Half year results for the 6 months to 30 June 2017
Creating a simpler business well positioned for the future
Financial highlights Underlying1 Underlying1 YOY Reported Reported Reported
- continuing 2017 2016 change 2017 2016 YOY change
operations
Revenue £2,066m £2,131m (3 %) £2,127m £2,156m (1 %)
Operating profit £228m £166m +38 % £63m £87m (28 %)
Profit before tax £195m £134m +46 % £28m £37m (26 %)
Earnings/(loss) per 22.92p 16.12p +42 % (0.11)p 4.66p (102 %)
share
Interim dividend per 11.1p 11.1p - 11.1p 11.1p -
share
Free cash flow £179m £214m (16 %) £182m £199m (9 %)
Highlights
Strategic initiatives: re-positioning going to plan
• Disposal of our Asset Services businesses for £888m to Link Group, expected
to complete in Q4 2017
• Completed disposal of transactional specialist recruitment businesses
• Cost initiatives on track to realise around £57m savings by the end of 2018
• Implemented new simplified market facing organisation structure.
2017 H1 financial summary: trading broadly in line with expectations
• Early adopted IFRS 15 from 1 January 2017 on a fully retrospective basis
• Underlying revenue declined by 3%. Growth on a like for like basis1 was 1%
including 0.5% organic decline
• Underlying profit before tax1 up 46% to £195m (H1 2016: £134m)
• Underlying earnings per share1 up 42% to 22.92p (H1 2016: 16.12p)
• Maintained interim dividend of 11.1p (H1 2016: 11.1p)
• Free cash flow before non-underlying items1 £179m (H1 2016: £214m) and after
non-underlying items £182m (H1 2016: £199m)
• Net debt at end June 2017 of £1,596m (H1 2016 £1,901m)
• Reported profit before tax £28m (H1 2016: £37m)
• Reported loss per share (0.11)p (H1 2016: 4.66p).
Major sales: win rate improved in quiet market
• £403m of major contract wins (H1 2016: £879m)
• Major contract win rate 1 in 2 (2016: 1 in 3)
• Bid pipeline £3.1bn (March 2017: £3.8bn), with a weighted average contract
length of 5.5 years (March 2017: 7 years). Annual value of bids maintained.
Outlook
• Underlying pre-tax profits before significant new contracts and restructuring
to rise modestly in the second half, compared to the first half of 2017
• Leverage at the end of 2017 around the bottom of our 2.0 to 2.5 times range,
prior to the impact of IFRS 15 and potential unwind of receivables financing
• We remain confident that the actions we commenced last year are making Capita
a simpler business, well positioned for the future under new leadership.
Nick Greatorex of Capita plc, commented:
"In the first half of 2017, we made good progress on executing the plans laid
out at the end of last year to reposition the Group: we announced the sale of
our Asset Services businesses, completed the disposal of our specialist
recruitment business and commenced a number of cost initiatives. We remain
confident that these actions are making Capita a simpler business, well
positioned for the future under new leadership."
1 Refer to appendix 1 for calculation of Alternative Performance Measures. Capita
Asset Services has been treated as a discontinued operation.
__________________________________________________________________________________________
Analyst & investor presentation:
Ian Powell Chairman and Nick Greatorex Interim CEO and Group Finance Director
of Capita plc will host a presentation of our results in London at 08:30 UK
time today.
There will also be a live video webcast and a telephone dial-in facility of the
presentation on the day, at 08.30am UK time, with an on-demand version
available on our website www.capita.com/investors later that day.
Please find the webcast link and dial-in details below:
Webcast link
http://www.investis-live.com/capita/594d0292e8adb21200ac6f59/hsre
To register for the webcast please paste the link above into your browser and
follow the on-screen instructions.
Telephone dial-in:
Location you are dialling from: Number to dial:
United Kingdom 020 3059 8125
All other locations + 44 20 3059 8125
Participant password: Capita - this must be quoted to the Operator in order for
participants to gain access to the conference.
_____________________________________________________________________________________
For further information:
Capita plc
Tel: 020 7799 1525
Shona Nichols, Executive Director, Communications
Andrew Ripper, Head of Investor Relations
Media enquiries
Powerscourt Tel: 020 7250 1446
capita@powerscourt-group.com
Victoria Palmer-Moore and Andy Jones
This announcement contains inside information.
About Capita
Capita is a leading UK provider of technology enabled customer and business
process services and integrated professional support services. With 73,000
people at over 500 sites, including 94 business centres across the UK, Europe,
India and South Africa, Capita uses its expertise, infrastructure and scale
benefits to transform its clients' services, driving down costs and adding
value. Capita is quoted on the London Stock Exchange (CPI.L). Further
information on Capita can be found at: http://www.capita.com.
Results for the 6 months to 30 June 2017
Overview
Capita has early adopted IFRS 15, the new revenue recognition standard, and is
reporting its performance in 2017 against the comparative period in 2016 under
this new standard.
Trading was broadly in line with our expectations in the first half of 2017.
The turn-around of our IT Services division progressed better than expected,
following restructuring of the management team and operating model, but we
continued to be impacted by weakness in a number of discretionary services. We
improved our major contract win rate in a relatively subdued business process
management market in the public sector.
Capita made good progress in the first half of 2017 on executing the plans laid
out at the end of last year to reposition the Group. We announced the disposal
of our Asset Services businesses for £888m to Link Group, which is expected to
complete in Q4 2017 following regulatory approvals, completed the disposal of
our transactional specialist recruitment businesses, implemented our new
organisation structure and progressed a number of cost initiatives.
These actions increase the Group's focus upon technology-enabled Business
Process Management, reduce leverage and leave us better placed to return to
sustainable growth over the course of 2018 and beyond.
Financial review
IFRS 15 Revenue from Contracts with Customers
We have adopted IFRS 15 fully retrospectively from 1 January 2017 to provide
investors with clarity on the impact of the new accounting standard in what is
a transitional year for the Group. IFRS 15 gives rise to changes in the timing
of revenue and cost recognition, better aligning Capita's financial results
with the delivery of its high value complex solutions to clients.
IFRS 15 will not impact upon the lifetime profitability of contracts, the cash
flow of contracts or the majority of our transactional businesses. The main
changes for Capita from the adoption of IFRS 15 are on its long term contracts
and software businesses, in particular:
• Revenue is more evenly phased over the life of contracts and active software
licences in line with the delivery of outcomes to clients and, consequently,
the timing of profits is re-profiled.
• Capita will potentially recognise lower profits or losses in the early years
of contracts where there are significant upfront restructuring costs or higher
operating costs prior to transformation, with a compensating increase in
profits in later years. The total net impact at Group level is a function of
the balance of contracts in early or late stage of their life cycle at
transition to IFRS 15 and in subsequent years. As a result contract profits,
and in certain cases contract losses, are now reported in the comparative
periods.
• The Group's balance sheet includes:
- new "contract fulfilment assets" created in the process of transforming
services; and
- an increased level of deferred income in relation to contracts where payments
have been received from clients to undertake transformation prior to the
planned outcomes being delivered. The majority of deferred income will unwind
within the following 12 months and is expected to be replaced by similar
advanced payments subject to additions or changes to the Group's contract
portfolio.
Major contracts performance
We have concluded discussions with the Ministry of Defence in relation to the
Defence Infrastructure Organisation ('DIO'), which is now expected to end in
2019. The H1 2017 results include a £16m benefit from the re-shaping of the DIO
contract which is not expected to recur in 2018. We are currently not expecting
to recognise the benefit of any gain share up to the contract modification date
in the second half of 2017. For the remaining two years, we will focus on
supporting the DIO in achieving its goal of being able to operate effectively
in a delegated environment.
Service delivery across our NHS Primary Care Support England ('PCSE) contract
has continued to improve but we are still addressing a number of challenges. We
are continuing to invest in completing the transformation of this service prior
to an inflection point in profitability being achieved. As previously
announced, the cash cost of these continuing improvements has been and will
remain high for the remainder of 2017.
We are still in discussion with a major life and pensions client which may lead
to the continuation of the contract with amended terms or a termination of the
contract. Subject to the outcome of this discussion, we will review the
carrying value of assets related to the contract and may incur associated
costs.
Revenue
Reported revenue decreased by 1% to £2,127m (H1 2016 £2,156m) and underlying
revenue1 decreased by 3% to £2,066m (H1 2016: £2,131m). Underlying revenue on a
like for like basis1, excluding results from businesses exited and assets held
for sale in both years, increased by 1% including 0.5% organic decline and 1.5%
growth from acquisitions. Revenue benefited from new contracts with Tesco
Mobile and mobilcom-debital, continued expansion of Department for Work and
Pensions (DWP) PIP assessments, an increase in BBC TV Licencing revenue after
contract modification and improved performances in network solutions and our
other IT businesses. This was offset by attrition from the loss of part of our
Civil Service Learning contract and weakness in real estate and central
government services. Our revenue mix in H1 2017 was 71% long term contractual,
16% short term contractual and 13% transactional.
Cost initiatives
We have commenced a number of short and long term cost initiatives, including
reductions in overheads, the offshoring of some IT applications support,
centralising more of our procurement and rationalising our property estate, to
further increase the efficiency of the Group. The net benefit from these
actions is still expected to be around £57m by the end of 2018, albeit with
slightly less benefit than originally anticipated being realised in the current
year.
Underlying operating profit
Underlying operating profit1 increased by 38% to £228.4m (H1 2016: £166.0m).
Profit rose as a result of a significant improvement in the performance of our
IT Services division and higher profits from a number of major contracts which
either reached post transformation inflection points or were renegotiated. This
was partially offset by an increase in central costs, reflecting a re-phasing
of incentive schemes and higher professional fees, and a decline in profits in
the Digital & Software Solutions division.
Divisional performance
We have modified our segmental reporting to align it with our management view
of divisional performance. This includes allocating only direct overheads,
such as payroll administration, pension and insurance costs, to the divisions,
and showing central costs separately. The impact of IFRS 15 is to re-profile
the timing of revenue and costs, which is reflected in the discussion of
divisional performance below:
Private Sector Partnerships - underlying revenue increased by 6%, driven by
growth in Capita Europe and an increase in BBC TV Licencing. Profitability
improved due to the dropping out of one-off contract modifications in the prior
year and the renegotiation of our Co-operative Bank contract, partially offset
by lower contributions from remediation services and employee solutions.
Public Services Partnerships - underlying revenue fell by 6% due to weakness in
central government services and real estate, which is not recovering as quickly
as expected. Underlying profits increased as a result of TfL, which went live
in H2 2016, the aforementioned re-shaping of DIO, lower costs on PCSE and a
good performance from our DWP PIP contract.
Professional Services - underlying revenue fell by 29% as a result of the
disposal of specialist recruitment. Underlying revenue on a like for like basis
fell by 4% due to the loss of part of our Civil Service Learning contract,
which was partially offset by growth in the Army Recruiting Partnering Project
(RPP). Underlying profits increased due to costs reducing on RPP and growth in
Fera and some of our trading businesses.
Digital & Software Solutions - underlying revenue fell by 1% and underlying
profits fell by 13%, as a result of two major long-term active software
licences ending in H2 2016. We are making good progress on the offshoring of
development work to enhance capability and efficiency.
IT Services - underlying revenue increased by 14% due to the acquisitions of
Trustmarque and Acutest and increased volumes in network solutions. Underlying
profits doubled, following our restructuring of the business in the second half
of 2016.
Underlying operating margin
Underlying operating margin1 was 11.1% (H1 2016: 7.8%).
Underlying net finance costs
The underlying net interest charge1 was £33.4m (H1 2016: £32.3m). Capita
terminated its higher coupon fixed rate interest rate swaps in the first half
and we now expect underlying interest costs to be in the range of £65m to £70m
in the full year to December 2017, subject to the timing of the completion of
disposals.
Profit before tax
Underlying profit before tax1 increased by 46% to £195.0m (H1 2016: £133.7m).
Reported profit before tax1 was £27.6m (H1 2016: £37.2m), reflecting the impact
of business exits and specific charges detailed in notes 5 and 7 of this
statement.
Discontinued operations
The results above exclude Capita Asset Services, which was treated as a
discontinued operation, as detailed in note 6 of this statement.
Earnings per share
Underlying earnings per share1 for continuing operations rose by 42% to 22.9p
(H1 2016: 16.1p). Our underlying tax rate was 18.5% (H1 2016: 15.7%) and we
expect our underlying tax rate to be around 19% in the full year to December
2017. Reported loss per share1 for total operations was (0.11)p (H1 2016:
4.66p).
Dividend
The Board is recommending an interim dividend of 11.1p per ordinary share (H1
2016: 11.1p). The interim dividend will be payable on 30 November 2017 to
shareholders on the register at the close of business on 20 October 2017.
Cash flow
Free cash flow1 before non-underlying expenses was £179.2m (H1 2016: £213.8m)
and free cash flow1 after non-underlying expenses was £182.0m (H1 2016: £
199.2m). Net capital expenditure was £50m (H1 2016: £80m) and we expect capital
expenditure in the full year to be slightly lower than 2016.
Balance sheet and net debt
Net liabilities at end June 2017 were £668.3m (H1 2016: £552.9m). This includes
significant deferred income balances recognised on the adoption of IFRS 15, as
explained in Appendix 2.
Net debt at end June 2017 was £1,596m (H1 2016: £1,901m). This included £1,568m
outstanding private placement bond debt, of which £90.3m matures in the next 12
months and the remainder at various maturities to 2027. In addition, we have £
620m of bank debt which matures in 2018 and 2019, and an undrawn £600m
revolving credit facility of which £81m matures in August 2020 and £519m in
August 2021.
At 30 June 2017, our net debt to annualised EBITDA1 ratio was 2.9 and
annualised interest cover1 was 7.8 times. Following the receipt of proceeds
from the disposal of our Asset Services businesses and expected cash flow in
the second half of the year, we expect leverage to fall to around the bottom of
our 2.0 to 2.5 times range at the end of 2017. Subject to the completion of
this disposal, we may choose to unwind our receivables financing which was a
balance of £120m at 30 June 2017 and, in conjunction with the impact of IFRS 15
upon contingent obligations under bonds and guarantees, this may result in
leverage being around the middle of our range.
Return on capital employed
Our post-tax return on average capital employed in the first half of 2017 was
15.2% (FY 2016: 12.9%).
Pension
Capita's pension deficit increased to £381m at 30 June 2017 (FY 2016: £345m),
reflecting a decrease in the discount rate. The latest triennial valuation
commenced in April 2017. We continue to expect a £12m increase in the IAS 19
pension charge this year and an increase in cash contributions from June 2018.
Capita has consulted with affected parties and their representatives concerning
its decision to close to future accrual the Group defined benefit scheme. The
defined benefit scheme will be replaced by a defined contribution scheme for
the affected employees. We will provide a further update on our plans to close
the financial deficit in due course, once we have reached agreement with the
scheme's trustees.
Connaught
This is an update on the potential costs in resolving matters relating to the
Connaught Income Series 1 Fund ("The Fund"), of which Capita Financial Managers
Limited ("CFM") was the Operator until September 2009, when it was replaced by
an unrelated company as Operator, following which CFM had no further
involvement with the Fund. The Fund went into liquidation in 2012 and its
liquidator brought a claim against both former Operators, which for its part,
the Group settled in 2016 for a sum of £18.5m.
The Financial Conduct Authority's (FCA) formal review of the activities of both
operators is ongoing. The FCA has recently indicated to the Company that it is
minded to seek a financial penalty against CFM in connection with its conduct
as operator of the Fund and to seek redress for the substantial losses incurred
by all investors when the Fund collapsed three years after CFM's involvement,
notwithstanding the amount settled during 2016.
The Company is continuing discussions with the FCA in relation to its findings
in respect of CFM's conduct and the associated potential financial penalty.
While these discussions with the FCA take place, provision at this time has
been made for the full potential amount of the financial penalty and associated
legal costs (£37m). The Company has taken a prudent approach to this provision
reflecting the early stages of our discussions with the FCA and the lack of
clarity on the basis supporting the FCA's position.
In respect of the redress the Board does not consider that the Company is
liable to pay further sums in addition to the amounts already paid in respect
of the settled claims and therefore no provision has been made at this
time. Based on the information available to date it is not possible at this
stage to determine what the ultimate outcome of the FCA review might be.
1 Refer to appendix for calculation of Alternative Performance Measures. Capita
Asset Services has been treated as a discontinued operation.
Major sales and business development
Our Group Business Development team work on major transformation contracts,
which are reported in our sales bid pipeline, and campaigns of replicable
solutions, such as in local government. They also engage with divisional sales
teams to enhance their capability and sales performance.
Capita has secured major contracts with an aggregate total value of £403m in
the year to date (H1 2016 £879m), comprised of 27% new contracts and 73%
renewals and extensions. Our win rate increased to 1 in 2 by value. The market
for major transformation contracts has remained subdued in the public sector to
date in 2017.
We secured a new contract to deliver apprenticeship services to the Civil
Service. Extensions were secured to our Personal Independence Payments contract
with the Department for Communities, Northern Ireland until end July 2019 and
our IT services contract with the Northern Ireland Education Authority to March
2019. The London Borough of Lambeth intends to extend our revenue, benefits and
customer services contract until 2026. We have also renewed our RSPCA customer
management contract, Royal London life and pensions contracts and mortgage
administration contract with Tesco Bank.
In addition to the above, we have also secured £45m of new local government
campaign wins in the year to date.
We are continuing with our period of exclusive engagement with British Airways
to explore forming a potential partnership to support its global customer
contact operations, which currently handles approximately 9.5 million calls per
annum.
