REG-Capita PLC: Half Year Results 2022
05/08/2022 07:15
Capita plc
Half Year Results 2022
Summary
* Half Year results in line with management expectations
* Pipeline growth and organisational structure give confidence in future
growth
* Continuing strong operational delivery for our clients
* Stronger balance sheet as we continue to make progress with disposals
* Expected to continue revenue growth trend and deliver positive free cash
flow in FY 2022
H1 2022 Financial outcome
* Adjusted revenue(1) increased by 0.6% to £1,480.1m (H1 2021: £1,471.9m)
with growth in contractual and transactional business offset by prior year
losses
* Adjusted profit before tax(1) increased by £35.9m to £37.0m (H1 2021:
£1.1m) reflecting cost efficiencies and cessation of major restructuring
spend
* Reported profit before tax of £0.1m (H1 2021: £261.1m) reflecting business
exits and Portfolio goodwill impairment
* Positive free cash flow before business exits(2) delivered; improving by
£71.9m to £12.7m (H1 2021 outflow: £59.2m) underpinned by improvement in
underlying cash generation and reduced pension deficit contributions
* Net debt reduced by £169.4m to £710.4m (31 December 2021: £879.8m)
reflecting positive free cash flow and proceeds from four disposals
Building our growth pipeline
* Strong contract win performance driven by the Experience division, with
Public Service division opportunities weighted to the second half * Total
Contract Value won of £1,611m (H1 2021: £2,472m) impacted by Royal Navy win
in H1 2021; Experience £808m, Public Service £571m, Portfolio £232m
* In Year Revenue won of £686m (H1 2021: £686m); Experience £201m, Public
Service £311m, Portfolio £174m
* Unweighted pipeline increased to £14,354m (31 December 2021: £13,947m)
with significant growth in Public Service and Portfolio divisions and good
progress to replenish opportunities in Experience
* Targeting new scopes of work and new clients: represents 26% of TCV won in
the first half; and 64% of opportunities in the remainder of this year
Strengthening the balance sheet
* Proceeds received year to date of £223m, taking total receipts from the
disposal programme to over £750m * AMT Sybex, Secure Solutions and Services,
Speciality Insurance and Trustmarque
* Agreed disposal of property businesses for £60m
* Three further processes currently in progress, including our Pay360 business
unit, with all disposals expected to have been launched by the end of the year
* RCF extended to 31 August 2024
Outlook
* We are focused on delivering our expectations for FY 2022
* Accelerated revenue growth in the second half of the year despite the
uncertain macro environment, with positive momentum in all divisions,
supported by a strong pipeline of opportunities
* Continuing to strengthen the balance sheet through the disposal programme of
non-core assets; all disposal processes launched by the year end
* On track to deliver positive free cash flow before the impact of business
exits for full year 2022
* We continue to make material progress in our strategy to build a more
focused, sustainable business for the long term
Jon Lewis, Chief Executive Officer, said:
"I am pleased with the progress we have continued to make across Capita so far
this year.
“Our performance has been in line with our expectations. We have increased
adjusted revenue, profit and free cash flow; and further reduced debt and
strengthened the balance sheet.
“Operationally, we have remained strong, continuing to deliver successfully
for our many clients in both the public and private sectors.
“As our reputation for delivery and digital transformation services
increases, we have secured a series of important contract wins and renewals,
as well as growing the amount of work won with new clients.
“We are well positioned for growth in the second half of the year and
beyond; and our full-year commitments remain on track.
“All of this has been achieved against the ongoing backdrop of Covid-19 and
increasing economic challenges; and I would like to thank all our colleagues
for their continued hard work, commitment and professionalism."
Six months ended 30 June 2022
Financial highlights - continuing operations Reported 2022 Reported 2021 Reported POP change Adjusted (1)2022 Adjusted (1)2021 Adjusted (1) POP change
Revenue £1,517.2m £1,619.4m (6%) £1,480.1m £1,471.9m 1%
Operating profit/(loss) (£51.2m) £40.8m (225%) £52.2m £22.5m 132%
Profit before tax £0.1m £261.1m (100%) £37.0m £1.1m 3,264%
EBITDA £115.6m £134.7m (14%) £123.2m £100.8m 22%
Cash generated/(used) by operations (2) £49.2m (£22.5m) 319% £49.0m (£16.0m) 406%
Earnings per share 1.10p 16.18p (93%) 3.31p 2.80p 18%
Free cash flow (2) £12.9m (£71.6m) 118% £12.7m (£59.2m) 121%
Net debt (£710.4m) (£894.4m) 21% (£710.4m) (£894.4m) 21%
(1) Capita reports results on an adjusted basis to aid understanding of
business performance.
(2) Cash generated/(used) by operations adjusted results' and free cash flow
adjusted results' = free cash flow before business exits and cash generated
from operations before business exits respectively (refer to note 12)
Investor presentation
A presentation for institutional investors and analysts hosted by Jon Lewis,
CEO and Tim Weller, CFO, will be held at 09:00am UK time, Friday 5 August
2022. This will be held at Capita offices at 65 Gresham Street, London EC2V
7NQ. A live audio webcast will also be available (www.capita.com/investors)
and will subsequently be available on demand. The presentation slides will be
published on our website at 07:00am and a full transcript will be available
the next working day.
Webcast link:
https://webcast.openbriefing.com/capita0822/
For further information:
Stuart Morgan, Investor Relations Director T +44 (0) 7989 665 484
Capita press office T +44 (0) 20 7654 2399
LEI no. CMIGEWPLHL4M7ZV0IZ88.
Chief Executive Officer's review
H1 22 Summary
We have delivered a first-half performance in line with our expectations.
Adjusted revenue(1) has grown. We have secured important contract renewals and
wins and grown the pipeline. We are embedding Capita’s new operating model
from which we expect to secure both revenue and profit benefits. We have made
good progress in strengthening the balance sheet.
Notwithstanding the current challenging economic environment, our markets
remain strong and continue to support growth in outsourcing services. This is
driven by both the public and private sectors investing in digital
transformation to drive efficiency and to deliver better citizen and customer
services. We are well placed to benefit as the UK Government’s largest
software and IT services provider and as the largest customer experience
provider in the UK.
As the operating model becomes more embedded we are becoming better positioned
to deliver our longer term aspirations.
Our growth model is becoming more established to drive at least market growth
rates in the medium term. In both the Public Service and Experience divisions
the industry verticals structure, led by dedicated client partners, is
generating more pipeline opportunities and we are seeing win rates improve.
The pipeline continues to grow and we are targeting both large and smaller
opportunities in our core divisions to grow revenue this year and beyond.
We are also seeing opportunities to drive efficiency from the model: reducing
the cost of delivering consistently good operational services; moving to more
digital offerings; simplifying reporting, organisational and legal structures;
eliminating internal friction points; and reducing overhead costs.
We have dedicated significant resource to ensuring that we have a motivated,
stable and well-trained workforce. As a result of initiatives taken this year
we have seen our mid-year employee Net Promoter Score improve significantly
from last year’s result and we are continuing to evolve our recruitment and
retention processes so that we attract the resources we need and attrition
levels are reduced sustainably.
Our disposal programme of non-core businesses to strengthen the balance sheet
is continuing. We completed four disposals in the first half and launched a
further three, with the sale of our real estate businesses now agreed. This
takes prospective proceeds to well over £800m. We expect to have launched the
disposal process of all our remaining Portfolio businesses by the end of the
year.
We are now focused on delivering on our expectations for the rest of the year.
We expect to grow revenue and profit in the second half, with a pipeline of
both large and smaller opportunities and ongoing cost savings opportunities.
We remain on track to deliver positive free cash flow before the impact of
business exits in 2022 and materially reduce net debt during the year.
Financial outcome
Adjusted revenue(1) grew by 0.6% year on year at £1,480.1m (H1 2021:
£1,471.9m), Public Service grew by 0.8% as the division benefited from a full
half year of revenue from the Royal Navy training contract and the Job Entry
Targeted Support (JETS) contract in Scotland, offsetting the absence of Covid
contracts delivered last year and some limited local government contract
losses. Revenue in Experience stabilised as the impact from historic lost
contracts rolled off and there was a positive benefit from the Trade Republic
contract won in 2021 and the first month of the ScottishPower contract. We
also saw strong revenue growth in the Portfolio division as Covid-affected
businesses recovered well, in particular the Agiito travel business and
Enforcement, despite some impact from omicron-constraints in the first half.
Adjusted profit before tax(1) for the half year increased by £35.9m to
£37.0m (H1 2021: £1.1m). This has been delivered by the recovery of the
Portfolio division, the timing of milestones on some of our larger contracts
in the core divisions, the cessation of major restructuring spend and by the
benefit at the Group level of overhead cost savings, offsetting the accrual
for the commitment to repay £4.9m of 2021 furlough-related income as
announced in May.
Reported profit before tax decreased to £0.1m (H1 2021: £261.1m) as a result
of the impact of business exits and a non-cash goodwill impairment in our
Portfolio division.
Free cash flow before business exits(1) improved by £71.9m to £12.7m (H1
2021: outflow £59.2m) reflecting an improvement in underlying cash generation
and the step down in pension deficit contributions.
Net debt at 30 June 2022 was £169.4m lower at £710.4m (31 December 2021:
£879.8m) as a result of the improving free cash flow and the receipt of
disposal proceeds. We have repaid £82m of debt so far this year, with
approximately £140m due to be paid in the second half. Pre-IFRS 16 net
financial debt(1) was £289.3m (31 December 2021: £431.4m).
Revenue growth
Our markets continue to see good growth, as governments and private sector
companies look to reduce costs in times of economic uncertainty, supporting
the need for continued outsourcing of digital transformation and customer
experience services. In the public sector the UK Government is looking to
deliver better citizen services at a lower cost and has published its Roadmap
for Digital and Data as it looks to accelerate improvements over the next
three years, including an additional £8bn of investment in the area. These
trends of focusing on digital transformation to deliver better customer
service and cost efficiency also continue to drive market growth in the
private sector.
At Capita we are becoming better organised to be able to take advantage of
these market conditions. This will support revenue growth in the second half
of the year and we expect our revenue growth trend to continue to improve
thereafter.
Total Contract Value (TCV) won in the first half was £1,611m (H1 2021:
£2,472m), including the BBC TV licence renewal (£456m), the renewal of the
Primary Care Support England contract (£94m), ScottishPower (£63m) and
Northern Ireland Education Authority (£51m). The decline year-on-year
reflects the substantial 2021 Royal Navy Training win in Public Service. The
TCV won by Experience increased by 54%, benefiting significantly from the BBC
win.
The In Year Revenue (IYR) generated from these wins was £686m (H1 2021:
£686m), flat year-on-year and helped in particular by the BBC contract. In
the remainder of the year we expect that around 86% of the in year revenue won
will be won from contracts of a value of £10m or less, which reduces the
reliance of large deals with binary outcomes.
The order book at 30 June 2022 was £5.9bn (31 December 2021: £6.1bn), with
£1.1bn recognised in the first half and £0.9bn won in order book-qualifying
revenue, as well as reflecting the impact of disposals. Book to bill has
remained at above 1x, a positive indicator of future growth, and is now at
1.1x at the half year, with the Experience division at 1.4x, its highest in
several years. Public Service has fallen to 0.8x, mainly due to the timing of
bid opportunities. We expect Group book to bill to increase by year end as
significant pipeline opportunities crystallise.
We have continued to build and replenish our pipeline since the year end. Our
total unweighted pipeline increased to £14.4bn (31 December 2021: £13.9bn),
mainly as the Public Service division increased its opportunity set (£8.5bn
vs £8.1bn at 31 December 2021). The Experience division is only slightly
down (at £5.4bn vs £5.5bn at 31 December 2021) despite having won the
£456m BBC renewal and £63m ScottishPower contract.
We are now more aligned to our markets in our approach to revenue growth. Our
structure in both divisions is more client-centric, with verticals that are
focused on specific market sectors and client partners that lead those
verticals, who have deep levels of sector understanding and experience, now
solely dedicated to understanding those client needs. They are also helping to
generate consulting work that spearheads our Consult, Transform, Deliver
service model. In the first half we won £40m of total contract value for
consulting work. This is more advanced in our Public Service division where we
have won consulting work across all of our verticals including work for the
Ministry of Defence and HMRC. In the Experience division we are currently
advising a transport client on data analysis and insight.
Our focus on verticals is reflected in the distribution of our pipeline, in
which over 90% of the opportunities are in 15 industries that are represented
through our verticals, and in particular two thirds of the pipeline is in five
“industries”: Telecommunications, Banking, Transportation, Central
Government and Healthcare. We have a track record of winning in these
industries too, given that 12 of the 15 industries have generated £4.4bn of
contract value in the last 18 months.
With a better understanding of our clients’ needs and more focused
capabilities, and with a more stable revenue base, we expect to deliver higher
rates of revenue growth through targeting new scopes of work and new clients,
with our sales teams explicitly incentivised to focus on the latter.
* During the first half we renewed £889m of TCV, mainly driven by the BBC
contract. This is a good example of a contract that is not just extending
previous work, but one where we are refreshing the solution to support the
evolving needs of our client
* New scopes of work for existing clients represented £295m of TCV, such as
DFRP and HMRC
* We won £128m of new work from new clients, including for ScottishPower and
Natwest. Between Public Service and Experience we won business from over 200
new clients (that we've not worked with for at least 12 months) in the first
half.
Unweighted pipeline in the remainder of the year is £5.5bn (H1 2021: £4.6bn)
which underpins our TCV and book to bill expectations for the end of the year.
Almost 70% of this pipeline represents new business and new clients, in
particular a telecom company, the Student Loans Company and a motor finance
company. Major renewals include two existing telecoms clients, a financial
services client, a second DWP contract and one for NHS Scotland. We have seen
a couple of contracts move into 2023, having originally been expected this
year, including one for the Department of Work and Pensions and one for a
major financial services company.
Our win rates remain good, at 83% overall, up from 76% last year,
demonstrating strong competitive positioning in the market. Win rates on
renewals have increased slightly from the year end and are now at 95% for the
first half, with Experience at 99%. Our win rates on growth on account and new
business have decreased slightly, mainly because of the impact of the Royal
Navy Training contract. The Experience division is seeing progress with its
win rate on new business, now at 48% from 26%.
Operational delivery
Delivering for our clients is paramount. Not only is it a key part of being a
responsible business but it creates the environment to grow revenue and
eliminate unnecessary cost.
The first half was another period of strong delivery for our clients. For
example:
* We continue to execute well on our Royal Navy Training contract, with all
major KPIs having been at Green status since the start of the contract. The
latest milestone delivered on time was the transfer of engineering and
maintenance support services of the Vanguard-class Nuclear Ship Control
trainer and the Role Performance Trainer, both based at Her Majesty's Naval
Base Clyde, as well as recently delivering the Maritime Composite Training
System. This latest milestone maintains our 100% success delivery record in
both time and cost on this contract and helps to ensure that our partnership
remains strong and that we are able to bid for additional scopes of work as
originally envisaged in the contract.
* In July we delivered the key stage two assessments on the Standards and
Testing Agency contract, for the first time. We were pleased with the overall
outcome on what was a particularly complex project to deliver, involving the
collection, marking and return of 3.9m scripts.
* We have recently extended our contract with a major international consumer
electronics client where we are now making good progress after some
Covid-related delays to the transformation and we are implementing our new
digital tools such as Assisted Customer Conversation. Customer satisfaction
has improved greatly and is now consistently over 90%.
* Our work for our new client ScottishPower started smoothly on the 6th June,
soon after the signing of the contract, with around 400 people transferring to
Capita from the previous service provider.
With all remaining legacy contract operational issues now resolved we have
eliminated a significant source of margin and cash drag on the Group.
Digital and technology
Our digital and technology strategy is a significant driver of future revenue
and margin opportunities.
Both divisions currently have strong capabilities to support delivery for
their clients, as evidenced in their rankings by TechMarketView and ISG.
However we remain on a journey in which we are transitioning from traditional
Business Process Outsourcing (BPO) contracts, where services are mainly
delivered by agents supported by technology, to Business Process Services and
Digital Transformation, where services and processes are much more heavily
delivered and supported by technology. The market for digital transformation
is both bigger and growing at up to three times the overall market rate.
The majority of our contract portfolio is currently BPO, around 80% across
both divisions, but the portfolio is starting to evolve through contracts such
as TfL ULEZ in Public Sector or Tesco Mobile in Experience. Both have
significant elements of market-leading digital technology and are high
performing contracts - Tesco Mobile is the UK’s top-ranked mobile phone
customer service provider. At another international technology client we have
recently deployed our Assisted Customer Conversation tool which, along with
our Virtual First hybrid working model, is now delivering CSAT scores of above
90%. We recently developed a partnership with HMRC to develop, deploy and
support robotic process automation tools to make HMRC’s processes simpler
and drive operational efficiency.
Both divisions continue to strengthen their technology capability. Through
building standardised, scaleable platforms, supported by partner technologies
from AWS, Salesforce and Microsoft, and deploying automation, AI and
analytics, we can drive cost efficiency for our clients and for ourselves. By
investing in tools and capabilities, we will enhance our client offerings.
Combining market-leading offerings and standardised technology stacks with our
client knowledge and insight will support faster revenue growth and be a
driver of medium-term margin opportunity.
Driving margins and efficiency
There is still much to be done to improve the EBITDA margins in the group over
the medium to long term. At a divisional level this will reflect improving
gross margins from contract pricing and business mix, further reduction in
service charges, along with deriving efficiency benefits from the operating
model. There is also opportunity to create benefits in our shared services as
we eliminate intercompany transactions, inefficiencies from our legal entity
structure, and improve our systems. Finally, our group overhead costs are too
high for a group of this size, particularly as we have disposed of multiple
businesses in recent years, and we are taking steps to review our structure in
this area.
Since establishing the new divisional structure in August last year, we have
made good progress in implementing the operating model, with the Public
Service division further ahead of the Experience division in its evolution.
This has involved internal restructuring to a matrix organisation in which
client-focused verticals are supported by division-wide consulting,
transformation and delivery capabilities, together with functional support
(HR, legal, commercial etc.).
We have consolidated sales teams so that individuals are now better aligned to
the key products that we are taking to market. Operationally we are rolling
out best practice, in particular using standardised methodologies to reduce
the level of bespoke customised solutions that Capita historically deployed.
In the Experience division this best practice includes the deployment of
service delivery to the most efficient location, including near-shore and
off-shore capabilities in Poland, Bulgaria, the Middle East, South Africa and
India.
We have more to do. The new structure is allowing us to produce data-driven
insights for further efficiency in operations, including more automation of
internal processes and increased use of internal self-service channels, as
well as the deployment of common technology platforms across divisions. And in
support of our growth propositions, we are standardising our technology stack
with common client-facing tools that will allow faster and more consistent
delivery for our clients.
We are actively managing the impact of inflation on the business. During the
first half there has been no material net profit impact on the Group mainly
due to the quantum and timing of inflationary clauses in contracts and pay
rises. On a full year basis we also expect no material net profit impact on
the Group. Looking forward we are taking a proactive approach to ensuring that
this protection continues, and where there are gaps (for instance when
indexation is capped or when contracts are fixed price) we are looking to
implement more dynamic pricing models.
We have delivered further overhead cost savings in the first half. Our
property costs continue to reduce as we close and exit more of our portfolio.
