit) £m
At 1 January 2018 13.8 501.3 (0.2) 1.8 (1,517.2) (0.4) 1.9 (999.0) 69.2 (929.8)
Profit for the period — — — — 65.5 — — 65.5 5.0 70.5
Other comprehensive income/(expense) — — — — 81.7 (2.6) (2.9) 76.2 — 76.2
Total comprehensive income/(expense) for the period — — — — 147.2 (2.6) (2.9) 141.7 5.0 146.7
Share based payment — — — — 4.0 — — 4.0 — 4.0
Shares issued/(purchased) 20.7 642.0 (11.0) — — — — 651.7 — 651.7
Movement in put options held by non-controlling interests — — — — (1.2) — — (1.2) — (1.2)
At 30 June 2018 34.5 1,143.3 (11.2) 1.8 (1,367.2) (3.0) (1.0) (202.8) 74.2 (128.6)
At 1 January 2019 34.5 1,143.3 (11.2) 1.8 (1,135.3) 1.6 1.5 36.2 67.1 103.3
Impact of change in accounting standards - IFRS 16 (1) — — — — (26.8) — — (26.8) — (26.8)
Impact of change in accounting standards - IFRIC 23 (2) — — — — 6.2 — — 6.2 6.2
At 1 January 2019, on adoption of IFRS 16 (1)and IFRC 23 (2) 34.5 1,143.3 (11.2) 1.8 (1,155.9) 1.6 1.5 15.6 67.1 82.7
Profit for the period — — — — 26.3 — — 26.3 3.0 29.3
Other comprehensive expense — — — — (43.6) 1.5 0.5 (41.6) — (41.6)
Total comprehensive (expense)/income for the period — — — — (17.3) 1.5 0.5 (15.3) 3.0 (12.3)
Share based payment — — — — 3.5 — — 3.5 — 3.5
Movement in put options held by non-controlling interests — — — — (2.0) — — (2.0) — (2.0)
As at 30 June 2019 34.5 1,143.3 (11.2) 1.8 (1,171.7) 3.1 2.0 1.8 70.1 71.9
1. The Group has initially applied IFRS 16 at 1 January 2019,
using the modified retrospective approach. Under this approach, comparative
information is not restated and the cumulative effect of initially applying
IFRS 16 is recognised in retained earnings at the date of initial application.
Refer to note 21 for further details.
2. The Group has initially applied IFRIC 23 Uncertainty over
Income Tax Treatments at 1 January 2019. The cumulative effect of initially
applying IFRIC 23 has been recognised in retained earnings at the date of
initial application. Comparative information is not restated. Refer to note 7
for further details.
Share capital – The balance classified as share capital is the nominal
proceeds on issue of the Company’s equity share capital, comprising 2 1/15p
ordinary shares.
Share premium – The amount paid to the Company by shareholders, in cash or
other consideration, over and above the nominal value of shares issued
to them.
Employee benefit trust and treasury shares – Shares that have been bought
back by the Company which are available for retirement or resale; shares held
in the employee benefit trust have no voting rights and do not have
entitlement to a dividend.
Capital redemption reserve – The Company can redeem shares by repaying the
market value to the shareholder, whereupon the shares are cancelled.
Redemption must be from distributable profits. The Capital redemption reserve
represents the nominal value of the shares redeemed.
Foreign currency translation reserve – Gains or losses resulting from the
process of expressing amounts denominated or measured in one currency in terms
of another currency by use of the exchange rate between the two currencies.
This process is required to consolidate the financial statements of foreign
affiliates into the total Group financial statements and to recognise the
conversion of foreign currency or the settlement of a receivable or payable
denominated in foreign currency at a rate different from that at which the
item is recorded.
Cash flow hedging reserve – This reserve records the portion of the gain or
loss on a hedging instrument in a cash flow hedge that is determined to be an
effective hedge.
Retained earnings – Net profits kept to accumulate in the Group after
dividends are paid and retained in the business as working capital.
Non-controlling interests (NCI) – This represents the equity in a subsidiary
that is not attributable directly or indirectly to the parent company.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Half year condensed consolidated cash flow statement
for the six months ended 30 June 2019
Notes 30 June 2019 30 June 2018 (1)
£m £m
Cash generated from/(used by) operations (1) 14 6.9 (94.4)
Cash generated from/(used by) discontinued operations 4 3.1 (97.4)
Income tax (paid)/received 7 (2.2) 14.8
Net interest paid (1) (26.3) (24.3)
Net cash outflow from operating activities (18.5) (201.3)
Cash flows from investing activities
Purchase of property, plant and equipment (22.3) (48.7)
Purchase of intangible assets (42.1) (20.8)
Proceeds from sale of property, plant and equipment/intangible assets 0.1 —
Additions to investments in associates (0.4) —
Prior year disposal costs (8.0) —
Deferred consideration received — 1.7
Cancellation of put options — (6.8)
Deferred consideration paid 15 (0.3) (11.1)
Contingent consideration paid (7.1) (15.1)
Net proceeds on disposal of subsidiary undertakings — 16.7
Net cash outflow from investing activities (80.1) (84.1)
Cash flows from financing activities
Repayment of term loan (100.0) —
Purchase of shares 16 — (11.0)
Capital element of lease rental payments (1) (56.0) —
Issue of share capital net of issue costs 16 — 671.1
Repayment of loan notes (11.1) (307.5)
Proceeds of fixed rate swaps — 61.1
Financing arrangement costs — (0.2)
Net cash (outflow)/inflow from financing activities (167.1) 413.5
(Decrease)/increase in cash and cash equivalents (265.7) 128.1
Cash and cash equivalents at the beginning of the period 642.7 478.4
Movement in exchange rates (0.1) (1.4)
Cash and cash equivalents as at 30 June 376.9 605.1
Cash and cash equivalents comprise:
Cash at bank and in hand 716.5 945.9
Cash held by disposal group held for sale and discontinued operations — 21.7
Overdrafts (339.6) (362.5)
Total 376.9 605.1
Adjusted cash generated from/(used by) operations 14 59.9 (51.6)
Adjusted free cash flows 14 (20.2) (109.0)
1. The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 21 for further details.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Notes to the half year condensed consolidated financial statements
for the six months ended 30 June 2019
1 Corporate information
Capita plc is a public limited company incorporated in England and Wales whose
shares are publicly traded. The half year condensed consolidated financial
statements of the Company and its subsidiaries (‘the Group’) for the six
months ended 30 June 2019 were authorised for issue in accordance with a
resolution of the Directors on 31 July 2019.
2 Basis of preparation, judgements and estimates, significant accounting
policies and going concern
(a) Basis of preparation
The half year condensed consolidated financial statements for the six months
ended 30 June 2019 have been prepared in accordance with the Disclosure
Guidance and Transparency Rules (DTR) of the Financial Conduct Authority and
with IAS 34 Interim Financial Reporting.
The half year condensed consolidated financial statements do not include all
the information and disclosures required in the annual financial statements
and should be read in conjunction with the Group’s annual financial
statements as at 31 December 2018, which have been prepared in accordance with
IFRSs as adopted by the European Union.
The half year condensed consolidated financial statements do not comprise
statutory accounts within the meaning of Section 434 of the Companies Act
2006. The statutory accounts for the year ended 31 December 2018 were approved
by the Board of Directors on 13 March 2019 and delivered to the Registrar of
Companies. The report of the auditors on those accounts was unqualified, did
not contain an emphasis of matter paragraph, and did not contain any statement
under Section 498 of the Companies Act 2006.
The half year condensed consolidated financial statements for the six months
ended 30 June 2019 have been reviewed by the Group's auditors pursuant to the
Auditing Practices Board guidance on Review of Interim Financial Information.
(b) Judgements and estimates
In preparing these half year condensed consolidated financial statements,
management make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amount of assets,
liabilities, income and expense. Actual results may differ from these
estimates. The significant judgements made by management in applying the
Group’s accounting policies and the key sources of estimation uncertainty
were the same as those that applied to the consolidated financial statements
as at the year ended 31 December 2018, other than those additional areas which
have arisen as a consequence of the adoption of IFRS 16 Leases - see note 21
where these are explained.
(c) Significant accounting policies
The accounting policies adopted in preparation of the half year condensed
consolidated financial statements are consistent with those followed in the
preparation of the Group’s annual financial statements for the year ended 31
December 2018, except for adoption of IFRS 16 Leases and IFRIC 23 Uncertainty
over Income Tax Treatments detailed below.
Initial adoption of IFRS 16 Leases
IFRS 16 (effective 1 January 2019) replaces IAS 17 and sets out the principles
for the recognition, measurement, presentation and disclosure of leases.
The Group applied IFRS 16 using the modified retrospective approach, under
which the cumulative effect of initially applying IFRS 16 is recognised in
retained earnings at 1 January 2019. Accordingly, the comparative information
presented for 2018 has not been restated - i.e. it is presented, as previously
reported, under IAS 17 and related interpretations. However to improve the
understandability of the Group's results we have excluded the impact of
adopting IFRS 16 in the six months ended 30 June 2019 adjusted operating
profit(1), adjusted profit before tax(1) and adjusted free cash flow(1) to
make them comparable to 2018.
On adoption of IFRS 16, the Group immediately recognised right-of-use assets
representing its rights to use the underlying assets and lease liabilities
representing its obligation to make lease payments. Adoption of IFRS 16 has
had a significant impact on the Group’s financial statements. Details of the
change in the Group’s accounting policy in respect of lease accounting and
an analysis of the impact of adopting IFRS 16 are set out in note 21.
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 (effective 1 January 2019) addresses the accounting for income
taxes when tax treatments involve uncertainty that affects the application of
IAS 12 Income Taxes.
The Group has initially applied IFRIC 23 Uncertainty over Income Tax
Treatments at 1 January 2019. The Group applies judgement in quantifying
uncertainties over income tax treatments and has considered whether it should
adjust its uncertain tax provisions in line with this new criteria. The Group
has recognised the cumulative impact of the adjustment arising on transition
within retained earnings on the initial date of application. Comparative
information is not restated.
Adoption of IFRIC 23 has not had a significant impact on the Group's financial
statements. Details of the change are set out in note 7.
(d) Going concern
The Directors have formed the judgement that it is appropriate to prepare the
half year condensed consolidated financial statements on the going concern
basis. Therefore, the condensed consolidated financial statements do not
include any adjustments which would be required if the going concern basis of
preparation is inappropriate.
