Computacenter - Final Results 2019
Final results for the year ended
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Financial Highlights
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2019 |
2018 |
Percentage Change Increase/ (Decrease) |
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Financial Performance |
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Services revenue (£ million) |
1,230.6 |
1,175.0 |
4.7 |
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Technology Sourcing revenue (£ million) |
3,822.2 |
3,177.6 |
20.3 |
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Revenue (£ million) |
5,052.8 |
4,352.6 |
16.1 |
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Adjusted1 profit before tax (£ million) |
146.3 |
118.2 |
23.8 |
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Adjusted1 diluted earnings per share (pence) |
92.5 |
75.7 |
22.2 |
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Dividend per share (pence) |
37.0 |
30.3 |
22.1 |
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Statutory profit before tax (£ million) |
141.0 |
108.1 |
30.4 |
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Statutory diluted earnings per share (pence) |
89.0 |
70.1 |
27.0 |
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Cash Position |
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Cash and cash equivalents (£ million) |
217.9 |
200.4 |
8.7 |
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Adjusted net funds3 (£ million)* |
137.1 |
66.2 |
107.1 |
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Net funds3 (£ million) |
20.3 |
57.3 |
(64.6) |
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Net cash flow from operating activities (£ million) |
202.0 |
115.2 |
75.3 |
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Reconciliation between Adjusted1 and Statutory Performance
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Adjusted1 profit before tax (£ million) |
146.3 |
118.2 |
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Exceptional and other adjusting items: |
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Costs related to acquisition (£ million) |
(0.9) |
(5.7) |
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Amortisation of acquired intangibles (£ million) |
(4.4) |
(4.4) |
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Statutory profit before tax (£ million) |
141.0 |
108.1 |
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*The Group recognised
Operational Highlights:
· The Group's total revenues grew 16.1 per cent or
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·
· The
· The US acquisition made on
The result has benefited from
The Group has adopted IFRS 16 from
A reconciliation between key adjusted1 and statutory measures is provided within the Group Finance Director's review contained in this announcement. Further details are provided in note 2 to the summary financial information contained within this announcement.
'As we stated back in January, the results for 2019 set a high bar for the business in 2020. It is too early to predict the outcome for the year as a whole and there is still much work to be done, particularly as we have not yet completed our first quarter. Our Services pipeline is the strongest we have seen for some time in both Professional and Managed Services. While we still believe customers will continue to invest in product, particularly in the areas of Security, Networking and Cloud, it may well be difficult to achieve the same growth rates we have seen in recent years.
The current COVID-19 outbreak makes forecasting the future even more challenging. In the short term, we are urgently supporting our customers focused on their business continuity plans which involves the need for a greater degree of remote working. We have seen a surge in demand for laptop computers for this purpose. To-date, supply constraints from our Technology Providers have been minimal, although there are some concerns going forward. We do however have some concerns that in the medium-term, customers may postpone significant IT infrastructure projects while the current uncertainty remains. In the longer term, we feel more certain, either because when this crisis is behind us, life will return to normal and the fundamental business drivers for IT growth remain or, if there is a long-term reduction in business travel and commuting with a consequent upsurge in remote working, it can only drive the need for technology even further.
Our current focus is on maintaining continuity for our customers for the services and products we supply as well as doing whatever we can to protect the health of our employees, customers and the wider community.'
1 Adjusted operating profit or loss, adjusted net finance income or expense, adjusted profit or loss before tax, adjusted tax, adjusted profit or loss, adjusted earnings per share and adjusted diluted earnings per share are, as appropriate, each stated before: exceptional and other adjusting items including gain or losses on business acquisitions and disposals, amortisation of acquired intangibles, utilisation of deferred tax assets (where initial recognition was as an exceptional item or a fair value adjustment on acquisition), and the related tax effect of these exceptional and other adjusting items, as Management do not consider these items when reviewing the underlying performance of the Segment or the Group as a whole. Prior to the adoption of IFRS 16, adjusted gross profit or loss and adjusted operating profit or loss included the interest paid on customer-specific financing (CSF) which Management considered to be a cost of sale. A reconciliation between key adjusted and statutory measures is provided within the Group Finance Director's review contained in this announcement which details the impact of exceptional and other adjusted items when compared to the non-Generally Accepted Accounting Practice financial measures in addition to those reported in accordance with IFRS. Further detail is provided within note 6 to the summary financial information contained in this announcement.
2 We evaluate the long-term performance and trends within our strategic objectives on a constant currency basis. Further, the performance of the Group and its overseas Segments are shown, where indicated, in constant currency. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information gives valuable supplemental detail regarding our results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our prior-period local currency financial results using the current period average exchange rates and comparing these recalculated amounts to our current period results or by presenting the results in the equivalent local currency amounts. Wherever the performance of the Group, or its overseas Segments, are presented in constant currency, or equivalent local currency amounts, the equivalent prior-period measure is also presented in the reported pound sterling equivalent using the exchange rates prevailing at the time. 2019 Highlights, as shown at the beginning of this announcement, and statutory measures, are provided in the reported pound sterling equivalent.
3 Adjusted net funds or adjusted net debt includes cash and cash equivalents, other short or other long-term borrowings and current asset investments. Following the adoption of IFRS 16 this measure excludes all lease liabilities. CSF balances which were previously included within this measure are now also excluded as they form part of lease liabilities. A table reconciling this measure, including the impact of finance lease liabilities, is provided within note 9 to the summary financial information contained in this announcement.
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Enquiries: |
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01707 631601 |
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01707 631515 |
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020 7353 4200 |
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Results Presentation Conference Call:
There will be a conference call available this morning at 0930 for analysts and investors unable to join the Results Presentation in person. For dial-in details, please contact
DISCLAIMER - FORWARD LOOKING STATEMENTS
This announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms 'anticipates', 'believes', 'estimates', 'expects', 'intends', 'may', 'plans', 'projects', 'should' or 'will', or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this announcement and include, but are not limited to, statements regarding the Groups' intentions, beliefs or current expectations concerning, amongst other things, results of operations, prospects, growth, strategies and expectations of its respective businesses.
By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of the Group's operations and the development of the markets and the industry in which they operate or are likely to operate and their respective operations may differ materially from those described in, or suggested by, the forward-looking statements contained in this announcement. In addition, even if the results of operations and the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this announcement, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, those risks in the risk factor section of the 2018 Computacenter Annual Report and Accounts, as well as general economic and business conditions, industry trends, competition, changes in regulation, currency fluctuations or advancements in research and development.
Forward-looking statements speak only as of the date of this announcement and may and often do, differ materially from actual results. Any forward-looking statements in this announcement reflect the Group's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Group's operations, results of operations and growth strategy.
Neither
Chairman's Statement
This is my first statement since succeeding
I have spent this year learning more about our business by engaging with key members of senior management and our stakeholders.
The CEO,
Enabling Success
This has been a year of strong progress for
Statutory diluted earnings per share (EPS) increased by 27.0 per cent to
We continue to monitor our growing adjusted net funds3, which reached
The Board in 2019
There have been several changes to the Board's composition this year, in addition to the Chairmanship transition.
We were pleased to announce the appointment of
Rene's appointment returned the Board to its full complement of independent Non-Executive Directors.
The independent external evaluator who facilitated our recent Board evaluation noted that whilst the Board was collegiate in its approach, Members provided real challenge to Management in an open environment.
Our Continued Commitment to Sustainability
During the year, the Board has addressed a variety of areas of the Company's approach to sustainability.
Whilst our footprint remains small compared to those of our Technology Providers and customers, we hope to make a difference to the overall impact of the IT industry by continuing to focus on and improve our impact on the environment in our part of the supply chain.
The Board agrees that it is both the right thing to do morally and a business imperative, to be able to support our customers' increasing efforts to improve the sustainability of their businesses.
We have also increased the targets for gender diversity across all levels of the organisation and set the Executive Directors and senior management specific measurable objectives in this area.
The Year Ahead
Before addressing the coming year, we need to acknowledge the unprecedented levels of change in both the external and internal operating environments for
Governance and regulatory requirements have increased. The geopolitical impacts of Brexit, trade disputes and general elections in our key markets have all weighed on customer sentiment.
As we look to 2020, the pace of change, and the challenges that accompany that change, look set to increase even further. Our business model, to date, has proved resilient and helped us to weather these challenges effectively.
We have considered, and will continue to monitor closely, the potential impact of the COVID-19 virus on our business, global trade, and the macro-economic outlook. The Company's Principal Risks and Uncertainties have been updated to reflect the emerging situation. We consider that the sensitivity analysis conducted to support the Directors' reasonable expectation of the impact of risks, and assessment of viability, to be sufficiently robust given what we know today, although considerable uncertainties remain surrounding the duration and impact of the COVID-19 virus.
As the pace of change continues to accelerate, we must continue to adapt just to keep up. Trust from our stakeholders remains paramount to our success and we can achieve that by always delivering on our existing commitments and by evolving our offer to lead the industry through the changes and challenges ahead.
