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Basis of accounting The financial statements are presented in accordance with applicable law and International Financial Reporting Standards, as adopted by the European Union (“adopted IFRSs”). The group’s significant accounting policies are detailed in note 3 on pages 51 to 58 and those that are most critical and/or require the greatest level of judgement are discussed in note 4 on pages 58 and 59.
Operating results The overall results are commented upon by the Chairman in his statement and operational trading is discussed in the operating review on pages 8 to 17. Profit from operations before amortisation of acquisition-related intangible assets (PBITA) amounted to £416.4m, an increase of 34% on the £311.4m in 2007 and an increase of 23% at constant exchange rates.
Associates Included within PBITA is £3.4m (2007: £3.0m) in respect of the group’s share of profit from associates, principally from the business of Space Gateway in the US which provides safety services to NASA. Cash flow from associates was £12.2m, compared to £1.0m in 2007. |
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Trevor Dighton
Chief Financial Officer |
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| The taxation charge of £89.3m provided upon profit from operations before amortisation of acquisition-related intangible assets less net interest, represents a tax rate of 26.9% compared to 27.5% in 2007. |
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Acquisitions and acquisition-related intangible assets Investment in acquisitions in the year (excluding acquired net debt of £210.3m) amounted to £369.8m, of which £358.2m was a cash outflow and £11.6m deferred consideration. This investment generated goodwill of £408.5m and other acquisition-related intangible assets of £202.0m.
The largest acquisition in the year was the purchase of the Global Solutions group (“GSL”), an international leader in the provision of support services for governments, public authorities and the private sector, based in the UK, on 12 May for total consideration of £176.1m.
Other significant acquisitions included ArmorGroup, an international provider of defensive, protective security services, head-quartered in the UK; Touchcom, a security consultancy and design business in the US; RONCO, an international provider of humanitarian mine action and ordnance services, specialised security and training, head-quartered in the US; MJM Investigations, a provider of insurance fraud mitigation and claims services in the US; Rock Steady, providing event security in the UK; Travel Logistics, a provider of passport and visa services in the UK; and Progard, the market leader in professional security services in the Republic of Serbia. In addition, the group acquired the 49% of its business in Macau that it did not already own, completed in March the purchase of a further 25% of its multi-service businesses in the Baltic States and, in December, acquired the final 10% of these businesses.
Larger acquisitions in 2007 included the purchase of controlling interests in Fidelity Cash Management in South Africa and the business of al Majal Facilities Management in Saudi Arabia; the purchase of RIG, a police recruitment business in the UK; and the recognition of put options that increased to 90% the group’s interest in the multi-service businesses in the Baltic states.
The contribution made by acquisitions to the results of the group during the year is shown in note 17 on pages 69 to 71.
The charge for the year for the amortisation of acquisition-related intangible assets other than goodwill amounted to £67.8m. Goodwill is not amortised. Acquisition-related intangible assets included in the balance sheet at 31 December 2008 amounted to £2,060.4m goodwill and £392.2m other.
Financing items Finance income was £104.9m and finance costs £189.3m, giving a net finance cost of £84.4m. Net interest payable on net debt was £81.2m. This is an increase of 41% over the 2007 cost of £57.4m due principally to the increase in the group’s average gross debt. The group’s average cost of gross borrowings in 2008 was 5.5% compared to 5.7% in 2007. The cost based on prevailing interest rates at 31 December 2008 was 4.6% compared to 5.7% at 31 December 2007.
Also included within financing are other net interest costs of £6.9m (2007: £1.3m), including the unwinding of the discount on put options over minority interests, and a net income of £3.7m (2007: £5.0m) in respect of movements in the group’s net retirement benefit obligations.
Taxation The taxation charge of £89.3m provided upon profit from operations before amortisation of acquisition-related intangible assets less net interest, represents a tax rate of 26.9%, compared to 27.5% in 2007. The group believes that an effective tax rate of around this level is sustainable going forward as a result of the ongoing rationalisation of the post-merger group legal structure and the elimination of fiscal inefficiencies. The amortisation of acquisition-related intangible assets gives rise to the release of the related proportion of the deferred tax liability established when the assets were acquired, amounting to £19.1m. Potential tax assets in respect of losses amounting to £503.9m have not been recognised as their utilisation is uncertain.
Disposals and discontinued operations The group disposed of its secure solutions businesses in Germany on 15 May 2008 and of its security systems business in France on 31 July 2008. The group’s disposal of its manned security business in France was in progress at 31 December 2008 and completed on 28 February 2009. In addition, during the year the group disposed of a number of small businesses, including the cash services business in Guatemala.