In the first half we disposed of 18 properties, as well as vacating another
nine properties and consolidating space in a further four. This has reduced
annualised lease costs by a further £4m and brings the total amount of
property that we have disposed of in the last two years to over 1.1m square
ft. Our IFRS 16 property lease liability has reduced by around £23m in the
first six months to £401m. We are targeting another 20 closures this year.
Investing in our people
Last year the business experienced unprecedented levels of employee attrition
as a result of the tight labour market and ongoing restructuring at Capita.
This was ultimately reflected in a 22 point fall in our employee Net Promoter
Score (eNPS) in late 2021.
We have made encouraging progress on both fronts. Our eNPS has improved by 16
points as of June 2022 and is now close to where it was in 2020, our best
position over the course of the transformation. Both Experience and Public
Service saw significant improvements, reflecting actions that we have taken
and plans that we have set out, particularly around personal development and
training and our Employee Value Proposition. In addition, our Virtual First
hybrid working approach is quoted as being a top three reason for working at
Capita. As well as being a driver of our Net Zero plans, and cost reductions,
we also see that people who work in a hybrid way are more engaged. We have
also communicated more frequently and more clearly, reflecting a key piece of
feedback from last year.
These actions have also helped us to reduce attrition and sustain high levels
of recruitment. We are now recruiting 2,500 people per month and have
recruited 15,000 people for the year so far. Attrition is reducing steadily.
We continue to focus on improving this, in particular through our vetting and
onboarding processes.
The cost of living crisis is also something that we are helping our colleagues
to address, in particular the lowest earners. We are committed to being a Real
Living Wage employer and plan to implement the recommended increase next year.
We also look to support our colleagues in other ways, such as through our
Level app that helps to manage day-to-day finances, offering financial
counselling and providing a broad range of other employee benefits.
Strengthening the balance sheet
We have continued to strengthen the balance sheet through the disposal of
non-core businesses, with the target to materially reduce net debt, as well as
improve the pension funding position.
During the first half we completed the disposal of four businesses: AMT Sybex,
Secure Solutions and Services, Speciality Insurance and Trustmarque and we
have received over £750m from our disposal programme started in 2021.
We launched three more processes, including the Property pillar, of which we
recently announced the agreement to sell our real estate and infrastructure
businesses to WSP for £60m.
We have also started the disposal process of our Pay360 business unit, which
currently sits in the Experience division. The business generated external
revenue of £44m and profit before tax of £7m in 2021. Pay360 has been a
standalone business historically, first in the Software division and since
2021 the Experience division, and which does not align with the division’s
strategy. We believe that Pay360's best interests are served by new ownership,
to take the business to its full potential. We will provide a further update
on this process later in the year. We have no plans to sell other businesses
in either Public Service or Experience.
We continue to see strong interest in the businesses we are disposing of and
we currently expect all of our disposal processes to have been launched by the
end of the year.
Growing free cash flow
We have delivered positive free cash flow before the impact of business exits
in the first half and target to build on this in the future.
In the main this will be delivered from consistent revenue growth and margin
improvements.
We also expect higher cash conversion as new contracts generate more cash as
we deliver transformation services and large legacy contracts come to the end
of their terms and associated deferred income is released from the balance
sheet.
In 2022 we will see a major reduction in previous one-off cash commitments,
mainly from reduced pension deficit payments, significantly reduced
restructuring costs associated with the transformation and completion of the
deferred VAT payments (the last £15m of which was repaid in the first
quarter).
Our closed book Life and Pensions business unit, which sits in the Experience
division, also continues to negatively impact the group’s cash performance,
as the costs of servicing a small number of legacy contracts in the business
unit significantly outweigh cash receipts from the relevant clients. The net
cash outflow from these contracts was £20m in FY 2021 and is forecast to be
broadly similar in future years. The impact is exacerbated by the evergreen
nature of some of the contracts potentially allowing customers to extend
indefinitely, particularly as we provide a good service at a low price. Whilst
we want to continue to support those Life & Pensions clients who remain core
to our Financial Services vertical, we are looking to resolve the situation
with regards to those few contracts that drive the negative performance. We
are redoubling our efforts to reduce the cash burn from these contracts.
Finally, some of the proceeds from our disposals will be used to accelerate
agreed pension deficit payments, which we expect to benefit the funding
position at the next triennial actuarial valuation, due at 31 March 2023, and
potentially reduce or eliminate future deficit payments.
Outlook
We are focused on delivering on our expectations for 2022.
We expect revenue growth and profit to increase in the second half of the
year, despite the uncertain economic outlook, to deliver positive free cash
flow before the impact of business exits and materially to reduce net debt
over the full year.
We expect revenue growth to be driven by work that we have already secured,
such as the new ScottishPower contract and the timing of contracts such as the
Standards and Testing Agency and the BBC and we have a healthy pipeline of
over £5bn of opportunity for the second half of this year.
We will continue to focus on greater efficiency and productivity, in the
second half of this year and beyond, and to minimise our overhead costs so
that we can drive margin in the longer term.
We expect to have launched all of our disposal processes by year end and
completion of the programme will result in a very low level of net financial
debt moving into 2023.
We continue to make material progress in our strategy to build a more focused,
sustainable Capita for the long term.
___________________________________________
1 Refer to alternative performance measures in the appendix
Divisional performance review
The following divisional financial performance is presented on an adjusted
revenue(1) and adjusted operating profit(1) basis. Reported profit is not
included, because the Board assesses divisional performance on adjusted
results. The basis of preparation of the adjusted figures and KPIs is set out
in the Alternative Performance Measures (APMs) summary in the appendix to this
statement.
Public Service
Capita is the number one strategic supplier of Business Process Services (BPS)
and technology services to the UK Government. The division is structured to
focus on five market verticals: Education & Learning; Local Public Services;
Health & Welfare; Defence, Fire & Security and Justice, Central Government &
Transport, as well as the non-consolidated Smart DCC subsidiary.
Our markets and growth strategy
We estimate that Government spending in the UK in the Software and IT Services
market has a value of circa £13.3bn. The BPS market, comprising both business
process outsourcing (BPO) and Digital BPS sub-segments, is growing at circa 5%
per annum.
In its recently published Roadmap for Digital and Data the UK Government
stated its intention to spend up to £8bn by 2025 on digital, data and
technology transformation in order to accelerate its digital transformation
and better respond to future challenges. As such, the BPS market is shifting
quickly towards being more digitally and data-enabled to provide productivity
improvements and cost savings during times of fiscal strain.
Our digital capability includes design experience, data mastery, modern
software engineering, user experience and an automation toolkit that is
combined with technology partners such as Microsoft Azure where it makes sense
to use them.
The Public Service division is well positioned, benefiting from its breadth of
coverage, domain understanding, scale, and sales and delivery capabilities in
our respective verticals, each of which presents significant opportunity.
Our pipeline remains strong with an unweighted pipeline of £8,463m, an
increase of £314m from 31 December 2021 with £571m of TCV won. Book to bill
for the period was 0.8x. Key bids in the second half the year include a
renewal with NHS Scotland and services with the Department for Work and
Pensions. Given this pipeline, we expect an improved book to bill ratio on a
full year basis.
During the first half of the year we agreed an extension of our Primary Care
Support England contract with the NHS, worth £94m over three years, a
two-year extension with Northern Ireland’s Education Authority and smaller
contracts with HMRC and Entrust (our joint venture with Staffordshire County
Council).
Operational delivery
Last year we finished fixing previously failing legacy contracts in the
division and across 2022 our operational delivery has remained consistently
strong.
For example, in the first half we delivered on all of the key milestones with
the Royal Navy training contracts and have now started running the Royal
Navy’s Maritime Composite Training System and launched the Aviation Fire
Programme at the Fire Service College.
Our performance on contract delivery continues to yield additional contract
opportunities and growth, aligned with our breadth of capability focused
around the Consult, Transform, Deliver model.
This is the model for our partnership with HMRC to develop, deploy and support
robotic software and other automation tools to make HMRC’s processes simpler
and drive operational efficiency. We are continuing to identify areas to
invest in to improve our digital offerings.
Using our internally developed grant disbursement solution GrantIS, we
successfully accelerated funding applications with the Department for
Education for the 38,000 applicants on the Turing Scheme. The platform remains
in use on a contract with the Department for International Trade and we
believe there are a number of further applications for the product within
grant management and in the wider distribution market.
A core part of our strategy is to standardise our platforms, where we can use
our process insight to present a ‘digital first’ solution for our
clients’ needs. This, alongside our culture of continuous improvement, will
drive margin improvements going forwards.
Divisional financial summary 2022 2021 % change
Adjusted revenue (1)(£m) 713.6 708.2 0.8%
Adjusted operating profit (1)(£m) 46.8 38.4 21.9%
Adjusted operating margin (1)(%) 6.6% 5.4% 22.2%
Adjusted EBITDA (1)(£m) 65.8 63.0 4.4%
Adjusted cash generated by operations before business exits (1)(£m) 58.1 75.5 (23.0)%
Order book (£m) (comparative at 31 December 2021) 3,025.0 3,286.3 (8.0)%
Adjusted revenue(1) increased 0.8% to £713.6m, reflecting the full half year
of the Royal Navy training contract, the Job Entry Targeted Support Scheme,
the Turing scheme with the Department for Education and the laptop
provisioning contract with the Northern Ireland Education Authority. This
offset the impact of previously announced Local Government handbacks and the
one-off benefit in 2021 within our Intelligent Communications business from
Covid related projects.
Adjusted operating profit(1) increased 21.9% to £46.8m with the full half
year impact of the Royal Navy training contract, other wins and benefit from
the non-repeat of the additional programme costs on EMS and restructuring
costs of £2.9m incurred as part of the Group's significant restructuring in
2021. This offset the margin impact from Local Government handbacks and the
reduction in margin on RPP as we moved into a new contract hosting phase.
Adjusted cash generated by operations before business exits(1) reduced by
23.0% to £58.1m as the EBITDA improvement was more than offset by the unwind
of 2021 working capital benefits from the TfL ULEZ contract and the settlement
of a previously provided for commercial claim.
Outlook
We expect revenue growth in the Public Service division in H2, driven by
completion of milestones on our Standards and Testing Agency contract and an
increase in transactional revenue in our Health & Welfare, Education &
Learning and Local Public Services verticals. We expect a reduction in margin
in H2 reflecting phasing and mix of work.
Experience
Capita Experience is one of Western Europe’s leading customer experience
businesses. It is the market leader in the UK and ranks third in EMEA. The
division comprises: core Customer Experience services; our payments business;
Capita Scaling Partners; closed book Life and Pensions; and the Pensions
Consulting and Pensions Administration business. Experience is structured
around three market verticals, Telecoms, Media & Technology, Multi-Industry
and Financial Services.
Our markets and growth strategy
The global customer experience market is valued at more than £244bn and is
expected to grow at around 5% per annum between 2020 and 2024. The market
continues to trend towards self-service and automation with clients looking to
digitise service offerings. Increasingly we are seeing clients utilising cloud
shoring agreements, digital and artificial intelligence and insight and
analytics-based solutions to improve service delivery while reducing costs.
The changing economic landscape poses an opportunity for the Group,
particularly within the Financial Services and Multi-Industry verticals (which
includes our Energy and Utilities clients) as institutions in these verticals
have a key role to play in helping vulnerable customers through periods of
uncertainty. More broadly, a challenging economic backdrop can create new
opportunities for service providers such as Capita Experience given the
capability we have to provide more efficient and effective customer management
solutions across a range of clients.
The unweighted pipeline at 30 June 2022 was £5,417m, a decrease of £93m
since 31 December 2021 with £808m of TCV won. In July, the total TCV won in
the year to date, exceeded the TCV won in 2021. The material win of the BBC TV
Licensing contract in H1 led to a book to bill for the period of 1.4x compared
with 0.9x in the comparative period, we expect book to bill to reduce slightly
but remain above 1x on a full year basis.
In the six months to June 2022, Experience successfully won over 1,600
opportunities. Notable wins and renewals include the five year renewal with
the BBC worth £456m and a new contract with ScottishPower worth £63m over
five years which successfully went live in June with no impact to operations.
Successful renewals were also signed with Plusnet, Samsung and Water Plus.
There remain a significant number of bids in 2022 and early into 2023
including a number of telecoms renewals, an insurance client renewal and new
business opportunities within the Utilities sector.
Operational delivery
Our new matrix structure allows us to have a clear view of client contracts
matched with an end-to-end view of delivery.
We deliver services both onshore and offshore with delivery centres in the UK,
Europe, the Middle East, India and South Africa. As economies continue to
recover from the pandemic, we are adapting to new ways of working, offering
hybrid working and flexibility in our locations, which drives benefits to
customers and employees.
In 2021, to support consistent delivery we expanded our geographical footprint
in South Africa, opening a new office in Durban. This site will be an
important strategic hub for future growth. This year, to improve our
multi-lingual capabilities for European clients we opened a site in Bulgaria
to support the delivery of our services in 35 different languages.
Within our advanced toolkit of services, we have rolled out our Assisted
Customer Conversation tool on a number of contracts. The tool, which leverages
AWS, drives a tailored customer experience, enhanced by Artificial
Intelligence, and we’ve successfully seen this reduce handling times of
calls while increasing both client and agent satisfaction. We believe this
tool has multiple uses across the current customer base and within our
pipeline of upcoming opportunities.
In 2022, we worked with a pre-existing customer, on a consulting basis, to
categorise all incoming calls across their entire estate and use data
analytics to improve and add value to the overall customer experience. This
type of consulting work, where it not only impacts improvements in our
BPO-type services, but extends into the entire customer experience, provides
an opportunity for our client to benefit from our extensive experience using
data analytics to improve the operations we service and their in-house and
multi-vendor environments as well.
As expected, we have seen continued volume attrition within our closed book
Life and Pensions business as contracts have been handed back and volumes on
existing clients decline.
Within our Pensions Administration business we have seen overall activity
levels improve and are looking to build on this in H2 and into 2023.
Divisional financial summary 2022 2021 % change
Adjusted revenue (1)(£m) 592.4 599.9 (1.3)%
Adjusted operating profit (1)(£m) 17.6 28.0 (37.1)%
Adjusted operating margin (1)(%) 3.0% 4.7% (36.2)%
Adjusted EBITDA (1)(£m) 54.1 65.3 (17.2)%
Adjusted cash generated by operations before business exits (1)(£m) 27.8 16.6 67.5%
Order book (£m) (comparative at 31 December 2021) 2,518.7 2,271.8 10.9%
Adjusted revenue(1) fell by 1.3% to £592.4m, reflecting the final year impact
of prior period losses including 3UK, Carphone Warehouse, Npower and William
Hill. The impact of losses on Experience continues to reduce as the division
stabilises. There were improved volumes in our Financial Services vertical
which offset the Phoenix contract loss and wider Life & Pensions volume
attrition. Wins in the period included a number of wins in our International
Market and ScottishPower.
Adjusted operating profit(1) decreased by 37.1% to £17.6m reflecting contract
losses, the non-repeat of one-off deferred income releases in 2021 relating to
Carphone Warehouse and the repayment of furlough income which more than offset
the £4.4m benefit from the non-repeat of significant restructuring incurred
in 2021.
Adjusted cash generated by operations before the impact of business exits(1)
increased by 67.5% to £27.8m driven by working capital improvements
principally reflecting increased customer advances.
Outlook
Revenue growth in Experience in H2 is expected to be driven by the
Telecommunications, Media & Technology vertical, particularly as we begin
implementation in our renewed BBC contract and within our wider International
Markets. We expect profit in H2 to improve in line with revenue growth and the
unwind of the H1 holiday pay accrual.
Portfolio
Capita Portfolio comprises non-core businesses that are intended for disposal.
The division is organised into pillars comprising businesses of similar
characteristics: People, Property, Software, Business Solutions, Travel and
the FERA joint venture.
We enjoy a strong market position within each pillar, with leading brands and
positive client perception of our services. In 2021 the division secured its
third consecutive year of improving customer NPS scores.
This year we have completed the disposal of four businesses, AMT Sybex, Secure
Solutions and Services, our Speciality Insurance business and Trustmarque.
During 2022, we launched the sales process for three further pillars. Our
readiness activity on the remaining pillars is progressing well and we expect
to have launched the disposal processes of all our remaining Portfolio
businesses by the end of the year.
Operational delivery across all pillars has remained strong and we have seen
good recovery in the areas heavily affected by the pandemic. We are well
positioned for growth with a more efficient long-term operating model in our
Agiito (travel and events) business in the Travel pillar. Despite wider market
challenges and uncertainty in the UK travel market, the Travel business
continues to perform well and is forecast to return to profitability in 2022.
We are working to ensure ongoing cost efficiency in the division ahead of
completion of the Portfolio asset sales, through successful vacancy management
and redeployment of staff into vacancies across the wider Group.
Divisional financial summary 2022 2021 % change
Adjusted revenue (1)(£m) 174.1 163.8 6.3%
Adjusted operating profit (1)(£m) 3.0 3.0 —%
Adjusted operating margin (1)(%) 1.7% 1.8% (5.6)%
Adjusted EBITDA (1)(£m) 17.9 19.4 (7.7)%
Adjusted cash used by operations before business exits (1)(£m) (7.4) (3.7) (100.0)%
Order book (£m) (comparative at 31 December 2021) 367.6 557.3 (34.0)%
Adjusted revenue(1) increased 6.3% to £174.1m as volumes in the Travel and
Enforcement businesses improved as Covid-19 restrictions eased across 2022.
Adjusted operating profit(1) was flat at £3.0m as we saw revenue growth
across the division and the benefit from the non-repeat of £1.6m of
significant restructuring incurred in 2021, which helped to offset the £1.8m
one-off impact of the previously announced furlough reimbursement in 2022.
Adjusted cash used by operations before the impact of business exits(1)
reduced to £(7.4)m reflecting the working capital movements from revenue
expansion within Agiito.
Outlook
Revenue and operating profit growth in H2 is expected to be driven by further
recovery in Covid impacted businesses with the benefit of high operational
leverage driving profit growth.
This outlook is based on the scope of the division at half year.
___________________________________________
1 Refer to alternative performance measures in the appendix
Chief Financial Officer's review
Financial highlights Reported results Adjusted (1)results
30 June 2022 30 June 2021 POP change 30 June 2022 30 June 2021 POP change
Revenue £1,517.2m £1,619.4m (6)% £1,480.1m £1,471.9m 1%
Operating (loss)/profit (£51.2m) £40.8m (225)% £52.2m £22.5m 132%
Profit before tax £0.1m £261.1m (100)% £37.0m £1.1m 3,264%
EBITDA £115.6m £134.7m (14)% £123.2m £100.8m 22%
Cash generated/(used) by operations (1) £49.2m (£22.5m) 319% £49.0m (£16.0m) 406%
Earnings per share 1.10p 16.18p (93)% 3.31p 2.80p 18%
Free cash flow* £12.9m (£71.6m) 118% £12.7m (£59.2m) 121%
Net debt (£710.4m) (£894.4m) 21% (£710.4m) (£894.4m) 21%
(1)Cash generated/(used) by operations adjusted results and free cash flow adjusted results = free cash flow before business exits and cash generated from operations before business exits respectively (refer to note 12)
Overview
Adjusted revenue(1) was in line with our expectations. Contractual revenue
growth from contract wins, reflected the annualised impact of Royal Navy
training, Job Entry Targeted Support (JETS) and Turing scheme and indexation,
partially offset by the annualised impact of prior year losses and the net
reduction in scope and volumes. Growth in transactional business was mainly
driven by Capita Portfolio, including the Agiito and Enforcement businesses,
which continued their recovery following Covid-related constraints. The
results for the period were not affected by any current period contract
losses, although there was a reduction in scope and volume reflecting pandemic
related work in 2021.