Bid pipeline
Our bid pipeline shows the total contract value of our major sales bids at a
specific point in time. It contains all bids with total contracted revenue
worth between £25m and a capped ceiling of £1bn, where we have been
short-listed to the last 4 or fewer. The total contract value of the bid
pipeline currently stands at £3.1bn (March 2017: £3.8bn), comprised of 28 bids
including 79% new business and 21% renewals and extensions. The weighted
average contract length of bids in the pipeline is 5.5 years (March 2017: 7
years) and the annual value of the bid pipeline has been maintained. We expect
decisions on the majority of bids within the next 12 months and continue to
have a large, active prospect list of opportunities behind the pipeline.
Rebids
There are no material contracts, defined as being in excess of 1% of Group
revenue, up for rebid in 2017 and 2018. Our next major contract renewal is the
Department for Work & Pensions Personal Independence Payments contract in mid
2019.
Disposals and acquisitions
In June, we announced the sale of our Asset Services businesses to Link
Administration Holdings ("Link Group") for a cash free, debt free consideration
of £888m. The transaction is subject to certain regulatory and other approvals
and is expected to complete in Q4 2017.
Upon completion of the sale, after the deduction of transaction expenses
(including certain separation related costs and a £17 million one-off pension
contribution) of approximately £72 million, the net cash proceeds are intended
to be used to reduce indebtedness.
We have completed the disposal of our stand-alone, transactional specialist
recruitment businesses (education, social care and health personnel) to
Endless. We are committed to our remaining Workplace Services businesses which
include our public and private recruitment process outsourcing ('RPO'),
executive search, vetting, employer branding agency and learning services
businesses.
We made two small acquisitions in the first half of 2017, Acutest, a provider
of software testing services, and NYS, a travel management business. The
aggregate consideration for these businesses was £10m, excluding deferred and
contingent consideration.
Group Board
Andy Parker stepped down from the Board and left Capita on 15 September 2017.
Andy has contributed strongly to the Company over the last 17 years and played
a key role in leading Capita, as Chief Executive, for the past three years and
through the challenges of 2016. Nick Greatorex, Capita's Group Finance
Director, was appointed as Interim Chief Executive from that date until a
successor takes up the post as Capita's new Chief Executive. During this
interim period, Nick will also continue with his responsibilities as Group
Finance Director. The Board is pleased with progress in our search process for
a successor.
Future prospects
We expect underlying pre-tax profits before significant new contracts and
restructuring to rise modestly in the second half, compared to the first half
of 2017, supported by the cumulative benefit from cost initiatives, partially
offset by some of our trading businesses which are not improving as quickly as
expected.
Following the receipt of proceeds from the disposal of our Asset Services
businesses and expected cash flow in the second half of the year, we expect
leverage to fall to around the bottom of our 2.0 to 2.5 times range at the end
of 2017. Subject to the completion of this disposal, we may choose to unwind
our receivables financing and, in conjunction with the impact of IFRS 15 upon
contingent obligations under bonds and guarantees, this may result in leverage
being around the middle of our range.
We remain confident that the actions we commenced last year are making Capita a
simpler business, well positioned for the future under new leadership.
-Ends-
Half year condensed consolidated income statement
for the 6 months ended 30 June 2017
Notes 30 June 2017 30 June 2016 (restated)
Underlying Business Specific Total Underlying Business Specific Total
exit items exit items
£m £m £m £m £m £m £m £m
Continuing
operations:
Revenue 3 2,065.9 61.4 - 2,127.3 2,131.3 24.6 - 2,155.9
Cost of sales (1,524.3 ) (49.7 ) - (1,574.0 ) (1,656.6 ) (17.9 ) - (1,674.5 )
Gross profit 541.6 11.7 - 553.3 474.7 6.7 - 481.4
Administrative 5,7 (313.2 ) (75.6 ) (101.9 ) (490.7 ) (308.7 ) (6.7 ) (78.7 ) (394.1 )
expenses
Operating profit 3 228.4 (63.9 ) (101.9 ) 62.6 166.0 - (78.7 ) 87.3
Net finance costs 8 (33.4 ) - 2.1 (31.3 ) (32.3 ) - (17.7 ) (50.0 )
Loss on disposal 5 - (3.7 ) - (3.7 ) - (0.1 ) - (0.1 )
Profit before tax 3 195.0 (67.6 ) (99.8 ) 27.6 133.7 (0.1 ) (96.4 ) 37.2
Income tax (36.0 ) (0.1 ) 12.2 (23.9 ) (21.0 ) - 18.2 (2.8 )
expense
Profit for the 159.0 (67.7 ) (87.6 ) 3.7 112.7 (0.1 ) (78.2 ) 34.4
period from
continuing
operations
Discontinued
operations:
Profit for the 6 - 25.8 - 25.8 - 23.5 (2.2 ) 21.3
period
Total profit for 159.0 (41.9 ) (87.6 ) 29.5 112.7 23.4 (80.4 ) 55.7
the period
Attributable to:
Owners of the 152.5 (41.9 ) (85.5 ) 25.1 106.9 23.4 (78.1 ) 52.2
Company
Non-controlling 6.5 - (2.1 ) 4.4 5.8 - (2.3 ) 3.5
interests
159.0 (41.9 ) (87.6 ) 29.5 112.7 23.4 (80.4 ) 55.7
Earnings/(loss) 9
per share
Continuing
operations:
- basic 22.92 p (10.18) p (12.85) p (0.11) p 16.12 p (0.02) p (11.44) p 4.66 p
- diluted 22.87 p (10.15) p (12.83) p (0.11) p 16.03 p (0.01) p (11.38) p 4.64 p
Total operations:
- basic 22.92 p (6.30) p (12.85) p 3.77 p 16.12 p 3.53 p (11.78) p 7.87 p
- diluted 22.87 p (6.29) p (12.82) p 3.76 p 16.03 p 3.51 p (11.71) p 7.83 p
Half year condensed consolidated statement of comprehensive income
for the 6 months ended 30 June 2017
30 June 2017 30 June 2016
(restated)
£m £m £m £m
Profit for the period 29.5 55.7
Other comprehensive (expense)/income
Items that will not be reclassified subsequently to
profit or loss
Actuarial loss on defined benefit pension schemes (25.5 ) (88.9 )
Deferred tax effect 4.3 16.0
(21.2 ) (72.9 )
Items that will or may be reclassified subsequently
to profit or loss
Exchange differences on translation of foreign 1.9 36.9
operations
Net investment hedge (2.4 ) (20.0 )
Gain on cash flow hedges 2.8 4.2
Reclassification adjustments for losses included in - 1.5
the income statement
Income tax effect (0.5 ) (1.0 )
2.3 4.7
1.8 21.6
Other comprehensive expense for the period net of (19.4 ) (51.3 )
tax
Total comprehensive income for the period net of 10.1 4.4
tax
Attributable to:
Owners of the Company 5.7 0.9
Non-controlling interests 4.4 3.5
10.1 4.4
Half year condensed consolidated balance sheet
at 30 June 2017
30 June 31 December
2017 2016
(restated)
Notes £m £m
Non-current assets
Property, plant and equipment 311.8 394.7
Intangible assets 2,449.1 2,754.2
Contract fulfilment assets 12 255.3 240.6
Financial assets 16 274.9 337.6
Deferred taxation 177.1 222.4
Trade and other receivables 37.6 48.8
3,505.8 3,998.3
Current assets
Financial assets 16 63.9 92.6
Contract fulfilment assets 12 43.1 41.6
Disposal group assets held for sale 5 755.3 -
Funds assets - 173.6
Trade and other receivables 692.7 801.1
Cash 1,122.6 1,098.3
2,677.6 2,207.2
Total assets 6,183.4 6,205.5
Current liabilities
Trade and other payables 797.0 977.0
Deferred income 1,472.9 1,374.9
Overdrafts 16 577.3 532.5
Financial liabilities 16 292.2 224.2
Disposal group liabilities held for sale 5 346.3 -
Funds liabilities - 173.6
Provisions 14 182.9 112.5
Income tax payable 8.8 18.6
3,677.4 3,413.3
Non-current liabilities
Trade and other payables 21.9 21.0
Deferred income 212.9 216.7
Financial liabilities 16 2,526.1 2,694.4
Deferred taxation 17.5 19.6
Provisions 14 15.1 48.2
Employee benefits 380.8 345.2
3,174.3 3,345.1
Total liabilities 6,851.7 6,758.4
Net liabilities (668.3 ) (552.9 )
Capital and reserves
Issued share capital 13.8 13.8
Share premium 501.3 501.3
Employee benefit trust and treasury shares (0.2 ) (0.2 )
Capital redemption reserve 1.8 1.8
Foreign currency translation reserve (6.7 ) (6.2 )
Cash flow hedging reserve 2.3 -
Retained earnings (1,253.2 ) (1,131.6 )
Equity attributable to owners of the Company (740.9 ) (621.1 )
Non-controlling interests 72.6 68.2
Total equity (668.3 ) (552.9 )
Half year condensed consolidated statement of changes in equity
for the 6 months ended 30 June 2017
Share Share Employee Capital Retained Foreign Cash Total Non-controlling Total
capital premium benefit redemption earnings currency flow interests equity
trust & reserve translation hedging
treasury reserve reserve
shares
£m £m £m £m £m £m £m £m £m £m
At 1 January 2016, as reported 13.8 500.7 (0.3 ) 1.8 196.5 (21.2 ) (12.0 ) 679.3 74.0 753.3
Impact of change in accounting - - - - (934.7 ) - - (934.7 ) (7.6 ) (942.3 )
standards - IFRS 15
At 1 January 2016, restated 13.8 500.7 (0.3 ) 1.8 (738.2 ) (21.2 ) (12.0 ) (255.4 ) 66.4 (189.0 )
Profit for the period, restated - - - - 52.2 - - 52.2 3.5 55.7
Other comprehensive (expense)/income - - - - (72.9 ) 16.9 4.7 (51.3 ) - (51.3 )
Total comprehensive (expense)/income - - - - (20.7 ) 16.9 4.7 0.9 3.5 4.4
for the period
Share based payment - - - - 5.0 - - 5.0 - 5.0
Income tax deduction on exercise of - - - - 0.9 - - 0.9 - 0.9
share options
Deferred income tax relating to - - - - (11.7 ) - - (11.7 ) - (11.7 )
share based payments
Fair value movement in put option of - - - - (2.4 ) - - (2.4 ) - (2.4 )
non-controlling interest
Shares issued - 0.6 - - - - - 0.6 - 0.6
Equity dividends paid - - - - (140.9 ) - - (140.9 ) (4.2 ) (145.1 )
At 30 June 2016, restated 13.8 501.3 (0.3 ) 1.8 (908.0 ) (4.3 ) (7.3 ) (403.0 ) 65.7 (337.3 )
At 1 January 2017, as reported 13.8 501.3 (0.2 ) 1.8 (102.3 ) (6.2 ) - 408.2 75.2 483.4
Impact of change in accounting - - - - (1,029.3 ) - - (1,029.3 ) (7.0 ) (1,036.3 )
standards - IFRS 15
At 1 January 2017, restated 13.8 501.3 (0.2 ) 1.8 (1,131.6 ) (6.2 ) - (621.1 ) 68.2 (552.9 )
Profit for the period - - - - 25.1 - - 25.1 4.4 29.5
Other comprehensive (expense)/income - - - - (21.2 ) (0.5 ) 2.3 (19.4 ) - (19.4 )
Total comprehensive income/(expense) - - - - 3.9 (0.5 ) 2.3 5.7 4.4 10.1
for the period
Share based payment - - - - 3.5 - - 3.5 - 3.5
Fair value movement in put option of - - - - 8.1 - - 8.1 - 8.1
non-controlling interests
Equity dividends declared (see note - - - - (137.1 ) - - (137.1 ) - (137.1 )
10)
At 30 June 2017 13.8 501.3 (0.2 ) 1.8 (1,253.2 ) (6.7 ) 2.3 (560.3 ) 72.6 (668.3 )
Half year condensed consolidated cash flow statement
for the 6 months ended 30 June 2017
30 June 30 June
2017 2016
(restated)
Total Total
Notes £m £m
Cash generated from operations before non-underlying cash 15 241.6 355.2
items
Non-underlying trading 5 0.5 -
Asset Services insurance recovery received 9.0 -
Business exit costs paid 14 (6.7 ) (11.3 )
Pension settlement paid - (3.3 )
Cash generated from continuing operations 244.4 340.6
Cash generated from discontinued operations 13.6 7.4
Income tax refunded/(paid) 16.0 (32.0 )
Net interest paid (28.7 ) (29.1 )
Net cash inflow from operating activities 245.3 286.9
Cash flows from investing activities
Purchase of property, plant and equipment (30.5 ) (44.5 )
Purchase of intangible assets (19.2 ) (35.8 )
Acquisition of subsidiary undertakings and businesses 13 (16.7 ) (91.6 )
Cash acquired on acquisition of subsidiary undertakings 13 4.2 12.3
Debt repaid on acquisition of subsidiary undertakings - -
Proceeds on disposal of subsidiary undertakings 5 16.4 25.0
Cash disposed of with subsidiary undertakings - (5.4 )
Deferred consideration received 3.0 -
Public sector subsidiary partnership payment (4.7 ) -
Deferred consideration paid (0.8 ) (6.7 )
Contingent consideration paid (2.1 ) (9.0 )
Purchase of financial assets - (0.2 )
Investing activities from discontinued operations (7.5 ) (8.4 )
Net cash outflow from investing activities (57.9 ) (164.3 )
Cash flows from financing activities
Issue of ordinary share capital - 0.6
Dividends paid 10 - (145.1 )
Capital element of finance lease rental payments 15 (1.8 ) (2.4 )
Proceeds from term loans 15 - 500.0
Repayment of fixed rate swaps 15 (84.6 ) -
Repayment of term loan 15 (30.0 ) -
Repayment of bonds 15 (33.8 ) (70.0 )
Financing arrangement costs 15 (1.2 ) -
Net cash (outflow)/inflow from financing activities (151.4 ) 283.1
Net increase in cash and cash equivalents 36.0 405.7
Cash and cash equivalents at the beginning of the period 565.8 85.3
Impact of movement in exchange rates 15 (3.2 ) 8.9
Cash and cash equivalents at 30 June 598.6 499.9
Cash and cash equivalents comprise:
Cash at bank and in hand 1,122.6 935.0
Cash held by discontinued operations 53.3 -
Overdraft (577.3 ) (435.1 )
Total 15 598.6 499.9
Notes to the half year condensed consolidated financial statements
for the 6 months ended 30 June 2017
1 Corporate information
Capita plc is a public limited company incorporated in England and Wales whose
shares are publicly traded. The half year condensed consolidated financial
statements of the Company and its subsidiaries ('the Group') for the 6 months
ended 30 June 2017 were authorised for issue in accordance with a resolution of
the Directors on 20 September 2017.
2 Basis of preparation, judgements and estimates, significant accounting
policies, principal risks and uncertainties and going concern
(a) Basis of preparation
The half year condensed consolidated financial statements for the 6 months
ended 30 June 2017 have been prepared in accordance with the Disclosure and
Transparency Rules (DTR) of the Financial Conduct Authority and with IAS 34
Interim Financial Reporting.
The half year condensed consolidated financial statements do not include all
the information and disclosures required in the annual financial statements and
should be read in conjunction with the Group's annual financial statements as
at 31 December 2016, which have been prepared in accordance with IFRSs as
adopted by the European Union.
The half year condensed consolidated financial statements do not comprise
statutory accounts within the meaning of Section 434 of the Companies Act 2006.
The statutory accounts for the year ended 31 December 2016 were approved by the
Board of Directors on 1 March 2017 and delivered to the Registrar of Companies.
The report of the auditors on those accounts was unqualified, did not contain
an emphasis of matter paragraph and did not contain any statement under Section
498 of the Companies Act 2006.
The half year condensed consolidated financial statements for the 6 months
ended 30 June 2017 have been reviewed by the Group's auditors pursuant to the
Auditing Practices Board guidance on Review of Interim Financial Information.
(b) Judgements and estimates
In preparing these half year condensed consolidated financial statements,
management make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amount of assets,
liabilities, income and expense. Actual results may differ from these
estimates. The significant judgements made by management in applying the
Group's accounting policies and the key sources of estimation uncertainty were
the same as those that applied to the consolidated financial statements as at
the year ended 31 December 2016 other than those additional areas which have
arisen as a consequence of the early adoption of IFRS 15 Revenue from Contracts
with Customers - see appendix 2 where these are explained.
(c) Significant accounting policies
The accounting policies adopted in preparation of the half year condensed
consolidated financial statements are consistent with those followed in the
preparation of the Group's annual financial statements for the year ended 31
December 2016, except for the early adoption of IFRS 15 Revenue from Contracts
with Customers.
Initial adoption of IFRS 15 Revenue from Contracts with Customers
The standard has an effective date of 1 January 2018 but the Group has decided
to early adopt this standard with a date of initial application to the Group of
1 January 2017.
IFRS 15 replaces all existing revenue requirements in IFRS and applies to all
revenue arising from contracts with customers unless the contracts are within
the scope of other standards such as IAS 17 Leases.
The standard outlines the principles entities must apply to measure and
recognise revenue with the core principle being that entities should recognise
revenue at an amount that reflects the consideration to which the entity
expects to be entitled in exchange for fulfilling its performance obligations
to a customer.
The principles in IFRS 15 must be applied using the following 5 step model:
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the
contract
5. Recognise revenue when or as the entity satisfies its performance
obligations
The standard requires entities to exercise considerable judgement taking into
account all the relevant facts and circumstances when applying each step of
this model to its contracts with customers. The standard also specifies how to
account for the incremental costs of obtaining a contract and the costs
directly related to fulfilling a contract, as well as requirements covering
matters such as licences of intellectual property, warranties, principal versus
agent assessment and options to acquire additional goods or services.