On 2 July 2007, the group disposed of its cash services business in France and during that year disposed of a number of small businesses, mainly in Latin America.
The loss attributable to discontinued operations comprises a loss of £13.3m in respect of post-tax trading of discontinued businesses, a profit of £12.0m in respect of the disposals made in the current year, an impairment of £29.4m in respect of the carrying value of the group’s manned security business in France and a profit of £1.6m in respect of adjustments to prior year disposals. The result from discontinued operations in 2007 comprises a loss of £11.5m in respect of trading of both the 2007 and the 2008 disposals, a £9.1m profit in respect of disposals and a £2.9m profit in respect of adjustments to prior year disposals.
The net cash proceeds from business disposals received in 2008 were £31.1m, including £27.0m in respect of the secure solutions businesses in Germany.
The contribution to the turnover and operating profit of the group from discontinued operations is shown in note 6 on pages 60 to 63 and their contribution to net profit and cash flows is detailed in note 7 on pages 63 and 64.
Profit for the year Profit for the year was £164.9m, compared to £160.6m in 2007. The increase represents the £105.0m increase in PBITA less the £30.7m increase in net interest cost, the £26.2m increase in amortisation of acquisition-related intangible assets, the £14.2m increase in the tax charge and the £29.6m increase in loss from discontinued operations.
Minority interests Profit attributable to minority interests was £13.7m in 2008, slightly higher than the £13.4m for 2007, reflecting minority partner shares in the group’s organic and acquisitive growth, less a reduction in minority shares in net profits consequent upon the group increasing its interests in certain subsidiaries.
Earnings per share Basic earnings per share from continuing and discontinued operations was 11.1p compared to 11.5p for 2007. These earnings are unchanged when calculated on a fully diluted basis, which allows for the potential impact of outstanding share options.
Adjusted earnings, as analysed in note 16 on page 68, excludes the result from discontinued operations, amortisation of acquisition-related intangible assets and retirement benefit obligations financing items, all net of tax, and better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. Adjusted earnings per share was 16.7p, an increase of 26% on 13.3p for 2007.
Dividends The directors recommend a final dividend of 3.68p (DKK 0.3052) per share. This represents an increase of 29% upon the final dividend for the year to 31 December 2007 of 2.85p (DKK 0.2786) per share. The interim dividend was 2.75p (DKK 0.2572) per share and the total dividend, if approved, will be 6.43p (DKK 0.5624) per share, representing an increase of 30% over the 4.96p (DKK 0.5105) per share total dividend for 2007.
The proposed dividend cover is 2.5 times (2007: 2.7 times) on adjusted earnings. The group has, in accordance with stated intentions, been reducing its dividend cover to the 2.5 times level over a period of several years. The group’s intention is that dividends in future increase broadly in line with normalised adjusted earnings.
Cash flow The primary cash generation focus of group management is on the percentage of operating profit converted into cash. From 2007, the group’s target conversion rate was raised from 80% to 85%. Operating cash flow, as defined for management purposes, was as follows: |
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2008
£m |
2007
£m |
|
| PBITA |
416.4 |
311.4 |
| Less share of profit from associates |
(3.4) |
(3.0) |
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| PBITA before share of profit from associates (Group PBITA) |
413.0 |
308.4 |
| Depreciation and amortisation of intangible assets other than acquisition-related |
116.1 |
99.6 |
| Loss (profit) on disposal of property, plant and equipment |
2.1 |
(14.4) |
| Movement in working capital and provisions |
(16.7) |
(8.2) |
| Net cash flow from capital expenditure |
(161.3) |
(109.0) |
|
| Operating cash flow |
353.2 |
276.4 |
|
| Operating cash flow as a percentage of group PBITA |
86% |
90% |
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Working capital was largely unchanged in both 2008 and 2007 due to a programme of billing and collection process improvements that is being rolled out across the group offsetting the impact of the group’s organic growth. Capital expenditure relative to the depreciation charge can vary from year to year due to the timing of asset replacements. It was 138% of depreciation in 2008, compared to 109% in 2007. Overall operating cash generation for the year was good, as a result of the maintenance of financial discipline across the organisation.