From 1 January 2022, the Board has limited the items excluded from the
adjusted results to business exits, amortisation and impairment of acquired
intangibles, impairment of goodwill and certain fair value adjustments which
impact net finance income/expense. This presentation provides a more
representative measure of the underlying performance of the business following
completion of the Group-wide transformation. The comparatives have been
represented on the same basis, with significant restructuring (£30.0m) and
certain litigation and claims (credit £8.9m) now included within adjusted
results for the six months ended 30 June 2021.
The increase in adjusted profit before tax(1) reflects the above change in
presentation, and therefore benefits from the reduction in restructuring costs
(which previously were disclosed as £30.0m in H1 2021), as well as the
benefit of stable revenues, and efficiencies delivered. In 2021, the Group
received £4.9m of funding under the coronavirus job retention scheme made
available by the Government to help ease the employment impact of Covid-19. In
May 2022, we announced the Group's intention to repay the 2021 furlough
related income at the end of the Group's publicly stated disposal programme
and no later than the end of June 2023. An accrual has been recognised for
this repayment in the period ended 30 June 2022.
The decrease in reported profit before tax reflects an impairment of goodwill
in the period, a reduction in operating profit from business exits and lower
gain on the sale of businesses, partially offset by the increase in adjusted
profit before tax(1).
From 1 January 2022, the Board considers free cash flow and cash generated
from operations before business exits each to be alternative performance
measures which provide a more representative measure of the sustainable cash
flow of the Group.
Cash generated from operations before business exits(1) increased by 406% to
£49.0m, benefiting from the improvement in adjusted profit(1) explained above
and a £43m reduction in pension deficit contributions as the Group reverts to
the £30m of regular annual deficit contributions set as part of the 2020
triennial funding agreement with the pension scheme trustees.
Free cash flow before business exits(1) in the six months ended 30 June 2022
was an inflow of £12.7m (2021: outflow £59.2m). The improvement primarily
reflected the above increase in cash generated from operations before business
exits(1), and a reduction in net interest paid in respect of leases and
private placement loan notes.
The increase in free cash flow reflects the above improvement in free cash
flow before business exits(1), supplemented by a reduction in the net cash out
flow in relation to business exits.
As part of our drive for simplification of the business, and strengthening the
balance sheet, we continue to seek to dispose of a number of non-core
businesses. During the first half of 2022 we completed the disposal of the AMT
Sybex, Secure Solutions and Services, Speciality Insurance and Trustmarque
businesses realising total proceeds net of disposal costs of £222.7m
(including settlement of intercompany balances on completion) with net cash
proceeds of £164.3m reflecting the cash held in the disposed entities on
completion. On 2 August 2022, we announced the disposal of our real estate and
infrastructure consultancy business for £60m on a cash free, debt free basis.
Taking into account cash-like and debt-like items, Capita expects to receive
proceeds of circa £69m at completion.
These disposals form part of the Board-approved disposal programme. The
preparation for a number of further disposals has commenced. The Group expects
to use the proceeds from this disposal programme to repay debt, to make
further deficit reduction contributions to the Group’s defined benefit
pension scheme and to invest in driving growth in the remaining core
businesses. In the first half of 2022, we repaid £82.1m of private placement
loan notes and made pension deficit contributions of £19.3m.
Liquidity as at 30 June 2022 was £423.8m, made up of £358.1m our undrawn
committed revolving credit facility (RCF) and £65.7m of cash and cash
equivalents less overdrafts and restricted cash. In July 2022, we extended the
RCF to 31 August 2024.
Financial review
Adjusted results
Capita reports results on an adjusted basis to aid understanding of business
performance. The Board has adopted a policy of disclosing separately those
items that it considers are outside the underlying operating results for the
particular period under review and against which the Group’s performance is
assessed internally. In the Board's judgement, these items need to be
disclosed separately by virtue of their nature, size and/or incidence for
users of the financial statements to obtain an understanding of the financial
information and the underlying in-period performance of the business.
In accordance with the above policy, the trading results of business exits,
along with the non-trading expenses and gain or loss on disposals, have been
excluded from adjusted results. To enable a like-for-like comparison of
adjusted results, the 2021 comparatives have been re-presented to exclude 2022
business exits. As at 30 June 2022, the following businesses met this
threshold and were classified as business exits and therefore excluded from
adjusted results in both 2022 and 2021: ESS, AXELOS, Life Insurance and
Pensions Servicing business in Ireland, AMT Sybex, Secure Solutions and
Services, the Speciality Insurance business, and Trustmarque.
Reconciliations between adjusted and reported operating profit, profit before
tax and free cash flow before business exits are provided on the following
pages and in the notes to the financial statements.
Adjusted revenue
Adjusted revenue (1)bridge by key driver £m
Six months ended 30 June 2021 1,471.9
Contract losses (45.0)
Net contract scope & volume (15.5)
Revenue indexation 10.2
Net transactional 3.5
Contract wins 55.0
Six months ended 30 June 2022 1,480.1
Adjusted revenue(1) was broadly in-line with the prior period. The adjusted
revenue(1) movements were as follows:
* contract losses are primarily those from the prior period, including 3UK,
Carphone Warehouse, NPower and William Hill. The results for the period were
not affected by any new contract losses;
* scope and volume reductions reflect pandemic related work in 2021 (circa
£6m) that did not repeat in 2022;
* impact of revenue indexation and inflationary increases on contracts within
Capita Experience and Capita Public Service;
* growth in transactional revenue mainly driven by Capita Portfolio, including
Agiito and Enforcement; and
* the benefit of the annualisation of the Royal Navy training contract and
JETS, the Turing scheme and the Northern Ireland Education Authority laptop
contract together with smaller wins within Capita Experience.
Order book
The Group’s order book was £5,911.3m at 30 June 2022 (31 December 2021:
£6,115.4m). Additions from contract wins and extensions in 2022 (£938.2m),
including the BBC extension within Capita Experience and Northern Ireland's
Education Authority extension within Capita Public Service and scope changes
(£122.6m), were offset by the reduction from revenue recognised in the period
(£1,057.2m), contract terminations (£5.5m) and business disposals
(£202.2m).
Adjusted profit before tax
Adjusted profit before tax (1)bridge by key driver £m
Six months ended 30 June 2021 1.1
Contract losses (12.4)
Net contract scope & volume (11.6)
Revenue indexation 10.2
Net transactional 10.0
Contract wins 9.8
Significant restructuring and certain litigation and claims 21.1
Other cost movements 13.7
Furlough repayment (4.9)
Six months ended 30 June 2022 37.0
Adjusted profit before tax(1) increased in 2022. The adjusted profit before
tax(1) bridge above reflects the following items:
* the margin effect of revenue losses, scope and volume, transactional changes
and contract wins results is a net £4.2m negative, with the ramp up mainly in
the second quarter from new wins not yet offsetting the impact of contract
losses;
* impact of revenue indexation on contracts within Capita Public Service and
Capita Experience;
* the re-presentation of the prior period to include significant restructuring
and certain litigation and claims following the end of the group wide
transformation;
* net reduction in other costs reflecting efficiencies delivered, partially
offset by inflation; and
* the effect of the announced intention to repay the 2021 furlough related
income.
Cash generated by operations and free cash flow
Adjusted operating profit to free cash flow before business exits (1) 30 June 2022 £m 30 June 2021 £m
Adjusted operating profit (1) 52.2 22.5
Add: depreciation/amortisation and impairment of property, plant and equipment and intangible assets 71.0 78.3
Adjusted EBITDA (1) 123.2 100.8
Working capital (14.0) (29.7)
Other operating cash flows (30.3) (14.1)
Operating cash flow 78.9 57.0
VAT deferral (14.9) (14.9)
Pension deficit contributions (15.0) (58.1)
Cash generated by operations before business exits (1) 49.0 (16.0)
Net capital expenditure (17.6) (20.1)
Interest/tax paid (18.7) (23.1)
Free cash flow before business exits (1) 12.7 (59.2)
Operating cash conversion increased to 64% (30 June 2021: 57%).
Cash generated from operations before business exits(1) benefited from the
improvement in adjusted profit(1) explained above. There were additional
benefits from the reduction in pension deficit contributions compared with
last year and reduced expenditure on contract fulfilment assets, offset by a
negative movement in cash flows from trade and other payables.
The increase in other operating cash flows was primarily due to movements in
provisions, with increased outflows in respect of restructuring and customer
contract provisions, partially offset by a decrease in claims and litigations.
Free cash flow before business exits(1) in the six months ended 30 June 2022
was an inflow of £12.7m (2021: outflow £59.2m). The improvement primarily
reflected the above increase in cash generated from operations before business
exits(1), and a reduction in net interest paid in respect of leases and the
Group's private placement loan notes.
Reported results
Adjusted to reported profit
As noted above, to aid understanding of our underlying performance, adjusted
operating profit(1) and adjusted profit before tax(1) exclude a number of
specific items, including the amortisation and impairment of acquired
intangibles and goodwill, and the impact of business exits.
Reported to adjusted profit bridge Operating (loss)/profit Profit before tax
30 June 2022 £m 30 June 2021 £m 30 June 2022 £m 30 June 2021 £m
Reported (51.2) 40.8 0.1 261.1
Business exits 7.7 (22.4) (54.3) (262.5)
Amortisation and impairment of acquired intangibles 3.2 4.1 3.2 4.1
Impairment of goodwill 92.5 — 92.5 —
Net finance income — — (4.5) (1.6)
Adjusted 52.2 22.5 37.0 1.1
Impairment of goodwill
In preparing these 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, an impairment test was performed.
At 30 June 2022, a goodwill impairment of £92.5m was recognised in respect
of the People and Property CGUs in the Group's Portfolio division. The
impairment reflects the difference between the expected net proceeds at
disposal and the cash flows the Group had previously projected it would
generate if it held these businesses into perpetuity. The difference has
arisen due to the potential for acquirers factoring in additional investment
and costs required to run the businesses on a standalone basis, coupled with
general macroeconomic conditions.
Business exits
Business exits include the effects of businesses that have been sold or exited
during the period and the results of businesses held-for-sale at the reporting
date.
In addition, business exits include the exit costs, including professional
fees, salary costs and separation planning costs, relating to further planned
disposals for which the held-for-sale and business exit criteria were not met
at 30 June 2022.
In accordance with our policy, the trading results of these businesses, along
with the non-trading expenses and gain on disposal, were included in business
exits and therefore excluded from adjusted results. To enable a like-for-like
comparison of adjusted results, the 2021 comparatives have been re-presented
to exclude businesses classified as business exits from 1 July 2021 to
30 June 2022.
At 30 June 2022 business exits primarily comprised:
Business Disposal completed on
AMT Sybex 1 January 2022
Secure Solutions and Services 3 January 2022
Trustmarque 31 March 2022
Speciality Insurance 29 April 2022
Further businesses are planned for disposal as part of the Group's
simplification strategy. However, given the status of the relevant disposal
processes, the businesses were not classified as assets held-for-sale at
30 June 2022 and, accordingly their trading results are included within
adjusted results.
Further detail of the specific items charged in arriving at reported operating
profit and profit before tax for 2022 is provided in note 3 to the condensed
consolidated financial statements.
Free cash flow to free cash flow before business exits
Free cash flow to free cash flow before business exits 30 June 2022 30 June 2021 £m
£m
Total 12.9 (71.6)
Business exits (4.5) (69.4)
Pension deficit contributions triggered by disposals 4.3 81.8
Before business exits 12.7 (59.2)
Free cash flow was lower than free cash flow before business exits(1)
reflecting free cash flows generated by business exits, offset by pension
deficit contributions triggered by the disposal of Trustmarque.
Movements in net debt
Net debt at 30 June 2022 was £710.4m (31 December 2021: £879.8m). The
reduction in net debt largely reflects the proceeds from the AMT Sybex, Secure
Solutions and Services and Trustmarque disposals.
Net debt 30 June 2022 31 December 2021 £m
£m
Opening net debt (879.8) (1,077.1)
Cash movement in net debt 180.7 208.5
Non-cash movements (11.3) (11.2)
Closing net debt (post-IFRS 16) (710.4) (879.8)
Remove closing IFRS 16 impact 421.1 448.4
Net financial debt (pre-IFRS 16) (289.3) (431.4)
Cash and cash equivalents net of overdrafts 126.4 101.5
Financial debt net of swaps (415.7) (532.9)
Net financial debt (pre-IFRS 16)/adjusted EBITDA (1) 2.6x 3.4x
Net debt (post-IFRS 16)/adjusted EBITDA (1) 3.7x 4.1x
Over the medium term, following the completion of our Portfolio divestment
programme, we will be targeting a pre-IFRS 16 net financial debt to adjusted
EBITDA(1) ratio for Capita of around 1.0.
The calculations of the net debt to adjusted EBITDA(1) and interest cover
ratios for covenant purposes in respect of the Group's US private placement
loan notes and other financing arrangements are set out in the alternative
performance measures appendix to the condensed consolidated financial
statements.
At 30 June 2022, the US private placement loan notes net debt to adjusted
EBITDA(1) covenant ratio was 1.2 times (30 June 2021: 1.5 times,
31 December 2021: 1.5 times) and was 1.6 times for all other financing
agreements (30 June 2021: 2.1 times, 31 December 2021: 2.0 times) compared
with maximum permitted levels of 3.0 times and 3.5 times respectively.
At 30 June 2022, the interest cover(1) covenant ratio was 8.4 times for the
US private placement loan notes and 8.0 times for other financing
arrangements (30 June 2021: 12.1 times and 12.0 times, and 31 December
2021: 9.9 times and 9.6 times respectively) compared with minimum permitted
levels of 4.0 times for all debt instruments.
The Group was compliant with all debt covenants at 30 June 2022.
Capital and financial risk management
Liquidity remains a key area of focus for the Group. Financial instruments
used to fund operations and to manage liquidity comprise US private placement
loan notes, Euro fixed-rate bearer notes, a Schuldschein loan, revolving
credit facilities (RCF's), leases and overdrafts.
Liquidity 30 June 2022 31 December 2021 £m
£m
RCF 358.1 385.7
Less: drawing on RCF — (40.0)
Undrawn committed facilities 358.1 345.7
Net cash, cash equivalents and overdrafts 126.4 101.5
Less: restricted cash (1) (60.7) (54.8)
Liquidity 423.8 392.4
The Group’s RCF provides flexible liquidity available to fund operations and
was undrawn at 30 June 2022 (31 December 2021: £40m drawn).
The existing RCF expires on 31 August 2022, and in June 2021 we entered into
a new £300m RCF covering the period from 31 August 2022 to 31 August 2023.
The two RCFs incorporate provisions such that the amounts available under the
facilities will be partially reduced when proceeds are realised from future
business disposals. In July 2022 the Group extended this second RCF to
31 August 2024. The extended facility is subject to covenants, which are the
same as in the existing RCF. The two RCF's incorporate provisions such that
they will partially reduce in quantum as a consequence of specified
transactions.
As part of the Group’s mitigation of the impact of Covid-19, in June 2020 a
non-recourse invoice discounting facility was obtained. The value of invoices
sold under the facility at 30 June 2022 was £4.3m (31 December 2021:
£3.9m).
At 30 June 2022, the Group had £126.4m of cash and cash equivalents net of
overdrafts, and £433.8m of private placement loan notes, fixed-rate bearer
notes, and Schuldschein loan. These debt instruments mature over the period to
2027, with repayment of £139.0m and £74.5m, in 2022 and 2023 respectively.
The 2022 and 2023 maturities are expected to be funded through the Group’s
existing facilities, cash and cash equivalents and from the proceeds of the
Group’s ongoing portfolio divestment programme without the need to obtain
new financing. As such, a measured approach will be taken to any potential
refinancing with time taken to implement a longer-term debt solution at the
appropriate moment.
Going concern
The Board closely monitors the Group’s funding position throughout the year,
including compliance with covenants and available facilities to ensure it has
sufficient headroom to fund operations. In addition, to support the going
concern assumption the Board conducts a robust assessment of the projections,
considering also the committed facilities available to the Group.
In carrying out the going concern assessment, the Board has recognised that,
in a severe but plausible downside scenario, the mitigants to the possibility
of insufficient liquidity in the going concern assessment period will require
third party agreements and approvals which represent events that are outside
the direct control of the Company. Accordingly, there are material
uncertainties, as defined in auditing and accounting standards applicable to
going concern assessments, related to events or conditions that may cast
significant doubt on the Group’s ability to continue as a going concern.
Nevertheless, reflecting the Board’s confidence in the benefits expected
from completion of the transformation programme and execution of the approved
disposal programme coupled with the potential to obtain further financing
beyond its existing committed funding facilities, the Group continues to adopt
the going concern basis in preparing these condensed consolidated financial
statements as set out in note 2 to the condensed consolidated financial
statements.
Pensions
The net defined benefit pension position for accounting purposes moved from a
small net asset at the start of the year (£5.8m) to a larger net asset by
30 June 2022 (£162.3m).
The main reasons for this movement were the £19.3m of deficit funding
contributions paid into the Group’s schemes during the period, along with
favourable market conditions (particularly the material increase in the yields
available on good quality long term corporate bonds in addition to a decrease
in future inflationary expectations) that are used to derive the assumptions
to value the schemes' liabilities. This increase was partially offset by
lower-than-expected asset returns predominantly as a result of inflation and
interest rate hedging. For further details, please refer to note 14 of the
condensed consolidated financial statements.
The valuation of the defined benefit pension scheme liabilities for funding
purposes (the actuarial valuation) differs from the valuation for accounting
purposes (which are shown in these condensed consolidated financial
statements) mainly due to different assumption principles being used based on
the different regulatory requirements of the valuations. Management estimate
that at 30 June 2022 the net asset of the Capita Pension and Life Assurance
Scheme (the Scheme) on a funding basis (ie the funding assumption principles
adopted for the full actuarial valuation at 31 March 2020 updated for market
conditions at 30 June 2022) was approximately £50m (31 December 2021: net
asset £40m). The Trustee of the Scheme has also agreed a secondary more
prudent funding target to enable it to reduce the reliance the Scheme has on
the covenant of the Group. On this basis, at 30 June 2022, the funding level
was around 94% (or a net liability of £85m). The deficit is expected to be
met by the remaining deficit contributions.
Balance sheet
Consolidated net assets were £406.3m at 30 June 2022 (31 December 2021: net
assets £296.5m).
The movement is predominantly driven by the gains on sale of AMT Sybex, Secure
Solutions and Services and Trustmarque, and the increase in the net pension
asset referred to above.
__________________________________________
1 Refer to alternative performance measures in the appendix
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 advisors accept and assume no liability to
any person in respect of this trading update except 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 principal risks and uncertainties faced by the Group and its approach to
internal control and risk management are set out on pages 53 to 61 of the 2021
Annual Report which is available on the Group’s website at
www.capita.com/investors/results-reports-and-presentations.
The principal risks and uncertainties, as set out below, have been reassessed
and the Board expect them to remain materially the same as those reported in
the 2021 Annual Report during the remaining six months of the financial year.