The Group has applied IFRS 15 fully retrospectively in accordance with
paragraph C3 (a) of the standard, restating the prior period's comparatives and
electing to use the following expedients:
• in respect of completed contracts, the Group will not restate contracts that
(i) begin and end within the same annual reporting period; or (ii) are
completed contracts at the beginning of the earliest period presented (para. C5
(a));
• in respect of completed contracts that have variable consideration, the Group
will use the transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the comparative periods
(para. C5(b)); and
• for all reporting periods presented before the date of initial application,
the Group will not disclose the amount of the transaction price allocated to
the remaining performance obligations or an explanation of when the Group
expects to recognise that amount as revenue (para C5(c)).
Details of the change in the Group's accounting policy in respect of revenue
recognition, related matters consequent upon the early adoption of IFRS 15 and
an explanation of the impact on the Group's prior period financial statements
are set out in appendix 2.
IFRS 16 Leases
The adoption of IFRS 16 Leases is mandatory for the Group for the financial
year beginning 1 January 2019.
IFRS 16 replaces the existing accounting requirements in IAS 17 Leases. A
single model for lessees will be required, eliminating off balance sheet
accounting for non-exempt operating leases. As a result, lease liabilities and
corresponding right of use lease assets would come onto the balance sheet and
would generally be unwound and depreciated over the term of the lease. The
presentation and timing of income and expense recognition in the income
statement would change, however the total income and expense over the term of
the lease remains the same. There would be no impact on cash flows as the
payments received or paid under the leases remain the same, although there
would be a change in presentation of cash flows. The application of the new
standard would have a varying impact on opening retained earnings at the
initial date of adoption dependent upon which transition method is chosen.
The Group is assessing the potential impact on its consolidated financial
statements resulting from the application of IFRS 16 and expects to disclose a
range of estimates for the quantitative impact prior to initial adoption. It is
not practicable to provide a reasonable estimate of the effect of IFRS 16 or to
conclude on the transition approach to be taken until the detailed reviews have
been completed.
(d) Principal risks and uncertainties and going concern
The Directors have considered the principal risks and uncertainties affecting
the Group's financial position and prospects in 2017 and out 12 months beyond
the reporting date. As described on pages 46 to 55 of the Group's annual report
for 2016, the Group continues to be exposed to a number of risks and has well
established systems and procedures in place to identify, assess and mitigate
those risks.
The principal risks include those arising from: significant failures in
internal control systems; lack of corporate financial stability; failures in
information security controls; legal and regulatory risk; adverse financial/
business performance; failure to innovate; increased internal business
complexity; adverse changes in the national or international political
landscape; operational issues leading to reputational risk; operational IT
risks; failure to effectively manage the Group's talent and human resources;
and weaknesses in the acquisition and contracting life cycle.
The Directors continue to review the principal risks on an ongoing basis and
confirm that there are no further principal risks, although noting that the
residual risk arising from the lack of corporate financial stability has
reduced during 2017 as the mitigating measures undertaken have impacted our
position. Further the residual risk from Operational IT risk has increased due
to identified dependencies on certain aged infrastructure which the Group will
address through its longer term IT strategy.
In assessing the basis of preparation for the period 30 June 2017, the
Directors have considered the principles of the FRC's "Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting
2014", namely assessing the applicability of the going concern basis, the
review period and disclosures.
The Group has net debt of £1,595.5m at 30 June 2017 (31 December 2016: £
1,778.8m).
The Group's committed revolving credit facility, bank term loan facilities and
private placement notes are subject to compliance with covenant requirements
including maximum ratios of adjusted net debt to adjusted EBITDA before
exceptional items. The Group's covenanted maximum ratio for all debt
instruments is currently 3.5 times falling to 3.0 times under some debt
instruments following receipt of the proceeds of the sale of the Capita Asset
Services businesses. They are tested semi-annually. The Group's calculation of
adjusted net debt to adjusted EBITDA at 30 June 2017 is 2.86 times and is in
compliance with the relevant ratios.
The Board has undertaken a rigorous assessment of the forecast assumptions that
support the going concern basis, taking into account the financial forecasts,
the Group's existing debt levels, the committed funding and liquidity
positions, the Group's historic experience in generating cash from trading
activities, and the working capital management strategies available to it.
They have applied sensitivity analysis to these forecasts through both
reductions in cash collections, underperformance against the 2017 business
plan, a potential delay of the completion of the sale of the Capita Asset
Services businesses into 2018, and the possible range of settlements described
in note 19 Contingent Liabilities. They have considered mitigating actions
available to the Group in response to these sensitivities. After applying
these sensitivities and mitigating actions, the Group forecasts that it will
continue to operate within its covenants.
Accordingly and notwithstanding that the half year condensed consolidated
balance sheet shows a net liability position (which from December 2017 will
have the effect of adding all outstanding contingent liabilities under
performance bonds and bank guarantees to adjusted net debt under the covenant
calculation), the Board has a reasonable expectation that the Company and the
Group will be able to operate as a going concern for the foreseeable future and
are satisfied that the half year condensed consolidated financial statements
should be prepared on a going concern basis.
3 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. As announced at the 2016 year end, the Group from 1 January 2017
introduced a new simplified structure that better aligns sales and operations
to the markets and customers that the Group addresses. This is now reflected
in the segment reporting and the comparatives have been restated on this same
basis. No segments are aggregated to form the operating segments below, and
the information presents the information as it is reported to the Group Board.
In preparing these interim statements, the Board has considered how business
performance is assessed internally and in addition to the announced new
business divisions, Group trading and central functions will also be reported
separately going forwards. Comparative information has been restated
accordingly. The Board believe the changes improve accountability and
transparency across the Group.
Digital & IT Public Professional Private Group Total Total Total
Software Services Sector Services Sector trading underlying non-underlying
Solutions Partnerships Partnerships and
central
functions
6 months to 30 June £m £m £m £m £m £m £m £m £m
2017
Continuing
operations
Contract length > 2 185.7 169.6 382.9 109.5 601.7 5.0 1,454.4 - 1,454.4
years
Contract length < 2 17.2 31.8 86.2 44.3 156.0 - 335.5 0.9 336.4
years
Transactional 4.0 72.5 69.7 96.8 33.0 - 276.0 60.5 336.5
(point in time)
Total segment 206.9 273.9 538.8 250.6 790.7 5.0 2,065.9 61.4 2,127.3
revenue
Trading revenue 224.1 378.5 577.6 310.0 857.7 40.2 2,388.1 - 2,388.1
Inter-segment (17.2 ) (104.6 ) (38.8 ) (59.4 ) (67.0 ) (35.2 ) (322.2 ) - (322.2 )
revenue
Total underlying 206.9 273.9 538.8 250.6 790.7 5.0 2,065.9 - 2,065.9
segment revenue
Non-underlying - - 5.9 54.6 0.9 - 61.4 61.4
revenue
Total segment 206.9 273.9 544.7 305.2 791.6 5.0 2,127.3
revenue
Underlying trading 58.6 46.2 45.8 51.2 81.5 (54.9 ) 228.4 - 228.4
result
Non-underlying - - 0.2 0.2 0.1 - 0.5 0.5
trading result
Total trading 58.6 46.2 46.0 51.4 81.6 (54.9 ) 228.9
result
Non-trading items:
Business exit costs (64.4 )
Intangible amortisation (63.9 )
Acquisition costs (1.1 )
Contingent consideration movement 0.1
Asset Services settlement provision (37.0 )
Operating profit 62.6
Net finance costs (31.3 )
Loss on business disposal (3.7 )
Profit before tax 27.6
Income tax expense (23.9 )
Profit for the period - continuing operations 3.7
Profit for the period - discontinued operations 25.8
Profit for the period - total 29.5
Digital & IT Public Professional Private Group Total Total Total
Software Services Sector Services Sector trading underlying non-underlying
Solutions Partnerships Partnerships and
central
functions
6 months to 30 June £m £m £m £m £m £m £m £m £m
2016 (restated)
Continuing operations
Contract length > 2 189.4 136.5 394.0 118.7 576.3 10.1 1,425.0 24.6 1,449.6
years
Contract length < 2 16.4 35.6 112.4 39.2 132.4 - 336.0 - 336.0
years
Transactional (point 3.8 69.1 64.1 195.2 38.1 - 370.3 - 370.3
in time)
Total segment revenue 209.6 241.2 570.5 353.1 746.8 10.1 2,131.3 24.6 2,155.9
Trading revenue 227.8 362.0 599.4 417.6 800.3 35.8 2,442.9 - 2,442.9
Inter-segment revenue (18.2 ) (120.8 ) (28.9 ) (64.5 ) (53.5 ) (25.7 ) (311.6 ) - (311.6 )
Total underlying 209.6 241.2 570.5 353.1 746.8 10.1 2,131.3 - 2,131.3
segment revenue
Non-underlying - - 22.5 - 2.1 - 24.6 24.6
revenue
Total segment revenue 209.6 241.2 593.0 353.1 748.9 10.1 2,155.9
Underlying trading 67.1 15.3 5.4 46.8 45.5 (14.1 ) 166.0 - 166.0
result
Non-underlying - - (0.8 ) - 0.8 - - -
trading result
Total trading result 67.1 15.3 4.6 46.8 46.3 (14.1 ) 166.0
Non-trading items:
Intangible amortisation (72.6 )
Acquisition costs (5.5 )
Contingent consideration movement (0.6 )
Operating profit 87.3
Net finance costs (50.0 )
Loss on business disposal (0.1 )
Profit before tax 37.2
Income tax expense (2.8 )
Profit for the period - continuing operations 34.4
Profit for the period 21.3
- discontinued
operations
Profit for the period 55.7
- total
4 Underlying operating profit
30 June 2017 30 June 2016 (restated)
Underlying Significant Total Underlying Significant Total
before new contracts underlying before new contracts underlying
significant and significant and
new contracts restructuring new contracts restructuring
and and
restructuring restructuring
£m £m £m £m £m £m
Continuing
operations:
Revenue 2,065.9 - 2,065.9 2,131.3 - 2,131.3
Cost of sales (1,524.3 ) - (1,524.3 ) (1,656.6 ) - (1,656.6 )
Gross profit 541.6 - 541.6 474.7 - 474.7
Administrative (313.2 ) - (313.2 ) (308.7 ) - (308.7 )
expenses
Operating profit 228.4 - 228.4 166.0 - 166.0
Following the adoption of IFRS 15, the Board has adopted a policy to separately
disclose the in-period operating profit/loss from significant new contract wins
and significant restructuring, in order for users of the financial statements
to obtain a proper understanding of the financial information and the
performance of the business.
A new contract is assessed as that which is either entirely new to the Group,
or a significant amendment to the scope and scale of an existing contract.
The Group continually assesses the resourcing levels, both at a divisional
level and also in relation to the management and delivery of individual
contracts. This results in restructuring in the normal course of business and
any such charges are recorded in "Underlying before significant new contracts
and restructuring" results. A significant restructuring is assessed as that
above this normal level of restructuring.
Contract terminations arising in the normal course of business and which result
in the disposal of a contract fulfilment asset and/or a true-up of revenue
recognised, will be included within "Underlying before significant new
contracts and restructuring", and separately disclosed if considered material.
5 Business exits
2017 business exits
Business exits are businesses that have been exited during the year or in the
process of being disposed of. None of these business exits meet 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. Accordingly, the separate presentation described below does
not fall within the requirements of IFRS 5 concerning discontinued operations.
The expected disposal of Capita Asset Services does meet the definition of a
discontinued operation, and is disclosed separately in note 6 - Discontinued
Operations.
In the 2016 annual report, we disclosed that the Group intended to dispose of
the majority of our specialist recruitment businesses which no longer fit the
Group's core business strategy. At 31 December 2016, neither of these
businesses met the criteria to be treated as held for sale.
During the period, the disposal of the specialist recruitment businesses has
been completed, along with the disposal of part of the Capita Europe business,
and the closure of an events business, and their results are all included
within business exits for the period. As at 30 June 2017, the Group was in an
active process to sell a non core property business and has treated this as a
disposal group held for sale at this date.
Income statement impact
Non-trading
Trading Cash Non-cash Total Total
£m £m £m £m £m
Revenue 61.4 - - - 61.4
Cost of sales (49.7 ) - - - (49.7 )
Gross profit 11.7 - - - 11.7
Administrative expenses (11.2 ) (56.4 ) (8.0 ) (64.4 ) (75.6 )
Operating profit/(loss) 0.5 (56.4 ) (8.0 ) (64.4 ) (63.9 )
Profit/(loss) on business disposal (see - 16.3 (20.0 ) (3.7 ) (3.7 )
below)
Profit/(loss) before tax 0.5 (40.1 ) (28.0 ) (68.1 ) (67.6 )
Income tax expense (0.1 ) - - - (0.1 )
Profit/(loss) for the period 0.4 (40.1 ) (28.0 ) (68.1 ) (67.7 )
Trading revenue and costs represent the current period trading performance of
those businesses being exited or disposed.
There are no cumulative income or expenses included in other comprehensive
income relating to the disposal group.
Loss on business disposal Cash Non-cash Total
£m £m £m
Property, plant and equipment - 1.2 1.2
Intangible assets - 6.9 6.9
Trade and other receivables - 24.0 24.0
Cash 0.1 - 0.1
Trade and other payables - (11.0 ) (11.0 )
Income tax - (0.2 ) (0.2 )
Deferred tax - (0.8 ) (0.8 )
Provisions - (0.1 ) (0.1 )
Total net assets disposed of 0.1 20.0 20.1
Cash consideration received 17.0 - 17.0
Costs of disposal (0.6 ) - (0.6 )
Proceeds, less costs, on disposal 16.4 - 16.4
Loss on business disposal 16.3 (20.0 ) (3.7 )
Non-trading administrative expenses Disposal/ Held for Total
closure disposal
£m £m £m
Cash paid or to be paid:
Separation costs paid (0.5 ) (5.0 ) (5.5 )
Provision in respect of disposal and closure (3.4 ) (47.5 ) (50.9 )
costs
(3.9 ) (52.5 ) (56.4 )
Non-cash:
Accelerated depreciation on property, plant (1.7 ) - (1.7 )
and equipment
Accelerated amortisation on goodwill - (6.3 ) (6.3 )
(1.7 ) (6.3 ) (8.0 )
(5.6 ) (58.8 ) (64.4 )
Analysed above are non-trading administrative expenses which include cash costs
from exiting the disposed business, the ongoing stranded costs such as property
and redundancy payments and impairment losses recognised in the disposal
group. These include costs in respect of the disposal of Capita Asset Services
as at 30 June 2017.
As at 30 June 2017, the Group was in an active process to sell a non core
property business and has treated this as a disposal group held for sale at
this date.
Assets and liabilities of disposal group held for
sale - continuing operations
As at As at
30 June 2017 31 December
2016
£m £m
Property, plant and equipment - 0.1
Intangible assets 2.4 -
Trade and other receivables 3.5 4.2
Assets held for sale 5.9 4.3
Trade and other payables (1.7 ) (9.1 )
Provisions (0.2 ) -
Liabilities held for sale (1.9 ) (9.1 )
Disposal group as reported on balance Continuing Discontinued Total
sheet operations operations
£m £m £m
Assets held for sale 5.9 749.4 755.3
Liabilities held for sale (1.9 ) (344.4 ) (346.3 )
2016 business exits
In the 6 months to 30 June 2016, the Group exited some of its small non-core
health businesses.
Income statement impact Non-trading
Trading Cash Non-cash Total Total
£m £m £m £m £m
Revenue 24.6 - - - 24.6
Cost of sales (17.9 ) - - - (17.9 )
Gross profit 6.7 - - - 6.7
Administrative expenses (6.7 ) - - - (6.7 )
Operating loss - - - - -
Loss on business disposal - 39.6 (39.7 ) (0.1 ) (0.1 )
Loss before tax - 39.6 (39.7 ) (0.1 ) (0.1 )
Income tax expense - - - - -
Loss for the period - 39.6 (39.7 ) (0.1 ) (0.1 )
Trading revenue and costs represent the trading performance of these businesses
in the period to the date of exit.
Non-trading costs include the costs of exiting a number of small non-core
health businesses and ongoing stranded costs such as IT, property lease and
redundancy payments.
Loss on business disposal Cash Non-cash Total
£m £m £m
Disposal group assets - 63.7 63.7
Disposal group liabilities - (20.0 ) (20.0 )
Total net assets disposed of - 43.7 43.7
Cash (net of cash disposed of) 19.6 - 19.6
Deferred consideration receivable 20.0 - 20.0
Fair value of residual interest - 4.0 4.0
Proceeds on disposal 39.6 4.0 43.6
Loss on business disposal 39.6 (39.7 ) (0.1 )
6 Discontinued operations
In the 2016 annual report, we disclosed that the Group intended to dispose of
the majority of the Capita Asset Services Division. At 31 December 2016, this
business did not meet the criteria to be treated as held for sale as the sale
process had not progressed sufficiently to be reasonably certain at that time,
but at 30 June 2017 the disposal process met the criteria to be treated as held
for sale.
The disposal meets the definition of a discontinued operation as stipulated by
IFRS 5. The comparatives have been restated. The following presentation, and
that included in other notes, follows the requirements of IFRS 5.
30 June 2017 30 June 2016
Trading Non-trading Total Trading Non-trading Total
£m £m £m £m £m £m
Discontinued operations:
Revenue 157.9 - 157.9 147.3 - 147.3
Cost of sales (56.4 ) - (56.4 ) (57.2 ) - (57.2 )
Gross profit 101.5 - 101.5 90.1 - 90.1
Administrative expenses (70.7 ) (0.6 ) (71.3 ) (62.2 ) (2.6 ) (64.8 )
Operating profit 30.8 (0.6 ) 30.2 27.9 (2.6 ) 25.3
Net finance costs - 0.6 0.6 - (0.1 ) (0.1 )
Profit before tax 30.8 - 30.8 27.9 (2.7 ) 25.2
Income tax expense (5.0 ) - (5.0 ) (4.4 ) 0.5 (3.9 )
Profit for the period 25.8 - 25.8 23.5 (2.2 ) 21.3
Non-trading items include amortisation on acquired intangibles within
administrative expenses, and fair value movements on available for sale assets
in net finance costs.