The management operating cash flow calculation is reconciled to the net cash from operating activities as disclosed in accordance with IAS7 Cash Flow Statements as follows: |
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2008
£m |
2007
£m |
|
| Cash flow from operating activities (IAS7 definition) |
373.0 |
291.3 |
| Net cash flow from capital expenditure |
(161.3) |
(109.0) |
| Add-back cash flow from discontinued operations |
27.2 |
1.8 |
| Add-back additional retirement benefit contributions |
32.3 |
26.1 |
| Add-back tax paid |
82.0 |
66.2 |
|
| Operating cash flow (G4S definition) |
353.2 |
276.4 |
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The additional retirement benefit contributions in 2008 included a one-off payment of £5.4m in respect of the acquired GSL schemes.
The group’s free cash flow, as defined by management, is analysed as follows: |
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2008
£m |
2007
£m |
|
| Operating cash flow |
353.2 |
276.4 |
| Net interest paid |
(80.0) |
(55.0) |
| Tax paid |
(82.0) |
(66.2) |
| New finance leases |
(17.1) |
(10.3) |
|
| Free cash flow |
174.1 |
144.9 |
|
|
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| Free cash flow is reconciled to the total movement in net debt as follows: |
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2008
£m |
2007
£m |
|
| Free cash flow |
174.1 |
144.9 |
| Cash flow from discontinued operations |
(27.2) |
(1.8) |
| Additional retirement benefit contributions |
(32.3) |
(26.1) |
| Net cash outflow on acquisitions |
(629.7) |
(162.9) |
| Net cash inflow from disposals |
31.1 |
7.9 |
| Net cash inflow from disposals |
12.2 |
1.0 |
| Dividends paid to minority interests |
(11.9) |
(3.8) |
| Loan to minority interests |
- |
(13.3) |
| Share issues less share purchases |
268.0 |
(2.2) |
| Dividends paid to equity holders of the parent |
(75.0) |
(59.3) |
| Net cash flow from hedging financial instruments |
(65.9) |
(4.3) |
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| Movement in net debt in the year |
(356.6) |
(119.9) |
| Foreign exchange translation adjustments to net debt |
(186.2) |
(12.2) |
| Net debt at 1 January |
(804.9) |
(672.8) |
|
| Net debt at 31 December |
(1,347.7) |
(804.9) |
|
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Net debt represents the group’s total borrowings less cash, cash equivalents and liquid investments. The components of net debt are detailed in note 39 on page 96.
Share capital On 13 May 2008, the group completed a placing of 127m ordinary shares of 25p at a price of 222p per share. Gross proceeds were £281.9m and issue costs £5.9m.
Financing and treasury activities The group’s treasury function is responsible for ensuring the availability of cost-effective finance and for managing the group’s financial risk arising from currency and interest rate volatility and counterparty credit. Treasury is not a profit centre and is not permitted to speculate in financial instruments. The treasury department’s policies are set by the board. Treasury is subject to the controls appropriate to the risks it manages. These risks are discussed in note 33 on pages 84 to 86.
Financing The group’s funding position is strong, with sufficient headroom against available committed facilities and very little debt maturing before 2012.
The group’s primary source of finance is a £1.1bn multicurrency revolving credit facility provided by a consortium of lending banks at a margin of 0.225% over Libor and maturing on 28 June 2012.
The group also has US $550m in financing from the private placement of unsecured senior loan notes on 1 March 2007, maturing at various dates between 2014 and 2022 and bearing interest at rates between 5.77% and 6.06%. The fixed interest rates payable have been swapped into floating rates for the term of the notes, at an average margin of 0.60% over Libor.
Between 7 March and 15 July 2008 the group had available committed facilities amounting to £350m at an initial margin of 0.35% over Libor. The purpose of these facilities was to provide the group with headroom whilst the group assessed options in the capital markets.
On 15 July 2008, the group completed a further $514m and £69m private placement of unsecured senior loan notes, maturing at various dates between 2013 and 2020 and bearing interest at rates between 6.09% and 7.56%. The proceeds of the issue were used to reduce drawings against the revolving credit facility. $265m of the US dollar receipts have been swapped into sterling for the term of the notes.
The group has other short-term committed facilities of £45m and uncommitted facilities of £578m.
The group’s net debt at 31 December 2008 of £1,347.7m represented a gearing of 92%. The group headroom at 31 December 2008 was £350m. The group has sufficient capacity to finance current investment plans.
On 9 March 2009, the group obtained a BBB credit rating from Standard & Poor’s, which provides the group with further flexibility as regards future funding.