Risk title Risk description
Living our purpose Failure to live our purpose and failure to change stakeholder perception so we are seen to live our purpose
Strategy Failure to define, resource and execute the right medium-term strategy
Innovation Failure to innovate and develop new value propositions for clients and customers
People attraction & retention Failure to attract, develop, engage and retain the right people for current and future client propositions
Culture Failure to change the culture and practices of Capita in line with our purpose and strategy
Data protection Failure to protect data, information and IT systems
Contracts Failure to secure new/extend existing contracts and services
Delighting clients Failure to delight clients and customers and deliver contractual obligations
Internal control Failure to maintain an adequate risk-based system of internal control
Geopolitical climate Failure to plan for, influence and respond to potential changes in the geopolitical climate
Financial stability Failure to maintain financial stability, viability and achieve financial targets / results
Wellbeing, health & safety Failure of Capita to protect the wellbeing, health and safety of all Capita’s employees, service users, and others
Climate change Failure to adapt Capita and its services to the impacts of climate change
Statement of Directors’ responsibilities
The Board of directors confirms, to the best of its knowledge, that these
condensed consolidated financial statements have been prepared in accordance
with IAS 34 as adopted for use in the UK 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 Board of directors of Capita plc are listed on
the Group website at www.capita.com/our-company/about-capita/about-board.
By order of the Board
J
Lewis
T Weller
Chief Executive
Officer
Chief Financial Officer
4 August
2022
4 August 2022
Condensed consolidated income statement
For the six months ended 30 June 2022 Notes 30 June 2022 £m 30 June 2021 £m
Continuing operations:
Revenue 6 1,517.2 1,619.4
Cost of sales (1,185.5) (1,271.6)
Gross profit 331.7 347.8
Administrative expenses (382.9) (307.0)
Operating (loss)/profit 6 (51.2) 40.8
Share of results in associates and investment gains 3.6 (0.9)
Net finance expense 7 (14.2) (19.1)
Gain on business disposal 4 61.9 240.3
Profit before tax 0.1 261.1
Income tax credit 8 18.2 10.9
Total profit for the period 18.3 272.0
Attributable to:
Owners of the Company 18.3 268.5
Non-controlling interests — 3.5
18.3 272.0
Earnings per share 9
– basic 1.10p 16.18p
– diluted 1.08p 15.94p
Adjusted operating profit 3 52.2 22.5
Adjusted profit before tax 3 37.0 1.1
Adjusted earnings per share 9 3.31p 2.80p
Adjusted and diluted earnings per share 9 3.25p 2.75p
Condensed consolidated statement of comprehensive income
For the six months ended 30 June 2022 Notes 30 June 2022 £m 30 June 2021 £m
Total profit for the period 18.3 272.0
Other comprehensive income/(expense)
Items that will not be reclassified subsequently to the income statement
Actuarial gain on defined benefit pension schemes 136.3 76.3
Tax effect on defined benefit pension schemes (34.1) (5.7)
Gain on fair value of investments — 0.1
Items that will or may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations 1.1 (1.1)
Exchange differences realised on business disposals 4 0.3 (2.8)
Gain/(loss) on cash flow hedges 10.3 (1.0)
Cash flow hedges recycled to the income statement 7 (1.2) 0.5
Tax effect on cash flow hedges (2.3) 0.1
Other comprehensive income for the period net of tax 110.4 66.4
Total comprehensive income for the period net of tax 128.7 338.4
Attributable to:
Owners of the Company 128.5 334.9
Non-controlling interests 0.2 3.5
128.7 338.4
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed consolidated balance sheet At 30 June 2022
Notes 30 June 2022 £m 31 December 2021 £m
Non-current assets
Property, plant and equipment 113.3 129.0
Intangible assets 132.4 147.3
Goodwill 10 757.1 951.7
Right-of-use assets 266.1 287.9
Investments in associates and joint ventures 0.3 0.7
Contract fulfilment assets 282.7 286.7
Financial assets 13 119.7 107.2
Deferred tax assets 158.7 176.0
Employee benefits 166.2 13.3
Trade and other receivables 14.9 15.7
2,011.4 2,115.5
Current assets
Financial assets 13 25.9 17.5
Disposal group assets held-for-sale — 138.8
Trade and other receivables 541.6 547.1
Cash 13 352.0 317.6
Income tax receivable 6.5 5.9
926.0 1,026.9
Total assets 2,937.4 3,142.4
Current liabilities
Trade and other payables 476.0 542.2
Deferred income 696.9 669.8
Overdrafts 13 225.6 231.9
Lease liabilities 13 59.7 61.6
Disposal group liabilities held-for-sale — 81.1
Financial liabilities 13 186.0 286.3
Provisions 11 76.7 126.6
1,720.9 1,999.5
Non-current liabilities
Trade and other payables 15.3 15.4
Deferred income 104.6 124.9
Lease liabilities 13 361.4 386.8
Financial liabilities 13 264.7 291.9
Deferred tax liabilities 5.9 5.9
Provisions 11 54.4 14.0
Employee benefits 3.9 7.5
810.2 846.4
Total liabilities 2,531.1 2,845.9
Net assets 406.3 296.5
Capital and reserves
Share capital 15 34.8 34.8
Share premium 15 1,145.5 1,145.5
Employee benefit trust and treasury shares 15 (4.8) (8.0)
Capital redemption reserve 1.8 1.8
Other reserves (1.0) (9.0)
Retained deficit (792.2) (890.6)
Equity attributable to owners of the Company 384.1 274.5
Non-controlling interests 22.2 22.0
Total equity 406.3 296.5
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed consolidated statement of changes in equity For the six months ended 30 June 2022
Share capital £m Share premium £m Employee benefit trust and treasury shares £m Capital redemption reserve £m Retained deficit £m Other reserves £m Total attributable to the owners of the parent £m Non controlling interests £m Total equity/ (deficit) £m
At 1 January 2021 34.5 1,143.3 (11.2) 1.8 (1,289.5) (13.4) (134.5) 53.4 (81.1)
Profit for the period — — — — 268.5 — 268.5 3.5 272.0
Other comprehensive income/(expense) — — — — 70.7 (4.3) 66.4 — 66.4
Total comprehensive income/(expense) for the period — — — — 339.2 (4.3) 334.9 3.5 338.4
Share based payment net of deferred tax effect — — — — 1.8 — 1.8 — 1.8
Exercise of share options under employee long term incentive plans — — 2.4 — (2.4) — — — —
Shares issued 0.3 — (0.3) — — — — — —
VAT refund on rights issue issuance costs — 2.2 — — — — 2.2 — 2.2
Dividends (2) — — — — — — — (36.7) (36.7)
Change in put-options held by non-controlling interests (3) — — — — 96.5 — 96.5 — 96.5
At 30 June 2021 34.8 1,145.5 (9.1) 1.8 (854.4) (17.7) 300.9 20.2 321.1
At 1 January 2022 34.8 1,145.5 (8.0) 1.8 (890.6) (9.0) 274.5 22.0 296.5
Impact of change in accounting standards – amendments to IAS 37 (1) — — — — (21.7) — (21.7) — (21.7)
At 1 January 2022 on adoption of IAS 37 34.8 1,145.5 (8.0) 1.8 (912.3) (9.0) 252.8 22.0 274.8
Profit for the period — — — — 18.3 — 18.3 — 18.3
Other comprehensive income — — — — 102.2 8.0 110.2 0.2 110.4
Total comprehensive income for the period — — — — 120.5 8.0 128.5 0.2 128.7
Share based payment net of deferred tax effect — — — — 2.7 — 2.7 — 2.7
Exercise of share options under employee long term incentive plans (note 15) — — 3.2 — (3.2) — — — —
Change in put-options held by non-controlling interests — — — — 0.1 — 0.1 — 0.1
At 30 June 2022 34.8 1,145.5 (4.8) 1.8 (792.2) (1.0) 384.1 22.2 406.3
1.The Group initially applied the amendments to IAS 37 at 1 January 2022 and
the cumulative effect of applying the amendments was recognised as an opening
balance adjustment to retained earnings. Refer to note 2 for further details.
2. Of the dividends during the six months ended 30 June 2021 to
non-controlling interests totalling £36.7m, the majority were related to
AXELOS Limited (£36.6m) who paid £10.7m in cash with the remainder settled
by the purchaser when AXELOS Limited was sold.
3. The option to acquire the non-controlling interest in AXELOS Limited
expired without being exercised on 28 February 2021, and the related
liability of £96.5m was de-recognised.
Share capital – The balance classified as share capital is the nominal
proceeds on issue of the 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
less issuance costs.
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 an
entitlement to dividends.
Capital redemption reserve – The Company can redeem shares by repaying the
market value to the shareholder, whereupon the shares are cancelled.
Redemption must be from distributable profits. The Capital redemption reserve
represents the nominal value of the shares redeemed.
Retained deficit – Net profits/(losses) accumulated in the Group after
dividends are paid.
Other reserves – This consists of foreign currency translation reserve
deficit of £7.1m (31 December 2021: deficit £8.3m) and cash flow hedging
reserve surplus of £6.1m (31 December 2021: deficit £0.7m).
Non-controlling interests (NCI) – This represents equity in subsidiaries
that is not attributable directly or indirectly to the Parent Company.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed consolidated cash flow statement
For the six months ended 30 June 2022
Notes 30 June 2022 £m 30 June 2021 £m
Cash generated from/(used by) operations 12 49.2 (22.5)
Income tax paid (2.5) (7.0)
Net interest paid (16.2) (18.2)
Net cash inflow/(outflow) from operating activities 30.5 (47.7)
Cash flows from investing activities
Purchase of property, plant and equipment (7.3) (11.0)
Purchase of intangible assets (10.8) (13.1)
Proceeds from sale of property, plant and equipment / intangible assets 0.5 0.2
Capital repayment from investments at fair value through other comprehensive income 0.2 —
Subsidiary partnership payment — (4.7)
Capital element of lease rental receipts 3.3 1.5
Total proceeds received net of disposal costs paid 4 222.7 306.0
Cash held by subsidiaries when sold 4 (58.4) (17.7)
Net cash inflow from investing activities 150.2 261.2
Cash flows from financing activities
Dividends paid to non-controlling interest — (10.7)
Capital element of lease rental payments (32.8) (47.3)
Proceeds from issue of share capital (net of issuance costs) — 2.2
Repayment of private placement loan notes and other debt (92.7) (0.5)
Repayment of revolving credit facility borrowings (40.0) —
Proceeds from cross currency interest rate swaps 10.1 —
Debt financing arrangement costs paid (0.3) (1.5)
Net cash outflow from financing activities (155.7) (57.8)
Increase in cash and cash equivalents 25.0 155.7
Cash and cash equivalents at the beginning of the period 101.5 141.1
Effect of exchange rates on cash and cash equivalents (0.1) 0.9
Cash and cash equivalents at 30 June 126.4 297.7
Cash and cash equivalents comprise:
Cash 352.0 546.0
Overdrafts (225.6) (258.4)
Cash, net of overdrafts, included in disposal group assets/liabilities held-for-sale — 10.1
Total 126.4 297.7
Cash generated from/(used by) operations before business exits 12 49.0 (16.0)
Free cash flow before business exits 12 12.7 (59.2)
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Notes to the condensed consolidated financial statements
For the six months ended 30 June 2022
1 Corporate information
Capita plc (the 'Company' or the 'Parent Company') is a public limited
liability company incorporated in England and Wales whose shares are publicly
traded.
The condensed consolidated financial statements of the Company and its
subsidiaries (the 'Group’) for the six months ended 30 June 2022 were
authorised for issue in accordance with a resolution of the Board of directors
on 4 August 2022.
2 Basis of preparation, judgements and estimates, and going concern
(a) Basis of preparation
These condensed consolidated financial statements have been prepared in
accordance with the Disclosure and Transparency Rules of the UK's Financial
Conduct Authority, and with IAS 34 'Interim Financial Reporting' under
UK-adopted International Financial Reporting Standards (IFRS).
These condensed consolidated financial statements have been prepared by
applying the accounting policies and presentation that were applied in the
preparation of the company’s published consolidated financial statements for
the year ended 31 December 2021, except for the impact of the amendments to
IAS 37 as detailed below.
These condensed consolidated financial statements do not comprise statutory
accounts within the meaning of Section 434 of the Companies Act 2006. A copy
of the statutory accounts for the year ended 31 December 2021 has been
delivered to the Registrar of Companies. The auditors have reported on those
accounts; their report was (i) unqualified (ii) contained a material
uncertainty in respect of going concern to which the auditor drew attention by
way of emphasis without modifying their report and (iii) did not contain a
statement under section 498(2) or (3) of the Companies.
These condensed consolidated financial statements have been reviewed by the
Group's auditors pursuant to the Auditing Practices Board guidance on Review
of Interim Financial Information.
Several amendments to reporting standards apply for the first time in 2022 but
were not applicable or not material to the Group, except for the impact of the
Amendment to IAS 37 as detailed below.
The Group is in the early stages of the assessment for all other standards,
amendments and interpretations that have been issued by the IASB but are not
yet effective.
Onerous contracts – cost of fulfilling a contract (amendments to IAS 37)
An onerous contract is a contract under which the unavoidable costs (ie, the
costs that the Group cannot avoid because it has the contract) of meeting the
obligations under the contract exceed the economic benefits expected to be
received under it.
The amendments specify that when assessing whether a contract is onerous or
loss-making, an entity needs to include costs that relate directly to a
contract to provide goods or services, which include both incremental costs
(eg. the costs of direct labour and materials) and an allocation of costs
directly related to contract activities (eg. depreciation of equipment used to
fulfil the contract as well as costs of contract management and supervision).
General and administrative costs do not relate directly to a contract and are
excluded unless they are explicitly chargeable to the counterparty under the
contract.
The Group has adopted the amendment which resulted in a change in accounting
policy for performing an onerous contracts assessment. Previously, the Group
included only incremental costs to fulfil a contract when determining whether
that contract was onerous. The revised policy requires inclusion of both
incremental costs and an allocation of other direct costs.
In accordance with the transitional provisions, the Group applies the
amendments to contracts for which it has not yet fulfilled all its obligations
at the beginning of the annual reporting period in which it first applies the
amendments (the date of initial application) and has not restated its
comparative information.
The adoption of the amended standard has resulted in a reduction in retained
earnings at 1 January 2022 of £21.7m, comprising an increase of £18.8m in
onerous contract provisions and an impairment of contract related assets of
£2.9m. The additional onerous contract provision recognised is tax
deductible, however, no deferred tax asset has been recognised reflecting the
probable level of future taxable profits that will be available against which
the assets can be utilised at 1 January 2022. For further details, please
refer to note 8.
Impact of amendments to IAS 37 1 January 2022 £m
Property, plant and equipment (0.5)
Contract fulfilment assets (2.4)
Total assets (2.9)
Provisions (18.8)
Total liabilities (18.8)
Retained earnings (21.7)
Total equity (21.7)
(b) Adjusted results
IAS 1 permits an entity to present additional information for specific items
to enable users to better assess the entity’s financial performance.
The Board has adopted a policy to separately disclose those items that it
considers are outside the underlying operating results for the particular
period under review and against which the Group’s performance is assessed.
In the Board’s judgement, these need to be disclosed separately by virtue of
their nature, size and/or incidence for users of the financial statements to
obtain a proper understanding of the financial information and the underlying
in-period performance of the business. Those items which relate to the
ordinary course of the Group’s operating activities remain within adjusted
profit.
From 1 January 2022, the Board has limited the items excluded from the
adjusted results to: business exits, amortisation and impairment of acquired
intangibles, impairment of goodwill and certain net finance expense/income,
because these metrics provide a more representative measure of the underlying
performance of the business post completion of the Group wide transformation.
In prior years, the Board excluded other items from the adjusted results
because they were material and required separate disclosure for users of the
financial statements to obtain a proper understanding of the financial
information and the underlying performance of the business. These items
included significant restructuring, contract-related provisions and
impairments, and certain litigation and claims.
From 1 January 2022, the Board considers free cash flow, and cash generated
from operations before business exits, to be alternative performance measures
because these metrics provide a more representative measure of the sustainable
cash flow of the Group. In prior years, the Board excluded certain items
from the reported free cash flow and cash generated from operations because
they were material and required separate disclosure for users of the financial
statements to obtain a proper understanding of the financial information and
the underlying performance of the business. These items included: significant
restructuring, all pension deficit contributions, utilisation of the
Government's VAT deferral scheme, non-recourse trade receivables financing and
certain litigation and claims.
The comparatives have been re-presented.
While the Board believes the alternative performance measures (APMs) used
provide a meaningful basis upon which to analyse the Group’s financial
performance and position, which is helpful to the reader, it notes that APMs
have certain limitations, and may not be directly comparable with similarly
titled measures presented by other companies.
A reconciliation between reported and adjusted operating profit and profit
before tax is provided in note 3, and a reconciliation between reported and
free cash flow before business exits and cash generated from operations is
provided in note 12.
(c) Judgements and estimates
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which require the
Board of directors to make judgements and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingencies at the date
of the financial statements and the reported income and expense during the
presented periods. Although these judgements and assumptions are based on the
Board’s best knowledge of the amounts, events or actions, actual results may
differ.
The significant judgements and assumptions made by the Board in applying the
Group's accounting policies and the key sources of estimation uncertainty were
the same as those applied to the consolidated financial statements for the
year ended 31 December 2021, except for the impact of the amendments to
IAS 37 detailed above and explained further in note 5.
The key sources of uncertainty that have a significant risk of causing
material adjustments to the carrying amounts of assets and liabilities within
the next financial year are summarised below and set out in more detail in the
related note:
* Contract accounting (note 5) - Impairment of contract fulfilment assets,
and onerous contract provisions
* Deferred tax asset recognition (note 8)
* Impairment of goodwill (note 10)
* Measurement of defined benefit pension obligations (note 14)
The key areas where significant accounting judgements have been made are
summarised below and set out in more detail in the related note where included
in the these condensed consolidated financial statements:
* Capitalisation of contract fulfilment assets
* Measurement of goodwill (note 10)
* Measurement of provisions (note 11) and contingent liabilities (note 18)
(d) Going concern
In determining the appropriate basis of preparation of these condensed
consolidated financial statements for the six month period ended 30 June
2022, the Board is required to consider whether the Group can continue in
operational existence for the foreseeable future. The Board has concluded that
it is appropriate to adopt the going concern basis, having undertaken a
rigorous assessment of the financial forecasts, key uncertainties, and
sensitivities, as set out below.
Accounting standards require that ‘the foreseeable future’ for going
concern assessment covers a period of at least twelve months from the date of
approval of these financial statements, although those standards do not
specify how far beyond twelve months a Board should consider. In its going
concern assessment, the Board has considered the period from the date of
approval of these financial statements to 31 December 2023, which is just
less than eighteen months from the date of approval of these condensed
consolidated financial statements ('the going concern period'), and includes
the scheduled repayments of private placement loan notes in the second half of
2023.
The base case financial forecasts used in the going concern assessment are
derived from financial projections for 2022-2023 as approved by the Board in
July 2022.
The going concern assessment considers the Group’s sources and uses of
liquidity and covenant compliance throughout the period under review. The
value of the Group’s existing committed RCF was £358.1m at 30 June 2022
and it expires on 31 August 2022. In June 2021 the Group entered into a
second RCF of £300m covering the period from 31 August 2022 to 31 August
2023 with certain lenders party to the existing RCF. The second RCF will
replace the existing RCF when the latter expires. In July 2022 the Group
extended this second RCF to 31 August 2024. The extended facility is subject
to covenants, which are the same as in the existing RCF. The two RCF's
incorporate provisions such that they will partially reduce in quantum as a
consequence of specified transactions.