For nearly 40 years,
This has been a landmark year for
Chairman
Our Performance in 2019
Financial performance
The Group's revenues increased by 16.1 per cent to
The Group made a statutory profit before tax of
The difference between statutory profit before tax and adjusted1 profit before tax primarily relates to the Group's reported net charge of
It should be noted that these results include an overall decrease of
With the increase in the Group's overall statutory profit after tax, statutory diluted earnings per share (EPS) increased by 27.0 per cent to
The result has benefited from
2019 was one of the most successful years in
This improvement on the prior year was evident across the board, although it was stronger in some areas than others. German Services gross profit showed the greatest increase across the Group, driven by strong growth in Professional Services and an excellent recovery in Services margins from the lows of 2018. The German Technology Sourcing business saw solid growth and an improvement in margins, even with the slow-down of its largest customer, which significantly reduced its spend back to normal levels after the surge in 2018.
Technology Sourcing performance
The Group's Technology Sourcing revenue increased by 20.3 per cent to
As noted in our 2018 Interim Report and Accounts, the prior year revenue performance was flattered by two one-off software licence sales in the
The
The Technology Sourcing business in
French Technology Sourcing revenues grew faster than expected, at improved margins, due to the widening portfolio of target customers, particularly in the Public Sector. The key Public Sector account that was renewed in the prior year unexpectedly saw much increased volumes, in contrast to historic trends following previous renewals. French Technology Sourcing margins increased and remain the best and most consistent across the Group.
Overall Group Technology Sourcing margins increased by 26 basis points during the year, when compared to the prior year.
Services performance
The Group's Services revenue increased by 4.7 per cent to
The overall Services result benefited from
The German Services business was buoyed by exceptionally high Professional Services volumes, particularly within the Public Sector which is becoming a key specialism in
Following the non-renewal of the Group's largest Managed Services customer in the year, the French business has signed a number of new contracts, providing continued optimism about the longer-term prospects for Managed Services in
Overall growth in the
Overall Group Services margins increased by 246 basis points during the year.
Outlook
As we stated back in January, the results for 2019 set a high bar for the business in 2020. It is too early to predict the outcome for the year as a whole and there is still much work to be done, particularly as we have not yet completed our first quarter. Our Services pipeline is the strongest we have seen for some time in both Professional and Managed Services. While we still believe customers will continue to invest in product, particularly in the areas of Security, Networking and Cloud, it may well be difficult to achieve the same growth rates we have seen in recent years.
The current COVID-19 outbreak makes forecasting the future even more challenging. In the short term, we are urgently supporting our customers focused on their business continuity plans which involves the need for a greater degree of remote working. We have seen a surge in demand for laptop computers for this purpose. To-date, supply constraints from our Technology Providers have been minimal, although there are some concerns going forward. We do however have some concerns that in the medium-term, customers may postpone significant IT infrastructure projects while the current uncertainty remains. In the longer term, we feel more certain, either because when this crisis is behind us, life will return to normal and the fundamental business drivers for IT growth remain or, if there is a long-term reduction in business travel and commuting with a consequent upsurge in remote working, it can only drive the need for technology even further.
Our current focus is on maintaining continuity for our customers for the services and products we supply as well as doing whatever we can to protect the health of our employees, customers and the wider community.
Financial performance
Revenues in the
The
We increased the number of large customers during 2019, which are those who contribute over
Overall margins in the
Administrative expenses increased by 6.3 per cent to
This resulted in adjusted1 operating profit growing by 10.6 per cent to
We have taken measures to manage our cost base, ensure we have only the right skills going forward and retain high utilisation levels for our Consulting and Engineering teams. This involved reducing the volume of legacy skills and ensuring we have the new and emerging skills our customers need, such as those related to adopting Public Cloud and enabling Multi-Cloud environments.
Technology Sourcing performance
Technology Sourcing revenue decreased by 1.3 per cent to
As noted above, revenue in 2018 contained two large, one-off and very low-margin software deals worth
The revenue mix in 2019 moved marginally towards Workplace business and away from Enterprise business, with customers typically purchasing new technology in advance of implementing Digital Workplace transformations.
Technology Sourcing margins grew by 70 basis points compared to the prior year, benefiting from some improvement in product mix.
With Brexit negotiations ongoing, we have taken the decision to create the ability to serve the European arms of some of our
We are confident that our progress in Technology Sourcing will continue through 2020, with new participation on two key Public Sector frameworks along with good demand from our existing customers to transform their environments. We are seeing more global consolidation of our customers' requirements for Technology Sourcing and are well positioned through our acquisition of
Services performance
Services revenue declined by 3.2 per cent to
We were disappointed that Professional Services revenues did not grow during 2019. This was partly due to delays in the uptake of Windows 10, as a result of Microsoft's decision to extend support for Windows 7. Professional Services benefited from work with existing customers, with more complex technology projects along with some key transformational programmes, typically driven by Digital Workplace and Public Cloud adoption.
The Managed Services decline was driven by the loss of a large customer in 2018, coupled with embedded year-on-year price reductions within our existing Contract Base, as we pass operational efficiency savings to our customers at renewal.
This was also a strong year for renewing existing contracts, notably with two large central government clients, where we signed multi-year renewals.
The outlook for Managed Services is encouraging with a significant pipeline ahead in our core markets of Finance, Public Sector, Technology Media & Telecoms (TMT) and core industries such as Pharmaceuticals, Utilities and Oil & Gas. The type of opportunities are across all areas from Workplace to Networking including Public Cloud adoption and are spread across the year meaning, should we execute effectively, we will have the resource to take on in line with customer expectations.
In Professional Services, we closed the year with an increased order book, which gives us confidence of a return to growth through 2020. In Managed Services, the strong renewals performance in 2019 gives us a good platform to grow the Contract Base again in 2020. Our customers have held back on a straightforward migration to Windows 10 in favour of greater collaboration and value through a new Digital Workplace. This creates an opportunity to return to some of the larger- volume Professional Services work we have seen previously.
Services margins increased by 276 basis points over the year, as a result of greater efficiency and through improvements in the quality of Services we deliver for customers, meaning we could achieve our year-on-year commitments to reduce the cost of those Services while also improving profitability.
Financial performance
Total revenue increased by 5.2 per cent to
After a slow start, the financial year ended slightly above expectations as a result of a good third quarter and a very strong fourth quarter.
Sales growth of 5.2 per cent was good, particularly given the significant decline in business with one of our largest customers. Despite the continuing problems in the automotive and chemical sectors, we maintained our growth path of previous years in these sectors. We also saw above-average growth in the Public Sector business and in some other sectors, such as the construction industry, trade and auditing firms. The customer base expanded further and there were particular initial successes in increasing the number of customers new to
The overall result was driven by a continued strong Technology Sourcing business and a strong Services business, particularly in Professional Services. Above all,
Overall margins in
Administrative expenses increased by 8.7 per cent to
Adjusted1 operating profit for the German business increased by 27.9 per cent to
We expect the German business to continue on its growth path in 2020. Despite the ongoing problems in the German economy, especially in the automotive industry and its suppliers, mechanical engineering and the chemical industry, we expect demand to remain strong, especially in the Public Sector. Digitalisation driven by the government and the associated investment in solutions and infrastructure will provide us with additional opportunities. Customers are signalling continued high demand in the areas of Security, Multi-Cloud management, Data Centers and Networking refreshes, followed by the first major investments in setting up and expanding collaboration environments. Ongoing Windows 10 migrations and implementations of Windows Evergreen Services will also ensure that demand remains high in 2020. It should be possible to expand the customer base through a major customer contract campaign initiated in 2019, which will continue in 2020. We should also benefit from the positive effects of the improved difficult contract performance in Managed Services.
Technology Sourcing performance
Technology Sourcing revenue grew by 4.2 per cent to
Our Technology Sourcing business benefited from ongoing strong Networking and Security demand, supported by our partnership with Cisco, as well as strong Workplace business, driven by Windows 10 and the associated replacement investments. Growth in Public Sector business meant overall performance in the year was reasonable, despite the significant decline in Data Center sales to our largest customer, a German software hyperscaler, which reverted to more normal levels of business. Adjusting for the impact of that customer, Technology Sourcing grew by 13 per cent, which should be above market.
We also saw a couple of wins benefiting from our new
Technology Sourcing margins increased by 15 basis points over last year and remained at a high level. The improvement was predominantly driven by the product mix, with more high-value
Services performance
Services revenue grew by 7.7 per cent to
In 2019, we reported strong Services growth ahead of the market average, especially in Professional Services. After a rather subdued first half of the year, we saw a very strong second half, with growth in almost all industries and especially in the Public Sector. Thanks to the headcount expansion in the technology areas, especially Security, Cloud and Networking, which we initiated in 2018, we were able to satisfy the continuing high level of customer demand to some extent. Nevertheless, the issue of resource scarcity remains a major challenge for all IT companies in
In the Managed Services Segment, we closed the year with revenues slightly above expectations. We focused on service stability for the problem deals in this area rather than growth, but were still able to maintain revenue at the previous year's level. However, three major wins should provide growth impetus in the coming year. These wins included a worldwide Workplace on-site and IMAC support for one of the largest German pharmaceutical companies, as well as a complete Workplace contract for a public health insurance company. Good results were also achieved in the extension of existing contracts, with almost all major contracts extended or renegotiated. This reflects an increase in customer satisfaction in this area, compared with the problems of previous years, with Services significantly stabilised and creating the basis for contract extensions.
Overall, the Services margin was 309 basis points higher than last year. Increasing Services profitability was one of the key goals for 2019, with the business achieving good results through stabilising and improving the profitability of the historical difficult contracts. This was a particular contributor to increased Services profits, along with the higher than expected Professional Services revenue.