Interest rates The group’s investments and borrowings at 31 December 2008 were, with the exception of the issue of private placement notes in July 2008, at variable rates of interest linked to Libor and Euribor, with the group’s exposure being predominantly to interest rate risk in US dollar and euro. The group’s interest risk policy requires treasury to fix a proportion of this exposure on a sliding scale utilising interest rate swaps.
The maturity of these interest rate swaps at 31 December 2008 was limited to five years. The market value of the Loan Note-related pay-variable receive-fixed swaps outstanding at 31 December 2008, accounted for as fair value hedges, was a gain of £92.3m. The market value of the pay-fixed receive-variable swaps and the pay-fixed receive-fixed cross-currency swaps outstanding at 31 December 2008, accounted for as cash flow hedges, was a gain of £32.3m.
Foreign currency The group has many overseas subsidiaries and associates denominated in various different currencies. Treasury policy is to manage significant translation risks in respect of net operating assets and income denominated in foreign currencies. The methods adopted are to use borrowings denominated in foreign currency supplemented by forward foreign exchange contracts.
During 2008 both the US dollar and euro appreciated significantly against sterling. The average rate for the dollar during 2008 was $1.86=£1 compared to $2.00=£1 for 2007. The rate at 31 December 2008 was $1.44=£1 compared to $1.99=£1 at 31 December 2007. This variance has impacted the group’s dollar-denominated assets and assets denominated in New Market currencies that follow the dollar. The average rate for the euro during 2008 was €1.26=£1 compared to €1.46=£1 for 2007. The rate at 31 December 2008 was €1.03=£1 compared to €1.36=£1 at 31 December 2007. This variance has impacted the group’s euro-denominated assets and assets denominated in European currencies that follow the euro.
Exchange differences on the translation of foreign operations included in the statement of recognised income and expense amount to a gain of £100.9m (2007: gain of £18.4m). These differences are net of a £186.2m loss (2007: £12.2m loss) on the retranslation of net debt and a £65.9m cash outflow (2007: £4.3m outflow) from forward exchange contracts.
The market value of forward contracts outstanding at 31 December 2008 was a loss of £28.6m.
Cash management To assist the efficient management of the group’s interest costs and its short-term deposits, overdrafts and revolving credit facility drawings, the group operates a global cash management system. At 31 December 2008, 90 group companies participated in the pool. Debit balances of £128.4m and credit balances of £131.0m were held within the cash pool. IFRS does not permit the netting off of these balances, which are therefore disclosed gross within current assets and current liabilities.
Retirement benefit obligations The group’s primary defined benefit retirement benefit schemes are those operated in the UK, but it also operates such schemes in a number of countries, particularly in Europe and North America. The latest full actuarial assessments of the UK schemes were carried out at 31 March 2007 in respect of the Group 4 scheme (approximately 8,000 members), at 5 April 2006 in respect
of the Securicor scheme (approximately 20,000 members) and at 31 March 2005 in respect of the GSL scheme (approximately 2,000 members) acquired during the year. These assessments and those of the group’s other schemes have been updated to 31 December 2008, including the review of longevity assumptions. The group’s funding shortfall on the valuation basis specified in IAS19 Employee Benefits was £286m before tax or £206m after tax (2007: £136m and £98m respectively).
The valuation of gross liabilities decreased during 2008 largely due to an increase in the appropriate AA corporate bond rate in the UK from 5.8% to 6.3%, partially offset by an increase in expected longevity. However, the value of the assets held in the funds decreased by £245m during 2008.
The group believes that the short-term volatility in reported retirement benefit obligations, in response to movements in asset prices and financial circumstances, is of limited relevance in the context of liabilities which are exceptionally long-term in nature and furthermore that, over the long term, investment returns on the retirement benefit scheme assets will be sufficient to fund retirement benefit obligations. However, in recognition of the regulatory obligation upon pension fund trustees to address reported deficits if they arise, the group anticipates that additional cash contributions will continue to be made at least at a level similar to that in 2008. The three schemes in the UK have combined under one trustee body with effect from 1 January 2009 and will all be formally actuarially assessed at 5 April 2009.
Corporate governance The group’s policies regarding risk management and corporate governance are set out in the Corporate Governance Statement on pages 33 to 35.
Going concern The directors are confident that, after making enquiries and on the basis of current financial projections and available facilities, they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.
Risks All businesses are subject to risk and many individual risks are macro-economic or social and common across many businesses. Many risks are to a greater or lesser extent controllable, but some are not controllable. Through its internal risk management process, the group identifies business-specific risks. It classifies the key risks as those which could materially damage the group’s strategy, reputation, business, profitability or assets and these risks are listed below. This list is in no particular order and is not an exhaustive list of all potential risks. Some risks may be unknown and it may transpire that others currently considered immaterial become material.