The Directors have undertaken a rigorous assessment of going concern and
liquidity, taking into accounting financial forecasts. Having taken decisive
action to strengthen the balance sheet through the raising of new equity and
the disposal of non-core businesses, the Board are satisfied that the Group
will continue to have adequate financial resources to realise their assets and
discharge its liabilities as they fall due.
1 Refer to alternative performance measures in Appendix 1.
3 Adjusted operating profit and adjusted profit before tax
The items below are excluded from the adjusted results as the Board has
concluded that it is appropriate to do so. These amounts are (or have been)
material, and require separate disclosure in order for the users of the
financial statements to obtain a proper understanding of the financial
information and the underlying performance of the business. The tax impact of
the operating profit adjusting items is a £15.4m credit (30 June 2018:
£17.2m credit). The tax impact of the profit before tax adjusting items is a
£18.1m credit (30 June 2018: £19.0m credit). These items are discussed
further below:
Operating profit Profit before tax
Notes 30 June 2019 30 June 2018 £m 30 June 2019 30 June 2018 £m
£m £m
Reported 60.8 66.7 31.2 42.3
Amortisation and impairment of acquired intangibles 28.7 47.8 28.7 47.8
Litigation and claims 0.8 3.7 0.8 3.7
Net finance costs 6 — — 1.3 9.4
Contingent consideration movements — (0.1) — (0.1)
Business exit – trading 1.7 (10.5) 1.7 (10.5)
Business exit – non-trading expenses — 1.7 — 1.7
Business exit – gain on disposals — — — (12.6)
Significant restructuring 56.5 49.1 56.5 49.1
Impact of IFRS 16 21 (6.4) — 5.9 —
Adjusted 142.1 158.4 126.1 130.8
Amortisation and impairment of acquired intangible assets: the Group carries
on its balance sheet significant balances related to acquired intangible
assets. The amortisation of these assets, and any impairment charges, are
reported separately as they distort the in-year trading results, and
performance of the acquired businesses is assessed through the underlying
operational results. No impairments were recognised in the six months ended 30
June 2019.
Litigation and claims: the charge of £0.8m at 30 June 2019 is the net
movement in historical provisions for litigation and claims which were
excluded from adjusted profit when originally recognised due to their age and
size. The charge at 30 June 2018 arose from the derecognition of an insurance
asset of £3.7m. The original claim to which the asset related was excluded
from adjusted profit due to its nature and size.
Net finance costs: net finance costs excluded from adjusted profits includes
the movements in the mark to market valuation of certain financial
instruments, and in 2018, the make-whole costs paid to noteholders on early
repayment of principal on the private placement loan notes from the proceeds
of the rights issue and disposals. Refer to note 6 for further details.
Contingent consideration movements: in accordance with IFRS 3, movements in
the fair value of contingent consideration on acquisitions go through the
Group income statement. These are reported separately because performance of
the acquired businesses is assessed through the underlying operational results
and such a charge/credit movement would distort underlying results.
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.
In the six months ended 30 June 2019 there have been no new business exits.
Business exit cost for the period includes an operating loss of £1.7m
primarily due to the REI Health business which was exited in the second half
of 2018.
In the six months ended 30 June 2018, the Group disposed of three small
businesses - Capita Specialist Insurance Solutions, Projen and Medicals Direct
Group - and treated two businesses as disposal groups held for sale - Supplier
Assessment Services (including Constructionline) and ParkingEye. In addition
the 2018 half year results have been restated for the trading of the REI
Health business exited in the second half of 2018 to enable comparability of
adjusted results. The impact of the restatement for REI Health was to exclude
an operating loss of £1.2m from adjusted profit.
Significant restructuring: in January 2018, the Group announced a multi-year
transformation plan. In the period to 30 June 2019, a charge of £56.5m (30
June 2018: £49.1m) was recognised in relation to the cost of the
transformation plan, and restructuring costs relating to Capita’s previously
announced cost reduction plan. The costs include the following:
• Cost to realise cost savings and efficiencies from the transformation
plan (£35.0m): including significant reductions in overheads via support
function restructuring and the elimination of duplicate roles, and the Group's
operational excellence programme which will improve the consistency of our
operations, reduce spans and layers, increasing the use of off-shoring and
automation, adopting lean methodologies and being smarter in terms of how we
work. These costs also include engaging the Group’s property expertise to
rationalise and increase the utilisation of Capita’s property estate, in
metro centres and regionally. As the Group continues to rationalise the
property estate cost associated with onerous lease commitments and
dilapidation liabilities will be captured and presented as part of the
transformation adjustments.
• Professional fees (£11.5m): incurred to support re-igniting sales
growth and increasing the proportion of centrally controlled spend,
consolidating the supplier base and leveraging the Group’s scale.
• Transformation of central group functions (£10.0m): investment in
programmes to improve the Group’s central functions, including finance,
sales, HR and IT. All costs associated with these programmes are recorded
separately, excluding any costs capitalised as part of the investment and the
ongoing depreciation and amortisation of such assets.
Impact of IFRS 16: the adoption of IFRS 16 has had a significant impact on the
Group’s financial statements and this has been excluded from adjusted profit
to enable comparability of adjusted results. Details of the change in the
Group’s accounting policy in respect of lease accounting and an analysis of
the impact of adopting IFRS 16 are set out in note 21.
4 Discontinued operations
Capita completed the disposal of its Asset Services businesses, including
Capita Financial Managers Limited (CFM), to the Link Group on 3 November 2017.
The disposal met the definition of a discontinued operation as stipulated by
IFRS 5.
The credit of £3.7m for the six months ended 30 June 2019, primarily relates
to a £3.1m return of redress payments made to the Financial Conduct Authority
(FCA) regarding the Connaught Income Series 1 Fund (30 June 2018: £4.4m
credit in relation to provision releases).
CFM was the Operator of the Connaught Income Series 1 Fund (the Fund) until
September 2009, when it was replaced by an unrelated company as Operator,
following which CFM had no further involvement with the Fund. The Fund went
into liquidation in 2012 and its liquidator brought a claim against both
former Operators, which for its part, Capita settled in 2016 for a sum of
£18.5m. The FCA undertook a formal review of the activities of both Operators
and announced that its conclusion was that CFM did not meet all of its
regulatory requirements in the period April 2008 to September 2009. To ensure
that investors receive appropriate redress and to bring this matter to a close
enabling the smooth disposal of CFM, CFM and Capita agreed a full and final
settlement with the FCA. In reaching this settlement, the full cooperation
which CFM gave to the FCA during the course of its investigation was
acknowledged.
In 2018, the Group agreed a redress payment with the FCA such that the final
amount of the redress payment would not exceed £61.5m. The redress payment
was based off third-party calculations and the final quantum of the redress
payments. The final quantum of the redress payments was determined in the
first half of 2019, and a cumulative £7.5m was returned to Capita by the FCA
during 2018 and 2019. The FCA have now closed the review of the fund and there
are no further redress payments that will be made.
Cash flows from other operating activities of £3.1m relates to the above
return of redress payments made to the FCA and £nil (2018: £19.0m)
separation costs incurred in relation to the disposal.
5 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. These divisions are supported by a common set of Group
capabilities and functions which are reported separately as 'Group trading and
central services'.
Before eliminating sales between business units on consolidation, the Group
accounts for sales between business units as if they were to a third party at
market rates.
The Group adopted IFRS 16 on 1 January 2019 using the modified retrospective
approach. Leases across the Group are centrally managed and controlled. As a
result, the Group's right-of-use lease assets and lease liabilities are held
in the Group trading and central services segment, and the related
depreciation included in the Group trading and central services income
statement. The IFRS 16 interest charges are included on a total group basis
only, in line with other finance costs. The divisions continue to recognise
rental costs on an IAS 17 basis as they do not control the use of the asset,
and this is reversed in the Group trading and central services segment and
replaced with the above IFRS 16 depreciation and interest cost. Under the
modified retrospective approach, comparative information is not restated.
Comparative information for the six months ended 30 June 2018 has been
restated for the impact of the closure of the REI Health business with total
adjusted revenue reduced by £1.9m and adjusted profit before tax increased by
£1.2m.