Financial performance
Total revenue increased by 15.7 per cent to
Our French business significantly increased its revenues in a positive market, as it refocused its sales activities on winning the right business with target customers, without reducing the size of the sales force. We were pleased to increase the number of large customers, including some high-profile new names, while working very well with our installed base, which has also showed good growth.
We were also pleased with good growth in our two business sectors. The Public Sector delivered good growth with existing customers, thanks to numerous wins in large framework contracts. In the private sector, we also grew business with existing customers by diversifying the activities delivered and won two significant new Managed Services contracts. We renewed 100 per cent of our Managed Services contracts in 2018, and achieved many gains in 2019, however we suffered a setback on a very large international account, which will have a negative impact on 2020 and in particular 2021.
The restructuring of the teams in the private sector continues to deliver results and we were pleased with the very good integration of new starters. The successful strengthening of the
We saw very good growth in Technology Sourcing and Services activities, after a very good year in 2018. We achieved this growth by working on the right customer set, with the right value proposition, by optimising our delivery capabilities, automating more and keeping our cost structures under control, leading to net results improving significantly.
This year was also important in demonstrating our ability to execute large technological projects, with an exceptional result on the two largest projects ever delivered by
We also launched our new Service Center in Perpignan, with the recruitment of more than 30 people. The Service Center is on track to grow to more than 150 employees in the coming months, to support the growth of Managed Services activities.
Overall, margins in
Overall adjusted1 gross profit grew by 24.3 per cent to
Administrative expenses increased by 16.8 per cent to
Adjusted1 operating profit for the French business increased by 76.3 per cent to
Technology Sourcing performance
Technology Sourcing revenue increased by 17.8 per cent to
2019 was a very good year for Technology Sourcing, thanks to the investment in the
The rebalancing of our technological activities is continuing as well, supported by the go-to-market propositions produced by the Group. We have seen significant improvement in our product mix alongside growth in all Segments.
Finally, in 2019 we launched a financing activity dedicated to
Services performance
Services revenue increased by 7.3 per cent to €120.7 million (2018: €112.5 million) and by 5.9 per cent in reported pound sterling equivalents2. Professional Services revenue increased by 27.6 per cent to €27.3 million (2018: €21.4 million), which was an increase of 25.9 per cent in reported pound sterling equivalents2. Managed Services revenues increased by 2.5 per cent to €93.4 million (2018: €91.1 million), an increase of 1.2 per cent in reported pound sterling equivalents2.
With many large wins over the last 18 months, Managed Services activity grew in 2019 despite the year-on-year revenue reduction on existing contracts. However, a large international contract was not renewed, which will affect our activity levels in 2020 and especially in 2021, as the contract comes to an end in the first half of 2020. This will also impact some of our international Service Centers which provided significant volumes of the customer-facing work .
However, 2020 will benefit from a full year of the major new contracts signed with CAC40 accounts that were in transition in 2019, enabling us to continue to grow Managed Services in
Although Professional Services activity remains relatively low compared to our Group colleagues, the business made pleasing progress and had strong growth in 2019, with ambitious growth plans in 2020
as well.
In 2019, we demonstrated the excellence of our Professional Services activities on very successful large projects. This was an important step in building the credibility of these activities with our target customer set, in order to support their major transformation projects. This performance was the result of joint efforts by the Sales and Delivery teams and we intend to continue in this direction. To support the resurgence of resource-on-demand type requests, we have set up a system dedicated to the sale and sourcing of expert profiles.
We are confident in our ability to continue to develop the Services business in 2020, while continuing to improve our margins.
Services margins increased by 82 basis points over last year.
During the second half of 2018, the Group completed the material acquisition of
Financial performance
Total revenue increased by 180.6 per cent to $986.6 million (2018: $351.6 million). In reported pound sterling equivalents2, total revenue was up 183.1 per cent.
The
Overall, margins in the
The Technology Sourcing business increased margin performance, due primarily to customer mix during the reporting period. The Professional Services business recovered somewhat from the first half due to cost reductions, but reported margins were still significantly below expectations overall. The Managed Services business reported flat margins year-on-year.
Overall adjusted1 gross profit grew by 153.9 per cent to $88.6 million (2018: $34.9 million) and by 157.4 per cent in reported pound sterling equivalents2. These headline numbers reflect the full-year inclusion of acquired entities.
Administrative expenses increased by 162.8 per cent to $77.0 million (2018: $29.3 million), and by 166.1 per cent in reported pound sterling equivalents2. This was due to increasing variable remuneration, investments in our business development programme to hire and train our next generation of sales professionals, a newly formed Partner Management function that is already driving significant bottom line results, as well as continuing focus on scaling our technical capabilities to enhance our value to customers and deploy our portfolio framework to enable our customers' success.
Adjusted1 operating profit for the
Overall, performance in the first half of 2019 was challenging, as sustaining last year's record growth in the underlying annualised comparative performance of
Margins in the
Technology Sourcing performance
Technology Sourcing revenue increased by 204.0 per cent to $934.0 million (2018: $307.2 million) and by 206.8 per cent in reported pound sterling equivalents2.
The Technology Sourcing business consolidated after the prior year's strong performance. We saw a similar technology spending mix amongst major partners and technologies, particularly in the Data Center and Networking lines of business. We benefited from significant continuing investments by our customers, as they continue to digitise their operations and modernise their infrastructure. We continue to see customers seeking to simplify their operations by consolidating to fewer suppliers, resulting in long-term commitments and larger transactions. Simplifying supply chains via consolidation and process integration remain powerful value propositions to our target market customers.
our margins. There is still additional work in progress to drive our results as far as possible towards those achieved in Group Technology Sourcing.
Services performance
Services revenue increased by 18.5 per cent to $52.6 million (2018: $44.4 million) and by 19.4 per cent in reported pound sterling equivalents2. Professional Services declined by 1.7 per cent to $17.4 million (2018: $17.7 million), which was a decrease of 1.4 per cent in reported pound sterling equivalents2. Managed Services increased by 31.8 per cent to $35.2 million (2018: $26.7 million), an increase of 33.3 per cent in reported pound sterling equivalents2.
There were particular challenges in the Professional Services business, which was scaled up to accommodate predicted growth that did not materialise. Necessary adjustments were made in the second quarter to return the business to the level of profitability seen in 2018. This resulted in over $3 million in annual costs being removed from Professional Services at the end of the first half, with those reductions proving sustainable at similar business volumes to those experienced during the period.
The overall Services performance was subdued but showed an improving trend from the first half to the second half of 2019. It is notable that we have continued to see double digit growth for our Integration Center projects, including complex distributed branch rollouts, as well as global Data Center build-out projects for our hyperscale customers.
We continued to renew and extend key contracts, which created expected headwinds in our Managed Services business through certain reductions in pricing and volumes, as well as transitioning new customers into our Services Contract Base. One of the major French-headquartered
We also continue to invest in and develop our operating models and practices for efficiency, with our customers increasingly leveraging centrally delivered shared Services, particularly in our near-shore Service Center in
Services margins decreased by 471 basis points but were 45 basis points ahead of the overall combined Group Services margin. Service margins were largely driven by under-utilisation of resources within the Professional Services segment, and flat margins within Managed Services.
International
The International Segment comprises a number of trading entities and offshore Global Service Desk delivery locations.
The trading entities include Computacenter Switzerland, Computacenter Belgium and Computacenter Netherlands. In addition to their operational delivery capabilities, these entities have in-country sales organisations, which enable us to engage with local customers. During the year, Computacenter Switzerland acquired PathWorks GmbH (PathWorks), a value-added reseller based in Neudorf (
These trading entities are joined in the Segment by the offshore Global Service Desk entities in
Financial performance
Revenues in the International business increased by 87.3 per cent to £191.4 million (2018: £102.2 million) and by 88.0 per cent in constant currency2.
This significant increase was the result of modest growth in our existing businesses in
Adjusted1 gross profit increased by 51.6 per cent to £43.5 million (2018: £28.7 million), and by 52.1 per cent in constant currency2. Approximately £11.2 million of the increase was from the acquired entities.
Administrative expenses increased by 66.5 per cent to £35.3 million (2018: £21.2 million) and by 67.3 per cent in constant currency2 with approximately £10.1 million of this increase due to the acquired entities.
Administrative expenses outside the acquired entities grew according to our investment plans. We have increased our Belgian sales force and further reshaped our sales organisation in
Overall adjusted1 operating profit increased by 9.3 per cent to £8.2 million (2018: £7.5 million) and by the same percentage in constant currency2, with the acquired entities contributing £1.2 million of growth,
in line with our ambitions.
The Belgian business delivered a small profit growth, in line with our plans. In 2019, our focus was to establish significant growth in our sales capacity, with the aim of gaining further market share in the coming years.
Thanks to the acquisition of PathWorks, our Swiss business showed an increase in profit for the fifth consecutive year. While our first-half performance was excellent in all business lines, our Services performance was less strong in the second half of the year, mainly because of delayed starts on some customer projects. The integration of PathWorks is on track and we are pleased to see that customers now use our full capabilities in Technology Sourcing, Professional Services and Managed Services.
