REG - Tesco PLC - Interim Results 2016/17 <Origin Href="QuoteRef">TSCO.L</Origin> - Part 4
05/10/2016 07:06
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cost price of a product, and as such is considered part of the purchase price
for that product. Accounting for the amount and timing of recognition of commercial income may require the exercise of
judgement, as detailed in the 2016 Annual Report and Group financial statements.
Commercial income is recognised when earned by the Group, which occurs when all obligations conditional for earning income
have been discharged, and the income can be measured reliably based on the terms of the contract. The income is recognised
as a credit within cost of sales. Where the income earned relates to inventories which are held by the Group at period
ends, the income is included within the cost of those inventories, and recognised in cost of sales upon sale of those
inventories. Amounts due relating to commercial income are recognised within other receivables, except in cases where the
Group currently has a legally enforceable right of set-off and intends to offset amounts due from suppliers against amounts
owed to those suppliers, in which case only the net amount receivable or payable is recognised. Accrued commercial income
is recognised within accrued income when commercial income earned has not been invoiced at the balance sheet date.
Below are the commercial income balances included within inventories and trade and other receivables, or netted against
trade and other payables. Amounts received in advance of income being earned are included in accruals and deferred income.
27 August 2016£m 27 February 2016£m 29 August 2015£m
Current assets
Inventories (53) (75) (71)
Trade and other receivables
- Other receivables 188 201 83
- Accrued income 93 100 95
Current liabilities
Trade and other payables
- Trade payables 186 305 178
- Accruals and deferred income (27) (43) (39)
The 27 February 2016 accruals and deferred income disclosure in this note included amounts that were unrelated to
commercial income, and has therefore been amended accordingly.
Whilst the commercial income balances disclosed above are based on our contracts with suppliers, they only represent part
of the overall economic relationship with the suppliers. Accordingly, these balances should be viewed together with other
balances related to the purchase of goods in order to understand the overall economic impact to the Group.
Note 15 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit
schemes and funded defined contribution schemes. The most significant of these are the funded defined benefit pension
schemes for the Group's employees in the UK (now closed to future accrual) and the Republic of Ireland, and the funded
defined contribution pension scheme for employees in the UK. Of these schemes, the UK defined benefit pension deficit
represents 96% of the Group deficit (2015: 96%).
The principal plan within the Group is the Tesco PLC Pension Scheme (the 'Scheme'), which is a funded defined benefit
pension scheme in the UK, the assets of which are held as a segregated fund and administered by the Trustee.
The Career Average section of the Scheme ('Pension Builder') was closed to new members and future accrual on 21 November
2015. The Final Salary section of the Scheme, which was closed to new entrants in 2001, was also closed to future accrual
on 21 November 2015. In their place, a defined contribution scheme, Tesco Retirement Savings Plan, was opened on 22
November 2015 and is open to all Tesco colleagues in the UK.
At 31 March 2014, the deficit valuation arising from the triennial actuarial assessment was £2.8bn. A plan to contribute
£270m a year has been agreed with the Trustee, to fund the UK deficit and to meet the expenses of the scheme.
UK Principal assumptions
The major assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation as at 27
August 2016 were as follows:
27 August 2016 % 27 February 2016% 29 August 2015 %
Discount rate 2.1 3.8 3.8
Price inflation 2.8 2.9 3.2
Rate of increase in deferred pensions* 1.8 1.9 2.2
Rate of increase in salaries N/A N/A 3.3
Rate of increase in pensions in payment*
Benefits accrued before 1 June 2012 2.6 2.7 3.0
Benefits accrued after 1 June 2012 1.8 1.9 2.2
Rate of increase in career average benefits
Benefits accrued before 1 June 2012 N/A N/A 3.2
Benefits accrued after 1 June 2012 N/A N/A 2.2
* In excess of any Guaranteed Minimum Pension ('GMP') element.
The rate of increase in salaries and career average benefits are no longer applicable, as the Scheme has closed to future
accrual.