Six months to 30 June 2019 Notes Software People Solutions Customer Management Government Services IT & Networks Specialist Services Group trading and central services Total adjusted Adjusting items Total reported
£m £m £m £m £m £m £m £m £m £m
Continuing operations
Long-term contractual 171.8 157.3 275.1 352.8 147.0 220.5 1.3 1,325.8 — 1,325.8
Short-term contractual 17.3 17.5 123.2 12.5 20.1 90.4 0.9 281.9 0.4 282.3
Transactional (point in time) 3.2 78.6 0.9 48.3 46.4 65.2 1.3 243.9 — 243.9
Total segment revenue 192.3 253.4 399.2 413.6 213.5 376.1 3.5 1,851.6 0.4 1,852.0
Trading revenue 222.9 345.1 455.3 429.3 320.0 421.2 21.8 2,215.6 — 2,215.6
Inter-segment revenue (30.6) (91.7) (56.1) (15.7) (106.5) (45.1) (18.3) (364.0) — (364.0)
Total adjusted segment revenue 192.3 253.4 399.2 413.6 213.5 376.1 3.5 1,851.6 — 1,851.6
Business exits – trading — — — — — 0.4 — — 0.4 0.4
Total segment revenue 192.3 253.4 399.2 413.6 213.5 376.5 3.5 — — 1,852.0
Adjusted operating profit/(loss) 3 49.2 12.5 26.0 20.4 23.8 67.7 (57.5) 142.1 —
Restructuring 3 (2.5) (15.1) (2.6) (0.3) (2.7) (3.2) (30.1) — (56.5)
Business exits – trading 3 — — — — — (1.7) — — (1.7)
Total trading result 46.7 (2.6) 23.4 20.1 21.1 62.8 (87.6) 142.1 (58.2) 83.9
Non-trading items:
Other adjusting items 3 — (23.1) (23.1)
Operating profit 142.1 (81.3) 60.8
Share of results in associates (0.6) — (0.6)
Net finance costs 6 (15.4) (13.6) (29.0)
Profit before tax 126.1 (94.9) 31.2
Income tax (expense)/credit 7 (23.7) 18.1 (5.6)
Profit/(loss) for the period – continuing operations 102.4 (76.8) 25.6
Profit for the period – discontinued operations — 3.7 3.7
Profit/(loss) 102.4 (73.1) 29.3
for the period – total
Six months to 30 June 2018 Notes Software £m People Solutions £m Customer Management £m Government Services £m IT & Networks £m Specialist Services £m Group trading and central services £m Total adjusted £m Adjusting items £m Total reported £m
Continuing operations
Long-term contractual 179.2 151.0 287.2 345.6 138.7 315.3 4.7 1,421.7 — 1,421.7
Short-term contractual 17.2 18.8 116.5 14.9 32.8 100.2 — 300.4 35.8 336.2
Transactional (point in time) 4.1 82.7 0.9 47.4 41.9 77.7 — 254.7 — 254.7
Total segment revenue 200.5 252.5 404.6 407.9 213.4 493.2 4.7 1,976.8 35.8 2,012.6
Trading revenue 225.3 325.4 459.2 423.5 340.6 521.3 26.1 2,321.4 — 2,321.4
Inter-segment revenue (24.8) (72.9) (54.6) (15.6) (127.2) (28.1) (21.4) (344.6) — (344.6)
Total adjusted segment revenue 200.5 252.5 404.6 407.9 213.4 493.2 4.7 1,976.8 — 1,976.8
Business exits – trading — — — — — 35.8 — — 35.8 35.8
Total segment revenue 200.5 252.5 404.6 407.9 213.4 529.0 4.7 — — 2,012.6
Adjusted operating profit/(loss) 3 48.8 16.4 17.2 18.6 25.5 81.1 (49.2) 158.4 —
Restructuring 3 (3.0) (4.8) (5.1) (2.1) (0.6) (13.3) (20.2) — (49.1)
Business exits – trading 3 — (0.3) — — — 10.8 — — 10.5
Total trading result 45.8 11.3 12.1 16.5 24.9 78.6 (69.4) 158.4 (38.6) 119.8
Non-trading items:
Business exits – non-trading 3 — (1.7) (1.7)
Other adjusting items 3 — (51.4) (51.4)
Operating profit/(loss) 158.4 (91.7) 66.7
Net finance costs 6 (27.6) (9.4) (37.0)
Gain on business disposal 3 — 12.6 12.6
Profit/(loss) before tax 130.8 (88.5) 42.3
Income tax credit 7 4.8 19.0 23.8
Profit/(loss) for the period – continuing operations 135.6 (69.5) 66.1
Profit for the period – discontinued operations 4 — 4.4 4.4
Profit/(loss) for the period – total 135.6 (65.1) 70.5
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 or equal to two
years). The length of the contract is calculated from the start of the service
commencement date. The figures represent the aggregate amount of currently
contracted transaction price allocated to the performance obligations that are
unsatisfied or partially unsatisfied. Revenue expected to be recognised upon
satisfaction of these performance obligations is as follows:
Order book 30 June 2019 Software People Solutions Customer Management Government Services IT & Specialist Services Group trading and central functions Total
£m £m £m £m Networks £m £m £m
£m
Long-term contractual 577.3 609.9 1,851.4 1,968.9 344.6 1,146.7 — 6,498.8
Short-term contractual 18.4 — 28.0 2.2 44.6 58.6 — 151.8
Total 595.7 609.9 1,879.4 1,971.1 389.2 1,205.3 — 6,650.6
Order book 31 December 2018 Software £m People Solutions £m Customer Management £m Government Services £m IT & Networks £m Specialist Services £m Group trading and central functions £m Total £m
Long-term contractual 559.6 715.3 2,027.4 2,187.5 390.4 1,213.5 — 7,093.7
Short-term contractual — — — — — 2.3 — 2.3
Total 559.6 715.3 2,027.4 2,187.5 390.4 1,215.8 — 7,096.0
The table below shows the time bands of the expected timing of revenue to be
recognised on long-term contractual at 30 June 2019:
Time bands of long-term contractual in order book Software People Solutions Customer Management Government Services IT & Specialist Services Group trading and central functions Total
£m £m £m £m Networks £m £m £m
£m
< 1 year 234.3 207.5 519.2 372.8 128.3 284.3 — 1,746.4
1–5 years 318.6 375.9 1,267.8 1,323.0 185.0 647.9 — 4,118.2
> 5 years 24.4 26.5 64.4 273.1 31.3 214.5 — 634.2
Total 577.3 609.9 1,851.4 1,968.9 344.6 1,146.7 — 6,498.8
The order book represents the consideration to which the Group will be
entitled to receive from the customers when the Group satisfies the remaining
performance obligations in the contracts. However, the total revenue that will
be earned by the Group will also include non-contracted volumetric revenue,
new wins, scope changes and anticipated contract extensions. These elements
have been excluded from the figures in the tables above as they are not
contracted. In addition, revenue from contract extensions is also excluded in
the order book unless they are pre-priced extensions whereby the Group has a
legal binding obligation to deliver the performance obligations during the
extension period. The total revenue related to pre-priced extensions that has
been included in the tables above amounted to £427.2m (31 December 2018:
£508.0m). The amounts presented do not include orders for which neither party
has performed and each party has the unilateral right to terminate a wholly
unperformed contract without compensating the other party.
Of the £6.5bn (31 December 2018: £7.1bn) revenue to be earned on long-term
contractual, £3.9bn (31 December 2018: £4.2bn) relates to material contracts
to the Group. This amount excludes revenue that will be derived from
frameworks (transactional (point in time) contracts), non-contracted
volumetric revenue, non-contracted scope changes and future unforeseen volume
changes from these material contracts, which together are expected to
contribute an additional £2.0bn (31 December 2018: £2.2bn) of revenue to the
Group over the life of these contracts.
6 Net finance costs
Six months to Six months to
Notes 30 June 2019 30 June 2018 £m
£m
Interest receivable (2.7) (0.6)
Private placement loan notes 15.3 20.0
Cash flow hedges recycled to the income statement (1.7) —
Bank loans and overdrafts 2.0 3.4
Net interest cost on defined benefit pension schemes 2.5 4.8
Interest payable 18.1 28.2
Net finance costs included in adjusted profit 15.4 27.6
Discount unwind on public sector subsidiary partnership payment 0.7 0.8
Non-designated foreign exchange forward contracts – mark-to-market (2.4) 3.6
Interest on lease liabilities 21 12.3 —
Fair value hedge ineffectiveness (1) 3.0 (3.7)
Private placement loan notes prepayment (2) — 8.7
Net finance costs excluded from adjusted profit 13.6 9.4
Total net finance costs 29.0 37.0
1. Fair value hedge ineffectiveness includes the costs of the early
termination of fair value hedges related to the early repayment of private
placement loan notes, ineffectiveness from changes in currency basis, and the
movement in mark-to-market valuations on hedge derivatives from the perceived
change in the credit worthiness of the counterparties to those instruments.
2. Private placement loan notes prepayment costs includes make-whole costs
paid to noteholders on early repayment of principal in 2018.
7 Income tax
The reported income tax charge for the half year of £5.6m resulted in a
reported tax rate of 17.9% (30 June 2018: reported income tax credit of
£23.8m and negative tax rate of 56.3%) while the adjusted income tax charge
for the half year of £23.7m resulted in an adjusted tax rate of 18.8% (30
June 2018: adjusted income tax credit of £4.8m and negative tax rate of
3.7%). Please refer to note 3 for tax impact of adjusting items.
Capita continues with its commitment to prompt disclosure and transparency in
all dealings with HMRC and overseas tax authorities. It does not have a
complex tax structure, nor does it pursue any aggressive tax avoidance
activities.
Further detail, regarding the tax strategy, can be found on the Policies and
Principles area of the Capita website
(capita.com/about-us/policies-and-principles).
Adoption of IFRIC 23 Uncertainty over Income Tax Treatments
The Group has initially applied IFRIC 23 at 1 January 2019. IFRIC 23 addresses
the accounting for income taxes when tax treatments involve uncertainty that
affects the application of IAS 12 Income Taxes. The Group applies judgement in
quantifying uncertainties over income tax treatments and has considered
whether it should adjust its uncertain tax provisions in line with this new
criteria. The Group has recognised the cumulative impact arising on transition
within retained earnings on the initial date of application.
The effect on the Group of adopting IFRIC 23 as at 1 January 2019 is an
increase in income tax receivable of £5.4m and a decrease in trade and other
payables of £0.8m, resulting in an increase in net assets of £6.2m and a
decrease in retained deficit of £6.2m.
8 Earnings per share
Basic earnings per share amounts are calculated by dividing net profit for the
period attributable to ordinary equity holders of the parent company by the
weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share amounts are calculated by dividing the net profit
for the period attributable to ordinary equity holders of the parent company
by the weighted average number of ordinary shares outstanding during the
period plus the weighted average number of ordinary shares that would be
issued on the conversion of all the dilutive potential ordinary shares into
ordinary shares.
The earnings per share figures are calculated based on earnings attributable
to ordinary equity holders of the parent company, and therefore excludes
non-controlling interest. The earnings per share is calculated on an adjusted
and total reported basis. The earnings per share for business exits, specific
items and the impact of IFRS 16 are bridging items to adjusted and total
reported earnings per share.
The following reflects the earnings and share data used in the basic and
diluted earnings per share computations:
Note 30 June 2019 30 June 2018
Continuing operations Total Continuing operations £m Total operations £m
£m operations
£m
Adjusted profit for the period 5 102.4 102.4 135.6 135.6
Less: Non-controlling interest (5.3) (5.3) (7.2) (7.2)
Adjusted profit attributable to shareholders 97.1 97.1 128.4 128.4
Profit for the period 5 25.6 29.3 66.1 70.5
Less: Non-controlling interest (3.0) (3.0) (5.0) (5.0)
Total profit attributable to shareholders 22.6 26.3 61.1 65.5
30 June 2019 30 June 2018 m
m
Weighted average number of ordinary shares (excluding trust and treasury shares) for basic earnings per share 1,656.3 1,256.1
Diluted potential ordinary shares:
Employee share options 17.7 11.7
Weighted average number of ordinary shares (excluding trust and treasury shares) adjusted for the effect of dilution 1,674.0 1,267.8
30 June 2019 30 June 2018
Continuing operations Total Continuing operations p Total operations p
p operations
p
Basic earnings per share - adjusted 5.86 5.86 10.22 10.22
- reported 1.36 1.59 4.86 5.21
Diluted earnings per share - adjusted 5.80 5.80 10.13 10.13
- reported 1.35 1.57 4.82 5.17
9 Dividends
The Board does not recommend the payment of an interim dividend.