Note 30 June 2017 31 December 2016
£m £m
Non-current assets
Property, plant and equipment 72.6 76.3
Intangible assets 250.5 250.8
Financial assets - 3.5
Deferred taxation 1.1 0.6
Trade and other receivables 1.9 5.9
326.1 337.1
Current assets
Financial assets 5.0 10.5
Funds assets 282.6 173.6
Income tax receivable 4.6 3.0
Trade and other receivables 77.8 113.6
Cash 53.3 37.7
423.3 338.4
Assets held for sale 749.4 675.5
Current liabilities
Trade and other payables 36.4 109.9
Deferred income 13.9 7.9
Funds liabilities 282.6 173.6
Provisions 14 0.2 24.4
333.1 315.8
Non-current liabilities
Trade and other payables 0.3 0.4
Deferred taxation 11.0 5.1
11.3 5.5
Liabilities held for sale 344.4 321.3
Net assets held for sale 405.0 354.2
30 June 2017 30 June 2016
£m £m
Cash flows from (used in) discontinued operations
Net cash inflow from operating activities 13.6 7.4
Net cash outflow from investing activities (7.5 ) (8.4 )
Net cash flow for period 6.1 (1.0 )
7 Specific items
Included within the specific items column are:
6 months to 30 June 2017 6 months to 30 June 2016 (restated)
Cash Cash Non-cash Cash Cash in Non-cash
in in Total in future Total
year future year
Notes £m £m £m £m £m £m £m £m
Amortisation of acquired - - 63.9 63.9 - - 72.6 72.6
intangibles
Contingent consideration 16 - - (0.1 ) (0.1 ) - - 0.6 0.6
movements
Asset Services settlement - 37.0 - 37.0 - - - -
provision
Professional fees regarding 0.7 0.3 - 1.0 3.3 2.0 - 5.3
acquisitions
Stamp duty paid on 0.1 - - 0.1 0.2 - - 0.2
acquisitions
Total 0.8 37.3 63.8 101.9 3.5 2.0 73.2 78.7
The above items are presented as specific items as the Board has concluded that
these items are not reflective of the in-period performance of the Group. The
tax impact of the above items is a £12.6m credit (30 June 2016: £14.6m
credit). These items are discussed below:
Amortisation of acquired intangible assets: the Group carries on its balance
sheet significant balances related to acquired intangible assets. The
amortisation of these assets, and any impairment charges, are reported
separately as they distort the in-year trading results and performance of the
acquired businesses is assessed through the underlying operational results.
Contingent consideration movements: in accordance with IFRS 3, movements in the
fair value of contingent consideration on acquisitions go through the Group
income statement. These are reported separately because performance of the
acquired businesses is assessed through the underlying operational results and
such a charge/credit movement would distort underlying results.
Asset services settlement provision: these costs relate to the litigation and
regulatory review concerning the Connaught Income series 1 Fund ("The Fund")
(see note 14), and are included in specific items as they are not reflective of
the in-year performance of the Group's operational activities.
Acquisition related costs and stamp duty: these costs incurred with
acquisitions are not included in the assessment of business performance which
is based on the underlying results. IFRS requires certain costs incurred in
connection with acquired businesses to be recorded within the Group income
statement. These charges are not included in the internal assessment of
business performance which as above is based on the underlying operational
results. These charges are therefore separately disclosed as specific items.
8 Net finance costs
6 months to 6 months
to
30 June 30 June
2017 2016
£m £m
Interest receivable (0.1 ) (0.1 )
Bonds 18.8 18.0
Fixed rate interest rate swaps - realised 3.2 5.9
Finance lease - 0.1
Bank loans and overdrafts 6.8 5.2
Net interest cost on defined benefit pension schemes 4.7 3.2
Interest payable 33.5 32.4
Underlying net finance costs 33.4 32.3
Fixed rate interest rate swaps - mark to market (0.5 ) 22.8
Discount unwind on public sector subsidiary partnership 1.0 1.0
payment
Fair value movement in trade investments - 0.1
Non-designated foreign exchange forward contracts - mark (1.6 ) (7.3 )
to market
Derivatives' counterparty credit risk adjustment - mark to (1.0 ) 0.9
market
Derivatives' own credit risk adjustment - mark to market - 0.2
Non-underlying net finance (income)/costs (2.1 ) 17.7
Total net finance costs 31.3 50.0
9 Earnings/(loss) per share
Basic earnings per share have been calculated using the weighted average number
of shares in issue during the period of 665.3m (30 June 2016: 663.2m). The
diluted average number of shares is 666.7m (30 June 2016: 666.9m) having
adjusted the weighted average number of shares for shares yet to be issued that
will be dilutive.
The profits used to calculate the measures are:
30 June 2017 30 June 2016
Continuing Total Continuing Total
operations operations operations operations
£m £m £m £m
Underlying profit attributable to 152.5 152.5 106.9 106.9
shareholders
Total profit/(loss) attributable to (0.7 ) 25.1 30.9 52.2
shareholders
As at 20 September 2017, there were 670.2m shares in issue.
10 Dividends
The interim dividend of 11.1p (2016: 11.1p) per share (not recognised as a
liability at 30 June 2017) will be payable on 20 October 2017 to ordinary
shareholders on the register at the close of business on 30 November 2017. The
dividend disclosed in the statement of changes in equity represents the final
ordinary dividend of 20.6p (2016: 21.2p) per share as proposed in the 31
December 2016 financial statements and approved at the Group's AGM (not
recognised as a liability at 31 December 2016) that was paid on 3 July 2017 and
so recognised as a financial liability at 30 June 2017.
11 Goodwill
Goodwill acquired through business combinations has been allocated to
Cash-Generating Units (CGUs), for impairment testing purposes, on the basis of
the expected benefit that will accrue to the individual CGU through synergies
realised from the acquisitions and integration with the Group as a whole.
These represent the lowest level within the Group at which goodwill can be
allocated on a reasonable and consistent basis.
Following the difficult trading conditions witnessed in 2016 as a result of
certain economic and political factors and having reviewed the constituent
businesses and markets in which Capita operates and the underlying assumptions
used to calculate the value in use for each CGU, goodwill was impaired by £
66.6m as at 31 December 2016.
In the 2016 annual financial statements, it was noted that the CGUs impaired in
the year are the most sensitive to a change in a single or combination of
assumptions and therefore any deterioration in assumptions would lead to
further impairment. In preparing these half year condensed consolidated
financial statements, the Group undertook a review to identify indicators of
impairment of goodwill for those CGUs. Consideration was given to their
operating performance in 2017 versus the 1 year budget forecast used in
identifying the cash flows for each CGU during the impairment testing performed
for the 2016 annual financial statements. Where this gave rise to an indicator
of potential impairment, further review was performed.
No impairments were identified as at 30 June 2017.
12 Contract fulfilment assets
In preparing these half year condensed consolidated financial statements, the
Group undertook a review to identify indicators of impairment of contract
fulfilment assets. The Group determined whether or not the contract fulfilment
assets and capitalised costs to obtain a contract were impaired by comparing
the carrying amount of the asset to the remaining amount of consideration that
the Group expects to receive less the costs that relate to providing services
under the relevant contract. In determining the estimated amount of
consideration, the Group used the same principles as it does to determine the
contract transaction price, except that any constraints used to reduce the
transaction price were removed for the impairment test.
In line with our accounting policy, as set out in Appendix 2, if a contract or
specific performance obligation exhibited marginal profitability or other
indicators of impairment, judgement was applied to ascertain whether or not the
future economic benefits from these contracts were sufficient to recover these
assets. In performing this impairment assessment, management is required to
make an assessment of the costs to complete the contract. The ability to
accurately forecast such costs involves estimates around cost savings to be
achieved over time, anticipated profitability of the contract, as well as
future performance against any contract-specific KPIs that could trigger
variable consideration, or service credits.
No contract fulfilment asset impairments were identified as at 30 June 2017 (31
December 2016: £nil).
13 Business combinations
The Group has made two acquisitions in the period which are shown in aggregate
below:
Provisional
fair value
to Group
£m
Intangible assets 5.6
Trade and other receivables < 1 year 7.0
Cash and cash equivalents 4.2
Trade and other payables < 1 year (0.6 )
Accruals < 1 year (2.4 )
Income tax (0.4 )
Deferred tax (1.0 )
Total identifiable net assets 12.4
Goodwill arising on acquisition 9.4
Total 21.8
Discharged by:
Cash consideration paid 15.6
Contingent consideration accrued 6.2
Total consideration 21.8
The full exercise to determine the fair value of intangible assets acquired is
still to be completed, thus the above numbers are provisional. In respect of
the acquisitions made in 2017, the Group has agreed to pay the vendors
additional consideration dependent on the achievement of performance targets in
the periods post-acquisition. These performance periods are of up to 3 years in
duration and will be settled in cash on their payment date on achieving the
relevant target. The range of the additional consideration payment is between £
nil and £7.0m and the Group has included £6.2m as contingent consideration
related to the additional consideration, which represents its fair value at the
acquisition date. The fair value of the contingent consideration has been
calculated based on the Group's expectation of what it will pay in relation to
the post-acquisition performance of the acquired entities by weighting the
probability of a range of payments to give an estimate of the final obligation.
Further cash consideration was paid in respect of previous acquisitions of £
7.6m.
Detail on the total amount of contingent consideration the Group has provided
as at 30 June 2017 is disclosed in note 16.
Acquisition related costs
The Group incurred acquisition related costs of £1.1m related to professional
fees paid for due diligence, general professional fees and legal related costs.
These costs have been included in specific items administrative costs in the
Group's consolidated income statement.
14 Provisions
Restructuring Business Asset Claims and Property Other Total
provision exit services litigation provision
provision settlement provision
provision
£m £m £m £m £m £m £m
At 1 January 2017 49.4 6.0 23.1 41.5 28.0 12.7 160.7
Utilisation (15.4 ) (6.7 ) (0.2 ) (6.6 ) (0.6 ) (8.5 ) (38.0 )
Provided/(released) - 56.4 37.5 0.5 (1.0 ) (1.5 ) 91.9
in the period - net
Provisions acquired - - - - (0.1 ) - (0.1 )
Transfer to accruals - - (16.1 ) - - - (16.1 )
Transfer to disposal (0.1 ) - - - (0.3 ) - (0.4 )
group
At 30 June 2017 33.9 55.7 44.3 35.4 26.0 2.7 198.0
The provisions made above have been shown as current or non-current on the
balance sheet to indicate the Group's expected timing of the matters reaching
conclusion.
Restructuring provision: the provision is in respect of the cost of the major
restructuring activities undertaken by the Group commencing in the last quarter
of 2016. It represents the cost of reducing role count where there is a
constructive obligation created through communication to affected employees
which has crystallised a valid expectation that roles are at risk.
Additionally it reflects the onerous nature of property lease provisions (net
of any sub-letting opportunity) on a discounted basis, where due to the reduced
requirement for space due to the redundancy programme there is additional
surplus capacity. The provision, due to the tail of the property lease
run-offs, is expected to unwind over 2 years.
Business exit provision: the provision relates to the cost of exiting
businesses through disposal or closure, including professional fees related to
business exits and the costs of separating the businesses being disposed.
Refer to note 5 for further detail. The provision is expected to unwind over 2
years.
Asset Services settlements:
1. Arch Cru: the parties to the CF Arch Cru Funds litigation have entered into
a full and final settlement of the proceedings on confidential terms.
2. Connaught: the potential costs in resolving matters relating to the
Connaught Income Series 1 Fund ("The Fund"), of which Capita Financial
Managers Limited ("CFM") was the Operator until September 2009, when it was
replaced by an unrelated company as Operator, following which CFM had no
further involvement with the Fund. The Fund went into liquidation in 2012
and its liquidator brought a claim against both former Operators, which for
its part, the Group settled in 2016 for a sum of £18.5m.
The Financial Conduct Authority's (FCA) formal review of the activities of
both operators is ongoing. The FCA has recently indicated to the Company
that it is minded to seek a financial penalty against CFM in connection
with its conduct as operator of the Fund and to seek redress for the
substantial losses incurred by all investors when the Fund collapsed three
years after CFM's involvement, notwithstanding the amount settled during
2016 as noted above.
The Company is continuing discussions with the FCA in relation to its
findings in respect of CFM's conduct and the associated potential financial
penalty. While these discussions with the FCA take place, provision at
this time has been made for the full potential amount of the financial
penalty and associated legal costs. The Company has taken a prudent
approach to this provision reflecting the early stages of our discussions
with FCA and the lack of clarity on the basis supporting the FCA's
position.
In respect of the redress the Board does not consider that the Company is
liable to pay further sums in addition to the amounts already paid in
respect of the settled claims and therefore no provision has been made at
this time. Based on the information available to date it is not possible
at this stage to determine what the ultimate outcome of the FCA review
might be.
3. Capita plc as part of the sale of the Asset Services business has provided
an indemnity against certain legacy claims. The provisions held, namely the
Asset Services settlement provision which includes provisions for Arch Cru,
Connaught and other legacy claims, have therefore been retained within the
Group and not transferred to held for sale assets. Legacy claims have been
settled post the balance sheet date and as the precise value of settlement
is known, the provision reflects a transfer from provisions to accruals,
the cash settlement of these claims occurring in July 2017.
Giving due consideration to these claims, the Group has a provision of £44.3m
at 30 June 2017 (31 December 2016: £23.1m).
Claims and litigation provision: in addition to the Asset Services Settlement
provision the Group is exposed to other claims and litigation. The Group makes
a provision when a claim has been made where it is more probable than not that
a loss might occur. These provisions are reassessed regularly to ensure that
the level of provisioning is consistent with the claims that have been
reported. The range of values attached to these claims can be significant and
where obligations are probable and estimable, provisions are made representing
the Group's best estimate of the expenditure to be incurred. The Group robustly
defends its position on each claim and they are often settled for amounts
significantly smaller than the initial claim and may result in no transfer of
economic benefits.
In the period the Group has settled a number of insurance liabilities which it
had provided for in previous years. Additionally, it has made provision for
new claims, which originate due to the nature of the Group's operations and
existing provisions where more information on the progress of the claim has
become apparent. The Group's exposure to claims is mitigated by having a
number of large insurers providing cover for the Group's activities, albeit
insurance recoveries are only recognised as an asset at the point the recovery
is virtually certain. As at 30 June 2017, £5.0m of such assets are held on the
Group's consolidated balance sheet (31 December 2016: £15.5m). Due to the
nature of these claims the Group can not give an estimate of the period over
which the provision will unwind.
Property provisions: includes a discounted provision for the difference
between the market value of the property leases acquired in 2011 with Ventura
and Vertex Private Sector and the lease obligations committed to at the date
the leases were signed by the previous owners. This is in accordance with IFRS
3 (revised) which requires the use of fair value measurement. The remaining
property provision is made on a discounted basis for the future rent expense
and related cost of leasehold property (net of estimated sub-lease income)
where the space is vacant or currently not planned to be used for ongoing
operations. The expectation is that this expenditure will be incurred over the
remaining periods of the leases which range from 1 to 24 years.
Other provision: relates to provisions in respect of potential claims arising
due to the nature of some of the operations that the Group provides, and an
onerous contract provision. These are likely to unwind over a period of 1 to 3
years.
15 Additional cash flow information
Operating cash flow for the 6 months ended 30 June
2017 2016
Notes £m £m
Cash flows from operating activities
Operating profit before interest and taxation from 62.6 87.3
continuing operations
Adjustment for underlying non-cash items:
Depreciation 33.4 36.0
Amortisation of intangible assets (treated as 9.9 8.1
depreciation)
Share based payment expense 3.5 5.0
Employee benefits 5.4 (1.8 )
Adjustment for non-underlying non-cash items:
Accelerated depreciation on business closure 5 1.7 -
Accelerated amortisation on business exit 5 6.3 -
Amortisation of intangible assets recognised on 7 63.9 72.6
acquisition
Contingent consideration 7 (0.1 ) 0.6
Non-underlying provisions 14 93.4 -
Non-underlying trading (0.5 ) -
Movement in underlying provisions - net (32.3 ) 0.2
Net movement in payables and receivables (5.6 ) 147.2
Cash generated from continuing operations before 241.6 355.2
non-underlying cash items1
Income tax refunded/(paid) 16.0 (32.0 )
Net interest paid (28.7 ) (29.1 )
Purchase of property, plant and equipment (30.5 ) (44.5 )
Purchase of intangible assets (19.2 ) (35.8 )
Free cash flow before non-underlying items 179.2 213.8
Non-underlying trading 0.5 -
Asset Services insurance recovery received 9.0 -
Business exit costs paid (6.7 ) (11.3 )
Pension settlement paid - (3.3 )
Free cash flow after non-underlying items 182.0 199.2
1see cash flow statement
Reconciliation of net cash flow to movement in net debt
Non-cash flow movements
Net debt Cash flow Acquisitions Foreign Fair Amortisation Net debt at
at 1 movements in 2017 exchange value of bond 30 June
January £m £m movements changes issue costs 2017
2017 £m £m £m £m
£m
Cash+ 565.8 36.0 - (3.2 ) - - 598.6
Loan notes (0.3 ) - - - - - (0.3 )
Bonds* (1,961.7 ) 35.0 - (7.6 ) 79.9 (0.6 ) (1,855.0 )
Currency swaps in relation to 357.9 - - - (77.7 ) - 280.2
US $ denominated bonds*
Interest rate swaps in 7.7 - - - (1.2 ) - 6.5
relation to GBP denominated
bonds*
Term loan (650.0 ) 30.0 - - - - (620.0 )
Finance leases (2.3 ) 1.8 - - - - (0.5 )
Total net liabilities from (2,248.7 ) 66.8 - (7.6 ) 1.0 (0.6 ) (2,189.1 )
financing activities
Underlying net debt (1,682.9 ) 102.8 - (10.8 ) 1.0 (0.6 ) (1,590.5 )
Fixed rate interest rate swaps (85.1 ) 84.6 - - 0.5 - -
Deferred consideration (10.8 ) 5.8 - - - - (5.0 )
(1,778.8 ) 193.2 - (10.8 ) 1.5 (0.6 ) (1,595.5 )
+ Cash comprises cash, cash equivalents and overdrafts. Included in
overdrafts on the Group's consolidated balance sheet are balances totalling £
577.3m (2016: £532.5m) held in the Group's notional cash pools under which the
bank has the right of offset against cash at bank of the same amount.