The main financial assumption is the discount rate. If the discount rate increased by 0.1% or 1.0%, the UK defined benefit
obligation would decrease by approximately £533m or £4,620m respectively. If this assumption decreased by 0.1% or 1.0%, the
UK defined benefit obligation would increase by approximately £533m or £6,673m respectively.
Summary of movements in Group deficit during the financial period
Changes in the Group deficit, including movements of discontinued operations up to classification as held for sale, are as
follows:
27 August 2016£m 27 February 2016£m 29 August 2015£m
Deficit in schemes at beginning of the period (3,175) (4,842) (4,842)
Current service cost (22) (570) (386)
Past service credit - 535 -
Net pension finance cost (58) (155) (84)
Contributions by employer 128 656 374
Foreign currency translation (18) (8) 5
Remeasurements (3,983) 1,164 (308)
Transfer to disposal group classified as held for sale* 5 45 45
Deficit in schemes at the end of the period (7,123) (3,175) (5,196)
Deferred tax asset ** 1,270 563 1,029
Deficit in schemes at the end of the period, net of deferred tax (5,853) (2,612) (4,167)
* Value after deferred tax is £5m (29 August 2015: £34m).
** The deferred tax assets in relation to the retirement benefit obligation has been partly offset with group deferred
tax liabilities in the balance sheet.
Note 16 Analysis of changes in net debt
At27 February 2016£m Cash flow£m Fair value and foreign exchange movements£m Interest (charge)/income £m Othernon-cashmovements£m Reclassifications of movements in net debt of the disposal group£m At27 August 2016£m
Total Group
Cash and cash equivalents 3,082 280 4 - - (11) 3,355
Short-term investments 3,463 970 2 - - - 4,435
Joint ventures loans 149 (16) - - 3 - 136
Interest and other receivables 1 (16) - 16 - - 1
Bank and other borrowings (13,253) (182) (442) (5) - 75 (13,807)
Interest payables (185) 205 (11) (252) - - (243)
Finance lease payables (99) 5 (8) - (3) - (105)
Net derivative financial instruments 698 (104) 494 3 - - 1,091
Net derivative interest 59 7 - (4) - - 62
Net debt of the disposal group - - - - - (64) (64)
Total Group (6,085) 1,149 39 (242) - - (5,139)
Tesco Bank
Cash and cash equivalents 554 217 - - - - 771
Joint ventures loans 34 - - - - - 34
Bank and other borrowings (1,441) - (3) - - - (1,444)
Interest payables (1) 2 - (2) - - (1)
Net derivative financial instruments (121) - (26) - - - (147)
Tesco Bank (975) 219 (29) (2) - - (787)
Retail
Cash and cash equivalents 2,528 63 4 - - (11) 2,584
Short-term investments 3,463 970 2 - - - 4,435
Joint ventures loans 115 (16) - - 3 - 102
Interest and other receivables 1 (16) - 16 - - 1
Bank and other borrowings (11,812) (182) (439) (5) - 75 (12,363)
Interest payables (184) 203 (11) (250) - - (242)
Finance lease payables (99) 5 (8) - (3) - (105)
Net derivative financial instruments 819 (104) 520 3 - - 1,238
Net derivative interest 59 7 - (4) - - 62
Net debt of the disposal group - - - - - (64) (64)
Net debt (5,110) 930 68 (240) - - (4,352)
Net debt excludes the net debt of Tesco Bank but includes that of discontinued operations. Balances and movements in
respect of the total Group and Tesco Bank are presented to allow reconciliation between the Group balance sheet and the
Group cash flow statement.