Financial position at 30 June 2022
The Group had net debt of £710.4m at 30 June 2022 (31 December 2021:
£879.8m) and adjusted net debt for covenant purposes of £350.0m
(31 December 2021: £502.0m). The Group was in compliance with all debt
covenants at 30 June 2022. The Group had liquidity of £423.8m at 30 June
2022 as detailed further in the Chief Financial Officer’s review.
The Group’s committed RCFs and private placement notes are subject to
financial covenants including a maximum ratio of adjusted net debt to adjusted
EBITDA and a minimum ratio of adjusted EBITA to borrowing costs. The Group’s
covenanted maximum adjusted net debt to adjusted EBITDA ratio is 3.0 or
3.5 times depending on the debt instrument in question and minimum adjusted
EBITA to borrowing costs is 4.0 times for all debt instruments. Compliance
with these covenants is tested semi-annually.
The components of the adjusted net debt to adjusted EBITDA and adjusted EBITA
to borrowing costs ratios are set out in the alternative performance measures
in the appendix.
The Group’s adjusted net debt to adjusted EBITDA at 30 June 2022 was
1.2 times for the US private placement loan notes and 1.6 times for other
financing agreements. The Group’s adjusted EBITA to borrowing costs at
30 June 2022 was 8.4 times for the US private placement loan notes and
8.0 times for other financing agreements. The Group is therefore in
compliance with the relevant ratios.
Board assessment
Base case scenario
Under the base case scenario, completion of the Group’s transformation
programme has simplified and strengthened the business and facilitates further
efficiency savings enabling sustainable growth in revenue, profit and cash
flow over the medium term. This enables the generation of positive free cash
flows, and when combined with available committed facilities allows the Group
to manage scheduled debt repayments. The base case financial forecasts
demonstrate liquidity headroom and compliance with all covenant measures
throughout the going concern period to 31 December 2023.
As previously announced, the Board’s plan is to establish an optimal capital
structure to support the execution of the Group’s strategy and to dispose of
businesses that do not align with that strategy. The disposal programme
requires agreement from third parties, and major disposals may be subject to
shareholder and lender approval. Such agreements and approvals, and also any
refinancing, are outside the direct control of the Company and as such, the
inclusion of the effect of any potential future disposals or uncommitted
financing in the Group’s projections is inappropriate for going concern
assessment purposes in accordance with IAS 1 Presentation of Financial
Statements.
The base case projections used for going concern assessment purposes reflect
business disposals completed up to the date of approval of these financial
statements but do not reflect the benefit of any further disposals that are in
the pipeline. The liquidity headroom assessment in the base case projections
reflects the Group’s existing committed financing facilities and debt
redemptions and does not reflect any potential future refinancing.
The base case assumes an improved financial position for the Group as a result
of the realisation of the benefits from completion of the transformation plan.
The key sensitivity to the base case is the execution associated with
delivering revenue growth.
Severe but plausible downside
In considering severe but plausible downside scenarios, the Board has taken
account of trading downside risks, which assume the Group is not successful in
delivering the anticipated levels of revenue growth and sustainable free cash
flows. The downside scenario used for the going concern assessment also
includes potential adverse financial impacts resulting from additional
inflationary pressure which cannot be passed on to customers, not achieving
targeted margins on new or major contracts, unforeseen operational issues
leading to contract losses and cash outflows, and unexpected potential
financial penalties and losses linked to incidents such as data breaches
and/or cyber-attacks.
In the absence of any mitigating actions, liquidity headroom shown in the
Group’s financial forecasts under this severe but plausible downside
scenario over the going concern period reduces substantially such that there
is a risk of insufficient liquidity.
There are mitigations, under the direct control of the Group, that could be
implemented to address any immediate shortfalls. These include reductions in
capital expenditure, setting aside any bonus payments and limiting
discretionary spend. While these are available as possible short-term
mitigations and would be actioned if required to ensure sufficient liquidity,
the Board is mindful that such restrictions may be detrimental to the
longer-term success of the Group. In addition, such actions would not
necessarily address potential liquidity requirements beyond the going concern
period should all the downside risks materialise.
The principal mitigation to the possibility of insufficient liquidity is the
continuation of the Board approved disposal programme which covers businesses
that do not align with the Group’s longer-term strategy. The Group has a
strong track record of executing major disposals. In 2021, the Board targeted
to achieve £700m of disposal proceeds by 30 June 2022 and has exceeded this
target. The disposal programme continues, with further disposal processes
launched in 2022. The Board is confident that the disposal programme will be
delivered, thereby introducing substantial net cash proceeds to the Group,
albeit with a corresponding removal of consolidated profits and cash flows
associated with the disposal businesses.
In addition to the ongoing disposal programme, the Group may seek to mitigate
the liquidity risks which might arise in the downside scenario by seeking
further sources of financing beyond its existing committed funding facilities.
The Board has been successful in obtaining new and extended financing
facilities in recent years, most recently the extension of the RCF which was
signed in July 2022.
Material uncertainties
The Board recognises that the disposal programme requires agreement from third
parties and that major disposals may be subject to shareholder and,
potentially, lender and regulatory approval. Similarly, any new refinancing,
requires agreement with lenders. Such agreements and approvals are outside the
direct control of the Company. Therefore, given that some of the mitigating
actions which might be taken to strengthen the Group's liquidity position in
the severe but plausible downside scenario are outside the control of the
Group, this gives rise to material uncertainties, as defined in accounting
standards, relating to events and circumstances which may cast significant
doubt about the Group’s ability to continue as a going concern and to
realise its assets and discharge its liabilities in the normal course of
business.
Adoption of going concern basis
Reflecting the Board’s confidence in the benefits expected from the
completion of the transformation programme and execution of the approved
disposal programme coupled with the potential to obtain further financing
beyond its existing committed funding facilities, the Group continues to adopt
the going concern basis in preparing these condensed consolidated financial
statements. The Board has concluded that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period to
31 December 2023. Consequently, these financial statements do not include any
adjustments that would be required if the going concern basis of preparation
were to be inappropriate.
3 Adjusted operating profit and adjusted profit before tax
The items below are excluded from the adjusted profit because the Board deems
that these amounts are (or have been) material and require separate disclosure
for users of the financial statements to obtain a proper understanding of the
financial information and the underlying performance of the business.
From 1 January 2022, the Board has limited the items excluded from the
adjusted results to: business exits, amortisation and impairment of acquired
intangibles, impairment of goodwill and certain mark-to-market valuation
changes that impact net finance expense/income, because these metrics provide
a more representative measure of the underlying performance of the business
post completion of the Group-wide transformation.
In prior years, the Board excluded other items from the adjusted results
because they were material and required separate disclosure for users of the
financial statements to obtain a proper understanding of the financial
information and the underlying performance of the business. These items
included: significant restructuring, contact-related provisions and
impairments, and certain litigation and claims.
The comparatives have been re-presented on the same basis, with significant
restructuring (£30.0m) and certain litigation and claims (credit £8.9m) now
included within adjusted results for the six months ended 30 June 2021.
The items excluded from adjusted profit are discussed further below:
Operating (loss)/profit Profit before tax
Notes 30 June 2022 £m 30 June 2021 £m 30 June 2022 £m 30 June 2021 £m
Reported (51.2) 40.8 0.1 261.1
Business exits 4 7.7 (22.4) (54.3) (262.5)
Amortisation and impairment of acquired intangibles 3.2 4.1 3.2 4.1
Impairment of goodwill 10 92.5 — 92.5 —
Net finance income 7 — — (4.5) (1.6)
Adjusted 52.2 22.5 37.0 1.1
1. Adjusted operating profit of £52.2m (30 June 2021: £22.5m) was generated
on adjusted revenue of £1,480.1m (30 June 2021: £1,471.9m) resulting in an
adjusted operating profit margin of 3.5% (30 June 2021: 1.5%).
2. The tax impact of the profit before tax adjusting items is a £0.6m charge
(30 June 2021: £34.1m charge).
Business exits: the trading result of businesses exited, or in the process of
being exited, and the gain or loss on disposals, are excluded from the Group's
adjusted results. Individual businesses within the Portfolio Division are
treated as held-for-sale (and therefore as a business exit) where the disposal
is seen to be highly probable, and expected to complete within the following
twelve months. Refer to note 4 for further details.
Amortisation and impairment of acquired intangible assets: the Group
recognised total acquired intangible asset amortisation of £3.2m (30 June
2021: £11.8m) of which £nil (30 June 2021: £7.7m) has been classified
within 'Business exit - non-trading expenses'.
Impairment of goodwill: goodwill is subject to impairment testing annually and
when indicators of impairment are identified. Any impairment charges are
reported separately.
Net finance income: net finance income excluded from adjusted profits include
movements in the mark-to-market valuation of certain financial instruments.
4 Business exits, assets held-for-sale and discontinued operations
Business exits are businesses that have been sold, exited during the period,
or are in the process of being sold or exited in accordance with the Group's
strategy. None of these business exits meets the definition of ‘discontinued
operations’ as stipulated by IFRS 5, which requires disclosure and
comparatives to be restated where the relative size of a disposal or business
closure is significant, which is normally understood to mean a reported
segment.
However, the trading results of these businesses, non-trading expenses, and
any gain/loss on disposal, have been excluded from adjusted results. To enable
a like-for-like comparison of adjusted results, the 30 June 2021 comparatives
have been re-presented to exclude businesses classified as business exits from
1 July 2021 to 30 June 2022.
Assets held-for-sale
The Group classifies a non-current asset (or disposal group) as held-for-sale
if its carrying amount will be recovered principally through a sale
transaction rather than continued use. For this to be the case, the asset (or
disposal group) must be available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such assets
(or disposal groups) and its sale must be highly probable. For the sale to be
highly probable, the appropriate level of management must be committed to a
plan to sell the asset (or disposal group), and an active programme to locate
a buyer and complete the plan must have been initiated. Further, the asset (or
disposal group) must be actively marketed for sale at a price that is
reasonable in relation to its current fair value, and, the sale should be
expected to be completed within one year from the date of classification.
Based on the above requirements, individual businesses within the Portfolio
Division will only reach the criteria to be treated as held-for-sale where the
disposal is seen to be highly probable, and expected to complete within the
following twelve months. At 30 June 2022 no disposals were deemed to have met
this threshold. At 30 June 2021, only the disposal of the AXELOS joint
venture was deemed to have met this threshold.
2022 business exits
Business exits at 30 June 2022 primarily comprised:
Business Disposal completed on
AMT Sybex 1 January 2022
Secure Solutions and Services 3 January 2022
Trustmarque 31 March 2022
Speciality Insurance 29 April 2022
Further disposals are planned as part of the simplification agenda. Since
these disposals did not meet the definition of business exits or assets
held-for-sale at 30 June 2022, their trading results were included within
adjusted results. However, exit costs related to those disposals, which
include professional fees, salary costs and separation planning costs, are
included within business exit non-trading administrative expenses.
Income statement impact 30 June 2022 30 June 2021
Trading £m Non-trading £m Total £m Trading £m Non-trading £m Total £m
Revenue 37.1 — 37.1 147.5 — 147.5
Cost of sales (27.0) — (27.0) (79.9) — (79.9)
Gross profit 10.1 — 10.1 67.6 — 67.6
Administrative expenses (4.4) (13.4) (17.8) (23.0) (22.2) (45.2)
Operating profit/(loss) 5.7 (13.4) (7.7) 44.6 (22.2) 22.4
Net finance income/(expense) 0.1 — 0.1 — (0.2) (0.2)
Gain on business disposal — 61.9 61.9 — 240.3 240.3
Profit before tax 5.8 48.5 54.3 44.6 217.9 262.5
Taxation (0.6) 0.4 (0.2) (8.3) (26.3) (34.6)
Profit after tax 5.2 48.9 54.1 36.3 191.6 227.9
Trading revenue and costs represent the current period trading performance of
the above businesses up to the point of being disposed or exited, and in the
comparative those businesses disposed of during 2021 (ESS, Life Insurance and
Pensions Servicing in Ireland, and AXELOS). Trading expenses primarily
comprise payroll costs of £17.1m (30 June 2021: £63.4m) and information
technology costs of £10.8m (30 June 2021: £27.7m).
Included within non-trading administrative expenses is £nil (30 June 2021:
£7.7m) of amortisation of acquired intangibles, which in accordance with the
Group’s policy were excluded from the Group’s adjusted results and have
been reclassified to business exits because they relate to businesses sold or
being exited. Other non-trading administrative expenses include: disposal
project costs of £11.2m (30 June 2021: £12.3m); and other costs of £2.2m
(30 June 2021: £2.2m).
2022 disposals
In the six months ended 30 June 2022, the gain arising on the disposal of the
AMT Sybex, Secure Solutions and Services, Trustmarque and Speciality Insurance
businesses was determined as follows:
30 June 2022 £m 30 June 2021 £m
Intangible assets 1.2 —
Goodwill 102.8 —
Income tax receivable and deferred tax asset 2.1 —
Contract fulfilment assets 5.1 —
Trade and other receivables 76.8 —
Accrued income 9.5 —
Prepayments 9.7 —
Cash and cash equivalents 38.8 —
Disposal group assets held-for-sale 141.8 120.4
Trade and other payables (94.9) —
Accruals (6.1) —
Other taxes and social security (8.7) —
Deferred income (27.2) —
Provisions (0.3) —
Capita group loan balances (51.1) —
Disposal group liabilities held-for-sale (136.2) (57.7)
Net identifiable assets sold 63.3 62.7
Sales price
- received in cash 126.5 308.8
- deferred receivable 10.8 —
Less: costs of disposal
- paid in cash (9.5) (2.8)
- accrued at period end (2.3) (5.8)
Net sales price 125.5 300.2
Realisation of cumulative currency translation difference (0.3) 2.8
Gain on business disposals 61.9 240.3
Net cash inflow
Cash proceeds received less costs of disposal paid 117.0 306.0
Settlement of receivables due from disposed subsidiaries
- disposal of subsidiaries in the period 51.1 —
- disposal of subsidiaries within disposal group assets/liabilities held-for-sale 54.6 —
105.7 —
Total proceeds received net of disposal costs paid 222.7 306.0
(Cash)/overdrafts held by subsidiaries when sold (38.8) —
(Cash)/overdrafts within disposal group assets/liabilities held-for-sale (19.6) (17.7)
Total (cash)/overdrafts held by subsidiaries when sold (58.4) (17.7)
In preparing these condensed consolidated financial statements, management
identified that the net assets of a business held-for-sale at 31 December
2021 and used to assess for impairment were incorrectly determined when
comparing to the expected net disposal proceeds. This resulted in an
overstatement of a goodwill impairment charge recognised within business exits
(£19.0m) and consequently, an understatement of assets held-for-sale at
31 December 2021. This error did not impact the adjusted results of the
Group.
Management has considered IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors and concluded that the impact of this error is not deemed
material since it would not influence the economic decisions of primary users
of the financial statements, not least because the business has been disposed
of in the current period, and therefore, the correction of the impairment has
been recognised in the current period within the gain on business disposal.
Disposal group assets and liabilities held-for-sale
Disposal group assets and liabilities held-for-sale at 31 December 2021
comprised the AMT Sybex, Secure Solutions and Services and Speciality
Insurance businesses, whose disposals were completed during the first half of
2022. At 30 June 2022, no disposals were deemed to have met the threshold to
be treated as held-for-sale.
Business exit cash flows
Businesses exited and being exited generated net operating cash inflows of
£4.5m (30 June 2021: cash inflows of £75.3m).
5 Contract accounting
At 30 June 2022, the Group had the following results and balance sheet items
relating to long-term contracts:
Note 30 June 2022 £m 30 June 2021 £m 31 December 2021 £m
Long-term contractual adjusted revenue 6 1,080.8 1,077.7
Non-current and current deferred income 801.5 794.7
Non-current contract fulfilment assets 282.7 286.7
Non-current and current onerous contract provisions 70.0 45.8
Background
The majority of the Group’s revenue is from contracts greater than two years
in duration (long-term contractual), which provided 73.0% of Group adjusted
revenue for the six months ended 30 June 2022 (30 June 2021: 73.2%).
Recoverability of contract fulfilment assets and completeness of onerous
contract provisions
Management first assesses whether the contract assets are impaired and then
further considers whether an onerous contract exists. For half and full year
reporting, the Audit and Risk Committee specifically reviews the material
judgements and estimates and the overall approach in respect of the Group’s
major contracts, including comparison against previous forecasts. Major
contracts include those that are material in size or risk to the Group’s
results. Other contracts are reported to the Audit and Risk Committee as
appropriate. These contracts are collectively referred to as 'major contracts'
in the remainder of this note.
The major contracts contributed £0.8billion at 30 June 2022 (30 June 2021:
£0.8billion) or 53% (30 June 2021: 53%) of the Group's adjusted revenue.
Non-current contract fulfilment assets as at 30 June 2022 were £282.7m, of
which £108.8m (31 December 2021: £184.1m) related to major contracts with
on-going transformational activities. The remainder relates to contracts post
transformation and includes non-major contracts.
The major contracts, both pre and post-transformation, are rated according to
their financial risk profile, which is linked to the level of uncertainty over
future assumptions. For those that are in the high and medium rated risk
categories the associated non-current contract fulfilment assets in aggregate
were £9.6m at 30 June 2022 (31 December 2021: £6.6m). The recoverability
of these assets is dependent on no significant adverse change in the key
contract assumptions arising in the next financial year. The balance of
deferred income associated with these contracts was £102.2m at 30 June 2022
(31 December 2021: £89.5m) and is forecast to be recognised as performance
obligations continue to be delivered over the life of the respective
contracts. Onerous contract provisions associated with these contracts were
£48.3m at 30 June 2022 (31 December 2021: £45.8m).
Following these reviews, contract fulfilment asset impairments of £0.1m at
30 June 2022 (30 June 2021: £0.8m) were identified and recognised within
adjusted cost of sales, of which, at 30 June 2022, £nil (30 June 2021:
£nil) related to contract fulfilment assets added during the period. As
discussed in note 2, the adoption of the amendment to IAS 37 resulted in
additional onerous contract provisions being required, as well as contract
asset impairments. On adoption of the amended standard the cumulative effect
was recognised as an opening balance adjustment to retained earnings.
Given the quantum of the relevant contract assets and liabilities, and the
nature of the estimates noted above, management has concluded that it is
reasonably possible that outcomes within the next financial year may be
different from management’s current assumptions and could require a material
adjustment to the carrying amounts of contract assets and onerous contract
provisions. As noted above, £108.8m of non-current contract fulfilment assets
relate to major contracts with on-going transformational activities and £9.6m
of non-current contract fulfilment assets relate to the high and medium rated
risk categories. Given the level of uncertainty, combination of variables and
timing across numerous contracts, it is not practical to provide a
quantitative analysis of the aggregated judgements that are applied.
Management does not believe that disclosing a potential range of outcomes on a
consolidated basis would provide meaningful information to a user of these
condensed consolidated financial statements. Due to commercial sensitivities,
the Group does not disclose amounts involved in any individual contract.
6 Revenue and segmental information
The Group’s operations are managed separately according to the nature of the
services provided, with each segment representing a strategic business
division offering a different package of client outcomes across the markets
the Group serves. Capita plc is a reconciling item and not an operating
segment.