* The aggregate bond fair value above of £1,855.0m (30 June 2016: £1,843.1m)
includes the GBP value of the US$ denominated bonds. To remove the Group's
exposure to currency fluctuations it has entered into currency swaps which
effectively hedge the movement in the underlying bond fair value. The interest
rate swaps are being used to hedge the exposure to changes in the fair value of
GBP denominated bonds. The sum of these items held at fair value equates to the
underlying value of the Group's bond debt of £1,568.3m (30 June 2016: £
1,491.2m).
In June 2017, the Group repaid USD$50m of Series A bonds at maturity,
equivalent to £33.8m. Of the Group's bond debt, £90.3m matures in the next 12
months and the remainder at various maturities to 2027. In February 2017, the
Group elected to terminate all of its fixed rate interest rate swaps. In the
period ended 30 June 2017, the Group prepaid £30m on a term loan. Of the
remaining outstanding term loans of £620m, having agreed amendments and
extensions, £520m now matures in September 2018 and £100m matures in May 2019.
In addition as at 30 June 2017, the Group has available to it a committed
Revolving Credit Facility of £600m of which £81m matures in August 2020 and £
519m matures in August 2021. This facility is available for the Group's
immediate use and £nil was drawn down at 30 June 2017.
Non-cash flow movements
Net debt Cash flow Acquisitions Foreign Fair Amortisation Net debt
at 1 movements in 2016 exchange value of bond at 30 June
January £m £m movements changes issue costs 2016
2016 £m £m £m £m
£m
Cash+ 85.3 405.7 - 8.9 - - 499.9
Bonds* (1,749.4 ) 70.0 - (31.1 ) (132.3 ) (0.3 ) (1,843.1 )
Currency swaps in relation 213.9 - - - 128.7 - 342.6
to US $ denominated bonds*
Interest rate swaps in 6.9 - - - 2.4 - 9.3
relation to GBP denominated
bonds*
Term loan (300.0 ) (500.0 ) - - - - (800.0 )
Finance leases (7.0 ) 2.4 (0.8 ) - - - (5.4 )
Total net liabilities from (1,835.6 ) (427.6 ) (0.8 ) (31.1 ) (1.2 ) (0.3 ) (2,296.6 )
financing activities
Underlying net debt (1,750.3 ) (21.9 ) (0.8 ) (22.2 ) (1.2 ) (0.3 ) (1,796.7 )
Fixed rate interest rate (67.0 ) - - - (22.8 ) - (89.8 )
swaps
Deferred consideration (21.5 ) 6.7 - - - - (14.8 )
(1,838.8 ) (15.2 ) (0.8 ) (22.2 ) (24.0 ) (0.3 ) (1,901.3 )
16 Financial instruments
Carrying values and fair values of financial instruments
The following table analyses by classification and category the Group's
financial instruments (excluding short term debtors, creditors, fund payables/
receivables and cash in hand) that are carried in the financial statements. The
values below represent the carrying amounts. The fair values are the same as
the carrying values other than twelve fixed rate bonds totalling £601.0m (31
December 2016: £593.1m), included below in the bond value of £1,855.0m (31
December 2016: £1,961.7m), with a carrying value of £601.0m (31 December 2016:
£593.1m) and a fair value of £632.9m (31 December 2016: £616.9m).
As at 30 June 2017 Available-for-sale At fair Loans and Derivatives Other Total
value receivables used for financial
through hedging liabilities
the income
statement
£m £m £m £m £m £m
Financial assets
Unlisted equity securities 2.3 - - - - 2.3
Investment loan - - 5.0 - - 5.0
Investment - - 4.0 - - 4.0
Deferred consideration receivable - - 14.0 - - 14.0
Insurance asset recoverable - - 5.0 - - 5.0
Cash flow hedges - - - 8.7 - 8.7
Non-designated foreign exchange - 7.5 - - - 7.5
forwards and swaps
Interest rate swaps in relation to - - - 6.5 - 6.5
GBP denominated bonds
Currency swaps in relation to USD - - - 285.8 - 285.8
denominated bonds
2.3 7.5 28.0 301.0 - 338.8
Financial liabilities
Overdrafts - - - - 577.3 577.3
Unsecured loan notes - - - - 0.3 0.3
Bonds - - - - 1,855.0 1,855.0
Term loan - - - - 620.0 620.0
Cash flow hedges - - - 3.1 - 3.1
Non-designated foreign exchange - 1.7 - - - 1.7
forwards and swaps
Foreign exchange swaps held for - - - 0.1 - 0.1
foreign net investment
Currency swaps in relation to USD - - - 5.6 - 5.6
denominated bonds
Contingent consideration - - - - 27.0 27.0
Deferred consideration - - - - 5.0 5.0
Obligations under finance leases - - - - 0.5 0.5
Public sector subsidiary partnership - - - - 55.1 55.1
payment
Put options of non-controlling - - - - 107.8 107.8
interests
Dividends declared - - - - 137.1 137.1
- 1.7 - 8.8 3,385.1 3,395.6
As at 31 December 2016 Available-for-sale At fair Loans and Derivatives Other Total
value receivables used for financial
through hedging liabilities
the income
statement
£m £m £m £m £m £m
Financial assets:
Available-for-sale assets 5.6 - - - - 5.6
Investment loan - - 5.0 - - 5.0
Investment - - 4.0 - - 4.0
Deferred consideration - - 17.0 - - 17.0
Insurance asset recoverable - - 15.5 - - 15.5
Cash flow hedges - - - 7.0 - 7.0
Non-designated foreign exchange - 7.4 - - - 7.4
forwards and swaps
Interest rate swaps in relation to - - - 7.7 - 7.7
GBP denominated bonds
Currency swaps in relation to USD - - - 361.0 - 361.0
denominated bonds
5.6 7.4 41.5 375.7 - 430.2
Financial liabilities:
Overdraft - - - - 532.5 532.5
Unsecured loan notes - - - - 0.3 0.3
Bonds - - - - 1,961.7 1,961.7
Term loan - - - - 650.0 650.0
Cash flow hedges - - - 4.2 - 4.2
Non-designated foreign exchange - 3.3 - - - 3.3
forwards and swaps
Foreign exchange swaps held for - - - 0.1 - 0.1
foreign net investment
Currency swaps in relation to USD - - - 3.1 - 3.1
denominated bonds
Contingent consideration - - - - 23.0 23.0
Deferred consideration - - - - 10.8 10.8
Obligations under finance leases - - - - 2.3 2.3
Public sector subsidiary partnership - - - - 58.8 58.8
payment
Put options of non-controlling - - - - 115.9 115.9
interests
Fixed rate interest rate swaps - 85.1 - - - 85.1
- 88.4 - 7.4 3,355.3 3,451.1
The fair value of financial instruments has been calculated by discounting the
expected future cash flows at prevailing interest rates, except for unlisted
equity securities and investment loans. The valuation models incorporate
various inputs including foreign exchange spot and forward rates and interest
rate curves. Unlisted equity securities and investment loans are held at
amortised cost. The Group enters into derivative financial instruments with
multiple counterparties, all of which are financial institutions with
investment grade credit ratings.
Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair
value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or
liabilities
Level 2: other techniques for which all inputs which have a significant effect
on the recorded fair value are observable, either directly or indirectly
Level 3: techniques which use inputs which have a significant effect on the
recorded fair value that are not based on observable market data.
As at 30 June 2017, the Group held the following financial instruments measured
at fair value:
30 June 31
2017 December
2016
£m £m
Assets measured at fair value
Cash flow hedges 8.7 7.0
Non-designated foreign exchange forwards and swaps 7.5 7.4
Interest rate swaps in relation to GBP denominated bonds 6.5 7.7
Currency swaps in relation to USD denominated bonds 285.8 361.0
308.5 383.1
Liabilities measured at fair value
Bonds 1,254.0 1,368.6
Cash flow hedges 3.1 4.2
Non-designated foreign exchange forwards and swaps 1.7 3.3
Foreign exchange swaps held for foreign net investment 0.1 0.1
Currency swaps in relation to USD denominated bonds 5.6 3.1
Fixed rate interest rate swaps - 85.1
Public sector subsidiary partnership payment 55.1 58.8
Put options of non-controlling interests 107.8 115.9
Contingent consideration 27.0 23.0
1,454.4 1,662.1
During both periods the Group only had Level 2 assets or liabilities measured
at fair value apart from contingent consideration, the public sector subsidiary
partnership payment and the put options of non-controlling interests which are
Level 3 liabilities. It is the Group's policy to recognise transfers between
levels of the fair value hierarchy at the end of the reporting period during
which the transfer occurred. During the 6 months ended 30 June 2017, there were
no transfers between Level 1 and Level 2 fair value measurements and no
transfers into or out of Level 3 fair value measurements.
Contingent consideration arises in business acquisitions where the Group has
agreed to pay the vendors additional consideration dependent on the achievement
of performance targets in the periods post-acquisition. These performance
periods are of up to 3 years in duration and will be settled in cash on their
payment date on achieving the performance criteria. The Group makes provision
for such contingent consideration for each acquisition based on an assessment
of its fair value at the acquisition date. Contingent consideration has been
calculated based on the Group's expectation of what it will pay in relation to
the post-acquisition performance of the acquired entities by weighting the
probability of a range of payments to give an estimate of the final
obligation. A sensitivity analysis was performed on the expected contingent
consideration of £27.0m. The sensitivity analysis performed adjusted the
probability of payment of the contingent amounts. A 10% increase in the
probability of contingent consideration being paid results in an increase in
potential contingent consideration of £3.9m. A 10% decrease in the probability
of the contingent consideration being paid results in a decrease in potential
contingent consideration of £3.3m.
The public sector subsidiary partnership payment liability is an estimate of
the annual preferred payments to be made by Axelos Limited (the partnership
formed with the Cabinet Office) to the Cabinet Office in years 2017 to 2023.
This payment is funded by Axelos Limited and is contingent on profits. The fair
value has been derived by discounting the expected payment at the Group cost of
debt to arrive at its present value. If the discount rate was to increase/
decrease by 1% the present value would decrease/increase by £2.0m.
The put options of the non-controlling interests are measured at amortised cost
based on the expected redemption value of the shares that will be paid in cash
by the Group. This value is determined by reference to the expected date of
exercise of the options, which is then discounted to arrive at a present
value. The sensitivity of the valuation to movements in both the discount rate
and the cash flows that have been used to calculate it, are as follows: a 10%
increase/decrease in the earnings potential of the business results in a £10.7m
increase/decrease in the valuation; a 1% increase/decrease in the discount rate
applied to the valuation results in a £2.0m decrease/£2.0m increase in the
valuation.
The following table shows the reconciliation from the opening balances to the
closing balances for level 3 fair values:
Contingent Subsidiary Put options of
consideration partnership non-controlling
payment interests
£m £m £m
At 1 January 2017 23.0 58.8 115.9
Arising from business combinations in the period 6.2 - -
Profit and loss movement - administrative expenses (0.1 ) - -
Discount unwind - net finance costs - 1.0 -
Movement of put options recognised in equity - - (8.1 )
Utilised (2.1 ) (4.7 ) -
At 30 June 2017 27.0 55.1 107.8
17 Capital commitments
At 30 June 2017, amounts contracted for but not provided in the financial
statements for the acquisition of property, plant and equipment amounted to £
7.5m (31 December 2016: £10.0m).
18 Related party transactions
Transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note.
Compensation of key management personnel (including Directors of the parent
company):
6 months 6 months
30 June 30 June
2017 2016
£m £m
Short term employment benefits 4.2 3.5
Post employment benefits 0.2 0.1
Share based payments 0.4 2.4
4.8 6.0
Gains on share options exercised in the period by key management personnel
totalled £0.4m (30 June 2016: £9.9m).
The following companies are substantial shareholders in the Company and
therefore a related party of the Company (in each case, for the purposes of the
Listing Rules of the UK Listing Authority). The number of shares held on 15
September 2017 was as below:
Shareholder No. of % of voting
shares rights
Veritas Asset Management LLP 92,861,962 13.91%
Invesco Asset Management 59,067,929 8.85%
Woodford Investment Management LLP 56,727,196 8.50%
The Capital Group Companies, Inc. 52,017,183 7.79%
Baillie Gifford & Co Limited 48,627,828 7.29%
BlackRock, Inc. 47,468,674 7.11%
T. Rowe Price 25,441,630 3.81%
Marathon Asset Management LLP 22,093,405 3.31%
19 Contingent liabilities
The Group has provided, through the normal course of its business, performance
bonds and bank guarantees of £91.1m (31 December 2016: £91.7m).
One of the Group's major life and pensions clients is conducting a strategic
review, the outcome of which is uncertain but could result in the continuation
of the contract with amended terms or the termination of the contract. If the
operation is terminated, the Group will incur associated costs, including the
costs of transferring the service provided, and the impairment of associated
contract assets, off-set by the release of contract liabilities. As the
outcome of the client's review is uncertain, the Group has not made any
provision for a future outflow of funds or for any asset impairments that might
result from the eventual outcome. The review is expected to conclude in 2017
and any outflow of funds will likely be in late 2017 or early 2018.
Further narrative on contingent liabilities, specifically in regard to the
Connaught Fund matter, can be seen in note 14.
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
2017 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 2017 is not prepared, in all
material respects, in accordance with IAS 34 Interim Financial Reporting as
adopted by the EU and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
We read the other information contained in the half-yearly financial report and
consider whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial
statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
Whilst the company has previously produced a half-yearly report containing a
condensed set of financial statements, those financial statements have not
previously been subject to a review by an independent auditor. As a
consequence, the review procedures set out above have not been performed in
respect of the comparative period for the six months ended 30 June 2016.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with International Financial Reporting Standards as
adopted by the EU. The directors are responsible for preparing the condensed
set of financial statements included in the half-yearly financial report in
accordance with IAS 34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the company
those matters we are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company for our review work, for this
report, or for the conclusions we have reached.
Robert Brent
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
20 September 2017
Statement of Directors' responsibilities
The Directors confirm, to the best of their knowledge, that this condensed set
of financial statements has been prepared in accordance with IAS 34 as adopted
by the European Union and that the Half Year Management Report includes a fair
review of the information required by Rules 4.2.4, 4.2.7 and 4.2.8 of the
Disclosure and Transparency Rules of the United Kingdom Financial Conduct
Authority.
The names and functions of the Directors of Capita plc are as listed in the
Group's Annual Report for 2016. A list of current Directors is maintained on
the Group website: www.capita.com.
By order of the Board
A N Greatorex
Interim Chief Executive & Group Finance Director
20 September 2017
Appendix 1 - Alternative Performance Measures (APMs) used in the half yearly
report for the 6 months to 30 June 2017
The Group presents various APMs as the Directors believe that these are useful
for users of the financial statements in helping to provide a balanced view of,
and relevant information on, the Group's financial performance, position and
cash flows. These APMs are mainly measures which disclose the 'underlying'
performance of the Group excluding specific items which are regarded as
non-underlying.
The Group separately presents intangible amortisation, asset impairments,
acquisition contingent consideration movements, acquisition expenses, the
financial impact of business exits or businesses in the process of being
exited, movements in the mark to market valuation of certain financial
instruments and other specific items in the income statement which, in the
Directors' judgement, need to be disclosed separately (see notes 5, 6 and 7) by
virtue of their nature, size and incidence in order for users of the financial
statements to obtain a proper understanding of the financial information and
the underlying performance of the business.
In addition, the Group presents other APMs including Key Performance Indicators
(KPIs) such as return on capital employed and interest cover by which we
monitor our performance and others such as organic and acquisition revenue
growth which provide useful information to users which is not otherwise readily
available from the financial statements.