Our business in
Technology Sourcing performance
Technology Sourcing revenue increased by 118.0 per cent to £123.6 million (2018: £56.7 million) and by 121.1 per cent in constant currency2.
Technology Sourcing in the International Segment benefited from £65.0 million of revenue from the acquisitions noted above.
In
While our acquired PathWorks business in
Technology Sourcing revenues in
Services performance
Services revenue increased by 49.0 per cent to £67.8 million (2018: £45.5 million) and by 47.7 per cent in constant currency2. Professional Services revenue was flat at £4.0 million (2018: £3.9 million) whilst Managed Services increased 53.4 per cent to £63.8 million (2018: £41.6 million), which was an increase of 51.5 per cent in constant currency2. The Segment benefited from an increase of £14.7 million in Services revenue due to the acquisitions noted above.
The Belgian operation grew in both Professional Services and Managed Services, although we still have an opportunity to increase our Professional Services contributions, hence our investment in our pre-sales capabilities around infrastructure solutions. Our existing Managed Services contracts deliver good contributions and we continue to work on an improved long-term Managed Services pipeline.
Although the Swiss operation saw a revenue increase in both Managed and Professional Services we saw a decrease in the total Services contribution. As mentioned above, this was due to the investments made in our Services capabilities, which we have not been able to fully utilise during the year. The Services pipeline continues to grow and we remain confident that these investments will show returns in 2020.
Compared to its pre-acquisition performance, the Dutch business saw a decline in Services revenue. This was partly due to our strategic decision to align our target customer base with that of the Group. On top of the aspiration to grow new Services opportunities within new targeted customers, we also use Group ERP system information to compare our Services performance with other
Group Finance Director's Review
The continued success of Technology Sourcing and margin improvements in the Services business, drove the Group's performance in 2019.
The Group result saw significant double digit increases in adjusted1 operating profit across the
Professional Services revenue was very strong across the Group, driven by high demand for increasingly complex skills across
Managed Services revenue was flat overall, with reductions in
A reconciliation between key adjusted1 and statutory measures is provided in Group Finance Director's Review included within this announcement.
Further details are provided in note 4 to the summary financial information within this announcement, Segment information.
Reconciliation from statutory to adjusted1 measures for the year ended 2019
|
|
Statutory results £'000 |
Adjustments |
Adjusted1 results £'000 |
|||
|
CSF interest £'000 |
Amortisation |
Utilisation of deferred tax £'000 |
Exceptionals and others £'000 |
|||
|
Revenue |
5,052,779 |
- |
- |
- |
- |
5,052,779 |
|
Cost of sales |
(4,389,665) |
- |
- |
- |
- |
(4,389,665) |
|
Gross profit |
663,114 |
- |
- |
- |
- |
663,114 |
|
|
|
|
|
|
|
|
|
Administrative expenses |
(516,090) |
- |
4,374 |
- |
94 |
(511,622) |
|
Operating profit |
147,024 |
- |
4,374 |
- |
94 |
151,492 |
|
|
|
|
|
|
|
|
|
Finance income |
980 |
- |
- |
- |
- |
980 |
|
Finance costs |
(7,046) |
- |
- |
- |
825 |
(6,221) |
|
Profit before tax |
140,958 |
- |
4,374 |
- |
919 |
146,251 |
|
|
|
|
|
|
|
|
|
Income tax expense |
(39,397) |
- |
(1,149) |
733 |
(878) |
(40,691) |
|
Profit for the year |
101,561 |
- |
3,225 |
733 |
41 |
105,560 |
Reconciliation from statutory to adjusted1 measures for the year ended 2018
|
|
Statutory results £'000 |
Adjustments |
Adjusted1 results £'000 |
|||
|
CSF interest £'000 |
Amortisation |
Utilisation of deferred tax £'000 |
Exceptionals and others £'000 |
|||
|
Revenue |
4,352,570 |
- |
- |
- |
- |
4,352,570 |
|
Cost of sales |
(3,804,019) |
(293) |
- |
- |
- |
(3,804,312) |
|
Gross profit |
548,551 |
(293) |
- |
- |
- |
548,258 |
|
|
|
|
|
|
|
|
|
Administrative expenses |
(439,183) |
- |
4,451 |
- |
5,240 |
(429,492) |
|
Operating profit |
109,368 |
(293) |
4,451 |
- |
5,240 |
118,766 |
|
|
|
|
|
|
|
|
|
Finance income |
1,250 |
- |
- |
- |
- |
1,250 |
|
Finance costs |
(2,490) |
293 |
- |
- |
417 |
(1,780) |
|
Profit before tax |
108,128 |
- |
4,451 |
- |
5,657 |
118,236 |
|
|
|
|
|
|
|
|
|
Income tax expense |
(27,199) |
- |
(1,169) |
1,933 |
(4,444) |
(30,879) |
|
Profit for the year |
80,929 |
- |
3,282 |
1,933 |
1,213 |
87,357 |
Profit before tax
The Group's statutory profit before tax increased by 30.4 per cent to £141.0 million (2018: £108.1 million). Adjusted1 profit before tax increased by 23.8 per cent to £146.3 million (2018: £118.2 million) and by 24.9 per cent in constant currency2.
The difference between statutory profit before tax and adjusted1 profit before tax primarily relates to the Group's reported net costs of £5.3 million (2018: net costs of £10.1 million) from exceptional and other adjusting items which is principally the amortisation of acquired intangibles as a result of the acquisition of
The Group has adopted IFRS 16 from 1 January 2019 which has resulted in changes in accounting policies and adjustments to the amounts recognised in the Financial Statements. The comparative results for the year ended 31 December 2019 have not been restated under the accounting policies adopted. The current year results include an overall decrease in profitability before tax of £1.7 million on both statutory and adjusted1 basis due to the impact of IFRS 16. Right-of-use assets and lease liabilities of £120.6 million were recorded as of 1 January 2019, with no net impact on retained earnings. The Group recognised £110.9 million of right-of-use assets and £116.8 million of lease liabilities as at 31 December 2019. An analysis of the impact of transition is presented in note 2 to the summary financial information within this announcement, summary of significant accounting policies. Further information on the implementation of, and transition to, IFRS 16 is included later within the Group Finance Director's Review.
Profit for the year
The statutory profit for the year increased by 25.6 per cent to £101.6 million (2018: £80.9 million). The adjusted1 profit for the year increased by 20.8 per cent to £105.6 million (2018: £87.4 million) and by 22.1 per cent in constant currency2.
Net finance income
Net finance charge in the year amounted to £6.1 million on a statutory basis (2018: charge of £1.2 million). The charge includes £3.7 million of interest on lease liabilities recognised following the adoption of IFRS 16 on 1 January 2019. This now includes the CSF charge previously excluded on an adjusted1 basis (2018: £0.3 million) but now included within the wider charge on lease liabilities under IFRS 16. A further £1.8 million of cost relates to interest on the term loan drawn down for the
Outside of the items above, net finance income of £0.7 million was recorded (2018: income of £0.5 million). On an adjusted1 basis, the net finance cost was £5.2 million during the year (2018: £0.5 million).