The tables below present revenue and trading results for the Group’s
business segments for the six months ended 30 June 2022 and 2021.
The new organisational structure, announced in March 2021, became operational
in the second half of 2021 and therefore the below disclosure presents the new
structure as reported to the Chief Operating Decision Maker. Under the new
structure, the Group comprises two core trading divisions - Capita Public
Service and Capita Experience - and a third division - Capita Portfolio -
which comprises non-core businesses that the Group intends to exit in due
course. Comparative information has been re-presented accordingly.
Adjusted revenue, excluding results from businesses exited in both periods
(adjusting items), was £1,480.1m (30 June 2021: £1,471.9m), an increase of
0.6% (2021: increase 0.3%).
Six months ended Notes Capita Capita Capita Capita Total Adjusting Total
30 June 2022 Public Experience Portfolio plc adjusted items reported
Service £m £m £m £m £m £m
£m
Continuing operations
Long-term contractual 613.7 449.2 17.9 — 1,080.8 10.7 1,091.5
Short-term contractual 66.7 115.8 66.9 — 249.4 2.0 251.4
Transactional (point-in-time) 33.2 27.4 89.3 — 149.9 24.4 174.3
Total segment revenue 713.6 592.4 174.1 — 1,480.1 37.1 1,517.2
Trading revenue 735.4 609.7 222.2 — 1,567.3 — 1,567.3
Inter-segment revenue (21.8) (17.3) (48.1) — (87.2) — (87.2)
Total adjusted segment revenue 713.6 592.4 174.1 — 1,480.1 — 1,480.1
Business exits – trading 4 — — 37.1 — — 37.1 37.1
Total segment revenue 713.6 592.4 211.2 — 1,480.1 37.1 1,517.2
Six months ended 30 June 2021 Notes Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total adjusted £m Adjusting items £m Total reported £m
Continuing operations
Long-term contractual 603.7 454.9 19.1 — 1,077.7 81.9 1,159.6
Short-term contractual 56.7 119.8 71.3 — 247.8 26.6 274.4
Transactional (point-in-time) 47.8 25.2 73.4 — 146.4 39.0 185.4
Total segment revenue 708.2 599.9 163.8 — 1,471.9 147.5 1,619.4
Trading revenue 728.9 621.4 237.7 — 1,588.0 — 1,588.0
Inter-segment revenue (20.7) (21.5) (73.9) — (116.1) — (116.1)
Total adjusted segment revenue 708.2 599.9 163.8 — 1,471.9 — 1,471.9
Business exits – trading 4 — — 147.5 — — 147.5 147.5
Total segment revenue 708.2 599.9 311.3 — 1,471.9 147.5 1,619.4
Order book
The tables below show the order book for each division, categorised into
long-term contractual (contracts with length greater than two years) and
short-term contractual (contracts with length less than two years). The length
of the contract is calculated from the start of the service commencement date.
The figures present the aggregate amount of the 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 2022 Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total £m
Long-term contractual 2,874.8 2,345.1 264.1 — 5,484.0
Short-term contractual 150.2 173.6 103.5 — 427.3
Total 3,025.0 2,518.7 367.6 — 5,911.3
Order book 31 December 2021 Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total £m
Long-term contractual 3,112.7 2,249.3 478.7 — 5,840.7
Short-term contractual 173.6 22.5 78.6 — 274.7
Total 3,286.3 2,271.8 557.3 — 6,115.4
The table below shows the expected timing of revenue to be recognised from
long-term contractual orders at 30 June 2022:
Time bands of expected revenue recognition from long-term contractual orders Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total £m
< 1 year 738.3 742.8 46.9 — 1,528.0
1–5 years 1,346.0 1,225.1 87.2 — 2,658.3
> 5 years 790.5 377.2 130.0 — 1,297.7
Total 2,874.8 2,345.1 264.1 — 5,484.0
The order book represents the consideration 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 because they are not
contracted. In addition, revenue from contract extensions is also excluded
from the order book unless the extensions are pre-priced whereby the Group has
a legally binding obligation to deliver the performance obligations during the
extension period. The total revenue related to pre-priced extensions that has
been included in the tables above amounted to £590.4m (31 December 2021:
£668.0m). 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 £5.5billion (31 December 2021: £5.8billion) revenue to be earned
from long-term contractual orders, £4.4billion (31 December 2021:
£4.3billion) relates to major contracts. This amount excludes revenue that
will be derived from frameworks (transactional (point-in-time) contracts),
non-contracted volumetric revenue, non-contracted scope changes and future
unforeseen volume changes from these major contracts, which together are
expected to contribute an additional £1.8billion (31 December 2021:
£2.3billion) of revenue to the Group over the life of the relevant contracts.
Deferred income
The Group’s deferred income balances solely relate to revenue from contracts
with customers. Revenue recognised in the reporting period that was included
in the deferred income balance at the beginning of the period was £681.5m
(30 June 2021: £738.5m; 31 December 2021: £941.5m).
Segmental profit
The tables below present trading results for the Group’s business segments
for the six month periods ended 30 June 2022 and 30 June 2021. For segmental
reporting, the costs of the central functions have been allocated to the
segments using appropriate drivers such as adjusted revenue, adjusted profit
or headcount.
Six months ended 30 June 2022 Notes Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total adjusted £m Adjusting items £m Total reported £m
Adjusted operating profit 3 46.8 17.6 3.0 (15.2) 52.2 — 52.2
Business exits – trading 4 — — 5.7 — — 5.7 5.7
Total trading result 46.8 17.6 8.7 (15.2) 52.2 5.7 57.9
Non-trading items:
Business exits – non-trading 4 — (13.4) (13.4)
Other adjusting items 3 — (95.7) (95.7)
Operating profit/(loss) 52.2 (103.4) (51.2)
Six months ended 30 June 2021 Notes Capita Public Service £m Capita Experience £m Capita Portfolio £m Capita plc £m Total adjusted £m Adjusting items £m Total reported £m
Adjusted operating profit 3 38.4 28.0 3.0 (46.9) 22.5 — 22.5
Business exits – trading 4 — — 44.6 — — 44.6 44.6
Total trading result 38.4 28.0 47.6 (46.9) 22.5 44.6 67.1
Non-trading items:
Business exits – non-trading 4 — (22.2) (22.2)
Other adjusting items 3 — (4.1) (4.1)
Operating profit 22.5 18.3 40.8
7 Net finance expense
The table below shows the composition of net finance expenses, including those
excluded from adjusted profit:
30 June 2022 £m 30 June 2021 £m
Interest income
Interest on cash (0.3) (0.3)
Interest on lease receivables (2.1) (2.1)
Total interest income (2.4) (2.4)
Interest expense
Private placement loan notes (1) 6.6 7.8
Cash flow hedges recycled to the income statement (1.2) 0.5
Bank loans and overdrafts 5.1 1.9
Interest on lease liabilities 11.3 11.5
Net interest (receivable)/payable on defined benefit pension schemes (0.6) 1.2
Total interest expense 21.2 22.9
Net finance expense included in adjusted profit 18.8 20.5
Included within business exits
Discount unwind on public sector subsidiary partnership payments — 0.4
Other financial income (0.1) (0.2)
Total included within business exits (0.1) 0.2
Other items excluded from adjusted profits
Non-designated foreign exchange forward contracts - mark-to-market (5.3) (1.5)
Other financial expense — 0.2
Fair value hedge ineffectiveness (2) 0.8 (0.3)
Total other items excluded from adjusted profits (4.5) (1.6)
Total net finance income excluded from adjusted profit (4.6) (1.4)
Total net finance expense 14.2 19.1
1. Private placement loan notes comprise US private placement loan notes,
Euro fixed rate bearer notes, and a Schuldschein loan.
2. Fair value hedge ineffectiveness includes ineffectiveness from changes in
currency basis, and the movement in mark-to-market valuations on hedge
derivatives from the perceived change in the credit worthiness of the
counterparties to those instruments.
8 Income tax
The adjusted income tax charge is based on management’s best estimate of the
full-year effective tax rate of 18.9%, estimated using full-year profit
projections excluding any discrete items. The estimated full year effective
tax rate has been applied to profit before adjusting items for the six months
ending 30 June 2022 to calculate the adjusted income tax charge for the six
month period. The tax credit on discrete items for the six months is
calculated separately, and mainly relates to the adjustment to unrecognised
deferred tax assets described below. The tax impact of adjusting items has
been calculated on an item-by-item basis.
There is a reported income tax credit for the period of £18.2m on reported
profit before tax of £0.1m (30 June 2021: reported income tax credit of
£10.9m on reported profit of £261.1m), and an adjusted income tax credit for
the period of £18.8m on adjusted profit before tax of £37.0m (30 June 2021:
adjusted tax credit of £45.0m on adjusted profit of £1.1m). The most
significant reconciling items, explaining the difference from the standard UK
rate of 19%, are movement in unrecognised deferred tax assets, non-taxable
profit on disposal and non-deductible goodwill impairment.
The main movements in the net deferred tax asset arise due to the deferred tax
liability, tax charge to equity, on the defined benefit pension scheme surplus
recognised for accounting purposes, partly offset by the change in the
accounting estimate of deferred tax, tax credit to the income statement.
Deferred tax assets are recognised only to the extent that it is probable that
future taxable profits will be available against which the assets can be
utilised. The recoverability of deferred tax assets is supported by the
deferred tax liabilities against which the reversal can be offset and the
expected level of future profits in the countries concerned. The recognition
of deferred tax assets has been based on the forecast accounting profits in
the full year profit projections for 2022 and the 2023-2024 business plans
approved by the Board, using a long-term growth rate of 1.7% and a reducing
probability factor applied to future profits, consistent with the approach in
2021. The impact of this assessment results in a change in the accounting
estimate of deferred tax of £26.1m, and unrecognised temporary differences
decreasing by £104.4m, resulting in total unrecognised temporary differences
at 30 June 2022 of £553.0m. Further disposals, planned as part of the
simplification agenda, could also have an impact on deferred tax assessment in
future periods.
Capita has an open and positive working relationship with HMRC, has a
designated customer compliance manager, and is committed to prompt disclosure
and transparency in all dealings with HMRC and overseas tax authorities. The
Group does not have a complex tax structure, nor does it pursue aggressive tax
avoidance activities. The Group has a low-risk rating from HMRC, reassessed at
the end of 2021, and has been awarded the Fair Tax Mark for its tax
disclosures from 2018 to 2020. The Group has operations in a number of
countries outside the UK. All Capita operations outside the UK are trading
operations and pay the appropriate local taxes on these activities. Further
detail regarding Capita's approach to tax can be found in our ‘Responsible
Taxation’ publication in the Policies and Principles area of the Capita
website
(https://www.capita.com/our-company/about-capita/policies-and-principles).
9 Earnings per share
Basic earnings per share amounts are calculated by dividing net profit for the
period attributable to ordinary shareholders 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 shareholders 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.
30 June 2022 30 June 2021
pence pence
Basic earnings per share – reported 1.10 16.18
– adjusted 3.31 2.80
Diluted earnings per share – reported 1.08 15.94
– adjusted 3.25 2.75
The following tables show the earnings and share data used in the basic and
diluted earnings per share calculations:
30 June 2022 30 June 2021
Notes £m £m
Reported profit before tax for the period 0.1 261.1
Income tax credit 8 18.2 10.9
Reported profit for the period 18.3 272.0
Less: Non-controlling interest — (3.5)
Total profit attributable to shareholders 18.3 268.5
Adjusted profit before tax for the period 3 37.0 1.1
Income tax credit 18.8 45.0
Adjusted profit for the period 55.8 46.1
Less: Non-controlling interest (0.6) 0.3
Adjusted profit attributable to shareholders 55.2 46.4
30 June 2022 £m 30 June 2021 £m
Weighted average number of ordinary shares (excluding trust and treasury shares) for basic earnings per share 1,668.9 1,659.0
Dilutive potential ordinary shares:
Employee share options 28.6 25.8
Weighted average number of ordinary shares (excluding trust and treasury shares) adjusted for the effect of dilution 1,697.5 1,684.8
The earnings per share figures are calculated based on earnings attributable
to ordinary shareholders of the Parent Company, and therefore exclude
non-controlling interest. Earnings per share are calculated on a total
reported basis and an adjusted basis. Earnings per share for business exits
and specific items are bridging items between total reported and adjusted
earnings per share.
10 Goodwill
In preparing these condensed consolidated financial statements, the Group
undertook a review to identify indicators of impairment of goodwill.
Consideration was given to performance against the financial forecasts used in
the impairment test conducted at 31 December 2021, as well as against
indicative disposal proceeds for Portfolio division Cash Generating Units
(CGUs) where disposal processes were seen to be sufficiently advanced. Where
this analysis gave rise to an indicator of potential impairment, an impairment
test was performed.
2022 £m
Cost
At 1 January 1,676.8
Business disposal (138.7)
Exchange movement 0.7
At 30 June 1,538.8
Accumulated impairment
At 1 January 725.1
Business disposal (35.9)
Impairment 92.5
At 30 June 781.7
Net book value
At 1 January 951.7
At 30 June 757.1
Cash-generating units
Reflecting the way management exercises oversight and monitors the Group’s
performance, the lowest level at which goodwill is monitored is at the
divisional level for Capita Public Service and Capita Experience, and at a
sub-divisional level for Capita Portfolio (comprising - People, Software,
Property, Business Solutions, Travel and Other). At 30 June 2022, the Group
had eight CGUs or groups of CGUs for the purpose of impairment testing of
goodwill.
Business exits
As set out in note 4, four businesses were sold during the period. Goodwill
relating to three of these businesses had been reclassified to disposal group
assets held-for-sale at 31 December 2021. Goodwill relating to the fourth
disposal (£102.8m) was included within the Technology group of CGUs at
1 January 2022, and then derecognised as part of business disposals during
the period.
One business within the Software CGU continues to meet the criteria to be
treated as a business exit at 30 June 2022. Goodwill relating to this
business had been fully impaired within business exits in December 2021.
The impairment test
The Group’s impairment test compares the carrying value of each CGU with its
recoverable amount. The recoverable amount of a CGU is the higher of fair
value less cost of disposal, and its value in use, where value in use would
typically be the expected cash flows to be generated from operating the
businesses into perpetuity.
At 30 June 2022, no planned disposals met the threshold to be classified as
held-for-sale (refer to note 4). However, the disposal of businesses aligned
to the People, Property and Business Solutions CGUs in Portfolio were
sufficiently advanced that the Board’s judgement was that for impairment
testing purposes the value in use of these CGUs should be determined based on
the future cash flows of the CGUs from continuing use up to the estimated date
of disposal, plus an estimate of the sale proceeds less cost of disposal.
The key inputs to the value in use calculations were the forecast cash flows,
both operational up to the expected date of disposal and the Board’s best
estimate of expected net proceeds at disposal. These have been derived from
management’s latest financial projections and reflect an assessment of the
range of bids currently being considered by the Board, the status of these
sale processes and the time horizon over which these transactions are expected
to complete. While it is the Board’s intention to complete these disposals
in the short-term, where there is presently no signed agreement in place with
any counterparty, the actual cash flows could differ from those assumed in the
impairment assessment.
The Board has considered an appropriate methodology to apply when allocating
central function costs, which is a key sensitivity. The methodology applied
for the 30 June 2022 impairment test was aligned to that applied in reporting
segmental performance (refer to note 6). The remaining costs of the Capita
plc segment are allocated based on forecast EBITDA for the second half of 2022
representing the first year of business post transformation.
At 30 June 2022, a goodwill impairment of £92.5m was recognised in respect
of the People and Property CGUs. The impairment has arisen primarily due to
the potential for acquirers factoring in additional investment and costs
required to run the businesses outside of the Group, and general macroeconomic
conditions. A circa 10% change in the expected net proceeds for either CGU
would result in a material impact to the impairment currently recognised.
The Travel CGU in Portfolio was impaired by £11.5m at 31 December 2021 and
is therefore sensitive to changes in assumptions giving rise to a further
impairment. At 30 June 2022, an impairment test was performed for the Travel
CGU using value in use based on the present value of future cash flows. The
key inputs to the calculation are described below:
* The cash flows were based on the most recent forecasts available
* The pre-tax discount rate used was 13.2% (31 December 2021: 15.7%), driven
primarily by a decline in levered beta of peer group comparators
* The long-term growth rate of 1.7% (31 December 2021: 1.7%) was applied to
forecast cash flows for years four and five based on economic growth forecasts
by recognised bodies
No impairment was recognised as a result of the impairment test. A sensitivity
analysis performed by a decrease in long-term growth rate of 1% (for the
terminal period), did not identify any impairment. An increase in the discount
rate of 2.8% or a 16% decrease in the forecast cash flows (across years one to
five and terminal value) would be required to trigger an impairment for the
Travel CGU.
11 Provisions
Restructuring provision £m Business exit provision £m Claims and litigation provision £m Property provision £m Customer contract provision £m Other provisions £m Total £m
At 1 January 25.6 1.5 13.3 9.7 84.7 5.8 140.6
Impact of change in accounting standards – amendments to IAS 37 (1) — — — — 18.8 — 18.8
At 1 January 2022 on adoption of IAS 37 25.6 1.5 13.3 9.7 103.5 5.8 159.4
Reclassification (2) (21.8) — — 21.8 — — —
Provisions in the period — 6.8 2.2 2.7 7.2 3.3 22.2
Releases in the period (0.2) — (0.7) (4.5) (3.4) (1.8) (10.6)
Utilisation (2.8) (2.7) (1.2) (7.6) (25.2) (0.4) (39.9)
At 30 June 0.8 5.6 13.6 22.1 82.1 6.9 131.1
30 June 2022 £m 31 December 2021 £m
Current 76.7 126.6
Non-current 54.4 14.0
131.1 140.6
1.The Group initially applied the amendments to IAS 37 at 1 January 2022 and
the cumulative effect of applying the amendments was recognised as an opening
balance adjustment to retained earnings. Refer to note 2 for further details.
2. Following the end of the Group-wide transformation programme, the element
of the restructuring provision relating to property costs (including
unavoidable running costs, such as insurance, security, and dilapidation
costs) where properties have been exited as a result of the transformation
programme, have been reclassified to the property provision as at 1 January
2022.
Restructuring provision: The provision represents the cost of reducing
headcount where communication to affected employees has crystallised a valid
expectation that the roles are at risk. These provisions are likely to unwind
within a year.
Business exit provision: The provision relates to the cost of exiting
businesses through disposal or closure including professional fees related to
business exits and the costs of separating the businesses being disposed.
These are likely to unwind over a period of one to four years.
Claims and litigation provision: The Group is exposed to claims and litigation
proceedings arising in the ordinary course of business. These matters are
reassessed regularly and where obligations are probable and estimable,
provisions are made representing the Group’s best estimate of the
expenditure to be incurred. Due to the nature of these claims, the Group
cannot give an estimate of the period over which this provision will unwind.
Property provision: The provision relates to unavoidable running costs, such
as insurance and security, of leasehold property where the space is vacant or
currently not planned to be used for ongoing operations, and for dilapidation
costs. The expectation is that this expenditure will be incurred over the
remaining periods of the leases which vary up to 25 years.