APMs presented 2017 2016 % change Source or calculation
(restated)
Revenue
Total revenue as reported £ m £2,155.9 m (1.3)% Line item in income
2,127.3 statement
2016 disposals reported H1 £- m (£24.6 m) Line item in income
2016 statement
2017 disposals (£61.4 m) £- m
Underlying revenue £ m £2,131.3 m (3.1)%
2,065.9
2016 disposals reclassed £- m £16.5 m
from business exit in H2
2017 disposals £- m (£101.9 m) Line item in income
statement
Underlying revenue on a £ m £2,045.9 m 1.0% Underlying revenue
like-for-like basis 2,065.9 excluding businesses
exited
2016 acquisitions (24.0 ) £0.0 m (1.2)% Additional contribution in
H1 2017 of acquisitions
acquired in 2016
2017 acquisitions (6.5 ) £0.0 m (0.3)% Contribution in H1 2017 of
acquisitions acquired in
2017
Underlying organic revenue £ m £2,045.9 m (0.5)% Underlying revenue
2,035.4 excluding businesses
exited
Profit
Operating profit from £62.6 m £87.3 m (28.3)% Line item in income
continuing operations as statement
reported
Business exit £63.9 m £- m Line item in income
statement
Specific items £101.9 m £78.7 m Line item in income
statement
Underlying operating profit £228.4 m £166.0 m 37.6% Line item in income
from continuing operations statement
Businesses held for sale n/a (£5.6 m) Businesses reported in H1
like-for-like comparison 2016 as underlying
reported in H1 2017 as
non-underlying
Like-for-like operating £228.4m £160.4 m 42.4% Underlying operating
profit profit excluding
businesses exited
Underlying profit before tax £195.0 m £133.7 m 45.8% Line item on income
from continuing operations statement
Underlying operating margin 11.1 % 7.8 % Calculation (underlying
operating profit/
underlying revenue)
Like-for-like operating 11.2 % 7.8 % 340 b.p. Calculation (like-for-like
margin operating profit/
like-for-like underlying
revenue)
Profit before tax from £27.6 m £37.2 m (25.8)% Line item in income
continuing operations as statement
reported
Underlying profit before tax £195.0 m £133.7 m 45.8% Line item in income
from continuing operations statement
Basic earnings per share (0.11)p 4.66p (102.4)% Line item in income
from continuing operations statement
as reported
Underlying earnings per 22.92p 16.12p 42.2% Line item in income
share statement and note 9
Cash flow
Cash generated by continuing £241.6m £355.2 m (32.0)% Line item in note 15 -
operations before additional cash flow
non-underlying cash items information
Underlying free cash flow £179.2m £213.8m (16.2)% Line item in note 15 -
from continuing operations additional cash flow
information
Free cash flow after £182.0m £199.2m (8.6)% Line item in note 15 -
non-underlying items from additional cash flow
continuing operations information
APMs presented (continued) 2017 2016 Source or calculation
(as
reported† )
Gearing
Annualised underlying EBIT £482.8 m £667.8 m This is underlying
operating profit. To
arrive at an annualised
figure, HY1 results are
added to the prior year's
HY2 results which can be
deduced by subtracting
the prior year's HY1
results from the FY
results.
Deduct: non-controlling (£14.8 m) (£12.6 m) Annualised result from
interest income statement before
tax charge
Deduct: acquisition costs (£4.6 m) (£13.0 m) Annualised result from
line item in note 7
Add back: share based £- m £11.0 m Annualised result from
payment expense line item in note 15 -
expense only
Add back: disposal of £0.8 m (£1.5 m) Annualised results from
non-current assets line item in note 15
Add back: non-current £2.8 m £2.4 m
service pension charge
Annualised adjusted EBIT a £467.0 m £654.1 m
Add back: pre-acquisition £1.4 m £17.8 m
underlying profit
Annualised adjusted EBIT £468.4 m £671.9 m
Depreciation and £99.5 m £95.3 m Line items per cash flow
amortisation
Annualised adjusted EBITDA b £567.9 m £767.2 m
Underlying net interest £33.4 m £32.3 m Line item in income
charge statement
Interest charge (£4.7 m) (£3.2 m) Line item in note 8
attributable to pensions
Borrowing costs £28.7 m £29.1 m Calculation (underlying
interest charge excluding
pension interest)
Annualised underlying c £59.6 m £55.5 m To arrive at an
interest charge annualised figure, HY1
results are added to the
prior year's HY2 results
which can be deduced by
subtracting the prior
year's HY1 results from
the FY results.
Equity attributable to d £408.2 m £679.3 m Last reported December
shareholders shareholders funds
15% of equity attributable e £61.2 m £101.9 m Calculation (d x 15%),
to shareholders minimum £nil
Contingent obligations f £91.1m £88.1m
under bonds and guarantees
g £29.9 m £0.0m If f>e, the difference is
treated as debt
Net debt h 1,595.5 m £1,901.3 m Line item in note 13
Adjusted net debt i £1,625.4 m £1,901.3 m Calculation (g + h)
Annualised underlying 7.8 x 11.8 x Calculation (a / c)
interest cover
Annualised adjusted net 2.86 x 2.48 x Calculation i / b)
debt to Annualised adjusted
EBITDA ratio
† Prior period debt
covenants are not
required to be restated
(Dec 16
restated)
Return on capital employed
(ROCE)
Underlying operating profit A £457.0 £394.6 Annualised underlying
operating profit, per
Note 4
Tax rate B 18.5 % 18.5 %
Tax C = A x £84.5m £73.0m Calculation (underlying
B profit multiply tax rate)
Underlying operating profit D = A - £372.5m £321.6m Calculation (underlying
after tax C profit less tax)
Current period net assets E (£668.3m) (£552.9m) Line item in balance
sheet
Current period underlying F £1,590.5m £1,682.9m Line item in note 15 -
net debt additional cash flow
information
Adjustments to capita G £1,385.9m £1,226.8m Includes post-tax impact
employed of accumulated acquired
intangible amortisation,
fixed rate swaps, put
options and pensions
H = £2,308.1m £2,356.8m Used in 2017 average
E+F+G capital employed
Less acquisition spend in I (£19.8m) (£89.5m) Consideration paid - cash
the period acquired + debt acquired,
per note 13
Current period capital M1 = I H £2,288.3m £2,267.3m
employed
Prior period net assets J (£337.3m) (£189.0m)
Prior period underlying net K £1,796.7m £1,750.3m
debt
Comparative prior period L £1,129.9m £1,046.2m Includes post-tax impact
adjustments of accumulated acquired
intangible amortisation,
fixed rate swaps, put
options and pensions
Prior period capital M2 = £2,589.3m £2,607.5m
employed J+K+L
Average capital employed N = £2,438.8m £2,437.4m
pre-acquisitions (M1+M2)/
2
Weighted average O £12.8m £59.7m Pro-rata no. of months
acquisition spend in the post-acquisition profit
period
Average capital employed P = N+O £2,451.6m £2,497.1m
ROCE Q = D / 15.2 % 12.9 %
P
Appendix 2 - Financial statements restatement under IFRS 15
The Group early adopted IFRS 15 Revenue from Contracts with Customers ("IFRS
15") on 1 January 2017 using the full retrospective method. This appendix
details the Group's new accounting policy for revenue and shows the impact of
the adoption of IFRS 15 on the Group's primary financial statements.
The cumulative effect of the adoption of IFRS 15 has resulted in a decrease in
net assets of £942.3 million as at 1 January 2016 (31 December 2016: £
1,036.3million). This reflects an important change in accounting policy as the
Group moves from one based predominantly on percentage of completion revenue
recognition to a methodology that is focused on aligning revenue recognition to
the delivery of solutions and value to its customers.
Accounting policy for revenue
The Group generates revenue largely in the UK and Europe.
The Group operates a number of diverse businesses and accordingly applies a
variety of methods for revenue recognition, based on the principles set out in
IFRS 15. Many of the contracts entered into are long term and complex in
nature given the breadth of solutions the Group offers.
The revenue and profits recognised in any period are based on the delivery of
performance obligations and an assessment of when control is transferred to the
customer.
In determining the amount of revenue and profits to record, and related balance
sheet items (such as contract fulfilment assets, capitalisation of costs to
obtain a contract, trade receivables, accrued income and deferred income) to
recognise in the period, management is required to form a number of key
judgements and assumptions. This includes an assessment of the costs the Group
incurs to deliver the contractual commitments and whether such costs should be
expensed as incurred or capitalised. These judgements are inherently subjective
and may cover future events such as the achievement of contractual milestones,
performance KPIs and planned cost savings. In addition, for certain contracts,
key assumptions are made concerning contract extensions and amendments, as well
as opportunities to use the contract developed systems and technologies on
other similar projects.
Revenue is recognised either when the performance obligation in the contract
has been performed (so 'point in time' recognition) or 'over time' as control
of the performance obligation is transferred to the customer.
For all contracts, the Group determines if the arrangement with a customer
creates enforceable rights and obligations. This assessment results in certain
Master Service Agreements ('MSA's') not meeting the definition of a contract
under IFRS 15 and as such the individual call-off agreements, linked to the
MSA, are treated as individual contracts.
The Group enters into contracts which contain extension periods, where either
the customer or both parties can choose to extend the contract or there is an
automatic annual renewal, and/or termination clauses that could impact the
actual duration of the contract. Judgement is applied to assess the impact
that these clauses have when determining the appropriate contract term. The
term of the contract impacts both the period over which revenue from
performance obligations may be recognised and the period over which contract
fulfilment assets and capitalised costs to obtain a contract are expensed.
For contracts with multiple components to be delivered such as transformation,
transitions and the delivery of outsourced services, management applies
judgement to consider whether those promised goods and services are (i)
distinct - to be accounted for as separate performance obligations; (ii) not
distinct - to be combined with other promised goods or services until a bundle
is identified that is distinct or (iii) part of a series of distinct goods and
services that are substantially the same and have the same pattern of transfer
to the customer.
At contract inception the total transaction price is estimated, being the
amount to which the Group expects to be entitled and has rights to under the
present contract. This includes an assessment of any variable consideration
where the Group's performance may result in additional revenues based on the
achievement of agreed KPIs. Such amounts are only included based on the
expected value or the most likely outcome method, and only to the extent that
it is highly probable that no revenue reversal will occur.
The transaction price does not include estimates of consideration resulting
from change orders for additional goods and services unless these are agreed.
Once the total transaction price is determined, the Group allocates this to the
identified performance obligations in proportion to their relative stand-alone
selling prices and recognises revenue when (or as) those performance
obligations are satisfied. The Group infrequently sells standard products with
observable standalone prices due to the specialised services required by
customers and therefore the Group applies judgement to determine an appropriate
standalone selling price. More frequently, the Group sells a customer bespoke
solution, and in these cases the Group typically uses the expected cost plus
margin or a contractually stated price approach to estimate the standalone
selling price of each performance obligation.
The Group may offer price step downs during the life of a contract, but with no
change to the underlying scope of services to be delivered. In general, any
such variable consideration, price step down or discount is included in the
total transaction price to be allocated across all performance obligations
unless it relates to only one performance obligation in the contract.
For each performance obligation, the Group determines if revenue will be
recognised over time or at a point in time. Where the Group recognises revenue
over time for long term contracts, this is in general due to the Group
performing and the customer simultaneously receiving and consuming the benefits
provided over the life of the contract.
For each performance obligation to be recognised over time, the Group applies a
revenue recognition method that faithfully depicts the Group's performance in
transferring control of the goods or services to the customer. This decision
requires assessment of the real nature of the goods or services that the Group
has promised to transfer to the customer. The Group applies the relevant
output or input method consistently to similar performance obligations in other
contracts.
When using the output method the Group recognises revenue on the basis of
direct measurements of the value to the customer of the goods and services
transferred to date relative to the remaining goods and services under the
contract. Where the output method is used, in particular for long term service
contracts where the series guidance is applied (see below for further details),
the Group often uses a method of time elapsed which requires minimal
estimation. Certain long term contracts use output methods based upon
estimation of number of users, level of service activity or fees collected.
If performance obligations in a contract do not meet the over time criteria,
the Group recognises revenue at a point in time (see below for further
details).
The Group disaggregates revenue from contracts with customers by contract type,
as management believe this best depicts how the nature, amount, timing and
uncertainty of the Group's revenue and cash flows are affected by economic
factors:
Contract term longer than 2 years
The Group provides a range of services in the majority of its reportable
segments under customer contracts with a duration of more than two years.
The nature of contracts or performance obligations categorised within this
revenue type is diverse and includes (i) long term outsourced service
arrangements in the public and private sectors; and (ii) active software
licence arrangements (see definition below).
The service contracts in this category include contracts with either a single
or multiple performance obligations.
The Group considers that the services provided meet the definition of a series
of distinct goods and services as they are (i) substantially the same and (ii)
have the same pattern of transfer (as the series constitutes services provided
in distinct time increments (e.g., daily, monthly, quarterly or annual
services)) and therefore treats the series as one performance obligation. Even
if the underlying activities performed by the Group to satisfy a promise vary
significantly throughout the day and from day to day, that fact, by itself,
does not mean the distinct goods or services are not substantially the same.
For the majority of long service contracts with customers in this category, the
Group recognises revenue using the output method as it best reflects the nature
in which the Group is transferring control of the goods or services to the
customer.
Active software licences are those where the Group has a continuing involvement
after the sale or transfer of control to the customer, which significantly
affects the intellectual property to which the customer has rights. The Group
is in a majority of cases responsible for any maintenance, continuing support,
updates and upgrades and accordingly the sale of the initial software is not
distinct. The Group's accounting policy for licences is discussed in more
detail below.
Over time service with contract length less than 2 years
The nature of contracts or performance obligations categorised within this
revenue type is diverse and includes (i) short term outsourced service
arrangements in the public and private sectors; and (ii) software maintenance
contracts.
The Group has assessed that maintenance and support (i.e. on-call support,
remote support) for software licences is a performance obligation that can be
considered capable of being distinct and separately identifiable in a contract
if the customer has a passive licence. These recurring services are
substantially the same as the nature of the promise is for the Group to 'stand
ready' to perform maintenance and support when required by the customer. Each
day of standing ready is then distinct from each following day and is
transferred in the same pattern to the customer.
Transactional (Point in time) contracts
The Group delivers a range of goods or services in all reportable segments that
are transactional services for which revenue is recognised at the point in time
when control of the goods or services has transferred to the customer. This
may be at the point of physical delivery of goods and acceptance by a customer
or when the customer obtains control of an asset or service in a contract with
customer-specified acceptance criteria.
The nature of contracts or performance obligations categorised within this
revenue type is diverse and includes (i) provision of IT hardware goods; (ii)
passive software licence agreements; (iii) commission received as agent from
the sale of third party software; and (iv) fees received in relation to
delivery of professional services.
Passive software licences are licences which have significant stand-alone
functionality and the contract does not require, and the customer does not
reasonably expect, the Group to undertake activities that significantly affect
the licence. Any ongoing maintenance or support services for passive licences
are likely to be separate performance obligations. The Group's accounting
policy for licences is discussed in more detail below.
Contract modifications
The Group's contracts are often amended for changes in contract specifications
and requirements. Contract modifications exist when the amendment either
creates new or changes the existing enforceable rights and obligations. The
effect of a contract modification on the transaction price and the Group's
measure of progress for the performance obligation to which it relates, is
recognised as an adjustment to revenue in one of the following ways:
a. prospectively as an additional separate contract;
b. prospectively as a termination of the existing contract and creation of a
new contract;
c. as part of the original contract using a cumulative catch up; or
d. as a combination of b) and c).
For contracts for which the Group has decided there is a series of distinct
goods and services that are substantially the same and have the same pattern of
transfer where revenue is recognised over time, the modification will always be
treated under either a) or b). d) may arise when a contract has a part
termination and a modification of the remaining performance obligations.
The facts and circumstances of any contract modification are considered
individually as the types of modifications will vary contract by contract and
may result in different accounting outcomes.
Judgement is applied in relation to the accounting for such modifications where
the final terms or legal contracts have not been agreed prior to the period end
as management need to determine if a modification has been approved and if it
either creates new or changes existing enforceable rights and obligations of
the parties. Depending upon the outcome of such negotiations, the timing and
amount of revenue recognised may be different in the relevant accounting
periods. Modification and amendments to contracts are undertaken via an agreed
formal process. For example, if a change in scope has been approved but the
corresponding change in price is still being negotiated, management use their
judgement to estimate the change to the total transaction price. Importantly
any variable consideration is only recognised to the extent that it is highly
probably that no revenue reversal will occur.
Principal versus agent
The Group has arrangements with some of its customers whereby it needs to
determine if it acts as a principal or an agent as more than one party is
involved in providing the goods and services to the customer. The Group acts as
a principal if it controls a promised good or service before transferring that
good or service to the customer. The Group is an agent if its role is to
arrange for another entity to provide the goods or services. Factors
considered in making this assessment are most notably the discretion the Group
has in establishing the price for the specified good or service, whether the
Group has inventory risk and whether the Group is primarily responsible for
fulfilling the promise to deliver the service or good.
This assessment of control requires judgement in particular in relation to
certain service contracts. An example, is the provision of certain recruitment
and learning services where the Group may be assessed to be agent or principal
dependent upon the facts and circumstances of the arrangement and the nature of
the services being delivered.
Where the Group is acting as a principal, revenue is recorded on a gross basis.
Where the Group is acting as an agent revenue is recorded at a net amount
reflecting the margin earned.
Licences
Software licences delivered by the Group can either be right to access
('active') or right to use ('passive') licences. Active licences are licences
which require continuous upgrade and updates for the software to remain useful,
all other licences are treated as passive licences. The assessment of whether
a licence is active or passive involves judgement. The key determinant of
whether a licence is active is whether the Group is required to undertake
activities that significantly affect the licensed intellectual property (or the
customer has a reasonable expectation that it will do so) and the customer is,
therefore, exposed to positive or negative impacts resulting from those
changes.
When software upgrades are sold as part of the software licence agreement (i.e.
software upgrades are promised to the customer), the Group applies judgement to
assess whether the software upgrade is distinct from the licence (i.e. a
separate performance obligation). If the upgrade is considered fundamental to
the ongoing use of the software by the customer, the upgrades are not
considered distinct and not accounted for as a separate performance obligation.
The Group considers for each contract that includes a separate licence
performance obligation all the facts and circumstances in determining whether
the licence revenue is recognised over time or at a point in time from the go
live date of the licence.
Contract related assets and liabilities
As a result of the contracts which the Group enters into with its customers, a
number of different assets and liabilities are recognised on the Group's
balance sheet. These include but are not limited to:
• Property, plant and equipment*
• Intangible assets*
• Contract fulfilment assets^
• Contract assets derived from costs to obtain a contract^
• Trade receivables*
• Accrued income^
• Deferred income^
* No change in the accounting policies for these assets as a result of the
adoption of IFRS 15
^ Refer below for the accounting policy applied following the adoption of IFRS
15
Contract fulfilment assets
Contract fulfilment costs are divided into (i) costs that give rise to an
asset; and (ii) costs that are expensed as incurred.