10 Goodwill
In preparing these interim condensed consolidated financial statements, the
Group undertook a review to identify indicators of impairment of goodwill.
Consideration was given to performance against forecasts used in the year end
impairment testing and where this gave rise to an indicator of potential
impairment, further review was performed. No impairments were identified as at
30 June 2019.
11 Contract fulfilment assets
Total £m
At 1 January 2019 264.2
Additions 47.2
Transfers from current contract fulfilment assets 0.2
Impairment (9.0)
Utilised during the period (46.8)
At 30 June 2019 255.8
Impairment
In preparing these half year condensed consolidated financial statements,
management undertook a review to identify indicators of impairment of contract
fulfilment assets. Management determined whether or not the contract
fulfilment assets were impaired by comparing the carrying amount of the asset
to the remaining amount of consideration that the Group expects to receive
less the costs that relate to providing services under the relevant contract.
In determining the estimated amount of consideration, the Group uses the same
principles as it does to determine the contract transaction price, except that
any constraints used to reduce the transaction price will be removed for the
impairment test.
If a contract exhibited marginal profitability or other indicators of
impairment, judgement was applied to ascertain whether or not the future
economic benefits from these contracts were sufficient to recover these
assets. In performing this impairment assessment, management is required to
make an assessment of the costs to complete the contract. The ability to
accurately forecast such costs involves estimates around cost savings to be
achieved over time, anticipated profitability of the contract, as well as
future performance against any contract-specific Key Performance Indicators
(KPIs) that could trigger variable consideration or service credits.
Following this review, contract fulfilment asset provisions for impairment of
£9.0m (30 June 2018: £13.8m, 31 December 2018: £22.2m) were identified and
recognised within adjusted cost of sales, of which, £3.1m relates to contract
fulfilment assets added during the period.
12 Deferred income
Current 30 June 2019 31 December 2018 £m
£m
Current 1,035.8 980.3
1,035.8 980.3
Non-current 30 June 2019 31 December 2018 £m
£m
Non-current 212.7 277.3
212.7 277.3
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 £693.8m (30
June 2018: £787.7m, 31 December 2018: £1,220.8m).
13 Provisions
Restructuring provision £m Business exit provision £m Asset services indemnity provision £m Claim and litigation provision £m Property provision £m Other £m Total £m
As at 1 January 2019 12.0 17.5 3.0 46.4 19.9 17.4 116.2
IFRS 16 adoption reclassification to right-of-use assets (1) (3.5) — — — (11.7) — (15.2)
Provisions provided for in the period 7.5 0.5 — 18.9 5.0 3.1 35.0
Provisions released in the period (1.8) (0.1) — (11.1) (0.2) (0.5) (13.7)
Utilisation (5.4) (4.2) — (4.7) (2.1) (3.9) (20.3)
Reclassification between categories (0.2) 3.2 (3.0) — — — —
At 30 June 2019 8.6 16.9 — 49.5 10.9 16.1 102.0
1. On adoption of IFRS 16 (effective 1 January 2019), all leases within the
scope of the standard were recognised as right-of-use assets and lease
liabilities on the Group's balance sheet. This resulted in the
reclassification of restructuring and property provisions of £15.2m against
these right-of-use assets. Refer to note 21 for further details.
The provisions made above have been shown as current or non-current on the
balance sheet to indicate the Group’s expected timing of the matters
reaching conclusion.
Judgement is required in measuring and recognising provisions related to
pending litigation or other outstanding claims subject to negotiated
settlement, mediation and arbitration, as well as other contingent
liabilities. Judgement is necessary in assessing the likelihood that a pending
claim will succeed, or a liability will arise, and to quantify the possible
range of the financial settlement. Because of the inherent uncertainty in this
evaluation process, actual losses may be different from the originally
estimated provision. Where no reliable basis of estimation can be made, no
provision is recorded. However, contingent liabilities disclosures are given
when there is a greater than remote probability of outflow of economic
benefits.
Restructuring provision: The provision represents the cost of reducing role
count where there is a constructive obligation created through communication
to affected employees which has crystallised a valid expectation that roles
are at risk. Additionally, it reflects leasehold property costs as described
below in property provisions where properties are exited as a result of the
transformation plan. During the period, additional provision has been made for
costs as further restructuring opportunities related to the transformation
plan have been identified.
Business exit provision: The provision relates to the cost of exiting
businesses through disposal or closure including professional fees related to
business exits and the costs of separating the businesses previously disposed.
Asset Services indemnity provision: Capita completed the disposal of its Asset
Services businesses to the Link Group on 3 November 2017. Capita plc, as part
of the sale of the Capita Asset Services businesses, has provided an indemnity
against certain legacy claims. The provisions held includes provisions for
Arch Cru and other legacy claims, and have therefore been retained within the
Group. Giving due consideration to these claims, the Group holds a provision
of £3.0m. The remaining provision has been transferred to business exit
provisions. Due to the nature of these claims, the Group cannot give an
estimate of the period over which this provision will unwind.
Claims and litigation provision: In addition to the Capita Asset Services
indemnity provision, the Group is exposed to other claims and litigation. The
Group makes a provision when a claim has been made where it is more probable
than not that a loss might occur. These provisions are reassessed regularly to
ensure that the level of provisioning is consistent with the claims that have
been reported. The range of values attached to these claims, can be
significant and, where obligations are probable and estimable, provisions are
made representing the Group’s best estimate of the expenditure to be
incurred. The Group robustly defends its position on each claim and they are
often settled for amounts significantly smaller than the initial claim and may
result in no transfer of economic benefits. Therefore, we do not disclose a
range of possible outcomes for these claims.
Due to the nature of these claims, the Group cannot give an estimate of the
period over which this provision will unwind.
Property provision: The property provisions remaining after the IFRS 16
adoption reclassification to right-of-use assets are for the related running
cost of leasehold property (net of estimated sub-lease income) where the space
is vacant or currently not planned to be used for ongoing operations. The
expectation is that this expenditure will be incurred over the remaining
periods of the leases which range from 1 to 26 years.
Other provisions: Relates to provisions in respect of other potential
exposures arising due to the nature of some of the operations that the Group
provides, the most significant of which are in respect of immaterial onerous
contracts. These are likely to unwind over a period of 1 to 10 years.
14 Additional cash flow information
30 June 2019 30 June 2018 (1)
Note Adjusted £m Reported £m Adjusted £m Reported £m
Cash flows from operating activities:
Operating profit (1) 3 142.1 60.8 158.4 66.7
Adjustments for non-cash items:
Depreciation (1) 29.9 82.5 28.5 29.5
Amortisation of intangible assets 14.7 43.4 12.9 60.7
Share based payment expense 3.5 3.5 4.0 4.0
Employee benefits 5.1 5.1 6.9 6.9
Other 0.6 0.6 1.3 4.9
Other adjustments:
Movement in provisions 2.7 1.0 1.3 (0.6)
Other adjustments:
Pension deficit contribution — (57.1) — (4.5)
Other contributions into pension schemes (8.9) (8.9) (7.5) (7.5)
Movements in working capital:
Trade and other receivables (1) (147.2) (140.5) (58.0) (59.0)
Non-recourse receivables financing — — (16.0) (16.0)
Trade and other payables (1) 19.6 18.7 (88.6) (84.7)
Deferred income (10.6) (10.6) (75.1) (75.1)
Contract fulfilment assets (non current) 8.4 8.4 (19.7) (19.7)
Cash generated from operations 59.9 6.9 (51.6) (94.4)
Adjustments for free cash flows:
Income tax (paid)/received (2.2) (2.2) 14.8 14.8
Interest paid (13.6) (26.3) (16.7) (24.3)
Purchase of property, plant and equipment (22.3) (22.3) (37.1) (48.7)
Purchase of intangible assets (42.1) (42.1) (18.4) (20.8)
Proceeds from sale of property, plant and equipment/intangible assets 0.1 0.1 — —
Free cash flow (20.2) (85.9) (109.0) (173.4)
1. Capita has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 21 for further details.
Adjusted free cash flow and cash generated from operations
Free cash flow Cash generated from operations
30 June 2019 30 June 2018 £m 30 June 2019 30 June 2018 £m
£m £m
Reported (85.9) (173.4) 6.9 (94.4)
Pension deficit contributions 57.1 4.5 57.1 4.5
Significant restructuring 57.7 37.3 57.7 37.3
Business exits 5.5 6.0 5.5 (8.0)
Impact of IFRS 16 (56.0) — (68.7) —
Other 1.4 16.6 1.4 9.0
Adjusted (20.2) (109.0) 59.9 (51.6)
Pension deficit contributions: in November 2018, we agreed a deficit recovery
plan with the Trustees of the Capita Pension and Life Assurance Scheme (the
‘Scheme’). The payments under the agreed deficit recovery plan total
£176m, of which £57.1m was paid in the six months ended 30 June 2019. In the
six months to 30 June 2018 contributions of £4.5m were made following closure
of the Scheme to future accrual for the majority of members of the Scheme.
These payments have been excluded from adjusted cash flows as they are treated
as a debt like item.
Significant restructuring: in April 2018, we announced a multi-year
transformation plan. In the period to 30 June 2019, a cash outflow of £57.7m
(2018: £37.3m) was incurred in relation to the cost of the transformation
plan, and restructuring costs relating to our previously announced cost
reduction plan. Refer to note 3.
Business exits: the cash flows of businesses exited, or in the process of
being exited, and the proceeds on disposals, are disclosed outside the
adjusted results. The 2018 results have been restated for those businesses
exited, or in the process of being exited, in the second half of 2018 to
enable comparability of the adjusted results.
Impact of IFRS 16: at 1 January 2019 the Group has initially applied IFRS 16,
using the modified retrospective approach. Under this approach, comparative
information is not restated and the cumulative effect of initially applying
IFRS 16 is recognised in retained earnings at the date of initial application.
To improve the comparability of the Group's cash flow statement, cash flows
from IFRS 16 have been excluded from the adjusted results.
Other: includes the cash flows related to other items excluded from adjusted
profit.