Taxation
The statutory tax charge was £39.4 million (2018: £27.2 million) on statutory profit before tax of £141.0 million (2018: £108.1 million). This represents a statutory tax rate of 27.9 per cent (2018: 25.2 per cent). The Group's adjusted1 tax rate has benefited from the historical tax losses in
During 2019, a tax credit of £0.8 million (2018: £3.1 million) was recorded due to post-acquisition activity in
The tax credit related to the amortisation of acquired intangibles was £1.1 million (2018: £1.2 million). This relates primarily to the £4.1 million of amortisation of intangible assets that were recognised as a result of the
The adjusted1 tax charge for the year was £40.7 million (2018: £30.9 million), on an adjusted1 profit before tax for the year of £146.3 million (2018: £118.2 million). The effective tax rate (ETR) was therefore 27.8 per cent (2018: 26.1 per cent) on an adjusted1 basis. The ETR during the year was higher than the previous year due to the large increase in profitability in
We expect that the ETR in 2020 will remain under upwards pressure, due to the increasing reweighting of the geographic split of adjusted1 profit before tax from the
The Group Tax Policy was reviewed during the year and approved by the Audit Committee and the Board, with no material changes from the prior year. We make every effort to pay all the tax attributable to profits earned in each jurisdiction that we operate in. We do not artificially inflate or reduce profits in one jurisdiction to provide a beneficial tax result in another and maintain approved transfer pricing policies and programmes, to meet local compliance requirements. Virtually all of the statutory tax charge in 2019 was incurred in either the
Revenue
|
|
Half 1 £m |
Half 2 £m |
Total £m |
|
2017 |
1,700.3 |
2,093.1 |
3,793.4 |
|
2018 |
2,008.9 |
2,343.7 |
4,352.6 |
|
2019 |
2,427.0 |
2,625.8 |
5,052.8 |
|
2019/18 |
20.8% |
12.0% |
16.1% |
Adjusted1 profit before tax
|
|
Half 1 |
|
Half 2 |
|
Total |
|||
|
£m |
% Revenue |
£m |
% Revenue |
£m |
% Revenue |
|||
|
2017 |
41.9 |
2.5% |
|
64.3 |
3.1% |
|
106.2 |
2.8% |
|
2018 |
52.1 |
2.6% |
|
66.1 |
2.8% |
|
118.2 |
2.7% |
|
2019 |
53.5 |
2.2% |
|
92.8 |
3.5% |
|
146.3 |
2.9% |
|
2019/18 |
2.7% |
|
|
40.4% |
|
|
23.8% |
|
Revenue by Segment
|
|
2019 |
|
2018 |
||||
|
Half 1 |
Half 2 |
Total |
Half 1 |
Half 2 |
Total |
||
|
|
793.9 |
787.7 |
1,581.6 |
|
861.1 |
750.2 |
1,611.3 |
|
|
889.0 |
1,054.7 |
1,943.7 |
|
866.0 |
1,006.7 |
1,872.7 |
|
|
271.4 |
291.5 |
562.9 |
|
230.7 |
262.6 |
493.3 |
|
|
380.4 |
392.8 |
773.2 |
|
13.4 |
259.7 |
273.1 |
|
International |
92.3 |
99.1 |
191.4 |
|
37.7 |
64.5 |
102.2 |
|
Total |
2,427.0 |
2,625.8 |
5,052.8 |
|
2,008.9 |
2,343.7 |
4,352.6 |
Adjusted1 operating profit by Segment
|
|
2019 |
|||||||
|
Half 1 |
|
Half 2 |
|
Total |
||||
|
£m |
% Revenue |
£m |
% Revenue |
£m |
% Revenue |
|||
|
|
23.5 |
3.0% |
|
41.0 |
5.2% |
|
64.5 |
4.1% |
|
|
32.6 |
3.7% |
|
51.9 |
4.9% |
|
84.5 |
4.3% |
|
|
6.1 |
2.2% |
|
6.2 |
2.1% |
|
12.3 |
2.2% |
|
|
1.2 |
0.3% |
|
7.9 |
2.0% |
|
9.1 |
1.2% |
|
International |
4.6 |
5.0% |
|
3.6 |
3.6% |
|
8.2 |
4.3% |
|
Central Corporate Costs |
(11.9) |
(0.5%) |
|
(15.2) |
(0.6%) |
|
(27.1) |
|
|
Total |
56.1 |
2.3% |
|
95.4 |
3.6% |
|
151.5 |
3.0% |
|
|
2018 |
|||||||
|
Half 1 |
|
Half 2 |
|
Total |
||||
|
£m |
% Revenue |
£m |
% Revenue |
£m |
% Revenue |
|||
|
|
25.9 |
3.0% |
|
32.4 |
4.3% |
|
58.3 |
3.6% |
|
|
32.2 |
3.7% |
|
34.6 |
3.4% |
|
66.8 |
3.6% |
|
|
2.1 |
0.9% |
|
5.0 |
1.9% |
|
7.1 |
1.4% |
|
|
0.4 |
3.0% |
|
3.9 |
1.5% |
|
4.3 |
1.6% |
|
International |
2.9 |
7.7% |
|
4.6 |
7.1% |
|
7.5 |
7.3% |
|
Central Corporate Costs |
(11.4) |
(0.6%) |
|
(13.8) |
(0.6%) |
|
(25.2) |
|
|
Total |
52.1 |
2.6% |
|
66.7 |
2.8% |
|
118.8 |
2.7% |
The table below reconciles the statutory tax charge to the adjusted1 tax charge for the year ended 31 December 2019.
|
|
2019 £'000 |
2018 £'000 |
|
Statutory tax charge |
39,397 |
27,199 |
|
Adjustments to exclude: |
|
|
|
Utilisation of German deferred tax assets |
(733) |
(1,933) |
|
Exceptional tax items |
839 |
3,091 |
|
Tax on amortisation of acquired intangibles |
1,149 |
1,169 |
|
Tax on exceptional items |
39 |
1,353 |
|
Adjusted1 tax charge |
40,691 |
30,879 |
|
Statutory ETR |
27.9% |
25.2% |
|
Adjusted1 ETR |
27.8% |
26.1% |
Exceptional and other adjusting items
The net loss from exceptional and other adjusting items in the year was £4.0 million (2018: loss of £6.4 million). Excluding the tax items noted above which resulted in a statutory gain of £1.3 million (2018: gain of £3.7 million), the profit before tax impact was a net loss from exceptional and other adjusting items of £5.3 million (2018: loss of £10.1 million).
An exceptional loss during the year of £0.1 million (2018: £5.2 million) resulted from costs directly relating to the acquisition of
We have continued to exclude the effect of amortisation of acquired intangible assets in calculating our adjusted1 results. Amortisation of intangible assets is non-cash and is significantly affected by the timing and size of our acquisitions, which distorts the understanding of our Group and Segmental operating results.
The amortisation of acquired intangible assets was £4.4 million (2018: £4.5 million), primarily relating to the amortisation of the intangibles acquired as part of the
Earnings per share
Statutory diluted earnings per share increased by 27.0 per cent to 89.0 pence per share (2018: 70.1 pence per share). Adjusted1 diluted earnings per share increased by 22.2 per cent to 92.5 pence per share (2018: 75.7 pence per share).
|
|
2019 |
2018 |
|
Basic weighted average number of shares (excluding own shares held) (no.'000) |
112,514 |
113,409 |
|
Effect of dilution: |
|
|
|
Share options |
1,655 |
1,984 |
|
Diluted weighted average number of shares |
114,169 |
115,393 |
|
|
|
|
|
Statutory profit for the year attributable to equity holders of the Parent (£'000) |
101,655 |
80,931 |
|
Basic earnings per share (pence) |
90.3 |
71.4 |
|
Diluted earnings per share (pence) |
89.0 |
70.1 |
|
|
|
|
|
Adjusted1 profit for the year attributable to equity holders of the Parent (£'000) |
105,654 |
87,359 |
|
Adjusted1 basic earnings per share (pence) |
93.9 |
77.0 |
|
Adjusted1 diluted earnings per share (pence) |
92.5 |
75.7 |
Dividend
The Group remains highly cash generative and adjusted net funds3 continue to regenerate on the Consolidated Balance Sheet, following the share buyback and the acquisition of
If further funds are not required for investment within the business, either for fixed assets, working capital support or acquisitions, and the distributable reserves are available in the Parent Company, we will aim to return the additional cash to investors through one-off returns of value, as we did in February 2018.
Dividends are paid from the standalone Balance Sheet of the Parent Company and, as at 31 December 2019, the distributable reserves were approximately £165 million (2018: £184 million).
The Board is pleased to propose a final dividend of 26.9 pence per share. The interim dividend paid on 11 October 2019 was 10.1 pence per share. Together with the final dividend, this brings the total ordinary dividend for 2019 to 37.0 pence per share, representing a 22.1 per cent increase on the 2018 total dividend per share of 30.3 pence.
The Board has consistently applied the Company's dividend policy, which states that the total dividend paid will result in a dividend cover of 2 to 2.5 times based on adjusted1 diluted earnings per share. In 2019, the cover was 2.5 times (2018: 2.5 times).
Subject to the approval of shareholders at our Annual General Meeting on 14 May 2020, the proposed dividend will be paid on Friday 26 June 2020. The dividend record date is set as Friday 29 May 2020 and the shares will be marked ex-dividend on Thursday 28 May 2020.
Central Corporate Costs
Certain expenses, such as those for the Board itself and related public company costs, Group Executive members not aligned to a specific geographic trading entity, and the cost of centrally funded strategic corporate initiatives that benefit the whole Group, are not specifically allocated to individual Segments because they are not directly attributable to any single Segment.
Accordingly, these expenses are disclosed as a separate column, 'Central Corporate Costs', within the Segmental note. These costs are borne within the
During the year, total Central Corporate Costs were £27.1 million, an increase of 7.5 per cent (2018: £25.2 million).
Within this:
· Board expenses, related public company costs and costs associated with Group Executive members not aligned to a specific geographic trading entity were slightly down at £7.1 million (2018: £7.5 million);
· share-based payment charges associated with the Group Executive members identified above, including the Group Executive Directors, increased from £2.7 million in 2018 to £3.0 million in 2019, due primarily to the increased value of
· strategic corporate initiatives increased from £15.0 million in 2018 to £17.1 million in 2019, primarily due to increased spend on projects designed to increase capability, enhance productivity or strengthen systems which underpin the Group.
Cash and cash equivalents and net funds
Cash and cash equivalents as at 31 December 2019 were £217.9 million, compared to £200.4 million at 31 December 2018.
The Group delivered an operating cash inflow of £200.0 million for the year to 31 December 2019 (2018: £115.2 million inflow).
Net funds3 as at 31 December 2019 was £20.3 million, compared to net funds3 of £57.3 million as at 31 December 2018.
Adjusted net funds3 as at 31 December 2019 was £137.1 million, compared to adjusted net funds3 of £66.2 million as at 31 December 2018.
The Group had two specific term loans at the end of the year and no other material borrowings. The Group drew down a £100 million term loan on 1 October 2018, to complete the acquisition of
The Group also has a specific term loan for the build and purchase of our new German headquarters and Integration Center in Kerpen, which stood at £24.8 million at 31 December 2019 (2018: £31.4 million). The Integration Center opened in November 2018 and the office facility opened in March 2019, which concluded the project.
For a full reconciliation of net funds3 and adjusted net funds3, see note 30 to the Consolidated Financial Statements, analysis of changes in net funds.
The Group returned £100 million to shareholders in the first quarter of the previous year.