When determining the appropriate accounting treatment for such costs, the Group
firstly considers any other applicable standards. If those other standards
preclude capitalisation of a particular cost, then an asset is not recognised
under IFRS 15.
If other standards are not applicable to contract fulfilment costs, the Group
applies the following criteria which, if met, result in capitalisation: (i) the
costs directly relate to a contract or to a specifically identifiable
anticipated contract; (ii) the costs generate or enhance resources of the
entity that will be used in satisfying (or in continuing to satisfy)
performance obligations in the future; and (iii) the costs are expected to be
recovered. The assessment of this criteria requires the application of
judgement, in particular when considering if costs generate or enhance
resources to be used to satisfy future performance obligations and whether
costs are expected to be recoverable.
The Group regularly incurs costs to deliver its outsourcing services in a more
efficient way (often referred to as 'transformation' costs). These costs may
include process mapping and design, system development, project management,
hardware (generally in scope of the Group's accounting policy for property,
plant and equipment), software licence costs (generally in scope of the Group's
accounting policy for intangible assets), recruitment costs and training.
The Group has determined that, where the relevant specific criteria are met,
the costs for (i) process mapping and design; (ii) system development; and
(iii) project management are likely to qualify to be capitalised as contract
fulfilment assets.
Capitalisation of costs to obtain a contract
The incremental costs of obtaining a contract with a customer are recognised as
an asset if the Group expects to recover them. The Group incurs costs such as
bid costs, legal fees to draft a contract and sales commissions when it enters
into a new contract.
Judgement is applied by the Group when determining what costs qualify to be
capitalised in particular when considering whether these costs are incremental
and whether these are expected to be recoverable. For example, the Group
considers which type of sales commissions are incremental to the cost of
obtaining specific contracts and the point in time when the costs will be
capitalised.
The Group has determined that the following costs may be capitalised as
contract assets (i) legal fees to draft a contract (once the Group has been
selected as a preferred supplier for a bid); and (ii) sales commissions that
are directly related to winning a specific contract.
Costs incurred prior to selection as preferred supplier are not capitalised but
are expensed as incurred.
Utilisation, derecognition and impairment of contract fulfilment assets and
capitalised costs to obtain a contract
The Group utilises contract fulfilment assets and capitalised costs to obtain a
contract to cost of sales over the expected contract period using a systematic
basis that mirrors the pattern in which the Group transfers control of the
service to the customer. The utilisation charge is included within cost of
sales. Judgement is applied to determine this period, for example whether this
expected period would be the contract term or a longer period such as the
estimated life of the customer relationship for a particular contract if, say,
renewals are expected.
A contract fulfilment asset or capitalised costs to obtain a contract is
derecognised either when it is disposed of or when no further economic benefits
are expected to flow from its use or disposal.
Management is required to determine the recoverability of contract related
assets within property, plant and equipment, intangible assets as well as
contract fulfilment assets, capitalised costs to obtain a contract, accrued
income and trade receivables. At each reporting date, the Group determines
whether or not the contract fulfilment assets and capitalised costs to obtain a
contract are impaired by comparing the carrying amount of the asset to the
remaining amount of consideration that the Group expects to receive less the
costs that relate to providing services under the relevant contract. In
determining the estimated amount of consideration, the Group uses the same
principles as it does to determine the contract transaction price, except that
any constraints used to reduce the transaction price will be removed for the
impairment test.
Where the relevant contracts or specific performance obligations are
demonstrating marginal profitability or other indicators of impairment,
judgement is required in ascertaining whether or not the future economic
benefits from these contracts are sufficient to recover these assets. In
performing this impairment assessment, management is required to make an
assessment of the costs to complete the contract. The ability to accurately
forecast such costs involves estimates around cost savings to be achieved over
time, anticipated profitability of the contract, as well as future performance
against any contract-specific KPIs that could trigger variable consideration,
or service credits. Where a contract is anticipated to make a loss, these
judgements are also relevant in determining whether or not an onerous contract
provision is required and how this is to be measured.
Deferred and accrued income
The Group's customer contracts include a diverse range of payment schedules
dependent upon the nature and type of goods and services being provided. The
Group often agrees payment schedules at the inception of long term contracts
under which it receives payments throughout the term of the contracts. These
payment schedules may include performance-based payments or progress payments
as well as regular monthly or quarterly payments for ongoing service delivery.
Payments for transactional goods and services may be at delivery date, in
arrears or part payment in advance.
Where payments made are greater than the revenue recognised at the period end
date, the Group recognises a deferred income contract liability for this
difference. Where payments made are less than the revenue recognised at the
period end date, the Group recognises an accrued income contract asset for this
difference.
Property commercialisation
Part of the Group's strategy is to create and deliver maximum value from assets
that are either owned by its customers or are acquired by the Group as part of
a wider transaction. By combining the Group's capabilities with the expertise
and assets of any organisation, the Group can significantly increase the value
that can be generated from often under-utilised assets. Our strategy often
involves the commercialisation of property assets, where the Group will invest
in real estate improvements to maximise the future capital value or commercial
letting potential. Such an investment approach can generate substantial
benefits that can be realised up-front or over time. Examples of up-front value
creation include entering into transactions when current market values offer
opportunities to generate immediate shareholder returns, with opportunities for
continued investment in the underlying asset. For example, the Group will
acquire property with a view to resale and subsequently complete a sale and
lease back transaction resulting in revenue and profit recorded in the year.
The Group applies judgement over the categorisation of such transactions as
operating or finance leases.
Consolidated income statement restatement under IFRS 15
Adjustment As reported, six months ended 30 June Discontinued operations Impact of IFRS 15 Restated, six months ended 30 June 2016
2016
Underlying Business Specific Total Underlying / Specific Underlying Specific Underlying Business Specific Total
exit items reclasification items items exit items
to business
exit
£m £m £m £m £m £m £m £m £m £m £m £m
Revenue A,B,C 2,405.4 24.6 - 2,430.0 (147.3 ) - (126.8 ) - 2,131.3 24.6 - 2,155.9
Cost of sales A,D (1,716.9 ) (17.9 ) - (1,734.8 ) 57.2 - 3.1 - (1,656.6 ) (17.9 ) - (1,674.5 )
Gross profit 688.5 6.7 - 695.2 (90.1 ) - (123.7 ) - 474.7 6.7 - 481.4
Administrative H (370.9 ) (6.7 ) (81.3 ) (458.9 ) 62.2 2.6 - - (308.7 ) (6.7 ) (78.7 ) (394.1 )
expenses
Operating profit 317.6 - (81.3 ) 236.3 (27.9 ) 2.6 (123.7 ) - 166.0 - (78.7 ) 87.3
Net finance costs (32.3 ) - (17.8 ) (50.1 ) - 0.1 - - (32.3 ) - (17.7 ) (50.0 )
Loss on disposal - (0.1 ) - (0.1 ) - - - - - (0.1 ) - (0.1 )
Profit before tax 285.3 (0.1 ) (99.1 ) 186.1 (27.9 ) 2.7 (123.7 ) - 133.7 (0.1 ) (96.4 ) 37.2
Income tax expense E (52.8 ) - 18.7 (34.1 ) 4.4 (0.5 ) 27.4 - (21.0 ) - 18.2 (2.8 )
Profit for the 232.5 (0.1 ) (80.4 ) 152.0 (23.5 ) 2.2 (96.3 ) - 112.7 (0.1 ) (78.2 ) 34.4
period from
continuing
operations
Profit for the - - - - 23.5 (2.2 ) - - - 23.5 (2.2 ) 21.3
period from
discontinued
operations
Total profit for 232.5 (0.1 ) (80.4 ) 152.0 - - (96.3 ) - 112.7 23.4 (80.4 ) 55.7
the period
Attributable to:
Owners of the 227.1 (0.1 ) (78.1 ) 148.9 (96.7 ) - 106.9 23.4 (78.1 ) 52.2
Company
Non-controlling 5.4 - (2.3 ) 3.1 0.4 - 5.8 - (2.3 ) 3.5
interests
232.5 (0.1 ) (80.4 ) 152.0 (96.3 ) - 112.7 23.4 (80.4 ) 55.7
Earnings per share
Continuing
operations:
- basic 34.24 p (0.02) p (11.78) p 22.44 p (3.54) p 0.33 p (14.58) p - p 16.12 p (0.02) p (11.44) p 4.66 p
- diluted 34.05 p (0.01) p (11.71) p 22.33 p (3.52) p 0.33 p (14.50) p - p 16.03 p (0.01) p (11.38) p 4.64 p
Total operations:
- basic 34.24 p (0.02) p (11.78) p 22.44 p - p - p (14.58) p - p 16.12 p 3.53 p (11.78) p 7.87 p
- diluted 34.05 p (0.01) p (11.71) p 22.33 p - p - p (14.50) p - p 16.03 p 3.51 p (11.71) p 7.83 p
Consolidated income statement restatement under IFRS 15 (continued)
Adjustment As reported, year ended 31 December 2016 Discontinued operations Impact of IFRS 15 Restated, year ended 31 December 2016
Underlying Business Specific Total Underlying / Specific Underlying Specific Underlying Business Specific Total
exit items reclasification items items exit items
to business
exit
£m £m £m £m £m £m £m £m £m £m £m £m
Revenue A,B,C 4,897.9 11.3 - 4,909.2 (316.3 ) - (224.3 ) - 4,357.3 11.3 - 4,368.6
Cost of sales A,D (3,627.7 ) (6.7 ) (7.5 ) (3,641.9 ) 111.8 - 97.4 (34.8 ) (3,418.5 ) (6.7 ) (42.3 ) (3,467.5 )
Gross profit 1,270.2 4.6 (7.5 ) 1,267.3 (204.5 ) - (126.9 ) (34.8 ) 938.8 4.6 (42.3 ) 901.1
Administrative H (728.9 ) (1.8 ) (388.3 ) (1,119.0 ) 144.5 4.3 (19.8 ) 59.4 (604.2 ) (1.8 ) (324.6 ) (930.6 )
expenses
Operating profit 541.3 2.8 (395.8 ) 148.3 (60.0 ) 4.3 (146.7 ) 24.6 334.6 2.8 (366.9 ) (29.5 )
Net finance costs (66.0 ) - (7.6 ) (73.6 ) (0.1 ) (0.1 ) - - (66.1 ) - (7.7 ) (73.8 )
Loss on disposal - 0.1 - 0.1 - - - - - 0.1 - 0.1
Profit before tax 475.3 2.9 (403.4 ) 74.8 (60.1 ) 4.2 (146.7 ) 24.6 268.5 2.9 (374.6 ) (103.2 )
Income tax expense E (87.9 ) 0.5 54.9 (32.5 ) 9.5 (0.9 ) 32.0 (3.9 ) (46.4 ) 0.5 50.1 4.2
Profit for the 387.4 3.4 (348.5 ) 42.3 (50.6 ) 3.3 (114.7 ) 20.7 222.1 3.4 (324.5 ) (99.0 )
period from
continuing
operations
Profit for the - - - - 50.6 (3.3 ) - - - 50.6 (3.3 ) 47.3
period from
discontinued
operations
Total profit for 387.4 3.4 (348.5 ) 42.3 - - (114.7 ) 20.7 222.1 54.0 (327.8 ) (51.7 )
the period
Attributable to:
Owners of the 376.7 3.4 (343.2 ) 36.9 (115.5 ) 20.7 210.6 54.0 (322.5 ) (57.9 )
Company
Non-controlling 10.7 - (5.3 ) 5.4 0.8 - 11.5 - (5.3 ) 6.2
interests
387.4 3.4 (348.5 ) 42.3 (114.7 ) 20.7 222.1 54.0 (327.8 ) (51.7 )
Earnings per share
Continuing
operations:
- basic 56.67 p 0.51 p (51.63) p 5.55 p (7.61) p 0.50 p (17.38) p 3.11 p 31.68 p 0.51 p (48.02) p (15.83) p
- diluted 56.67 p 0.51 p (51.63) p 5.55 p (7.61) p 0.50 p (17.38) p 3.11 p 31.68 p 0.51 p (48.02) p (15.83) p
Total operations:
- basic 56.67 p 0.51 p (51.63) p 5.55 p - p - p (17.38) p 3.11 p 31.68 p 8.12 p (48.52) p (8.71) p
- diluted 56.67 p 0.51 p (51.63) p 5.55 p - p - p (17.38) p 3.11 p 31.68 p 8.12 p (48.52) p (8.71) p
Total adjustment to Total profit for the period due to the adoption of IFRS 15
is £(114.7)m to underlying + £20.7m to specific items, being £94.0m.
Consolidated balance sheet restatement under IFRS 15
Adjustment As Impact of Restated As Impact of Restated
reported IFRS 15 1 Jan reported IFRS 15 31 Dec
1 Jan 2016 31 Dec 2016
2016 2016
£m £m £m £m £m £m
Non-current assets
Property, plant and equipment 406.0 - 406.0 394.7 - 394.7
Intangible assets 2,810.0 - 2,810.0 2,754.2 - 2,754.2
Contract fulfilment assets D - 277.6 277.6 - 240.6 240.6
Financial assets 186.6 - 186.6 337.6 - 337.6
Deferred taxation E 18.8 162.8 181.6 32.0 190.4 222.4
Trade and other receivables F 86.1 (41.7 ) 44.4 128.4 (79.6 ) 48.8
3,507.5 398.7 3,906.2 3,646.9 351.4 3,998.3
Current assets
Financial assets 44.3 - 44.3 92.6 - 92.6
Contract fulfilment assets D - 40.4 40.4 41.6 41.6
Disposal group assets held for sale 84.1 - 84.1 - - -
Funds assets 161.7 - 161.7 173.6 - 173.6
Trade and other receivables F 1,011.9 (284.1 ) 727.8 976.0 (174.9 ) 801.1
Cash 534.0 - 534.0 1,098.3 - 1,098.3
1,836.0 (243.7 ) 1,592.3 2,340.5 (133.3 ) 2,207.2
Total assets 5,343.5 155.0 5,498.5 5,987.4 218.1 6,205.5
Current liabilities
Trade and other payables G 1,144.0 (271.0 ) 873.0 1,297.6 (320.6 ) 977.0
Deferred income B,C,G - 1,157.3 1,157.3 - 1,374.9 1,374.9
Overdrafts 448.7 - 448.7 532.5 - 532.5
Financial liabilities 230.8 - 230.8 224.2 - 224.2
Disposal group liabilities held for sale 40.4 - 40.4 - - -
Funds liabilities 161.7 - 161.7 173.6 - 173.6
Provisions 69.4 - 69.4 112.5 - 112.5
Income tax payable E 46.2 - 46.2 18.6 - 18.6
2,141.2 886.3 3,027.5 2,359.0 1,054.3 3,413.3
Non-current liabilities
Trade and other payables G 29.3 (15.5 ) 13.8 35.1 (14.1 ) 21.0
Deferred income B,C,G - 228.5 228.5 - 216.7 216.7
Financial liabilities 2,163.4 - 2,163.4 2,694.4 - 2,694.4
Deferred taxation E 19.0 (2.0 ) 17.0 22.1 (2.5 ) 19.6
Provisions 49.0 - 49.0 48.2 - 48.2
Employee benefits 188.3 - 188.3 345.2 - 345.2
2,449.0 211.0 2,660.0 3,145.0 200.1 3,345.1
Total liabilities 4,590.2 1,097.3 5,687.5 5,504.0 1,254.4 6,758.4
Net assets 753.3 (942.3 ) (189.0 ) 483.4 (1,036.3 ) (552.9 )
Capital and reserves
Issued share capital 13.8 - 13.8 13.8 - 13.8
Share premium 500.7 - 500.7 501.3 - 501.3
Employee benefit trust (0.3 ) - (0.3 ) (0.2 ) - (0.2 )
and treasury shares
Capital redemption reserve 1.8 - 1.8 1.8 - 1.8
Foreign currency translation reserve (21.2 ) - (21.2 ) (6.2 ) - (6.2 )
Cash flow hedging reserve (12.0 ) - (12.0 ) - - -
Retained earnings 196.5 (934.7 ) (738.2 ) (102.3 ) (1,029.3 ) (1,131.6 )
Equity attributable to 679.3 (934.7 ) (255.4 ) 408.2 (1,029.3 ) (621.1 )
owners of the Company
Non-controlling interests 74.0 (7.6 ) 66.4 75.2 (7.0 ) 68.2
Total equity 753.3 (942.3 ) (189.0 ) 483.4 (1,036.3 ) (552.9 )
Consolidated cash flow statement restatement under IFRS 15
As a result of the adoption of IFRS 15, certain reclassifications are required
in relation to the following cash flow movements between relevant balance sheet
accounts. There has been no change in the net cash generated from operations
as a result of these reclassifications or restatement of these balance sheet
accounts:
• As identified in adjustment H (below), in 2016, the Group recognised a write
down of accrued income in underlying profit and specific items in relation to
certain long term service contracts. Under IFRS 15 this accrued income would
not have been originally recognised and hence has been reversed out of the
income statement on adoption of IFRS 15. Movements in the operating cash flow
note reflect the reversal of this non-cash movement;
• As identified in adjustment D (below), the Group has recognised new contract
fulfilment assets on adoption of IFRS 15 from 1 January 2016 with amortisation
and impairment expenses recorded through the income statement in the six months
ended 30 June 2016 and year ended 31 December 2016. Movements in the operating
cash flow note reflect these non-cash movements recorded in the income
statement; and
• As identified in adjustments D, B and C, on transition to IFRS 15 as at 1
January 2016, the Group has recognised contract fulfilment assets and restated
the accrued income and deferred revenue accounts recorded in the balance
sheet. Movements in the operating cash flow note reflect the relevant cash and
non-cash movements in reclassified line items.