Reconciliation of net cash flow to movement in net debt
Net debt at 1 Lease liability Cash flow Non-cash Net debt at 30 June 2019
January 2019 adjustment £m (2) movements movement £m
£m £m £m (3)
Cash, cash equivalents and overdrafts 642.7 — (265.7) (0.1) 376.9
Other loan notes (0.3) — — — (0.3)
Private placement loan notes (1) (1,108.0) — 11.1 (19.1) (1,116.0)
Currency swaps in relation to USD denominated private placement loan notes (1) 99.6 — — 16.7 116.3
Interest rate swaps in relation to GBP denominated private placement loan notes (1) 1.9 — — (0.6) 1.3
Term loan (100.0) — 100.0 — —
Lease liabilities (2) — (643.9) 56.0 (3.7) (591.6)
Total net liabilities from financing activities (1,106.8) (643.9) 167.1 (6.7) (1,590.3)
Deferred consideration (2.0) — 0.3 — (1.7)
Net debt (466.1) (643.9) (98.3) (6.8) (1,215.1)
1. The sum of these items held at fair value equates to the underlying value
of the private placement loan note debt of £998.4m (31 December 2018:
£1,006.5m).
The lease liabilities relate to amounts due by Capita where the Group is a
Lessee. Refer to note 21 for further details on the impact of IFRS 16.
Non-cash movement relates to foreign exchange on cash, fair value changes on
the swaps, amortisation of loan notes issue costs, amortisation of the
discount on the Euro debt issue and the IFRS 16 modifications, additions and
terminations to our leases.
Cash flow movements
Net debt at 1 January 2018 Rights issue £m Cash flow movements £m Non-cash movement £m Net debt at 30 June 2018
£m £m
Cash, cash equivalents and overdrafts 478.4 671.1 (543.0) (1.4) 605.1
Other loan notes (0.3) — — — (0.3)
Private placement loan notes (1,664.0) — 307.5 0.1 (1,356.4)
Currency swaps in relation to USD denominated private placement loan notes 176.8 — (60.6) 4.4 120.6
Interest rate swaps in relation to GBP denominated private placement loan notes 5.4 — (0.5) (1.4) 3.5
Term loan (100.0) — — — (100.0)
Finance leases (1) (0.2) — 0.2 — —
Adjusted net debt (1,103.9) 671.1 (296.4) 1.7 (727.5)
Deferred consideration (13.1) — 11.1 — (2.0)
Net debt (1,117.0) 671.1 (285.3) 1.7 (729.5)
1. Capita has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 21 for further details.
15 Financial instruments
Carrying values and fair values of financial instruments
The financial instruments included in the Group's financial statements have
been measured at either fair value or amortised cost.
The financial instruments measured at amortised cost consist of cash and
overdrafts, insurance asset recoverable, lease receivables and lease
liabilities and loan notes subject to fixed rate interest. With the exception
of 12 fixed rate private placement loan notes, the carrying amount of these
instruments are a reasonable approximation of their fair value because the
interest receivable/payable is close to current market rate or the instruments
are short term in nature. Lease receivables and lease liabilities have been
measured at amortised cost using the effective interest rate method (refer to
note 21).
Financial instruments measured at fair value have been classified by levels of
the following financial hierarchy:
Level 1: quoted (unadjusted) prices in active markets for identical assets or
liabilities.
Level 2: other techniques for which all inputs which have a significant effect
on the recorded fair value are observable, either directly or indirectly.
The fair value of financial instruments has been calculated by discounting the
expected future cash flows at prevailing interest rates, except for held for
trading assets (which are unlisted equity securities). The valuation models
incorporate various inputs including foreign exchange spot and forward rates
and interest rate curves.
Level 3: techniques which use inputs which have a significant effect on the
recorded fair value that are not based on observable market data.
Unlisted equity securities and other financial instruments where observable
market data is not readily available have been held at either amortised cost
or cost (undiscounted cash flows), as a reasonable approximation of fair
value.
The following table analyses by classification and category the carrying value
of the Group’s financial instruments and identifies the level of the fair
value hierarchy for instruments carried at fair value:
As at 30 June 2019 Fair value hierarchy At fair value At fair value Derivatives Amortised cost Total Current £m Non-current £m
through through equity used for £m £m
the P&L £m hedging
£m £m
Financial assets
Cash Level 1 — — — 716.5 716.5 716.5 —
Insurance asset recoverable Level 2 — — — 1.3 1.3 1.3 —
Lease receivables (1) Level 2 — — — 16.5 16.5 3.0 13.5
Cash flow hedges Level 2 — — 9.7 — 9.7 5.7 4.0
Non-designated foreign exchange forwards and swaps Level 2 5.0 — — — 5.0 3.2 1.8
Interest rate swaps in relation to GBP denominated loan notes Level 2 — — 1.3 — 1.3 — 1.3
Currency swaps in relation to USD denominated loan notes Level 2 — — 118.0 — 118.0 36.1 81.9
Investments Level 3 1.5 — — — 1.5 — 1.5
Held for trading assets Level 3 — 2.7 — — 2.7 — 2.7
6.5 2.7 129.0 734.3 872.5 765.8 106.7
Fair value hierarchy At fair value At fair value Derivatives Amortised cost Total Current £m Non-current £m
through through equity used for £m £m
the P&L £m hedging
£m £m
Financial liabilities
Overdrafts Level 1 — — — 339.6 339.6 339.6 —
Private placement loan notes (2) Level 2 — — — 1,116.0 1,116.0 272.2 843.8
Other loan notes Level 2 — — — 0.3 0.3 0.3 —
Lease liabilities (1) Level 2 — — — 591.6 591.6 87.9 503.7
Cash flow hedges Level 2 — — 0.3 — 0.3 0.3 —
Non-designated foreign exchange forwards and swaps Level 2 0.4 — — — 0.4 0.4 —
Currency swaps in relation to USD denominated loan notes Level 2 — — 1.7 — 1.7 — 1.7
Contingent consideration Level 3 6.4 — — — 6.4 6.2 0.2
Deferred consideration Level 2 — — — 1.7 1.7 1.0 0.7
Public sector subsidiary partnership payment Level 3 — — — 39.6 39.6 9.4 30.2
Put options of non-controlling interests Level 3 — 120.5 — — 120.5 115.1 5.4
6.8 120.5 2.0 2,088.8 2,218.1 832.4 1,385.7
1. Lease receivables relates to amounts due to be received for finance
subleases where the Group is a Lessor and lease liabilities relates to amounts
due by the Group where the Group is a Lessee. Refer to note 21 for further
details on the impact of IFRS 16 on the Group.
2. Private placement loan notes include US private placement loan notes,
Euro fixed rate bearer notes and a Schuldschein loan.
The Group's private placement loan notes of £1,116.0m consist of floating and
fixed rate loan notes. The fair value of the private placement loan notes
have been calculated by discounting the expected future cash flows at
prevailing foreign exchange spot and forward rate, and interest rate curves.
The fair value of floating rate borrowings approximates to the carrying value
because interest rates are at floating rates where payments are reset to
market values at intervals of less than one year. The floating rate private
placement loan notes which have a carrying value and a fair value of £654.3m,
including the GBP equivalent of the US Dollar denominated loan notes at 30
June 2019. The 12 private placement loan notes that remain subject to fixed
rate interest have a carrying value of £461.7m and a fair value of £471.5m.
The private placement loan notes include the GBP carrying value of the USD
denominated loan notes at 30 June 2019. To mitigate exposure to currency
fluctuations the Group has entered into currency swaps which effectively hedge
movements in the loan notes' fair value arising from changes in foreign
exchange and interest rates. Interest rate swaps hedge exposure to changes
in the fair value of GBP denominated loan notes. The Group enters into
derivative financial instruments with multiple counterparties, all of which
are financial institutions with investment grade credit ratings.
As at 31 December 2018 Fair value hierarchy At fair value through the P&L £m At fair value through equity £m Derivatives used for hedging £m Amortised cost £m Total £m Current £m Non-current £m
Financial assets
Cash Level 1 — — — 957.5 957.5 957.5 —
Insurance asset recoverable Level 2 — — — 1.3 1.3 1.3 —
Cash flow hedges Level 2 — — 8.3 — 8.3 5.0 3.3
Non-designated foreign exchange forwards and swaps Level 2 3.9 — — — 3.9 2.1 1.8
Interest rate swaps in relation to GBP denominated loan notes Level 2 — — 1.9 — 1.9 0.5 1.4
Currency swaps in relation to USD denominated loan notes Level 2 — — 103.1 — 103.1 9.3 93.8
Investments Level 3 — 6.1 — — 6.1 — 6.1
Held for trading assets Level 3 — 2.7 — — 2.7 — 2.7
3.9 8.8 113.3 958.8 1,084.8 975.7 109.1
Fair value hierarchy At fair value through the P&L £m At fair value through equity £m Derivatives used for hedging £m Amortised cost £m Total £m Current £m Non-current £m
Financial liabilities
Overdrafts Level 1 — — — 314.8 314.8 314.8 —
Private placement loan notes (1) Level 2 — — — 1,108.0 1,108.0 82.2 1,025.8
Other loan notes Level 2 — — — 0.3 0.3 0.3 —
Term loan Level 2 — — — 100.0 100.0 100.0 —
Cash flow hedges Level 2 — — 1.2 — 1.2 1.2 —
Non-designated foreign exchange forwards and swaps Level 2 1.4 — — — 1.4 1.4 —
Currency swaps in relation to USD denominated loan notes Level 2 — — 3.5 — 3.5 — 3.5
Contingent consideration Level 3 8.9 — — — 8.9 — 8.9
Deferred consideration Level 2 — — — 2.0 2.0 1.3 0.7
Public sector subsidiary partnership payment Level 3 — — — 43.5 43.5 9.4 34.1
Put options of non-controlling interests Level 3 — 118.5 — — 118.5 107.3 11.2
10.3 118.5 4.7 1,568.6 1,702.1 617.9 1,084.2
1. Private placement loan notes include US private placement loan notes,
Euro fixed rate bearer notes and a Schuldschein loan.
During the period ended 30 June 2019, there were no transfers between Level 2
and Level 3 fair value measurements and no transfers into or out of Level 1
fair value measurements.
During the period ended 30 June 2019, there were no transfers between Level 2
and Level 3 fair value measurements and no transfers into or out of Level 1
fair value measurements.