Reconciliation of net cash flow to movement in net debt 27 August2016£m 29 August 2015
£m
Net increase in cash and cash equivalents 280 164
Elimination of Tesco Bank movement in cash and cash equivalents (217) 64
Retail cash movement in other net debt items
Net increase/ (decrease) in short-term investments 970 (293)
Net decrease in joint venture loans (16) (3)
Net (increase)/ decrease in borrowings and lease financing (177) 758
Net cash flows from derivative financial instruments (104) (186)
Net interest paid on components of net debt 194 172
Change in net debt resulting from cash flow 930 676
Retail net interest charge on components of net debt (240) (221)
Retail fair value and foreign exchange movements 68 31
Debt acquired on business combinations - (561)
Retail other non-cash movements - (32)
Decrease/ (increase) in net debt for the period 758 (107)
Opening net debt (5,110) (8,481)
Closing net debt (4,352) (8,588)
Note 17 Disposals
On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in its Turkish operations to
Migros. The assets and liabilities related to the Turkish operations have been classified as a disposal group held for sale
within the period. The sale is subject to local regulatory approvals with completion expected in the financial year. Refer
to Note 7 for further information.
During the period, the Group sold its interests in Dobbies Garden Centres, Giraffe and Harris + Hoole and closed its
Nutricentre business, further enhancing the focus of the UK retail business on its core strengths. The Group received £213m
in cash net of costs incurred and cash disposed, of which £198m related to Dobbies, and recognised £1m in deferred
consideration. The Group disposed of net assets of £243m and incurred costs to sell of £12m. In addition, the Group
disposed of a 6.9% interest (on a fully diluted basis) in Lazada Group S.A. ('Lazada') for net cash consideration of
US$115m (£81m), retaining an 8.8% shareholding. The total loss of £4m from these transactions has been included within the
Group's underlying results.
Note 18 Contingent liabilities
There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected
to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than
not that a settlement will be required and the value of such a payment can be reliably estimated.
On 22 September 2014, the Group announced that it had identified an overstatement of its expected profit for the first half
of the year, as contained in guidance it had issued in August 2014, relating to the recognition of commercial income and
the deferral of costs. The Serious Fraud Office ('SFO') commenced an investigation into accounting practices at the Group
on 29 October 2014.
On 9 September 2016, the SFO announced its decision to prosecute three former Group employees for fraud and false
accounting, while the Group's position is still under consideration. The timing and outcome of the SFO investigation in
relation to the Group remains unclear and there is the possibility of fines and/or other consequences. The Group is
co-operating with the SFO.
The Group has reached agreements to settle both a class action and an opt out action brought by US investors who dealt
through the American Depository Receipts ('ADRs') programme which represented approximately 2.46% of issued share capital.
As previously reported, law firms in the UK have announced the intention of forming claimant groups to commence litigation
against the Group for matters arising out of or in connection with its overstatement, and purport to have secured third
party funding for such litigation. In this regard, the Group has received two letters before action from two law firms. No
such litigation has yet been formally commenced and the Group is consequently unable to make any assessment of the likely
outcome.
Prior to the disposal of its Korean operations ('Homeplus'), Tesco PLC provided guarantees in respect of thirteen Homeplus
lease agreements in Korea in the event of termination of the relevant lease agreement by the landlord due to Homeplus's
default. Entities controlled by MBK and CPPIB, as the purchasers of Homeplus, undertook to procure Tesco PLC's release from
these guarantees following the disposal of Homeplus, which currently remains outstanding. The maximum potential liability
as at 27 February 2016 under these guarantees was approximately KRW627bn (£427m).
This liability decreases over time with all relevant leases expiring in the period between 2026 and 2033. Tesco PLC has the
benefit of an indemnity from the purchasers of Homeplus for any claims made under such guarantees.