Consolidated statement of changes in equity restatement under IFRS 15
No reconciliation of the restated consolidated statement of changes in equity
is presented as the only changes to this primary statement for the relevant
period presented are as follows:
• Consolidated statement of changes in equity as at 1 January 2016: recognition
of the restated retained earnings figure as presented in the restated
consolidated balance sheet as at this date.
• Consolidated statement of changes in equity as at 30 June 2016: recognition
of the restated profit for the six month period ended 30 June 2016 as presented
in the restated consolidated income statement for this period.
• Consolidated statement of changes in equity as at 31 December 2016:
recognition of the restated profit for the year ended 31 December 2016 as
presented in the restated consolidated income statement for this year.
Notes to the financial statements restatement under IFRS 15
Management has undertaken an extensive exercise to consider the Group's major
contractual arrangements as part of the implementation of IFRS 15. A number of
significant areas have been identified for adjustment which include:
• Recognition of revenue by the Group as agent or principal (Adjustment A);
• Accounting for software licences (Adjustment B);
• Recognition of profit from service contracts over time in line with the
output method (Adjustment C);
• Recognition, utilisation and derecognition of contract fulfilment assets
(Adjustment D);
• Impact on tax balances as a result of adoption of IFRS 15 (Adjustment E);
• Decrease in trade and other receivables (Adjustment F);
• Reclassification of trade and other payables (Adjustment G);
• Reversal of prior period accrued income impairment within specific items
(Adjustment H); and
• Reclassification of significant restructuring costs to underlying (Adjustment
I).
These adjustments are discussed in the relevant sections below.
Under IFRS 15, the pattern and timing of revenue recognition has changed
resulting in an overall decrease of £126.8m in revenue for the 6 months ended
30 June 2016 (year ended 31 December 2016: £224.3m), increase in deferred
income of £1,099.3m at the 1 January 2016 opening balance sheet date (31
December 2016: £1,256.9m) and decrease in accrued income of £325.8m at the 1
January 2016 opening balance sheet date (31 December 2016: £254.5m).
Table 1 on the following page reconciles the movements in relation to IFRS 15
for the income statement for the six months ended 30 June 2016 and the year
ended 31 December 2016 and the balance sheet as at 1 January 2016 and as at 31
December 2016.
Table 2 provides further detail on the reconciling movements for the income
statement for the year ended 31 December 2016.
Following the tables are explanatory notes for each of the adjustments referred
to above.
The table below reconciles movements in relation to IFRS 15 for the income
statement for the six months ended 30 June 2016 and the year ended 31 December
2016 and the balance sheet as at 1 January 2016 and as at 31 December 2016.
Refer to below the tables for explanatory notes on each of the adjustments.
Table 1: Consolidated income statement for the six months ended 30 June 2016
Adjustment Underlying Specific items Profit Trade and other Deferred income Trade and Contract Deferred Adjustment
to net for the receivables other fulfilment tax to net
assets at period payables asset liabilities
1 January at 31
Adjustment 2016 Revenue Cost Admin Tax Cost of Admin Tax Non-current Current Current Non-current Current Non-current Non-current Current Asset Liability December
of expenses sales expenses 2016
sales
£m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
A - Agent vs. - 0.7 (0.7 ) - - - - - -
principal
B - Software (163.2 ) (7.2 ) - - - - - - (7.2 )
licences
C - Recognition in (1,214.8 ) (120.3 ) - - - - - - (120.3 )
line with output
D - Recognition of 214.7 - (3.7 ) - - - - - (3.7 )
non-current
contract fulfilment
assets
D - Recognition of 62.9 - 1.7 - - - - - 1.7
software contract
fulfilment assets
D - Recognition of 40.4 - 5.8 - - - - - 5.8
current contract
fulfilment assets
E - Tax 164.8 - - - 27.4 - - - 27.4
H - Reversal of (47.1 ) - - - - - - - -
accrued income
impairment
I - - - - - - - - - -
Reclassification of
significant
restructuring
Total (942.3 ) (126.8 ) 3.1 - 27.4 - - - (96.3 )
Consolidated income statement for the year ended 31 December 2016 Consolidated balance sheet for the year ended 31 December 2016
A - Agent vs. - (90.9 ) 90.9 - - - - - - - - - - - - - - - - -
principal
B - Software (163.2 ) (15.3 ) - - - - - - (15.3 ) - - (104.8 ) (73.7 ) - - - - - - (178.5 )
licences
C - Recognition in (1,214.8 ) (118.1 ) - - - - - - (118.1 ) (79.6 ) (174.9 ) (949.5 ) (128.9 ) - - - - - - (1,332.9 )
line with output
D - Recognition of 214.7 - (0.6 ) - - (42.3 ) - - (42.9 ) - - - - - - 171.8 - - - 171.8
non-current
contract fulfilment
assets
D - Recognition of 62.9 - 5.9 - - - - - 5.9 - - - - - - 68.8 - - - 68.8
software contract
fulfilment assets
D - Recognition of 40.4 - 1.2 - - - - - 1.2 - - - - - - - 41.6 - - 41.6
current contract
fulfilment assets
E - Tax 164.8 - - - 32.0 - - (3.9 ) 28.1 - - - - - - - - 190.4 2.5 192.9
G - - - - - - - - - - - - (320.6 ) (14.1 ) 320.6 14.1 - - - - -
Reclassification of
trade and other
payables
H - Reversal of (47.1 ) - - 39.6 - 7.5 - - 47.1 - - - - - - - - - - -
accrued income
impairment
I - - - - (59.4 ) - - 59.4 - - - - - - - - - - - - -
Reclassification of
significant
restructuring
Total (942.3 ) (224.3 ) 97.4 (19.8 ) 32.0 (34.8 ) 59.4 (3.9 ) (94.0 ) (79.6 ) (174.9 ) (1,374.9 ) (216.7 ) 320.6 14.1 240.6 41.6 190.4 2.5 (1,036.3 )
The table below provides further detail on the reconciling movements for the
income statement for the year ended 31 December 2016. Refer to below the table
for explanatory notes in respect of each adjustment.
Table 2: Consolidated income statement for the year ended 31 December 2016
Adjustment As Discontinued As Adjustments: Adjustments: Reclassifications Restated
reported operations reported - from pre 1 previously
continuing Jan 16 and recognised in
operations recognised 2016 now
in 2016 spread
forward
£m £m £m £m £m £m £m
Agent vs. Principal A - - - (90.9 )
Software revenue from pre 1 Jan 16 and B - 100.0 - -
recognised in 2016
Software revenue previously recognised in B - - (115.3 ) -
2016 now spread forward
Recognition in line with output from pre 1 C - 1,096.6 - -
Jan 16 and recognised in 2016
Recognition in line with output previously C - - (1,214.7 ) -
recognised in 2016 now spread forward
Underlying Revenue 4,897.9 (316.3 ) 4,581.6 1,196.6 (1,330.0 ) (90.9 ) 4,357.3
Agent vs. Principal A - - - - - 90.9
Non-current contract fulfilment asset D - - - (47.1 ) - -
utilisation in 2016
Non-current contract fulfilment asset D - - - (17.0 ) - -
disposals in 2016
Non-current contract fulfilment asset D - - - - 63.5 -
additions in 2016
Software contract fulfilment asset D - - - (7.1 ) - -
utilisation in 2016
Software contract fulfilment asset additions D - - - - 13.0 -
in 2016
Completion of point in time performance D - - - (40.4 ) - -
obligations
Costs deferred to future point in time D - - - - 41.6 -
performance obligations
Underlying cost of sales (3,627.7 ) 111.8 (3,515.9 ) (111.6 ) 118.1 90.9 (3,418.5 )
Reversal of accrued income impairment H 39.6 - -
Reclassification of 2016 group restructuring I - - (59.4 )
to underlying from specific items
Underlying admin expenses (728.9 ) 144.5 (584.4 ) 39.6 - (59.4 ) (604.2 )
Underlying operating profit 541.3 (60.0 ) 481.3 1,124.6 (1,211.9 ) (59.4 ) 334.6
Underlying profit before tax 475.3 (60.1 ) 415.2 1,124.6 (1,211.9 ) (59.4 ) 268.5
Specific items - contract fulfilment asset D - - - (42.3 ) -
disposal
Specific items - reversal of accrued income H - - - 7.5 - -
impairment
Specific items cost of sales (7.5 ) - (7.5 ) (34.8 ) - - (42.3 )
Reclassification of 2016 group restructuring I - - - - - 59.4
to underlying from specific items
Specific Items admin expenses (388.3 ) 4.3 (384.0 ) - - 59.4 (324.6 )
Specific items profit before tax (403.4 ) 4.2 (399.2 ) (34.8 ) - 59.4 (374.6 )
Profit before tax 74.8 (55.9 ) 18.9 1,089.8 (1,211.9 ) - (103.2 )
Adjustment A - Accounting for agent vs. principal
The previous agent vs. principal guidance contained in IAS 18 has been
revisited by the Group in light of the revised guidance under IFRS 15 in
assessing whether it acts as an agent or as a principal in its major
contractual arrangements.
As a result of this assessment, the Group concluded that for certain contracts
it is appropriate to move from principal to agency accounting or vice versa. In
respect to moving from principal to agency, this related to certain software
sales arrangements as the Group has concluded that the Group does not control
the good or service being provided to the customer. As a result, there is a net
adjustment of £0.7m to increase revenue and cost of sales for the 6 months
period ended 30 June 2016, and of £90.9m to reduce revenue and cost of sales
for the year ended 31 December 2016.
Adjustment B - Accounting for software licences
Under previous accounting, revenue in relation to certain software licences was
recognised at a point in time. Under IFRS 15, the Group has determined that a
number of these arrangements result in the customer having the right to access
the licence (an 'active' licence) rather than having the right to use the
licence (a 'passive' licence). Under an active licence the ongoing support and
upgrades are fundamental to the ongoing use of the licences by the customer.
Hence total revenue for the licence and upgrades are combined with these
revenues now recognised over the term of the customer contract rather than at a
point in time resulting in a net decrease in accrued/deferred income at 1
January 2016 of £163.2m, 31 December 2016: £178.5m; and a net decrease in
revenue in the six months ended 30 June 2016 of £7.2m and in the year ended 31
December 2016 of £15.3m.
For the year ended 31 December 2016 the net decrease in revenue comprises the
recognition of £100.0m of revenue from pre 1 January 2016 and the deferral of £
115.3m of revenue previously recognised in 2016.
Adjustment C - Revenue recognition in line with output
Under the previous accounting, revenue for certain contracts was recognised
under the percentage of completion method based upon costs incurred to date as
a proportion of the estimated full cost of completing the contract, and
applying the percentage to the total revenue expected to be earned. Such
percentage of completion accounting would typically result in higher levels of
revenue recognised in the earlier stages of a contract in line with the profile
of costs incurred.
Under IFRS 15, all elements of the contract, including transformation activity,
are combined. Due to the application of the series guidance and output
methodology within IFRS 15, these contracts now have revenue recognised in line
with their output measured on a contract specific basis.
As such, revenue is now spread over the expected life of the contract rather
than in line with the costs profile, which has resulted in a reduction in
revenue recognised in periods prior to 1 January 2016 and a net increase in
deferred/accrued income as at 1 January 2016 of £1,214.8m, as at 31 December
2016: £1,332.9m; and a decrease in opening retained earnings as at 1 January
2016 of £1,214.8m, a decrease in revenue in the six months ended 30 June 2016
of £120.3m, and year ended 31 December 2016 of £118.1m.
For the year ended 31 December 2016 the net decrease in revenue comprises the
recognition of £1,096.6m of revenue from pre 1 January 2016 and the deferral of
£1,214.7m of revenue previously recognised in 2016.
Adjustment D - Recognition, utilisation and derecognition of contract
fulfilment assets
IFRS 15 specifies that certain costs to fulfil a contract are to be capitalised
as contract fulfilment assets if relevant criteria are met.
The Group incurred costs that were previously expensed and which related to
resources to allow it to deliver services under its long term contracts and
active software licence arrangements. In certain situations, costs associated
with the installation of certain IT equipment in contracts have also been
capitalised as contract fulfilment assets.
The adjustments to recognise contract fulfilment assets on the balance sheet as
at 1 January 2016 of £318.0m recognises the net book value of the identified
contract fulfilment assets at the opening balance sheet date.
These adjustments also include the recognition of certain costs of obtaining a
contract. IFRS 15 specifies that the incremental costs of obtaining a contract
with a customer are capitalised if the entity expects to recover them.
The cost of utilising these assets is recognised within cost of sales on a
consistent basis over the life of the relevant customer contract.
The adjustment of £3.8m for the 6 months period ended 30 June 2016 (year ended
31 December 2016: £6.5m) is to recognise a net decrease in cost of sales due to
the de-recognition of contract costs now capitalised as contract fulfilment
assets net of the utilisation charge recorded for the period in relation to
these assets and the de-recognition of certain contract fulfilment assets.
For the year ended 31 December 2016, the above net adjustment of £6.5m
comprises: non-current contract fulfilment additions of £63.5m, utilisation of
£47.1m, and disposals of £17.0m; software contract fulfilment additions of £
13.0m, and utilisation of £7.1m; and current contract fulfilment additions of £
41.6m, and utilisation of £40.4m.
Specific item
As disclosed in the 31 December 2016 financial statements, Capita ceased to
work on the IT system transformation in respect of its contract with The
Co-operative Bank plc. Under IFRS 15 this modification has led to an
impairment of a contract fulfilment asset in respect of this contract as these
costs were no longer considered recoverable.
The adjustment of £42.3m in the year ended 31 December 2016 recognises the
charge incurred on derecognising this contract fulfilment asset. This item has
been included within the other non-underlying column because it is one-off in
nature and is due to a contractual dispute rather than arising as a result of
service credit penalties
Adjustment E - Tax
Due to the changes in assets, liabilities, income and expenses recognised as a
result of the application of IFRS 15, there are consequent IAS 12 Income taxes
differences that arise as discussed below.
Deferred tax
Due to the changes in the pattern and timing of revenue recognition under IFRS
15, a deferred income liability is recognised on the balance sheet from 1
January 2016, which will be recognised through the income statement in later
periods. The impact of these revenue recognition changes is only recognised for
tax purposes via a one-off transitional tax adjustment on 1 January 2017, so no
tax deduction is available in 2016 for the reduction in historic revenue
recognised.
Contract fulfilment assets have also been recognised on the balance sheet from
1 January 2016, which will be charged to the income statement in later periods.
Under IAS 12, the tax base of an asset is the amount that will be deductible
for tax purposes against any taxable economic benefits that will flow to an
entity when it recovers the carrying amount of the asset. The tax base of the
contract fulfilment asset recognised on the balance sheet prior to 1 January
2017 is therefore reduced by the amounts for which tax deductions have already
been taken, creating a temporary difference.
Under the principles of IAS 12, a movement of £164.8m in deferred tax therefore
arises, recognised as an increase in the deferred tax asset of £162.8m and a
reduction in the deferred tax liability of £2.0m as at 1 January 2016 (31
December 2016: £192.9m movement, increase in deferred tax asset of £190.4m, and
reduction in deferred tax liability of £2.5m) as a result of the transition to
IFRS 15.
Income statement deferred tax credit
The deferred tax asset balance increase of £190.4m and the deferred tax
liability decrease of £2.5m as at 31 December 2016, give rise to an income
statement deferred tax credit of £27.4m for the 6 month period to 30 June 2016
and of £28.1m for the year ended 31 December 2016.
Income statement current tax expense
There is no income statement current tax expense impact for the 6 months ended
30 June 2016 or the year ended 31 December 2016.
Adjustment F - decrease in trade and other receivables
The decrease in trade and other receivables relates to the restatement of
accrued revenues as detailed in Adjustments B and C above. The decrease in
non-current accrued income is £41.7m as at 1 January 2016, and £79.6m at 31
December 2016, and the decrease in current accrued income is £284.1m and £
174.9m at 31 December 2016.
Adjustment G - Reclassification of trade and other payables
In order to provide users with relevant financial information in the primary
financial statements, the Group has decided to reclassify deferred income into
its own primary statement line item reflecting the materiality and nature of
this balance in the context of the Group's business.
The decrease in trade and other payables relates to the reclassification and
restatement of deferred income as discussed above. Prior to adoption of IFRS
15, deferred income was classified within 'Trade and other payables' although
this was not accounted for as a financial liability.
Adjustment H - Reversal of accrued income impairments
In 2016, the Group recognised an impairment of £47.1m historic accrued income,
of which £39.6m was recognised in underlying profit, and £7.5m within the
specific items column in relation to the dispute with The Co-operative Bank
plc. Under IFRS 15 this accrued income would not have been originally
recognised as the timing of revenue recognition has changed in comparison to
the previous accounting policy as discussed in Adjustment C above, hence the
adjustment of £47.1m for the year ended 31 December 2016 recognises the
reversal of these previous impairments.
Adjustment I - Reclassification of significant restructuring
Following the adoption of IFRS 15, the Board has adopted a policy to separately
disclose the in year operating profit/loss from significant new contract wins
and related, or significant, restructuring ("Significant new contract wins and
restructuring") within underlying results, in order for users of the financial
statements to obtain a proper understanding of the financial information and
the performance of the business.
The Group continually assesses the resourcing levels, both at a divisional
level and also in relation to the management and delivery of individual
contracts. This results in restructuring in the normal course of business and
any such charges are recorded in "underlying before significant new contract
wins and restructuring" results. A significant restructuring is assessed as
that above this normal level of restructuring.
In the year ended 31 December 2016, the Board announced a major programme, with
the restructuring of the Group into 6 new reporting divisions under a
Group-wide programme. The cost of this Group-wide programme, £59.4m, was
charged to specific items, being the element above the normal level of
restructuring undertaken by the Group. Following the adoption of the above
policy, the 2016 income statement has been restated to reclassify the cost of
this programme to 'Significant new contract wins and restructuring' within
underlying.