The public sector subsidiary partnership payment liability is an estimate of
the aggregate of annual payments to the Cabinet Office in the years 2019 to
2023 to be made by AXELOS Limited (the partnership formed with the Cabinet
Office). This payment is funded by AXELOS Limited and the carrying value
of £39.6m has been derived by discounting the expected payment at an
annualised rate of 2.8% to present value.
The carrying value of the liability is sensitive to movements in the
profitability of AXELOS and is subject to a cap. Under all reasonably
plausible scenarios, the cap has been reached and therefore the sensitivity to
changes in both the discount rate and the cash flows that have been used to
calculate it is £nil.
The put options of non-controlling interest are in respect of AXELOS and Fera.
These are measured at fair value which has been calculated based on the
amounts that will be paid in cash by the Group to purchase the shares of the
non-controlling interests in the event the options are exercised, which has
then been discounted at an annualised rate of 2.7% to arrive at its present
value. The Group is unaware of any intention for the options to be
exercised.
The sensitivity of the valuation of the put options of the non-controlling
interests to movements in both the discount rate and the cash flows that have
been used to calculate it are as follows: a 10% increase or decrease in the
earnings potential of the businesses results in an increase or decrease in the
valuation of £11.0m. A 1% increase or decrease in the discount rate applied
to the valuation results in an increase or decrease in the valuation of
£0.1m.
A sensitivity analysis has been performed on the expected contingent
consideration of £6.4m. The analysis adjusts the probability of payment of
the contingent amounts. A 10% increase or decrease in the probability of
contingent consideration being paid results in an increase or decrease in
potential contingent consideration of £0.5m.
The following table shows the reconciliation from the opening balances to the
closing balances for Level 3 fair value:
Contingent consideration £m Subsidiary partnership payment £m Put options of non-controlling interests £m Investments £m Held for trading assets £m
At 1 January 2019 8.9 43.5 118.5 6.1 2.7
Reclassification as investment in associates — — — (6.1) —
Utilised (2.5) (4.6) — — —
Movement of put options recognised in equity — — 2.0 — —
Additions — — — 1.5 —
Discount unwind — 0.7 — — —
As at 30 June 2019 6.4 39.6 120.5 1.5 2.7
16 Issued share capital and share premium
Share capital Share premium Treasury shares Employee benefit trust shares
Allotted, called up and fully paid m £m £m m £m m £m
Ordinary shares of 2 (1)/ (15)p
At 1 January 2019 1,671.1 34.5 1,143.3 2.9 (0.1) 12.0 (11.1)
Shares allotted in the period — — — (0.2) — — —
At 30 June 2019 1,671.1 34.5 1,143.3 2.7 (0.1) 12.0 (11.1)
In the six months to 30 June 2019, the Group did not purchase any Treasury
shares and allotted and issued 182,232 (30 June 2018: nil) treasury shares
with an aggregate nominal value of £3,767 (30 June 2018: £nil) to satisfy
exercises under the Group's share option and long term incentive plans. The
total consideration received in respect of these shares was £nil (30 June
2018: £nil).
The Group will use shares held in the employee benefit trust ("EBT") and
treasury shares in order to satisfy future requirements for shares under the
Group’s share option and long-term incentive plans. During the period, the
EBT allotted nil (30 June 2018: 32,367) ordinary 2 1/15p shares with an
aggregate nominal value of £nil (30 June 2018: £669) to satisfy exercises
under the Group’s share option and long-term incentive plans. The total
consideration received in respect of these shares was £nil (30 June
2018: £nil).
The Group has an unexpired authority to repurchase up to 10% of its issued
share capital.
17 Capital commitments
At 30 June 2019, amounts contracted for but not provided in the financial
statements for the acquisition of property, plant and equipment amounted to
£12.6m (31 December 2018: £10.7m).
18 Related party transactions
Compensation of key management personnel:
30 June 2019 30 June 2018 £m
£m
Short-term employment benefits 4.2 3.7
Pension 0.1 0.1
Share-based payments 1.5 0.3
5.8 4.1
Gains on share options exercised in the period by Capita plc Executive
Directors were £nil (30 June 2018: £nil) and by key management personnel
£0.2m (30 June 2018: £nil).
During the period, the Group rendered administrative services to Smart DCC
Ltd, a wholly-owned subsidiary which is not consolidated. The Group received
£42.3m (30 June 2018: £28.1m) of revenue for these services. The services
are procured by Smart DCC on an arm’s length basis under the DCC licence.
The services are subject to review by Ofgem to ensure that all costs are
economically and efficiently incurred by Smart DCC.
Capita Pension and Life Assurance Scheme is a related party of the Group.
The following companies are substantial shareholders in the Company and
therefore a related party of the Company (in each case, for the purposes of
the Listing Rules of the UK Listing Authority). The number of shares held on
25 July 2019 was as below:
Shareholder No. of shares % of voting rights
Veritas Asset Management LLP (1) 192,533,863 11.54
Invesco Ltd 191,409,106 11.47
Investec Asset Management Ltd 153,805,729 9.22
RWC Asset Management LLP 127,012,876 7.61
Schroders Investment Management Ltd 101,030,829 6.05
Coltrane Asset Management, L.P 83,888,589 5.03
BlackRock, Inc. 74,230,358 4.45
Marathon Asset Management LLP 64,756,810 3.88
St. James’ Place plc 60,297,710 3.61
Veritas Funds PLC 55,009,900 3.30
Vanguard Group, Inc. 54,711,874 3.28
Jupiter Asset Management Limited 53,573,060 3.21
Norges Bank Investment Management 52,121,121 3.12
1. This includes the holding of Veritas Funds PLC.
19 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 £79.0m (31 December 2018: £84.0m).
The Group is in discussions with a number of its life insurance clients, the
outcomes and timings of which are uncertain but could result in the
continuation of contracts with amended terms or the termination of contracts.
If an operation is terminated, the Group may incur associated costs,
accelerate the recognition of deferred income or the impairment of contract
assets. As the outcome of these discussions is uncertain, the Group has not
made any provision for a future outflow of funds that might result from the
eventual outcome.
Capita completed the disposal of its Capita Asset Services businesses,
including CFM, to the Link Group on 3 November 2017. Capita plc, as part of
the sale of the Capita Asset Services businesses, has provided an indemnity
against certain legacy claims.
The Group is in discussions with a customer in respect of the operational,
financial and contractual impacts of the delays to the planned transformation.
The outcomes and timings of these discussions are uncertain, but may result in
the Group incurring additional costs, the quantum of which are unable to be
reliably estimated. As the outcome of these discussions is uncertain, the
Group has not made any provision for a future outflow of funds that might
result from the eventual outcome.
The Group has been notified under a supplier contract of a potential liability
relating to past services received. As the basis of any liability is currently
being assessed and the method of any settlement is yet to be agreed, there is
no reliable estimate of the eventual outcome and accordingly the Group has not
made any provision for a future outflow of funds that might result.
The Group entities are parties to legal actions and claims which arise in the
normal course of business. The Group throughout the period needs to apply
judgement in determining the merit of litigation against it and the chances of
a claim successfully being made. It needs to determine the likelihood of an
outflow of economic benefits occurring and whether there is a need to disclose
a contingent liability or whether a provision might be required due to the
probability assessment.
At any time there are a number of claims or notifications that need to be
assessed across the Group. The disparate nature of the Group entities
heightens the risk that not all potential claims are known at any point in
time. Under the transformation plan, the support functions including
commercial and legal are being strengthened and a Chief General Counsel has
been appointed. This enhances the current processes in place to assess the
likelihood of historical claims arising.
20 Post balance sheet events
There are no post balance sheet events that have an adjusting effect on the
financial statements.
21 Adoption of IFRS 16 Leases
Adoption method
On adoption of IFRS 16 (effective 1 January 2019) the Group has elected to
grandfather the assessment of which arrangements are leases. Contracts not
identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether
there is a lease under IFRS 16.
Under the transition rules, the Group has applied IFRS 16 using the modified
retrospective approach, with the cumulative effect of applying the standard
recognised in retained earnings on 1 January 2019. Comparative information
presented for 2018 has not been restated.
At transition
As a lessee, the Group previously classified leases as operating or finance
leases based on its assessment of whether the lease transferred significantly
all of the risks and rewards incidental to ownership of the underlying asset
to the Group. Under IFRS 16, the Group recognises right-of-use assets and
lease liabilities for all the leases on its balance sheet.
The Group used the following practical expedients when applying IFRS 16 to
leases previously classified as operating leases:
• applied the exemption not to recognise right-of-use assets and liabilities
for leases of low value or for which the lease term ends within 12 months of
the date of initial application, on a lease-by-lease basis
• relied on previous assessments on whether leases are onerous for
impairment of right-of-use assets
• excluded initial direct costs from the measurement of the right-of-use
asset at the date of initial application
• used hindsight when determining the lease term if the contract contains
options to extend or terminate the lease
• applied the exemption not to separate non-lease components such as service
charges from lease rental charges
Under transition rules for leases classified as operating leases, lease
liabilities were measured at the present value of the remaining lease
payments, discounted at the Group’s incremental borrowing rate as at 1
January 2019.
Right-of-use assets are measured at cost, which comprised the initial amount
of the lease liability adjusted for any lease payments made at or before the
adoption date, less any lease incentives received at or before the adoption
date and less any onerous lease provisions (reclassified on the opening
balance sheet).
For a selection of material long-term leases, the Group has applied the
modified retrospective method one approach, as if IFRS 16 had always been
applied using the incremental borrowing rate at the date of initial
application. Under this method, the difference between the right-of-use asset
and lease liability was recorded in retained earnings.
At 1 January 2019 the Group had no lease commitments previously classified as
finance leases under IAS 17.
The Group is not required to make any adjustments on transition to IFRS 16 for
which it acts as a lessor, except for subleases. Under IFRS 16, the Group
assessed the classification of subleases with reference to the right-of-use
asset, not the underlying asset. This resulted in certain leases being
classified as finance leases under IFRS 16 and recognition of a finance lease
receivable (recorded within line item financial assets on the consolidated
balance sheet).
Accounting policies
The Group leases various assets, comprising land and buildings, equipment and
motor vehicles.
The determination whether an arrangement is, or contains, a lease is based on
whether the contract conveys a right to control the use of an identified asset
for a period of time in exchange for consideration.