Note 19 Lease commitments
Operating lease commitments - Group as lessee
Future minimum rentals payable under non-cancellable operating leases are as follows:
27 August 2016£m 27 February 2016£m 29 August 2015£m
Within one year 1,266 1,296 1,163
Greater than one year but less than five years 3,890 3,918 4,172
After five years 7,751 7,831 8,669
Total minimum lease payments 12,907 13,045 14,004
Future minimum rentals payable under non-cancellable operating leases after five years are analysed further as follows:
27 August 2016£m 27 February 2016£m 29 August 2015£m
Greater than five years but less than ten years 3,310 3,272 3,669
Greater than ten years but less than fifteen years 2,335 2,303 2,586
After fifteen years 2,106 2,256 2,414
Total minimum lease payments - after five years 7,751 7,831 8,669
The Group has used operating lease commitments from continuing operations discounted at 7% (27 February 2016: 7%, 29 August
2015: 7%) of £7,771m (27 February 2016: £7,814m, 29 August 2015: £9,091m) in its calculation of total indebtedness. Total
operating lease commitments included for Turkey were £27m at 27 February 2016 and £41m at 29 August 2015.
Operating lease payments represent rentals payable by the Group for certain of its retail, distribution and office
properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses
and renewal rights. Purchase options and renewal rights where they occur are at market value. Escalation clauses are in
line with market practices and include inflation linked, fixed rates, resets to market rents and hybrids of these.
The Group has lease break options on certain sale and leaseback transactions. These options are exercisable if the Group
exercises an existing option to buy back, at market value and at a specified date, either the leased assets or the equity
of the other joint venture partner. No commitment has been included in respect of the buy-back option as the option is at
the Group's discretion. The Group is not obliged to pay lease rentals after that date, therefore minimum lease payments
exclude those falling after the buy-back date. The current market value of these properties is £3.0bn (27 February 2016:
£3.2bn, 29 August 2015: £4.0bn) and the total lease rentals, if they were to be incurred following the option exercise
date, would be £2.5bn (27 February 2016: £2.6bn, 29 August 2015: £3.1bn) using current rent values. These lease break
options are between 2016 and 2023.
The additional lease rentals if incurred following the option exercise date would be as follows:
27 August 2016£m 27 February 2016£m 29 August 2015£m
Within one year 36 45 10
Greater than one period but less than five years 82 72 189
Greater than five years but less than ten years 667 686 819
Greater than ten years but less than fifteen years 661 718 810
After fifteen years 1,054 1,115 1,245
Total contingent additional lease rentals 2,500 2,636 3,073
Operating lease commitments with joint ventures and associates
Since 1988 the Group has entered into several joint ventures and associates, and sold and leased back properties to and
from these joint ventures and associates. The terms of these sale and leasebacks vary. However, common factors include: the
sale of the properties to the joint venture or associate at market value; options within the lease for the Group to
repurchase the properties at market value; market rent reviews; and 20 to 30 full-year lease terms. The Group reviews the
substance as well as the form of the arrangements when determining the classification of leases as operating or finance.
All of the leases under these arrangements are operating leases.
Independent review report to Tesco PLC
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report
for the 26 weeks ended 27 August 2016 which comprises the Group Income Statement, the Group Statement of Comprehensive
Income, the Group Balance Sheet, the Group Statement of Changes in Equity, the Group Cash Flow Statement and related Notes
1 to 19. We have read the other information contained in the half-yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial
statements.
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland)
2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state
to it in an independent review 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 formed.
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 Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by
the European Union. The condensed set of financial statements included in this half-yearly financial report has been
prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European
Union.
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.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
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.
Conclusion
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 26 weeks ended 27 August 2016 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
4 October 2016
Glossary
Alternative performance measures
The Directors use alternative performance measures as they believe these measures provide additional useful information on
the underlying trends, performance and position of the Group. These measures are used for performance analysis. The
alternative performance measures are not defined by IFRS and therefore may not be directly comparable with other companies'
alternative performance measures. These measures are not intended to be a substitute for, or superior to, IFRS
measurements.