Customer contract provision: The provision includes onerous contract
provisions in respect of customer contracts where the costs of fulfilling a
contract (both incremental and costs directly related to contract activities)
exceeds the economic benefits expected to be received under the contract,
claims/obligations associated with missed milestones in contractual
obligations, and other potential exposures related to contracts with
customers. These provisions are forecast to unwind over periods of up to six
years.
The customer contract provision includes £72.7m in respect of contracts in
Capita Experience. The Group has highlighted in prior reporting the structural
challenges associated with the closed book Life and Pensions contracts. These
provided for upfront cash inflows to support initial transformation activities
with a much lower level of cash inflow after the transformation phase was
completed. Under the Group’s long-term contract accounting policy, the cash
flow profile of these contracts has resulted in deferral of profit into future
years which is not backed by net cash flows (because the relevant cash
receipts arose in the early years of contract execution). Additionally, some
of the contracts contain evergreen clauses potentially allowing the customers
to extend the contracts indefinitely until the run-off of the underlying life
and pension books is complete.
The closed book Life and Pensions business has remained in structural decline
because some customers, with legacy IT systems, have switched to suppliers who
can provide a single digital platform for all their books. The Group has
sought to drive efficiencies to mitigate this fall off in volumes, while
supporting customers who have selected new outsource providers or taken the
activities back in-house.
The closed books and contractual dynamics have led to onerous conditions to
service certain of these contracts. Management has been required to assess the
likely length of the remaining contracts, given the pattern and experience of
contract terminations while also recognising the evergreen clauses.
Accordingly, the Group has, in prior years, provided for the onerous contract
conditions based on the best estimate of the remaining contract terms.
The Group has continued to support a major customer on the transfer of
services to another supplier. This is taking significantly longer than
initially expected. In 2021, management reassessed the lifetime estimate to
include not only the onerous contract terms but also the period and likely
costs to support the final handover of services. This assessment was extended
across all contracts that contain evergreen clauses, including those where
there are ongoing discussions regarding either termination or transfer of
services.
This reassessment, reflecting the developments in the latter half of 2021,
provided cover for contracts to extend out to 2026. This resulted in an
increase to the contract provision of £39.5m which was reported as an
adjusting item in 2021. At 30 June 2022, the provision was increased to
provide cover for contracts to extend out to June 2027 (ie. a five year
rolling period). The increase in the provision was reflected in adjusted
results.
Other provisions: Relates to provisions in respect of other potential
exposures arising as a result of the nature of some of the operations that the
Group provides. These are likely to unwind over periods of up to five years.
12 Cash flow information
30 June 2022 30 June 2021
Note Reported £m Before business exits £m Reported £m Before business exits £m
Cash flows from operating activities:
Reported operating (loss)/profit 3 (51.2) (51.2) 40.8 40.8
Less: business exit operating loss/(profit) 4 — 7.7 — (22.4)
Total operating (loss)/profit (51.2) (43.5) 40.8 18.4
Adjustments for non-cash items:
Depreciation 49.0 49.0 60.1 58.9
Amortisation of intangible assets 22.0 21.9 31.7 21.4
Share based payment expense 2.7 2.7 1.8 1.8
Employee benefits 4.3 4.3 4.0 4.0
Loss on disposal of property, plant and equipment / intangible assets 0.7 0.7 0.1 0.1
Impairment of non-current assets 94.7 94.7 2.1 2.1
Other adjustments:
Movement in provisions (28.0) (32.0) (20.5) (15.7)
Pension deficit contribution (19.3) (15.0) (139.9) (58.1)
Other contributions into pension schemes (4.9) (4.9) (4.3) (4.3)
Movements in working capital:
Trade and other receivables (88.5) (39.9) (84.6) (43.4)
Non-recourse trade receivables financing 0.4 0.4 (7.2) (7.2)
Trade and other payables 50.8 4.6 107.9 20.5
VAT deferral (14.9) (14.9) (14.9) (14.9)
Deferred income 34.7 24.2 22.9 25.6
Contract fulfilment assets (non-current) (3.3) (3.3) (22.5) (25.2)
Cash generated/(used) by operations 49.2 49.0 (22.5) (16.0)
Adjustments for free cash flows:
Income tax paid (2.5) (2.5) (7.0) (4.8)
Net interest paid (16.2) (16.2) (18.2) (18.3)
Net cash flows from operating activities 30.5 30.3 (47.7) (39.1)
Purchase of property, plant and equipment (7.3) (7.3) (11.0) (8.4)
Purchase of intangible assets (10.8) (10.8) (13.1) (11.9)
Proceeds from sale of property, plant and equipment / intangible assets 0.5 0.5 0.2 0.2
Free cash flow 12.9 12.7 (71.6) (59.2)
Free cash flow and cash generated from operations
From 1 January 2022, the Board considers free cash flow, and cash generated
from operations before business exits, to be alternative performance measures
because these metrics provide a more representative measure of the sustainable
cash flow of the Group.
These measures are analysed below:
Free cash flow Cash generated from operations
2022 £m 2021 £m 2022 £m 2021 £m
Total 12.9 (71.6) 49.2 (22.5)
Business exits (4.5) (69.4) (4.5) (75.3)
Pension deficit contributions triggered by disposals 4.3 81.8 4.3 81.8
Before business exits 12.7 (59.2) 49.0 (16.0)
Business exits: the cash flows of businesses exited, or in the process of
being exited, and the proceeds from disposals, are disclosed outside the
adjusted results. The 30 June 2021 results have been re-presented for those
businesses exited, or in the process of being exited, during the period from
1 July 2021 to 30 June 2022 to enable comparability of the adjusted results.
Pension deficit contributions triggered by disposals: the Trustee of the CPLAS
Scheme has agreed with the Group to accelerate the payment of future agreed
deficit contributions on a pound for pound basis in the event of disposal
proceeds being used to fund mandatory prepayments of debt. During the period,
the disposal of the Trustmarque business led to accelerated deficit
contributions of £4.3m, with a further £1.6m due in the second half of 2022.
In addition, a further £14.5m in accelerated contributions is required by
31 March 2024 as a result of that disposal.
Reconciliation of net cash flow to movement in net debt
Six months ended 30 June 2022 Net debt at 1 January £m Cash flow movements £m Non-cash movement (2) £m Net debt at 30 June £m
Cash, cash equivalents and overdrafts 101.5 25.0 (0.1) 126.4
Other loan notes (1.3) 0.5 — (0.8)
Credit facilities (46.0) 40.0 — (6.0)
Private placement loan notes (1) (512.9) 92.5 (13.4) (433.8)
Cross-currency interest rate swaps (1) 28.0 (10.1) 7.7 25.6
Lease liabilities (448.4) 32.8 (5.5) (421.1)
Total net liabilities from financing activities (980.6) 155.7 (11.2) (836.1)
Deferred consideration (0.7) — — (0.7)
Net debt (879.8) 180.7 (11.3) (710.4)
1. The sum of these items equates to the fair value of the Group’s private
placement loan note debt: £408.2m (31 December 2021: £484.9m). The £92.5m
of cash flow movement during the period represents £92.2m of private
placement loan note repayments and £0.3m of maintenance expenses for the
revolving credit facility.
2. Non-cash movement relates to: the effect of changes in foreign exchange
rates on cash; fair value changes on the swaps; amortisation of loan notes
issue costs; amortisation of the discount on the Euro debt; and additions,
terminations and foreign exchange rate effects on the Group's leases.
Overdrafts comprise the aggregate value of bank account debit balances within
the Group’s notional interest pooling arrangement. The aggregate value is
fully offset by credit balances within the same arrangement.
At 30 June 2022, £nil of the Group’s £358.1m committed revolving credit
facility was drawn (31 December 2021: £40.0m drawn).
Six months ended 30 June 2021 Net debt at 1 January £m Cash flow movements £m Non-cash movement (2) £m Net debt at 30 June £m
Cash, cash equivalents and overdrafts 141.1 155.7 0.9 297.7
Other loan notes (2.3) — 1.0 (1.3)
Loan included within disposal group liabilities held-for-sale (3) — — (26.0) (26.0)
Private placement loan notes (1) (765.1) 1.5 19.0 (744.6)
Cross-currency interest rate swaps (1) 57.5 — (10.4) 47.1
Interest rate swaps (1) 0.5 — (0.5) —
Lease liabilities (508.1) 47.3 (5.8) (466.6)
Total net liabilities from financing activities (1,217.5) 48.8 (22.7) (1,191.4)
Deferred consideration (0.7) — — (0.7)
Net debt (1,077.1) 204.5 (21.8) (894.4)
1. The sum of these items equates to the fair value of the Group’s private
placement loan note debt: £697.5m (31 December 2020: £707,1m). The £1.5m
of cash flow movement during the period represents expenses incurred for
renewing and extending the revolving credit facility.
2. Non-cash movement relates to: the effect of changes in foreign exchange
rates on cash; fair value changes on the swaps; amortisation of loan notes
issue costs; amortisation of the discount on the Euro debt; and additions,
terminations; foreign exchange rate effects on the Group's leases; and the
loan detailed in footnote 3 below.
3. The loan included within disposal group liabilities held-for-sale
represents an interest bearing loan payable by AXELOS Limited to HM Government
in connection with a dividend payable by this company as at 30 June 2021. The
loan was subject to interest at 6%pa and was settled on completion of the
disposal on 29 July 2021.
13 Financial Instruments
The Group’s financial assets and liabilities are classified based on the
following fair value hierarchy:
• Level-1: quoted (unadjusted) prices in active markets for identical assets
or liabilities.
• Level-2: other techniques for which all inputs that have a significant
effect on the recorded fair value are observable, either directly or
indirectly.
With the exception of current financial instruments (which have a short
maturity), the fair value of the Group’s level-2 financial instruments was
calculated by discounting the expected future cash flows at prevailing
interest rates. The valuation models incorporate various inputs including
foreign exchange spot and forward rates and interest rate curves. In the case
of floating rate borrowings nominal value approximates to fair value because
interest is set at floating rates where payments are reset to market values at
intervals of less than one year.
• Level-3: other techniques for which inputs that have a significant effect
on the recorded fair value are not based on observable market data.
Other financial instruments, where observable market data is not available,
are carried at either amortised cost or cost (undiscounted cash flows) as a
reasonable approximation of fair value.
During the six months ended 30 June 2022, there were no assets or liabilities
transferred between the fair value levels.
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 the instruments carried at fair value:
At 30 June 2022 Note Fair value hierarchy At fair value through P&L £m At fair value through OCI £m Derivatives used for hedging £m Amortised cost £m Total £m Current £m Non- current £m
Financial assets
Lease receivables n/a — — — 79.3 79.3 5.9 73.4
Cash flow hedges Level-2 — — 8.2 — 8.2 4.5 3.7
Non-designated foreign exchange forwards and swaps Level-2 7.3 — — — 7.3 5.5 1.8
Cross-currency interest rate swaps a Level-2 — — 26.4 — 26.4 7.7 18.7
Originated loans receivable n/a — — — 0.5 0.5 — 0.5
Financial assets at fair value through P&L Level-3 12.5 — — — 12.5 — 12.5
Financial assets at fair value through OCI Level-3 — 0.6 — — 0.6 — 0.6
Deferred consideration receivable n/a — — — 10.8 10.8 2.3 8.5
19.8 0.6 34.6 90.6 145.6 25.9 119.7
Other financial assets
Cash and cash equivalents n/a — — — 352.0 352.0 352.0 —
Total financial assets 19.8 0.6 34.6 442.6 497.6 377.9 119.7
At 30 June 2022 Note Fair value hierarchy At fair value through P&L £m At fair value through OCI £m Derivatives used for hedging £m Amortised cost £m Total £m Current £m Non- current £m
Financial liabilities
Private placement loan notes a n/a — — — 433.8 433.8 170.6 263.2
Other loan notes n/a — — — 0.8 0.8 0.8 —
Credit facilities b n/a — — — 6.0 6.0 6.0 —
Non-designated foreign exchange forwards and swaps Level-2 0.1 — — — 0.1 0.1 —
Cross-currency interest rate swaps a Level-2 — — 0.8 — 0.8 — 0.8
Deferred consideration payable n/a — — — 0.7 0.7 — 0.7
Put options of non-controlling interests c Level-3 — 8.5 — — 8.5 8.5 —
0.1 8.5 0.8 441.3 450.7 186.0 264.7
Other financial liabilities
Overdrafts n/a — — — 225.6 225.6 225.6 —
Lease liabilities n/a — — — 421.1 421.1 59.7 361.4
Total financial liabilities 0.1 8.5 0.8 1,088.0 1,097.4 471.3 626.1
Financial assets measured at amortised cost consist of cash, lease
receivables, originated loans and deferred consideration receivable. The
carrying value of cash is a reasonable approximation of its fair value due to
the short-term nature of the instruments. Lease receivables, originated loans
and deferred consideration receivable are measured at amortised cost using the
effective interest rate method. Included in other investments are £0.6m
(31 December 2021: £0.8m) of strategic investments in unlisted equity
securities which are not held-for-trading and the Group elected to recognise
at Fair Value through Other Comprehensive Income (FVOCI). During the period no
dividends were received from, and no disposals were made of, strategic
investments.
Financial liabilities measured at amortised cost consist of loan notes,
overdrafts, lease liabilities, credit facilities and deferred consideration
payable. With the exception of certain series within the fixed rate private
placement loan notes, the carrying value of financial liabilities are a
reasonable approximation of their fair value. This is because either the
interest payable is close to market rates or the liability is short-term in
nature. The private placement loan note series that remain subject to a fixed
rate of interest have an underlying carrying value of £291.3m (31 December
2021: £320.7m) and a fair value of £242.4m (31 December 2021: £278.2m).
The carrying value of overdrafts is a reasonable approximation of fair value
reflecting the short-term nature of the instruments. Lease liabilities and
deferred consideration payable are measured at amortised cost using the
effective interest rate method.
The Group’s key financial liabilities are set out below:
a. Private placement loan notes
The private placement loan notes were issued in US dollars, Pounds sterling,
and Euros at fixed interest rates. The Group manages its exposure to foreign
exchange and interest rate movements through cross-currency interest rate
swaps, interest rate swaps, and forward foreign exchange contracts.
b. Revolving credit facility
The Group's revolving credit facility (RCF) was undrawn at 30 June 2022
(31 December 2021 £40.0m drawn). The Chief Financial Officer's review and
basis of preparation in note 2 includes further details of the RCF.
c. Put options of non-controlling interests
The liability at 30 June 2022 represents the present value of the cost to
acquire the non-controlling interest in Fera Science Limited. The option held
by the non-controlling shareholder of Fera Science Limited became exercisable
in April 2021. A sensitivity analysis assuming a 10% increase/decrease in the
earnings potential of the business results in a £0.9m increase/decrease in
the valuation.
At 31 December 2021 Note Fair value hierarchy At fair value through P&L £m At fair value through OCI £m Derivatives used for hedging £m Amortised cost £m Total £m Current £m Non- current £m
Financial assets
Lease receivables n/a — — — 82.1 82.1 6.6 75.5
Cash flow hedges Level-2 — — 0.9 — 0.9 0.7 0.2
Non-designated foreign exchange forwards and swaps Level-2 1.8 — — — 1.8 0.8 1.0
Cross-currency interest rate swaps a Level-2 — — 30.2 — 30.2 9.4 20.8
Originated loans receivable n/a — — — 0.5 0.5 — 0.5
Financial assets at fair value through P&L Level-3 8.4 — — — 8.4 — 8.4
Financial assets at fair value through OCI Level-3 — 0.8 — — 0.8 — 0.8
10.2 0.8 31.1 82.6 124.7 17.5 107.2
Other financial assets
Cash and cash equivalents n/a — — — 317.6 317.6 317.6 —
Cash and cash equivalents included within disposal group assets held-for-sale 4 n/a — — — 15.8 15.8 15.8 —
Total financial assets 10.2 0.8 31.1 416.0 458.1 350.9 107.2
At 31 December 2021 Note Fair value hierarchy At fair value through P&L £m At fair value through OCI £m Derivatives used for hedging £m Amortised cost £m Total £m Current £m Non- current £m
Financial liabilities
Private placement loan notes a n/a — — — 512.9 512.9 226.3 286.6
Other loan notes n/a — — — 1.3 1.3 0.3 1.0
Credit facilities b n/a — — — 46.0 46.0 46.0 —
Cash flow hedges Level-2 — — 1.8 — 1.8 0.8 1.0
Non-designated foreign exchange forwards and swaps Level-2 4.7 — — — 4.7 4.3 0.4
Cross-currency interest rate swaps a Level-2 — — 2.2 — 2.2 — 2.2
Deferred consideration payable n/a — — — 0.7 0.7 — 0.7
Put options of non-controlling interests c Level-3 — 8.6 — — 8.6 8.6 —
4.7 8.6 4.0 560.9 578.2 286.3 291.9
Other financial liabilities
Overdrafts n/a — — — 231.9 231.9 231.9 —
Lease liabilities n/a — — — 448.4 448.4 61.6 386.8
Total financial liabilities 4.7 8.6 4.0 1,241.2 1,258.5 579.8 678.7
The following table shows the changes from the opening to closing balances for
Level-3 fair value financial instruments.
Put options of non- controlling interests £m Investments and other investments £m
At 1 January 8.6 9.7
Change in put-options held by non-controlling interests recognised in equity (0.1) —
Additions — 0.2
Gain on fair value recognised through profit and loss — 3.7
At 30 June 8.5 13.6
Non-recourse sale of receivables
The Group holds a non-recourse short-term receivables facility. The
outstanding invoices sold under this facility at 30 June 2022 totalled £4.3m
(31 December 2021: £3.9m). The costs of selling such invoices (£0.3m) were
included in administrative expenses in the condensed consolidated income
statement. In addition, the Group's German business uses an invoice
discounting arrangement relating to a specific customer contract, and the
value of the invoices sold under that arrangement at 30 June 2022 was £7.7m
(31 December 2021: £12.5m).
14 Employee benefits
The 31 March 2020 triennial valuation of the Capita Pension and Life
Assurance Scheme (the Scheme), concluded in 2021, identified a deficit for
funding purposes of £182.2m. Deficit recovery contributions have been paid in
accordance with the agreed schedule of contributions, with the remaining
amount (inclusive of the contributions required to enable the Scheme to target
a lower-risk investment strategy facilitating lower reliance on the covenant
provided by the Group) scheduled to be paid over the period to December 2026.
The funding schedule agreed with the Trustee of the Scheme would see deficit
contributions of £15m in the second half of 2022, £30m in 2023 and £15m in
each of 2024, 2025 and 2026. The Trustee of the Scheme has agreed with the
Group to accelerate the payment of some of the deficit contributions on a
pound for pound basis in the event of disposal proceeds being used to fund
mandatory prepayments of debt. The current expectation is that the required
contributions will be paid ahead of schedule and could be paid by 2024.
The total net defined benefit pension position for accounting purposes moved
from a small net surplus at the start of the year (surplus: £5.8m) to a
larger net surplus by 30 June 2022 (surplus: £162.3m). The main reasons for
this movement were the £19.3m of deficit funding contributions paid into the
Group’s schemes during the period, along with favourable market conditions
(particularly the material increase in the yields available on good quality
long term corporate bonds in addition to a decrease in future inflationary
expectations that are used to derive the assumptions), partially offset by
lower-than-expected asset returns predominantly as a result of inflation and
interest rate hedging. The hedging aims to match the value of the assets to
the movement in the Trustee of the Scheme's value of liabilities arising from
changes in market expectations of future inflation rates and future gilt
yields.