The following sets out the Group’s lease accounting policy for all leases
with the exception of leases with a low value and term of 12 months or less
which we have taken the exemption under the standard. These are expensed to
the income statement as incurred.
At the inception of the lease, the Group recognises a right-of-use asset and a
lease liability. A right-of-use asset is capitalised in the balance sheet at
cost, which comprises the present value of minimum lease payments determined
at the inception of the lease. A lease liability of equivalent value is also
recognised. Right-of-use assets are depreciated using the straight-line method
over the shorter of estimated life or the lease term. Depreciation is included
within the line item administrative expenses in the consolidated income
statement.
Under IFRS 16 the right-of-use assets will be tested for impairment in
accordance with IAS 36 ’Impairment of Assets’. This will replace the
previous requirement to recognise a provision for an onerous lease. As noted
above, the Group has elected to apply the exemption to treat existing onerous
leases as impairments on adoption.
The corresponding lease liability is included on the balance sheet as a lease
liability. The lease liability is measured at amortised cost using the
effective interest rate method. Lease payments are apportioned between a
finance charge and a reduction of the lease liability based on the constant
interest rate applied to the remaining balance of the liability. Interest
expense is included within the line item net finance costs in the consolidated
income statement.
The lease payments comprise fixed payments, including in-substance fixed
payments such as service charges and variable lease payments that depend on an
index or a rate, initially measured using the minimum index or rate at
inception date. The payments also include any lease incentives and any penalty
payments for terminating the lease, if the lease term reflects the lessee
exercising that option.
The lease term determined comprises the non-cancellable period of the lease
contract. Periods covered by an option to extend the lease are included if the
Group has reasonable certainty that the option will be exercised and periods
covered by the option to terminate are included if it is reasonably certain
that this will not be exercised.
The lease liability is subsequently remeasured (with a corresponding
adjustment to the related right-of-use asset) when there is a change in future
lease payments due to a renegotiation or market rent review, a change of an
index or rate or a reassessment of the lease term.
The Group acts a lessor or intermediate lessor. When the Group acts as a
lessor, it determines at lease commencement whether the lease is a finance
lease or an operating lease. To classify each lease, the Group makes an
overall assessment of whether the lease transfers to the lessee substantially
all of the risks and rewards of ownership in relation to the underlying asset.
If this is the case, then the lease is a finance lease; if not, then it is an
operating lease. When the Group is an intermediate lessor, it accounts for its
interests in the head lease and the sub-lease separately. The Group recognises
lessor payments under operating leases as income on a straight-line basis over
the lease term. The Group accounts for finance leases as finance lease
receivables, using the effective interest rate method.
The Group has made judgements in adopting IFRS 16 such as; determining
contracts in scope for IFRS 16, determining the interest rate used for
discounting of future cash flows, and the lease term. The lease liability at
30 June 2019 includes £23.3m of future lease payments (undiscounted) for
leases with termination options that could be exercised but are recognised at
full term at this time.
At 30 June 2019, potential future cash outflows of £51.3m (undiscounted) have
not been included in the lease liability because the Group is reasonably
certain that the leases will not be extended (or not terminated) at this time.
The assessment of the lease term is reviewed if a significant event or change
in circumstance occurs which effects this assessment and that is within the
Group’s control to change.
Impact of adopting IFRS 16
On adoption:
A summary of the impact on the Group of adopting IFRS 16 is as follows:
Footnote As reported 31 Dec 2018 £m IFRS 16 impact £m At adoption 1 January 2019 £m
Non-current assets
Property, plant and equipment 213.6 — 213.6
Intangible assets 1,587.7 — 1,587.7
Right-of-use assets a — 568.2 568.2
Contract fulfilment assets 264.2 — 264.2
Financial assets b 109.1 14.1 123.2
Deferred taxation c 144.6 5.4 150.0
Trade and other receivables 26.2 — 26.2
2,345.4 587.7 2,933.1
Current assets
Financial assets b 18.2 3.0 21.2
Trade and other receivables d 771.7 (14.9) 756.8
Cash 957.5 — 957.5
Income tax receivable 0.9 — 0.9
1,748.3 (11.9) 1,736.4
Total assets 4,093.7 575.8 4,669.5
Current liabilities
Trade and other payables d 668.7 (26.1) 642.6
Deferred income 980.3 — 980.3
Overdrafts 314.8 — 314.8
Lease liabilities e — 95.3 95.3
Financial liabilities 303.1 — 303.1
Provisions d 96.8 (6.4) 90.4
2,363.7 62.8 2,426.5
Non-current liabilities
Trade and other payables 11.6 — 11.6
Deferred income 277.3 — 277.3
Lease liabilities e — 548.6 548.6
Financial liabilities 1,084.2 — 1,084.2
Deferred taxation 15.2 — 15.2
Provisions d 19.4 (8.8) 10.6
Employee benefits 219.0 — 219.0
1,626.7 539.8 2,166.5
Total liabilities 3,990.4 602.6 4,593.0
Net assets 103.3 (26.8) 76.5
Capital and reserves
Issued share capital 34.5 — 34.5
Share premium 1,143.3 — 1,143.3
Employee benefit trust and treasury shares (11.2) — (11.2)
Capital redemption reserve 1.8 — 1.8
Foreign currency translation reserve 1.6 — 1.6
Cash flow hedging reserve 1.5 — 1.5
Retained deficit f (1,135.3) (26.8) (1,162.1)
Surplus/(deficit) attributable to owners of the Company 36.2 (26.8) 9.4
Non-controlling interests 67.1 — 67.1
Total equity 103.3 (26.8) 76.5
Footnotes:
a. Right-of-use assets: non-current assets have been impacted
due to recognition of right-of-use assets on 1 January 2019. The right-of-use
assets are initially measured at cost, which comprises the initial amount of
the lease liability adjusted for any lease payments made at or before the
adoption date less any lease incentives received at or before the adoption
date (reclassified on the opening balance sheet).
b. Finance lease receivable: Financial assets have been impacted
by recognition of finance lease receivables where the Group acts as an
intermediate lessor and has classified the sub lease as a finance lease
because the sub-lease is for a substantial amount of the remaining term of the
head lease. The finance lease receivables have been classified between current
and non-current.
c. Deferred tax asset: Under IFRS 16, a lease liability was
recognised on the balance sheet from 1 January 2019, which will be recognised
through the income statement in subsequent periods. Right-of-use assets were
also recognised on the balance sheet from 1 January 2019, which will be
charged to the income statement in subsequent periods. Under IAS 12, the tax
base of the net liability is the amount that will be deductible for tax
purposes. A temporary difference is therefore created in relation to the net
liability.
The impact of these changes is recognised for tax purposes via a tax
adjustment which spreads over the weighted average lease period at 1 January
2019. Under the principles of IAS 12, a net movement of £5.4m is reflected as
a transitional adjustment, arising from an increase in deferred tax assets as
a result of the transition to IFRS 16.
d. Reclassification of balance sheet items: As noted above in a,
the right-of-use asset is initially measured at cost plus lease payments made
at or before the adoption date (prepayments), less any lease incentives
received (rent free accruals) and less onerous provisions existing at the
adoption date. These balances have been reclassified to right-of-use asset on
adoption.
e. Lease liabilities: Financial liabilities have been impacted
due to the recognition of lease liabilities. This liability is initially
measured at the present value of the lease payments that are not paid at the
adoption date, discounted using the Group’s incremental borrowing rate. The
lease payments comprise fixed payments, including in-substance fixed payments
such as service charges and variable lease payments that depend on an index or
a rate, initially measured using the minimum index or rate at commencement
date. The lease liabilities have been classified between current and
non-current.
f. Retained deficit: For a selection of material long-term
leases, the Group applied the modified retrospective method one approach,
where the right-of-use asset is calculated from the lease inception and
depreciated - resulting in a charge to retained deficit representing the
different between the right-of-use asset and the finance lease liability.
In calculating the lease liability to be recognised on adoption, the Group
used a weighted average incremental borrowing rate at 1 January 2019 of 4.6%.
The below outlines the difference between the Group's operating lease
commitment as at 31 December 2018 and the lease liability recognised on
adoption:
1 January 2019
Lease liabilities recognised
Operating lease commitment at 31 December 2018 as disclosed in the Group’s consolidated financial statements 736.0
Discounted using the incremental borrowing rate at 1 January 2019 (113.5)
Extension and termination options reasonably certain to be exercised 21.4
643.9
of which:
Current 95.3
Non-current 548.6
In the period:
As at 30 June 2019, the Group has £513.6m of right-of-use assets and £591.6m
of lease liabilities.
The impact to the income statement for the period to 30 June 2019 and the
forecast for the 12 months ending 31 December 2019 is as follows:
Consolidated income statement Six months to 30 June 2019 £m Expected adoption impact for the year ending 31 December 2019* £m Revised expected adoption impact for the year ending 31 December 2019 £m
EBITDA 59.0 130 - 135 112 - 117
Depreciation expense (52.6) 111 - 114 99 - 104
Operating profit 6.4 19 - 21 12 - 14
Net finance costs on lease liabilities (12.3) (28) - (30) (26) - (28)
Profit before tax (5.9) (8) - (10) (12) - (14)
*As per Capita plc Annual Report 2018
As a result of adopting IFRS 16, rental costs which were previously recognised
in operating profit have been replaced by right-of-use asset depreciation and
net finance costs on the finance lease liability. As the asset is depreciated
on a straight line basis over the lease term and the interest is accrued using
the effective interest rate method, while EBITDA has improved, profit is
reduced in the earlier years as a result of applying IFRS 16.
Although IFRS 16 has no impact on the Group's total cash flow, outflows from
financing activities increase while cash outflows from operating activities
decrease, as recognition of rental costs, previously recognised solely as cash
outflows from operations are now apportioned between finance charges and
reduction of the lease obligation.
Due to the Group transformation plan, which includes a rationalisation of
Capita’s properties, the Group’s lease portfolio is expected to change
over the next few years. Any changes to the lease portfolio will be accounted
for when transacted as required under IFRS 16 and our Group policy. Costs and
impairments on the right-of-use assets arising from the property programme
will be excluded from adjusted profit in line with the current Group policy.