Capital expenditure in 2019 was £29.2 million (2018: £51.4 million), with the decrease due to the investment in our German headquarters, which primarily occurred in 2018. Current year spend included the final elements of the German facility, other investments in IT equipment and software tools to enable us to deliver improved service to our customers and the establishment of a new Integration Center in
The Group continued to manage its cash and working capital positions appropriately using standard mechanisms, to ensure that cash levels remained within expectations throughout the year. The Group had no debt factoring at the end of the year outside the normal course of business. From time to time, some customers request credit terms longer than our standard of 30-60 days. In certain instances, we will arrange for the sale of the receivables on a true sale basis to a finance institution on the customers' behalf. We would receive funds typically on 45-day terms from the finance institution who will then recover payment from the customer on terms agreed with them. The cost of such an arrangement is borne by the customer and enables us to receive the full amount of payment in line with our standard terms. The benefit to the cash and cash equivalents position of such arrangements as at 31 December 2019 is £33.8 million.
The Group excludes finance lease liabilities from its non-GAAP adjusted net funds3 measure, due to the distorting effect of the capitalised lease liabilities on the Group's overall liquidity position under the new IFRS 16 accounting standard. More details on these leases and the transition to IFRS 16 can be found below.
There were no interest-bearing trade payables as at 31 December 2019 (2018: nil).
The Group's adjusted net funds3 position contains no current asset investments (2018: nil).
Net funds as at 31 December 2019 and 31 December 2018 were as follows:
|
|
2019 £'000 |
2018 £'000 |
|
Cash and short-term deposits |
217,881 |
200,442 |
|
Cash and cash equivalents |
217,881 |
200,442 |
|
Bank loans |
(80,772) |
(134,234) |
|
Adjusted net funds3 (excluding CSF and lease liabilities) |
137,109 |
66,208 |
|
CSF |
- |
(8,928) |
|
Lease liabilities |
(116,766) |
- |
|
Net funds |
20,343 |
57,280 |
Implementation of, and transition to, IFRS 16 Leases
A new accounting standard, IFRS 16 Leases, became effective for the Group from 1 January 2019 and replaces IAS 17 Leases.
IFRS 16 provides a single lessee accounting model, specifying how leases are recognised, measured, presented and disclosed. The Group elected to apply the modified retrospective approach for transition to IFRS 16, meaning the Group has not restated the comparatives for 2018.
The Group has recognised an asset representing its right as a lessee to use a leased item and a liability for future lease payments, for all properties, equipment and vehicles previously held under operating leases. The costs of such leases have been recognised in the Consolidated Income Statement, split between depreciation of the right-of-use asset and an interest cost on the lease liability. This is similar to the accounting for finance leases under IAS 17, but substantively different to the accounting for operating leases, under which no right-of-use asset or lease liability was recognised, and rentals payable were expensed to the Consolidated Income Statement on a straight-line basis.
IFRS 16 therefore results in an increase to operating profit, which is reported prior to interest being deducted. Depreciation of the right-of-use asset is charged on a straight-line basis but interest is charged on outstanding lease liabilities and therefore reduces over the life of the lease. As a result, the impact on the Consolidated Income Statement below operating profit depends on the average lease maturity in any particular year. For an immature portfolio, depreciation and interest are higher than the rental charge they replace in any year and therefore IFRS 16 is dilutive to EPS. For a mature portfolio, they are lower and therefore IFRS 16 is accretive to EPS.
Finance leases previously capitalised under IAS 17 Leases have been reclassified to the right-of-use asset category under IFRS 16.
The Group took the benefit of the two key practical expedients on adoption of IFRS 16, which relate to either short-term contracts in which the lease term is 12 months or less, or low-value assets (less than £5,000), which are expensed to other operating expenses.
Refer to note 2 to the summary financial information within this announcement, for further detail on the practical expedients applied on adoption of IFRS 16.
The judgements made by the Group on adoption of IFRS 16 included the selection of an appropriate discount rate to calculate the lease liability.
The adoption of IFRS 16 has had a significant impact on the presentation of the Group's assets and liabilities. The right-of-use assets are included within property, plant and equipment and corresponding lease liabilities are included within financial liabilities on the face of the Consolidated Balance Sheet. The cash and cash equivalents or the total cash flow at the year end are not affected by the adoption of IFRS 16. However, cash generated from operations and free cash flow measures increase, as operating lease rental expenses are no longer recognised as operating cash outflows. Cash outflows are instead split between interest paid and repayments of obligations under leases, which both increase.
On initial application, the Group has elected to record right-of-use assets based on the corresponding lease liability. Right-of-use assets and lease liabilities of £120.6 million were recorded as of 1 January 2019, with no net impact on retained earnings. The Group recognised £110.9 million of right-of-use assets and £116.8 million of lease liabilities as at 31 December 2019. During the year, the Group recognised £40.3 million of depreciation charge and £3.7 million of interest costs from these leases.
In the previous year, the rental expense of £42.3 million was charged to the Consolidated Income Statement under IAS 17. Had IAS 17 continued in operation during 2019, Group profit before tax, on both an adjusted1 and statutory basis, would have been £1.7 million higher.
Asset reunification
Following the changes to our Articles of Association approved at our AGM on 16 May 2019, the Company, in conjunction with our Registrar, conducted an asset reunification exercise during the year. We are aware that shareholders can lose touch with us due to a number of reasons. The Board wanted to re-unite as many shareholders as possible with their unclaimed assets. Our Registrar engaged a specialist company, to help us trace shareholders with unclaimed assets. Following this process, all shares in the names of shareholders who had not cashed dividend cheques in over 12 years, and that could not be traced through the asset unification process, were sold with the resultant funds returned to the company alongside all uncashed dividends. A total of 21,458 shares were forfeited from 355 shareholders with a total of £0.2 million returned to the Company from the sale of the shares. These funds have been allocated by the Board to be used to support the charitable partners selected by our employees.
RDC acquisition
During the year we bought back R.D. Trading Limited (RDC), to ensure that we have an organic capability dedicated to the repurposing and recycling of IT equipment our customers no longer need. This allows us to have a positive impact at the end of the IT lifecycle, rather than assuming our responsibilities stop when we sell product to customers.
Segmental reporting structure changes
Due to the acquisitions made in 2018, Management reviewed the way it reported Segmental performance to the Board and the Chief Executive Officer, who is the Group's Chief Operating Decision Maker ('CODM'), during the first half of the year. As a result of this analysis, the Board has adopted a new Segmental reporting structure for the year ended 31 December 2019.
In accordance with IFRS 8 Operating Segments, the Group has identified five revised operating Segments:
·
·
·
·
· International.
The Group has now added a fifth operating Segment which comprises the
The
The International Segment now comprises a core 'Rest of
The French and German Segments remain unchanged from those reported at 31 December 2018.
As noted previously, 'Central Corporate Costs' continue to be disclosed as a separate column within the Segmental note.
This new Segmental reporting structure is the basis on which internal reports are provided to the Chief Executive Officer, as the CODM, for assessing performance and determining the allocation of resources within the Group.
Segmental performance is measured based on external revenues, adjusted1 gross profit, adjusted1 operating profit and adjusted1 profit before tax.
The change in Segmental reporting has no impact on reported Group numbers.
Further information on this Segmental restatement can be found in note 4 to the Consolidated Financial Statements where, to enable comparisons with prior year performance, historical segment information for the year ended 31 December 2018 has been restated in accordance with the revised Segmental reporting structure. All discussion within this Annual Report and Accounts on Segmental results reflects this revised structure and the resultant prior year restatements.
Trade creditor arrangements
Capital management
Details of the Group's capital management policies are included in note 27 to the Consolidated Financial Statements.
Financial instruments
The Group's financial instruments comprise borrowings, cash and liquid resources, and various items that arise directly from its operations.
The Group enters into hedging transactions, principally forward exchange contracts or currency swaps, to manage currency risks arising from the Group's operations and its sources of finance. As the Group continues to expand its global reach and benefit from lower cost operations in geographies such as
The Group's policy is not to undertake speculative trading in financial instruments. The main risks arising from the Group's financial instruments are interest rate, liquidity and foreign currency risks. The overall financial instruments strategy is to manage these risks in order to minimise their impact on the Group's financial results. The policies for managing each of these risks are set out below. Further disclosures in line with the requirements of IFRS 7 are included in the Consolidated Financial Statements.
Interest rate risk
The Group finances its operations through a mixture of retained profits, bank borrowings, leases and loans for certain customer contracts. The Group's general bank borrowings, other facilities and deposits are at floating rates. No interest rate derivative contracts have been entered into. The Group's specific borrowing facility for the purchase of
Liquidity risk
The Group's policy is to ensure that it has sufficient funding and facilities in place to meet any foreseeable peak in borrowing requirements. The Group's positive net cash was maintained throughout 2019 and at the year end was £217.9 million, with net funds3 of £20.3 million after including the Group's two specific borrowing facilities and lease liabilities recognised under IFRS 16. Excluding these lease liabilities, adjusted net funds3 was £137.1 million at the year end.
Due to strong cash generation over the past four years, the Group can currently finance its operational requirements from its cash balance, and it operates an informal cash pooling arrangement for the majority of Group entities. During 2015, we extended an existing specific committed facility of £40.0 million for a three-year term through to February 2018. In January 2018, we extended the facility to £60.0 million with an expiry date of 22 May 2021. The Group has never drawn on this committed facility.