Diluted earnings per share from continuing operations before exceptional itemsProfit after tax before exceptional items attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the financial period Net debtNet debt excludes the net debt of Tesco Bank but includes that of the discontinued operations. Net debt comprises bank and other borrowings, finance lease payables, net derivative financial instruments, joint venture loans and other receivables and net interest receivables/payables, offset by cash and cash equivalents, and short-term investments.Operating marginOperating margin is based on operating profit before exceptional items and on revenue.Operating profit before exceptional itemsThis is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items.Profit before tax ('PBT') before exceptional items and net pension finance costs This measure excludes exceptional items and the net finance costs of the defined benefit pension deficit as the costs are impacted by corporate bond yields, which can fluctuate significantly.Profit/ (losses) arising on property-related itemsThese relate to the Group's property activities including gains and losses on disposal of property assets, development property built for resale and property joint ventures; costs resulting from changes in the Group's store portfolio and distribution network, including pre-opening and post-closure costs; and income/ (charges) associated with impairment of non-trading property and related onerous contracts.Retail cash flowCash generated from/ (used in) operations for retail activities.Revenue excl. fuelThis is the headline measure of revenue for the Group. It excludes the impact of sales, predominantly fuel sales, made at petrol filling stations, due to the volatilities associated with movements in fuel prices.Total indebtednessNet debt plus IAS19 deficit in the pension schemes (net of associated deferred tax) plus the present value of future minimum rentals payable under non-cancellable operating leases.
adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group, including performance-based options which the Group considers to have
been earned. Diluted earnings per share from continuing operations before exceptional items and net pension finance costsProfit after tax before exceptional items and net pension finance costs attributable to owners of the parent divided by the weighted
average number of ordinary shares in issue during the financial period adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group,
including performance-based options which the Group considers to have been earned. Exceptional itemsExceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which,
individually or, if of a similar type, in aggregate, are excluded from the Group's alternative performance measures by virtue of their size and nature in order to better reflect management's view of the performance of the Group.The Group exercises
judgement in assessing whether items should be classified as exceptional. This assessment covers the nature of the item, cause of occurrence and the scale of impact of that item on reported performance. Reversals of previous exceptional items are assessed
based on the same criteria.Free cash flowFree cash flow is net cash generated from/ (used in) operating activities less capital expenditure on property, plant and equipment, investment property and intangible assets.Growth in salesThe year on year
percentage movement in revenue excl. fuel for continuing operations excluding fuel for 26 weeks at a constant foreign exchange rate.Like-for-likeLike-for-like is the growth in sales from stores that have been open for at least a year at a constant foreign
exchange rate and includes online sales.
Glossary
Other Capital expenditure ('Capex')The additions to property, plant and equipment, investment property and intangible assets (excluding assets acquired under business combinations).Capital employedNet assets plus net debt plus dividend creditor less net assets of the disposal groups and non-current assets classified as held for sale.Enterprise ValueThis is calculated as market capitalisation plus net debt.FTEFTE refers to full time equivalents.LPILPI refers to Limited Price Inflation.Market capitalisationThe total value of all Tesco shares calculated as total number of shares multiplied by closing share price at period-end.MTNMTN refers to Medium Term Note. Net Promoter Score ('NPS')This is a loyalty measure based on a single question requiring a score between 0-10. The NPS is calculated by subtracting the percentage of detractors (scoring 0-6) from the percentage of promoters (scoring 9-10). This generates
a figure between -100 and 100 which is the NPS.Pension deficit, IAS 19 basis (post tax)This is post-employment benefit obligations net of the related deferred tax.Return on capital employed ('ROCE')Return divided by the average of opening and closing
capital employed.ReturnProfit before exceptional items and interest, after tax (applied at effective rate of tax).RPIRPI refers to Retail Price Index.Total shareholder return ('TSR')The notional annualised return from a share, measured as the percentage
change in the share price, plus the dividends paid with the gross dividends reinvested in Tesco shares. This is measured over both a one and five-year period.
Investor information
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Security reminder
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and give a copy of this list to the Registrar of Companies every year. The Registrar of Companies makes this list available
to anyone who requests it and many companies use this information to market their services. We are aware that some of our
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