1. Price competition
The security industry comprises a number of very competitive markets. In particular, manned security markets can be fragmented with relatively low economic barriers to entry and the group competes with a wide variety of operators of varying sizes. Actions taken by the group’s competitors may place pressure upon its pricing, margins and profitability.
2. Major changes in market dynamics
Such changes in dynamics could include new technologies, government legislation or customer consolidation and could, particularly if rapid or unpredictable, impact the group’s revenues and profitability or the carrying value of goodwill and other assets.
3. Cash losses
The group is responsible for the cash held on behalf of its customers. Increases in the value of cash lost through criminal attack may increase the costs of the group’s insurance. Were there to be failures in the control and reconciliation processes in respect to customer cash these could also adversely affect the group’s profitability.
4. Onerous contractual obligations
Should the group commit to sales contracts specifying disadvantageous pricing mechanisms, unachievable service levels or excessive liability it could impact its margins and profitability.
5. Inappropriate sourcing of staff
The group’s greatest asset is its large and committed work force. However, were the group to source inappropriate staff, whether it be as permanent employees, temporary workers or sub-contractors, the result could be detrimental to the group’s reputation and could adversely affect the group’s growth and profitability.
6. Poor operational service delivery
Should the group fail to meet the operational requirements of its customers it could impact its reputation, contract retention and growth.
7. Financing
If due to adverse financial market conditions insufficient or only very costly financial funding were available, the group might not be in a position to implement its strategy as it plans to do or invest in acquisitions or capital expenditure, adversely impacting its growth and profitability.
8. Defined benefit pension schemes
A prolonged period of poor asset returns and/or unexpected increases in longevity could require increases in the current levels of additional cash contributions to defined benefit pension schemes, which may constrain the group’s ability to invest in acquisitions or capital expenditure, adversely impacting its growth and profitability.
9. Regulatory requirements
Security can be a high-profile industry. There is a wide and ever-changing variety of regulations applicable to the group’s businesses across the world. Failure to comply with such regulations may adversely affect the group’s revenues and profitability.
The group has a robust risk assessment and control process in place to identify and mitigate the controllable risks faced by the organisation. Mitigation measures include:
1. The group’s diversity
The group operates around 150 businesses across over 110 countries and across a range of product areas. Most of the risks detailed above are market-specific and, therefore, any particular issue should only impact part of the group’s operations.
2. Management structure
The group operates a management structure that is appropriate to the scale and breadth of its activities. Business performance and strategies are reviewed continuously by regional, divisional and group management. Potential issues requiring management attention are therefore identified and there is a wide range of expertise available throughout the organisation, which is utilised as necessary to address these issues.
3. Authorisation procedures
The group has clear authorisation limits and procedures which are cascaded throughout the organisation. For example, a contract approval process is in place, under which certain contracts are reviewed by the group’s legal department.
4. Group standards
Each of the group’s businesses applies the systems and procedures appropriate to its size and complexity. However, the group requires that these conform to group standards in respect of matters such as operational and financial controls, recruitment and vetting, financial reporting, contract risk management, business continuity planning and project management techniques. Further standards, including those in respect of IT systems, are applied on a divisional or regional basis.
5. Internal audit
The Internal Audit department operates under a wide remit, which includes ensuring adherence to group authorisation procedures and control standards. A separate dedicated cash audit function monitors compliance with the group’s standards on cash management and reconciliation.
6. Diversified sources of finance
The group’s treasury department monitors the group’s financing requirements and extends its sources of finance as necessary. For example, during the last two years the group has raised around $1.1bn of funding in the form of long-term loan notes from the US private placement market.
7. Market engagement
Most of the risks to which the group is exposed are market risks. So as to better understand and influence the market, the group is committed to a policy of proactive engagement across its geographic range, with customers, industry associations, government regulators and employee representatives. |
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Investment in acquisitions in the year (excluding acquired net debt) amounted to £369.8m. |
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Net interest payable on net debt was £81.2m. This is an increase of 41% over the 2007 cost of £57.4m. |
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Net cash proceeds from business disposals received in 2008 were £31.1m. |
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On 13 may 2008, the group completed A placing of 127m ordinary shares. Gross proceeds were £281.9m and issue costs £5.9m. |
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On 9 March 2009, the group obtained a BBB credit rating from Standard & Poor’s which provides the group with further flexibility as regards future funding. |
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