The Group has a Board-monitored policy to manage its counterparty risk. This ensures that cash is placed on deposit across a range of reputable banking institutions.
Foreign currency risk
The Group operates primarily in the
The Group uses an informal cash pooling facility to ensure that its operations outside the
The Group has been successful in winning international Services contracts, where Services are provided in multiple countries.
We aim to minimise currency exposure by invoicing the customer in the same currency in which the costs are incurred. For certain contracts, the Group's committed contract costs are not denominated in the same currency as its sales. In such circumstances, for example where contract costs are denominated in South African rand, we eliminate currency exposure for a foreseeable period on these future cash flows, through forward currency contracts.
In 2019, the Group recognised a loss of £0.8 million (2018: loss of £3.2 million) through other comprehensive income in relation to the changes in fair value of related forward currency contracts, where the cash flow hedges relating to firm commitments were assessed to be highly effective.
The Group reports its results in pound sterling. The ongoing weakness in the value of sterling against most currencies during 2019, in particular the euro, continued to benefit our revenues and profitability as a result of the conversion of our foreign earnings. However, the exchange rates seen in 2019 were not materially dissimilar to those seen in 2018. The impact of restating 2018 results at 2019 exchange rates would be a decrease of approximately £32.0 million in 2018 revenue and a decrease of £1.2 million in 2018 adjusted1 profit before tax.
Credit risk
The Group principally manages credit risk through customer credit limits. The credit limit is set for each customer based on its creditworthiness, assessed by using credit rating agencies, and the anticipated levels of business activity. These limits are determined when the customer account is first set up and are regularly monitored thereafter.
There are no significant concentrations of credit risk within the Group. The Group's major customer, disclosed in note 4 to the Consolidated Financial Statements, consists of entities under the control of the
Planning for the
There remains considerable uncertainty around the structure of the future trading relationship between the
This Committee is led by the Group Finance Director and includes senior staff from the key areas that may be affected, including:
· Finance, including Group Tax &
· Group Human Resources, for employment and related matters;
· Group Legal & Contracting, including intellectual property, data protection and supplier contracting;
· Group Information Services, including IT systems, location of IT infrastructure and location of data; and
· Group Technology Sourcing, including Export/Import, Supply Chain Services, Commercial Operations, Technology Provider Relations and the potential impact of Waste Electrical and Electronic Equipment (WEEE).
The Committee meets regularly to review papers submitted by the subject matter experts and monitors an action list, to identify ways to minimise the impact of this change. The Committee monitors negotiation developments, actively considers the possible impacts of the
Initial position and preparation
We are committed to operating our business and serving our customers in a way that properly manages and mitigates the impact of the
While
Due to the already global nature of
Technology Sourcing
Any trade barriers created as a result of the
While the precise outcome of the
Data transfer regulation
By incorporating the EU Commission approved Standard Contractual Clauses, the Group has built data transfer adequacy into its intra-Group agreements, to which all of its relevant
In this regard, the Company establishes appropriate safeguards for the purposes of General Data Protection Regulation Article 46, when transferring personal data to third countries not considered adequate by EU data protection standards.
People
Whilst we do not employ a significant number of EU27 citizens in the
Opportunities
We are not alone in our sector in facing these challenges. A number of our European competitors have strong presences within the EU and sell from this base into the
It is likely that there will be additional investment required in IT systems to manage the transition. Whilst this will be a cost to us, it will also be an opportunity, as our customers, in some cases, may need to increase investment in a similar manner.
Wider economic impact
There is significant uncertainty in relation to the ultimate outcome of the trade negotiations that are expected to be resolved in 2020, to avoid a final 'no-deal' type departure from the EU on 31 December 2020, and the impact that this may have on business confidence and investment plans and therefore the marketplaces in which we operate. Whilst the
Going Concern
The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out within this Group Finance Director's Review.
The Directors have, after due consideration, a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of 12 months from the date of approval of the Consolidated Financial Statements.
Thus, they continue to adopt the Going Concern basis of accounting in preparing the Consolidated Financial Statements.
Viability Statement
In accordance with provision 31 of the
Viability timeframe
The Directors have assessed the Group's viability over a period of three years from 31 December 2019. This period was selected as an appropriate timeframe for the following reasons:
· the Group's rolling strategic review, as considered by the Board, covers a three-year period;
· the period is aligned to the length of the Group's Managed Services contracts, which are typically three to five years long;
· the short lifecycle and constantly evolving nature of the technology industry lends itself to a period not materially longer than three years;
· Technology Sourcing has seen greater recent growth than the Group's Services business, increasing the revenue mix towards the part of the business that has less medium-term visibility and is therefore more difficult to forecast; and
· the continuing macro-economic and political environment, following the Referendum on leaving the
Whilst the Directors have no reason to believe the Group will not be viable over a longer period than three years, we believe that a three-year period presents shareholders with a reasonable degree of confidence, while providing a longer-term perspective.
With regard to the principal risks, the Directors remain assured that the business model will be valid beyond the period of this Viability Statement. There will continue to be demand for both our Professional and Managed Services businesses, and it is the responsibility of the Management to ensure that the Group remains able to meet that demand at an appropriate cost to our customers. The Group's value-added product reselling Technology Sourcing business only appears vulnerable to disintermediation at the low end of the product range, as the Group continues to provide a valuable service to customers and vendors alike.
Prospects of the Group assessment process and key assumptions
The assessment of the Group's prospects derives from the annual strategic planning and review process. This begins with an annual away day for the Board, where Management presents the strategic review for discussion against the Group's current and future operating environments.
High-level expectations for the following year are set with the Board's full involvement and are delivered to Management, who prepare the detailed bottom-up financial target for the following year. This financial target is reviewed and agreed by Management before presentation to the Board for approval.
On a rolling annual basis, the Board considers a three-year business plan consisting of the detailed bottom-up financial target for the following year (2020) and forecast information for two further years (2021 and 2022), which is driven by top-down assumptions overlaid on the detailed target year. Key assumptions used in formulating the forecast information include organic revenue growth, margin improvement and cost control, continued strategic investments through the Consolidated Income Statement, and forecast Group effective tax rates, with no changes to dividend policy or capital structure beyond what is known at the time of the forecast. The financial target for 2020 was considered and approved by the Board on 17 December 2019, with amendments and enhancements to the target as part of the full three-year plan considered and approved by the Board on 5 March 2020.
Impact of risks and assessment of viability
The three-year business plan is subject to sensitivity analysis which involves flexing a number of the main assumptions underlying the forecast. The forecast cash flows from the three-year plan are aggregated with the current position, to provide a total three-year cash position against which the impact of potential risks and uncertainties can be assessed. In the absence of significant external debt, the analysis also considers access to available committed and uncommitted finance facilities, ability to raise new finance in most foreseeable market conditions and the ability to restrict dividend payments as an instrument of last resort.
The potential impact of the principal risks and uncertainties is then applied to the sensitised three-year business plan. This assessment includes only those risks and uncertainties that, individually or in plausible combination, would threaten the Group's business model, future performance, solvency or liquidity over the assessment period and which are considered to be severe, but reasonable scenarios. It also takes into account an assessment of how the risks are managed and the effectiveness of any mitigating actions. The combined effect of the potential occurrence of several of the most impactful risks and uncertainties is then compared to the cash position generated throughout the sensitised three-year plan, to assess whether the business will be able to continue in operation.
For the current period, the risk related to an eventual 'no-deal' departure of the
Conclusion
Based on the period and assessment above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meets its liabilities as they fall due over the three-year period to 31 December 2022.
Fair, balanced and understandable
The
Management undertakes a formal process through which it can provide comfort to the Board in making this statement.