The Group has considered the impact of IFRIC 14 on the various schemes (in
relation to either recognising a surplus or allowing for the impact of any
funding commitments made) and has concluded, based on the interpretation of
the rules for each of the schemes, that IFRIC 14 would increase the deficits
shown at this balance sheet date for only one scheme, which is reflected in
the balance sheet position. For the Scheme and the other schemes, IFRIC 14
would not limit the surplus or increase the deficits shown at the balance
sheet date because the Group has an unconditional right to a refund at some
point during the life of the schemes.
The valuation of the defined benefit pension scheme liabilities for funding
purposes (the actuarial valuation) differs from the valuation for accounting
purposes (as shown in these condensed consolidated financial statements)
mainly due to different assumption principles being used based on the
different regulatory requirements of the valuations. Management estimates that
at 30 June 2022 the net asset of the Scheme on a funding basis (ie. the
funding assumption principles adopted for the full actuarial valuation at
31 March 2020 updated for market conditions at 30 June 2022) was
approximately £50m (31 December 2021: net asset £40m). The Trustee of the
Scheme has also agreed a secondary more prudent funding target to enable it to
reduce the reliance the Scheme has on the covenant of the Group. On this
basis, as at 30 June 2022, the funding level was around 94% (or a net
liability of £85m). The deficit is expected to be met by the remaining
deficit contributions.
15 Issued share capital and share premium
Share capital Share premium Employee benefit trust and treasury shares
Allotted, called up and fully paid No.m £m £m No.m £m
Ordinary shares of 2 1/15p
At 1 January 1,684.1 34.8 1,145.5 18.1 (8.0)
Exercise of share options under employee long term incentive plans — — — (7.3) 3.2
At 30 June 1,684.1 34.8 1,145.5 10.8 (4.8)
The Group uses shares held in the Employee Benefit Trust (EBT) and treasury
shares to satisfy future requirements for shares under the Group’s share
option and long-term incentive plans.
During the six months to 30 June 2022, the Group did not purchase any
treasury shares, and did not allot nor issue any treasury shares (30 June
2021: 2,299,955 whose aggregate nominal value was £47,532) 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
2021: £nil).
On 19 April 2021, 13m ordinary 2 1/15p shares were allotted to the EBT for an
aggregate nominal value of £268,667 to satisfy exercises under the Group’s
share plans. The total consideration received in respect of these shares was
£268,667. During the six months to 30 June 2022, 7,319,499 (30 June 2021:
5,194,329) shares with a value of £3.2m (30 June 2021: £2.4m) were
transferred out of the EBT 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 2021: £nil).
The Group has an unexpired authority to repurchase up to 10% of its issued
share capital.
16 Commitments
At 30 June 2022, amounts contracted for but not provided in the financial
statements for the acquisition of property, plant and equipment amounted to
£4.7m (31 December 2021: £3.6m).
As part of the disposal of Trustmarque to One Equity Partners in March 2022,
Capita entered into a five year agreement committing to procure sufficient of
the Group's IT and technology requirements through Trustmarque as a reseller
of such services to enable Trustmarque to realise a specified level of gross
profits over the period of that agreement. The price paid for these purchases
will be equivalent to that paid by other customers of Trustmarque, and the
Group expects to have sufficient demand to meet the commitment. It is
currently estimated that the total expenditure with Trustmarque under this
agreement over the five year period will be approximately £300m of which less
than 25% is expected to be capital in nature.
17 Related-party transactions
Compensation of key management personnel
30 June 2022 £m 30 June 2021 £m
Short-term employment benefits 3.1 4.2
Pension 0.1 0.2
Share based payments 1.2 1.8
4.4 6.2
Gains on share options exercised in the period by Capita plc Executive
Directors were £0.1m (30 June 2021: £nil) and by key management personnel
£0.3m (30 June 2021: £1.0m).
During the period, the Group provided administrative services to Smart DCC
Ltd, a wholly-owned subsidiary which is not consolidated. The Group received
£53.3m (30 June 2021: £49.1m) of revenue for these services. The services
are procured by Smart DCC Ltd 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 Ltd.
The Capita Pension and Life Assurance Scheme is a related party of the Group.
18 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 £35.2m (31 December 2021: £28.7m).
The Group is reviewing its position in respect of a number of its closed book
Life and Pensions contracts. The outcome and timing of this review, which are
uncertain, could result in the continuation of contracts with amended terms or
the termination of contracts. If an operation is terminated, the Group may
incur associated costs, accelerate the recognition of deferred income or the
impairment of contract assets.
The Group's entities are parties to legal actions and claims which arise in
the normal course of business. The Group needs to apply judgement in
determining the merit of litigation against it and the chances of a claim
being successfully made. It needs to determine the likelihood of an outflow of
economic benefits occurring and whether there is a need to disclose a
contingent liability or whether a provision might be required due to the
probability assessment.
At any time there are a number of claims or notifications that need to be
assessed across the Group. The disparate nature of the Group's entities
heightens the risk that not all potential claims are known at any point in
time.
19 Post balance sheet events
There are no post balance sheet events that have an adjusting effect on these
condensed consolidated financial statements.
The following events occurred after 30 June 2022, and before the approval of
these condensed consolidated financial statements, but have not resulted in
adjustment to these financial statements:
Disposal of real estate and infrastructure consultancy business
The disposal of the real estate and infrastructure business to WSP was
announced on 2 August 2022 for £60m on a cash free, debt free basis. Taking
into account cash-like and debt-like items, Capita expects to receive proceeds
of circa £69m at completion. The sale is subject to certain consents.
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 2022 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 2022 is not prepared, in
all material respects, in accordance with IAS 34 Interim Financial Reporting
as adopted for use in the UK and the Disclosure Guidance and Transparency
Rules (“the DTR”) of the UK’s Financial Conduct Authority (“the UK
FCA”).
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity (“ISRE (UK) 2410”) issued 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.
Material uncertainty related to going concern
We draw attention to note 2 to the condensed set of financial statements which
indicates that the group may require completion of its planned disposal
programme or a refinancing. Both require agreements and consents from third
parties which are not within the direct control of the company. These events
and conditions, along with the other matters explained in note 2 (d),
constitute material uncertainties that may cast significant doubt on the
group’s ability to continue as a going concern.
Our conclusion is not modified in respect of this matter.
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 2, the annual financial statements of the group are
prepared in accordance with UK-adopted international accounting standards.
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 for use in the UK.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the group’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to
liquidate the group or to cease operations, or have no realistic alternative
but to do so.
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. Our conclusion, including our conclusions relating to going concern,
are based on procedures that are less extensive than audit procedures, as
described in the Basis for conclusion section of this report.
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.
Ian Griffiths
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
4 August 2022
Alternative performance measures
The Group presents various alternative performance measures (APMs) because the
performance of the Group is reported and measured on this basis internally or
reported on externally for covenant purposes. This includes key performance
indicators (KPIs) such as adjusted revenue, adjusted profit before tax,
adjusted earnings per share, free cash flow before business exits, interest
cover and gearing ratios.
These APMs should not be viewed as a complete picture of the Group’s
financial performance which is presented in the reported results. The
exclusion of certain items may result in a more favourable view when costs
such as acquired intangible amortisation and impairments of goodwill are
excluded. These measures may not be comparable when reviewing similar measures
reported by other companies.
APM Closest equivalent IFRS measure Definition, Purpose and Reconciliation
Income statement
Adjusted revenue Revenue Calculated as revenue less any revenue relating to businesses that have been sold, or exited during the year or prior year; or, are in the process of being sold, or exited.
This measure of revenue is used internally in respect of the Group’s continuing business (being the Group’s continuing activities, which exclude business exits) and the Board believes it is a good indication of ongoing performance.
The table below shows a reconciliation between reported and adjusted revenue, as well as adjusted revenue growth:
30 June 2022 30 June 2021
Reported revenue per the income statement £1,517.2m £1,619.4m
Deduct: business exits (note 4) (£37.1m) (£147.5m)
Adjusted revenue £1,480.1m £1,471.9m
Adjusted revenue growth 0.6% 0.3%
Adjusted operating profit Operating profit Calculated as reported operating profit excluding items determined by the Board to be outside underlying operations. These items are detailed in note 3.
The Board believes that this measure is useful for investors because it is closely monitored by management to evaluate the Group’s operating performance and to make financial, strategic and operating decisions.
A reconciliation of reported to adjusted operating profit is provided in note 3.
Adjusted operating profit margin Operating profit margin Calculated as the adjusted operating profit divided by adjusted revenue.
This measure is an indicator of the Group’s operating efficiency.
The table below shows the components, and calculation, of adjusted operating profit margin:
30 June 2022 30 June 2021
Adjusted revenue a £1,480.1m £1,471.9m
Adjusted operating profit (note 3) b £52.2m £22.5m
Adjusted operating profit margin b/a 3.5% 1.5%
Adjusted EBITDA EBITDA Calculated as adjusted operating profit for the six month period before: depreciation, amortisation and impairment of property, plant and equipment and intangible assets; net finance costs; and, the share of results in associates and investment gains (other than those already excluded from adjusted operating profit).
The Board believes that adjusted EBITDA is a useful measure for investors because it is closely monitored by management to evaluate Group and divisional operating performance and is the basis of the measure agreed with the lenders for the purpose of measuring compliance with covenants.
This measure has been calculated pre and post IFRS 16 to enable investors to understand the impact of the Group’s lease portfolio on adjusted EBITDA.
The table below shows the calculation of adjusted EBITDA:
Post IFRS 16 Pre IFRS 16
30 June 2022 30 June 2021 30 June 2022 30 June 2021
Adjusted profit before tax £37.0m £1.1m £40.3m £5.2m
Add back: adjusted net finance expense (note 7) £18.8m £20.5m £9.6m £11.1m
Add back: adjusted depreciation and impairment of property, plant and equipment £22.5m £24.6m £22.5m £24.6m
Add back: depreciation of right-of-use assets £27.8m £36.4m £—m £—m
Add back: adjusted amortisation and impairment of intangibles £20.7m £17.3m £20.7m £17.3m
Remove: Share of results in associates and investment gains (income statement) (£3.6m) £0.9m (£3.6m) £0.9m
Adjusted EBITDA £123.2m £100.8m £89.5m £59.1m
Adjusted EBITDA margin 8.3% 6.8% 6.0% 4.0%
Alternative performance measures continued
APM Closest equivalent IFRS measure Definition, Purpose and Reconciliation
Income statement continued
Adjusted profit before tax Profit before tax Calculated as profit or loss before tax excluding the items detailed in note 3 which include: business exits (trading results, non-trading expenses, and any gain/(loss) on business disposal); acquired intangible amortisation; and impairment of goodwill and acquired intangibles.
The Board believes that this measure is useful for investors because it is closely monitored by management to evaluate the Group’s operating performance and to make financial, strategic and operating decisions.
A reconciliation of reported to adjusted profit before tax is provided in note 3.
Adjusted profit after tax Profit after tax Calculated as the above adjusted profit or loss before tax, less the tax credit or expense on adjusted profit or loss.
The table below shows a reconciliation:
30 June 2022 30 June 2021
Adjusted profit before tax (note 3) £37.0m £1.1m
Tax on adjusted profit (note 8) £18.8m £45.0m
Adjusted profit after tax £55.8m £46.1m
Adjusted basic earnings per share Basic earnings per share Calculated as the adjusted profit/(loss) for the period after tax less non-controlling interests divided by the weighted average number of ordinary shares outstanding during the period.
The Board believes that this provides an indication of basic earnings per share of the Group on adjusted profit after tax.
For the calculation of adjusted basic earnings per share refer to note 9.
Adjusted diluted earnings per share Diluted earnings per share Calculated as the adjusted profit/(loss) for the period after tax less non-controlling interests divided by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would have been issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
The Board believes that this provides an indication of diluted earnings per share of the Group on adjusted profit after tax.
For the calculation of adjusted diluted earnings per share refer to note 9.
Cash flows and net debt
Cash flows generated/(used) by operations before business exits Cash generated /(used) by operations Calculated as the cash flows generated from operations excluding the items detailed in note 12 which includes: business exits (trading results, non-trading expenses) and pension deficit contributions which have been triggered by disposals.
The
Board
belie
ves
that
this
measu
re is
usefu
l for
inves
tors
becau
se it
is
close
ly
monit
ored
by
manag
ement
to
evalu
ate
the
Group
’s
opera
ting
perfo
rmanc
e and
to
make
finan
cial,
strat
egic
and
opera
ting
decis
ions.
A reconciliation of reported to cash generated/(used) by operations excluding business exits is provided in note 12.
Free cash flow before business exits Net cash flows from operating activities Calculated as cash generated from operations after: capital expenditure; income tax and interest; and, the proceeds from the sale of property, plant and equipment and intangible assets, but before the impact of business exits.
From
1
Janua
ry
2022,
the
Board
consi
ders
free
cash
flow
and
cash
gener
ated
from
opera
tions
befor
e
busin
ess
exits
provi
de a
more
repre
senta
tive
measu
re of
the
susta
inabl
e
cash
flow
of
the
Group
.
Free cash flow is a measure used to show how efficient the Group is at generating cash and the Board believes it is useful for investors and management to measure whether the Group has enough cash to fund operations, capital expenditure, debt and pension obligations, and dividends.
A reconciliation of net cash flows from operating activities to free cash flow and reported to free cash flows excluding business exits free cash flow is provided in note 12.
Alternative performance measures continued
APM Closest equivalent IFRS measure Definition, Purpose and Reconciliation
Cash flows and net debt continued
Net debt Borrowings, cash, derivatives, lease liabilities and deferred consideration Calculated as the net of the Group’s: cash, cash equivalents and overdrafts; the fair value of the Group’s private placement loan notes debt; other loan notes; lease liabilities; and, deferred consideration.
The
Board
belie
ves
that
net
debt
enabl
es
inves
tors
to
see
the
econo
mic
effec
t of
debt,
relat
ed
hedge
s and
cash
and
cash
equiv
alent
s in
total
and
shows
the
indeb
tedne
ss of
the
Group
.
The calculation of net debt is provided in note 12.
Net financial debt No direct equivalent Calculated as the sum of the Group’s: cash, cash equivalents and overdrafts; the fair value of the Group’s private placement loan notes; other loan notes; and, deferred consideration.
The Board believes that this measure of net debt allows investors to see the Group's net debt position excluding its IFRS 16 lease liabilities.
30 June 2022 31 December 2021
Net debt (note 12) £710.4m £879.8m
Remove: IFRS16 impact (note 12) (£421.1m) (£448.4m)
Net financial debt £289.3m £431.4m
Gearing: net debt to adjusted EBITDA ratio No direct equivalent This ratio is calculated as net debt divided by adjusted EBITDA over a rolling twelve month period including business exits not yet completed at the balance sheet date.
The
Board
belie
ves
that
this
ratio
is
usefu
l
becau
se it
shows
how
signi
fican
t net
debt
is
relat
ive
to
adjus
ted
EBITD
A.
This measure has been calculated including and excluding the impact of IFRS 16 leases on EBITDA and net debt because the Board believes this provides useful information to enable investors to understand the impact of the Group’s lease portfolio on its gearing ratio.
The table below shows the components, and calculation, of the net debt to adjusted EBITDA ratio:
Post IFRS 16 Pre IFRS 16
30 June 2022 31 December 2021 30 June 2022 31 December 2021
Adjusted EBITDA £193.4m £184.8m £111.1m £94.5m
EBITDA in respect of business exits not yet completed £0.6m £32.2m £0.6m £32.2m
Adjusted EBITDA (including business exits not yet completed) £194.0m £217.0m £111.7m £126.7m
Net debt / net financial debt £710.4m £879.8m £289.3m £431.4m
Net debt / net financial debt to adjusted EBITDA ratio 3.7x 4.1x 2.6x 3.4x
Alternative performance measures continued
The below measures are submitted to the Group’s lenders and the Board
believes these measures provide a useful insight to investors. The
31 December 2021 comparatives have not been restated because they are not
required to be restated for covenant purposes.
Source
Covenants (based on rolling 12 months) 30 June 2022 31 December 2021
Adjusted operating profit (1) (£23.9m) £139.1m
Add: significant restructuring £118.8m £—m
Add: litigation, claims and contract related provisions £41.1m £—m
Add: business exit – trading £25.8m £50.8m
Add: share of earnings in associates (£0.3m) £0.6m
Deduct: non-controlling interest (£1.0m) (£2.4m) Adjusted EBIT attributable to NCI
Add back: share-based payment charge £2.1m £1.2m
Add back: non-current service pension charge £3.7m £2.6m
Add back: amortisation of purchased intangibles £46.3m £40.8m
Adjusted EBITA a1 £212.6m £232.7m
Less: IFRS 16 impact (£9.5m) (£8.9m)
Adjusted EBITA (excluding IFRS 16) a2 £203.1m £223.8m
Adjusted EBITA £212.6m £232.7m
Deduct: business exit – trading sold (£26.7m) (£22.9m) Trading profit for businesses sold
Add back: adjusted depreciation and impairment of property, plant and equipment and right of use assets £107.9m £117.1m
Covenant calculation – adjusted EBITDA b1 £293.8m £326.9m
Less: IFRS 16 impact (£70.6m) (£77.1m)
Covenant calculation – adjusted EBITDA (excluding IFRS 16) b2 £223.2m £249.8m
Adjusted interest charge (£43.3m) (£45.0m)
Interest cost attributable to pensions (£0.3m) £1.5m
Cash flow hedges recycled to the income statement (£1.1m) £0.6m
Borrowing costs c1 (£44.7m) (£42.9m)
Less: IFRS 16 impact £19.3m £19.5m
Borrowing costs (excluding IFRS 16) c2 (£25.4m) (£23.4m)
5.1 Interest cover (US PP covenant) a1/c2 8.4x 9.9x Adjusted EBITA/Borrowing costs with adjusted EBITA including the impact of IFRS 16 and the borrowing costs excluding the impact of IFRS 16. Minimum permitted value of 4.0
5.2 Interest cover (other financing agreements) a2/c2 8.0x 9.6x Adjusted EBITA/Borrowing costs with both variables excluding IFRS 16. Minimum permitted value of 4.0
Net debt £710.4m £879.8m Line information in note 12
Cash, net of overdrafts, included in disposal group assets and liabilities held for sale £—m £15.8m
Restricted cash (2) £60.7m £54.8m Cash that may not be applied against net debt for covenant calculation purposes
Less: IFRS 16 impact (£421.1m) (£448.4m)
Covenant calculation - adjusted net debt (excluding IFRS 16) d1 £350.0m £502.0m
6.1 Adjusted net debt to post IFRS 16 adjusted EBITDA ratio (US PP covenant) d1/b1 1.2x 1.5x Adjusted net debt/adjusted EBITDA with adjusted net debt excluding the impact of IFRS 16 and adjusted EBITDA including the impact of IFRS 16. Maximum permitted value of 3.0
6.2 Adjusted net debt to adjusted EBITDA ratio (other financing agreements) d1/b2 1.6x 2.0x Adjusted net debt/adjusted EBITDA with both variables excluding IFRS 16. Maximum permitted value of 3.5
1. Adjusted operating profit excludes items that are separately disclosed and
considered to be outside the underlying operating results for the particular
period under review and against which the Group’s performance is assessed.
2. Restricted cash includes cash required to be held under FCA regulations and
cash to cover the cost of repatriating balances currently held in foreign
accounts.
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Announcement