INDEPENDENT REVIEW REPORT TO CAPITA PLC
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2019 which comprises the condensed consolidated income statement,
condensed consolidated statement of comprehensive income, condensed
consolidated balance sheet,condensed consolidated statement of changes in
equity, condensed consolidated cash flow statement and the related explanatory
notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2019 is not prepared, in all
material respects, in accordance with IAS 34 Interim Financial Reporting as
adopted by the EU and the Disclosure Guidance and Transparency Rules (“the
DTR”) of the UK’s Financial Conduct Authority (“the UK FCA”).
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
We read the other information contained in the half-yearly financial report
and consider whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial
statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
Directors’ responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with International Financial Reporting Standards as
adopted by the EU. The directors are responsible for preparing the condensed
set of financial statements included in the half-yearly financial report in
accordance with IAS 34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the company
those matters we are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company for our review work, for this
report, or for the conclusions we have reached.
Robert Brent
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
31 July 2019
Appendix - Alternative Performance Measures (APMs) used in the half yearly
report for the six months to 30 June 2019
The Group presents various APMs as the Directors believe that these are useful
for users of the financial statements in helping to provide a balanced view
of, and relevant information on, the Group’s financial performance, position
and cash flows. These APMs are mainly measures which disclose the
‘adjusted’ performance of the Group excluding specific items which are
regarded as adjustments. Those items which relate to the ordinary course of
the Group’s operating activities remain within adjusted profit. The
following items are excluded from adjusted profit: the financial impact of
adopting IFRS 16, intangible amortisation, impairment of goodwill and acquired
intangibles, acquisition contingent consideration movements, the financial
impact of business exits or businesses in the process of being exited,
acquisition expenses (if material), movements in the mark-to-market valuation
of certain financial instruments, the impact of significant new contracts and
restructuring, and specific non-recurring items in the income statement. In
the Directors’ judgement, these need to be disclosed separately (see notes
3, 4, and 6) by virtue of their nature, size and/or incidence, in order for
users of the financial statements to obtain a proper understanding of the
financial information and the underlying performance of the business.
In addition, the Group presents other APMs including key performance
indicators (KPIs) such as return on capital employed and interest cover by
which we monitor our performance and others such as organic and acquisition
revenue growth which provide useful information to users which is not
otherwise readily available from the financial statements.
30 June 2019 30 June 2018 % change Source
Revenue - continuing operations
Total revenue as reported 1,852.0m 2,012.6m (8.0%) Line item in income statement
Deduct: business exit (0.4m) (35.8m) Line item in note 5
1. Adjusted revenue 1,851.6m 1,976.8m (6.3)% Line item in note 5
Operating profit - continuing operations
Operating profit as reported 60.8m 66.7m (8.8%) Line item in income statement
Adjusting items 81.3m 91.7m See note 3
2. Adjusted operating profit 142.1m 158.4m (10.3)% Line item in note 3
Adjusted operating profit margin 7.7% 8.0% Adjusted operating profit/adjusted revenue
Profit before tax - continuing operations
Profit before tax as reported 31.2m 42.3m (26.2%) Line item in income statement
Adjusting items 94.9m 88.5m See note 3
3. Adjusted profit before tax 126.1m 130.8m (3.6)% Line item in note 3
4. Adjusted basic earnings per share 5.86p 10.22p (42.7)%
30 June 2019 31 December 2018 Restated (2) 30 June 2018 Source
Headline gearing (based on rolling 12 months)
Adjusted profit before tax (1) £277.4m £282.1m £318.9m
Add back: adjusted net finance costs £41.0m £53.2m £58.6m
Add back: adjusted depreciation and impairment on property, plant and equipment. £66.6m £65.2m £51.5m
Add back: adjusted amortisation £29.7m £27.9m £18.4m
Adjusted EBITDA a £414.7m £428.4m £447.4m
Net Debt £1,215.1m £466.1m £729.5m Line information in note 14
Remove IFRS 16 impact (£591.6m) £—m £—m Line information in note 14
Net debt (excluding IFRS 16) b £623.5m £466.1m £729.5m
5 Net debt to adjusted EBITDA ratio KPI b/a 1.5x 1.1x 1.6x Headline net debt/adjusted EBITDA
1 Adjusted operating profit excludes items that are separately disclosed and considered to be outside the underlying operating results for the particular period under review and against which the Group’s performance is assessed. 2 This is effective from the 12-month period ended 30 June 2018, but for the Group's APMs, the comparatives have been restated to be presented on a consistent basis. In addition, the comparatives have been restated to include results of business exits during 2018.
30 June 2019 31 December 2018 Restated (2) 30 June 2018 Source
Covenants (based on rolling 12 months)
Adjusted operating profit (1) £319.0m £335.3m £377.5m
Add business exit – trading £4.6m £16.8m £26.8m
Add share of earnings in associates (£0.6m) £—m £—m
Deduct: acquisition costs £—m £—m (£0.6m)
Deduct: non-controlling interest (£10.2m) (£12.5m) (£15.0m) Adjusted EBIT attributable to NCI
Add back: share-based payment charge £2.9m £3.4m £3.4m
Add back: non-current service pension charge £9.7m £9.5m £0.6m
Add back: amortisation on purchased intangibles £29.6m £27.8m £22.8m
Adjusted EBITA a1 £355.0m £380.3m £415.5m
Add: IFRS 16 impact £6.4m £—m £—m See note 21
Adjusted EBITA (including IFRS 16) a2 £361.4m £380.3m £415.5m
Adjusted EBITA £355.0m £380.3m £415.5m Line item above
Add back: pre-acquisition adjusted profit £—m £—m £0.3m
Deduct business exit – trading sold (£17.8m) (£19.7m) (£10.2m) Trading profit for businesses sold
Add back: depreciation and impairment on property, plant and equipment. £65.6m £65.2m £59.7m
Covenant calculation - adjusted EBITDA b1 £402.8m £425.8m £465.3m
Add: IFRS 16 impact £59.0m £—m £—m See note 21
Covenant calculation - adjusted EBITDA (including IFRS 16) b2 £461.8m £425.8m £465.3m
Adjusted interest charge (£41.0m) (£53.2m) (£67.3m)
Interest cost attributable to pensions £7.1m £9.4m £9.3m
Cash flow hedges recycled to the income statement (£4.2m) (£2.5m) £—m
Borrowing costs c1 (£38.1m) (£46.3m) (£58.0m) Adjusted EBITA/Borrowing costs
Add: IFRS 16 impact (£12.3m) £—m £—m See note 21
Borrowing costs (including IFRS 16) c2 (£50.4m) (£46.3m) (£58.0m)
6.1 Interest cover (US PP covenant) a2/c2 7.2x Adjusted EBITA/Borrowing costs including the impact of IFRS 16
6.2 Interest cover (other financing agreements) a1/c1 9.3x 8.2x 7.2x Adjusted EBITA/Borrowing costs excluding the impact of IFRS 16
Net debt £1,215.1m £466.1m £729.5m Line information in note 14
Restricted cash (3) £42.5m £28.6m £—m Cash that may not be applied against net debt for covenant calculation purposes
Adjusted net debt £1,257.6m £494.7m £729.5m
Remove IFRS 16 impact (£591.6m) £—m £—m Line information in note 14
Adjusted net debt (excluding IFRS 16) d1 £666.0m £494.7m £729.5m
7.1 Adjusted net debt to post IFRS 16 adjusted EBITDA ratio KPI (US PP covenant) (4) d1/b2 1.4x Adjusted net debt/adjusted EBITDA with adjusted net debt excluding the impact of IFRS 16 and adjusted EBITDA including the impact of IFRS 16
7.2 Adjusted net debt to adjusted EBITDA ratio KPI (other financing agreements) d1/b1 1.7x 1.2x 1.6x 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 For covenant test purposes, this is effective from the 12-month period ended 30 June 2018, but for the Group's APMs, the comparatives have been restated to be presented on a consistent basis. In addition, the comparatives have been restated to include results of business exits
during 2018. 3 Restricted cash includes cash required to be held under FCA regulations, cash held in foreign bank accounts and cash represented by non-controlling interests and joint ventures. 4 As noted in the Group's annual report 2018, on 20 April 2018, Capita agreed various amendments with the noteholders under its US private placement notes. This included the carve-out of up to £100m worth of bonds and guarantees from the definition of indebtedness.
30 June 2019 31 December 2018 30 June 2018 Source
ROCE-Pre IFRS 16
Adjusted operating profit a £319.0m £335.3m £377.5m Adjusted operating profit - rolling 12 month
Tax rate b 13.7% 9.7% 9.0% 2018 tax rate impacted by one-off deferred tax credit - rolling 12 month
Tax c = a x b £43.7m £32.5m £34.0m Adjusted operating profit multiplied by tax rate
Adjusted operating profit after tax d = a - c £275.3m £302.8m £343.5m Adjusted operating profit less tax
Current year net assets/(liabilities) e £104.6m £103.3m (£128.6m) Line in balance sheet
Current year adjusted net debt before IFRS 16 f £621.8m £464.1m £727.5m Line item in note 14 – additional cash flow information, net debt excluding the impact of deferred consideration and finance leases that arose from the adoption of IFRS 16
Adjustments to capital employed g £1,274.9m £1,276.5m £1,298.5m Includes post-tax impact of accumulated acquired intangible amortisation, fixed rate swaps, put options and pensions
m (1)= e+f+g £2,001.3m £1,843.9m £1,897.4m Used as current period capital employed balance in average capital employed pre-acquisition 'n'
Less acquisition spend in year h £—m £—m (£1.2m) Consideration paid - cash acquired + debt acquired - rolling 12 month
Current year capital employed i = e+f+g+h £2,001.3m £1,843.9m £1,896.2m
Prior year net liabilities j (£929.8m) (£668.3m)
Prior year adjusted net debt k £1,103.9m £1,590.5m
Comparative prior year adjustments l £1,359.7m £1,385.9m Includes post-tax impact of accumulated acquired intangible amortisation, put options and pensions
Prior year capital employed m (2)= j+k+l £1,533.8m £2,308.1m Used as prior period capital employed balance in average capital employed pre-acquisition 'n'
Average capital employed pre-acquisitions n = (i+m)/2 £1,949.4m £1,688.9m £2,102.2m
Weighted average acquisition spend in year o £—m £—m £33.4m Pro rata number of months post-acquisition (including contingent and deferred consideration payments)
Average capital employed p = n+o £1,949.4m £1,688.9m £2,135.6m
8. ROCE KPI q = d/p 14.1% 17.9% 16.1%
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