This Strategic Report was approved by the Board on 11 March 2020 and signed on its behalf by:
MJ Norris
Chief Executive Officer
FA Conophy
Group Finance Director
Consolidated Income Statement
For the year ended 31 December 2019
|
|
Note |
2019 £'000 |
2018 £'000 |
|
Revenue |
4,5 |
5,052,779 |
4,352,570 |
|
Cost of sales |
|
(4,389,665) |
(3,804,019) |
|
Gross profit |
|
663,114 |
548,551 |
|
|
|
|
|
|
Administrative expenses |
|
(516,090) |
(439,183) |
|
Operating profit |
|
147,024 |
109,368 |
|
|
|
|
|
|
Finance income |
|
980 |
1,250 |
|
Finance costs |
|
(7,046) |
(2,490) |
|
Profit before tax |
|
140,958 |
108,128 |
|
|
|
|
|
|
Income tax expense |
7 |
(39,397) |
(27,199) |
|
Profit for the year |
|
101,561 |
80,929 |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
Equity holders of the Parent |
|
101,655 |
80,931 |
|
Non-controlling interests |
|
(94) |
(2) |
|
Profit for the year |
|
101,561 |
80,929 |
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
- basic |
8 |
90.3p |
71.4p |
|
- diluted |
8 |
89.0p |
70.1p |
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019
|
|
Note |
2019 £'000 |
2018 £'000 |
|
Profit for the year |
|
101,561 |
80,929 |
|
|
|
|
|
|
Items that may be reclassified to Consolidated Income Statement: |
|
|
|
|
Loss arising on cash flow hedge |
|
(915) |
(3,231) |
|
Income tax effect |
|
176 |
490 |
|
|
|
(739) |
(2,741) |
|
Exchange differences on translation of foreign operations |
|
(18,175) |
7,828 |
|
|
|
(18,914) |
5,087 |
|
Items not to be reclassified to Consolidated Income Statement: |
|
|
|
|
Remeasurement of defined benefit plan |
|
(786) |
(1,000) |
|
Other comprehensive income for the year, net of tax |
|
(19,700) |
4,087 |
|
|
|
|
|
|
Total comprehensive income for the year |
|
81,861 |
85,016 |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
Equity holders of the Parent |
|
81,956 |
85,013 |
|
Non-controlling interests |
|
(95) |
3 |
|
Total comprehensive income for the year |
|
81,861 |
85,016 |
Consolidated Balance Sheet
As at 31 December 2019
|
|
Note |
2019 £'000 |
2018 £'000 |
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
|
212,325 |
106,267 |
|
Intangible assets |
|
175,670 |
184,613 |
|
Investment in associate |
|
54 |
57 |
|
Deferred income tax assets |
7d |
9,204 |
9,587 |
|
Prepayments |
|
3,520 |
3,524 |
|
|
|
400,773 |
304,048 |
|
Current assets |
|
|
|
|
Inventories |
|
122,189 |
99,524 |
|
Trade and other receivables |
|
996,462 |
1,180,394 |
|
Prepayments |
|
82,315 |
69,320 |
|
Accrued income |
|
94,030 |
101,899 |
|
Forward currency contracts |
|
3,218 |
3,851 |
|
Cash and short-term deposits |
9 |
217,881 |
200,442 |
|
|
|
1,516,095 |
1,655,430 |
|
Total assets |
|
1,916,868 |
1,959,478 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
|
978,220 |
1,142,628 |
|
Deferred income |
|
174,258 |
143,080 |
|
Financial liabilities |
|
56,606 |
10,640 |
|
Forward currency contracts |
|
1,707 |
612 |
|
Income tax payable |
|
39,278 |
42,184 |
|
Provisions |
|
7,703 |
11,990 |
|
|
|
1,257,772 |
1,351,134 |
|
Non-current liabilities |
|
|
|
|
Financial liabilities |
|
140,932 |
132,522 |
|
Provisions |
|
13,982 |
15,041 |
|
Deferred income tax liabilities |
7d |
11,698 |
13,009 |
|
|
|
166,612 |
160,572 |
|
Total liabilities |
|
1,424,384 |
1,511,706 |
|
Net assets |
|
492,484 |
447,772 |
|
|
|
|
|
|
Capital and reserves |
|
|
|
|
Issued share capital |
|
9,270 |
9,270 |
|
Share premium |
|
3,942 |
3,942 |
|
Capital redemption reserve |
|
74,957 |
74,957 |
|
Own shares held |
|
(113,563) |
(113,474) |
|
Translation and hedging reserves |
|
14,028 |
32,941 |
|
Retained earnings |
|
503,928 |
440,119 |
|
Shareholders' equity |
|
492,562 |
447,755 |
|
Non-controlling interests |
|
(78) |
17 |
|
Total equity |
|
492,484 |
447,772 |
Approved by the Board on 11 March 2020.
|
MJ Norris |
FA Conophy |
|
Chief Executive Officer |
Group Finance Director |
Consolidated Statement of Changes in Equity
For the year ended 31 December 2019
|
|
Attributable to equity holders of the Parent |
Shareholder's equity £'000 |
Non- controlling interests £'000 |
Total equity £'000 |
|||||
|
Issued share capital £'000 |
Share premium £'000 |
Capital redemption reserve £'000 |
Own shares held £'000 |
Translation and hedging reserves £'000 |
Retained earnings £'000 |
||||
|
At 1 January 2019 |
9,270 |
3,942 |
74,957 |
(113,474) |
32,941 |
440,119 |
447,755 |
17 |
447,772 |
|
Profit for the year |
- |
- |
- |
- |
- |
101,655 |
101,655 |
(94) |
101,561 |
|
Other comprehensive income |
- |
- |
- |
- |
(18,913) |
(786) |
(19,699) |
(1) |
(19,700) |
|
Total comprehensive income |
- |
- |
- |
- |
(18,913) |
100,869 |
81,956 |
(95) |
81,861 |
|
Cost of share-based payments |
- |
- |
- |
- |
- |
6,775 |
6,775 |
- |
6,775 |
|
Tax on share-based payments |
- |
- |
- |
- |
- |
1,790 |
1,790 |
- |
1,790 |
|
Exercise of options |
- |
- |
- |
15,798 |
- |
(10,071) |
5,727 |
- |
5,727 |
|
Purchase of own shares |
- |
- |
- |
(15,887) |
- |
- |
(15,887) |
- |
(15,887) |
|
Asset reunification |
- |
- |
- |
- |
- |
210 |
210 |
- |
210 |
|
Equity dividends |
- |
- |
- |
- |
- |
(35,764) |
(35,764) |
- |
(35,764) |
|
At 31 December 2019 |
9,270 |
3,942 |
74,957 |
(113,563) |
14,028 |
503,928 |
492,562 |
(78) |
492,484 |
|
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2018 |
9,299 |
3,913 |
74,957 |
(11,360) |
27,859 |
390,725 |
495,393 |
14 |
495,407 |
|
Profit for the year |
- |
- |
- |
- |
- |
80,931 |
80,931 |
(2) |
80,929 |
|
Other comprehensive income |
- |
- |
- |
- |
5,082 |
(1,000) |
4,082 |
5 |
4,087 |
|
Total comprehensive income |
- |
- |
- |
- |
5,082 |
79,931 |
85,013 |
3 |
85,016 |
|
Cost of share-based payments |
- |
- |
- |
- |
- |
6,425 |
6,425 |
- |
6,425 |
|
Tax on share-based payments |
- |
- |
- |
- |
- |
2,706 |
2,706 |
- |
2,706 |
|
Exercise of options |
- |
- |
- |
11,158 |
- |
(7,592) |
3,566 |
- |
3,566 |
|
Purchase of own shares |
- |
- |
- |
(13,274) |
- |
- |
(13,274) |
- |
(13,274) |
|
Return of Value (RoV) |
- |
- |
- |
(99,998) |
- |
- |
(99,998) |
- |
(99,998) |
|
Expenses relating to RoV |
- |
- |
- |
- |
- |
(1,196) |
(1,196) |
- |
(1,196) |
|
Cancellation of deferred shares |
(29) |
29 |
- |
- |
- |
- |
- |
- |
- |
|
Equity dividends |
- |
- |
- |
- |
- |
(30,880) |
(30,880) |
- |
(30,880) |
|
At 31 December 2018 |
9,270 |
3,942 |
74,957 |
(113,474) |
32,941 |
440,119 |
447,755 |
17 |
447,772 |
Consolidated Cash Flow Statement
For the year ended 31 December 2019
|
|
Note |
2019 £'000 |
2018 £'000 |
|
Operating activities |
|
|
|
|
Profit before taxation |
|
140,958 |
108,128 |
|
Net finance cost |
|
6,066 |
1,240 |
|
Depreciation of property, plant and equipment (excluding right-of-use assets) |
|
21,456 |
19,380 |
|
Depreciation of right-of-use asset |
|
40,266 |
- |
|
Amortisation of intangible assets |
|
11,543 |
15,428 |
|
Share-based payments |
|
6,775 |
6,425 |
|
Loss on disposal of intangibles |
|
116 |
164 |
|
Loss on disposal of property, plant and equipment |
|
347 |
177 |
|
Net cash flow from inventories |
|
(27,422) |
(28,887) |
|
Net cash flow from trade and other receivables (including contract assets) |
|
136,682 |
(274,968) |
|
Net cash flow from trade and other payables (including contract liabilities) |
|
(108,799) |
285,361 |
|
Net cash flow from provisions |
|
10,670 |
5,865 |
|
Other adjustments |
|
(2,414) |
726 |
|
Cash generated from operations |
|
236,244 |
139,039 |
|
Income taxes paid |
|
(34,231) |
(23,821) |
|
Net cash flow from operating activities |
|
202,013 |
115,218 |
|
|
|
|
|
|
Investing activities |
|
|
|
|
Interest received |
|
980 |
1,250 |
|
Acquisition of subsidiaries, net of cash acquired |
|
6,116 |
(55,970) |
|
Purchases of property, plant and equipment |
|
(30,132) |
(45,442) |
|
Purchases of intangible assets |
|
(8,737) |
(5,935) |
|
Proceeds from disposal of property, plant and equipment |
|
1,009 |
146 |
|
Net cash flow from investing activities |
|
(30,764) |
(105,951) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
Interest paid |
|
(3,318) |
(2,490) |
|
Interest expense on lease liabilities |
|
(3,728) |
- |
|
Dividends paid to equity shareholders of the Parent |
|
(35,764) |
(30,880) |
|
Return of Value (RoV) |
|
- |
(99,998) |
|
Expenses on RoV |
|
- |
(1,196) |
|
Asset reunification |
|
210 |
- |
|
Proceeds from share issues |
|
5,727 |
3,566 |
|
Purchase of own shares |
|
(15,887) |
(13,274) |
|
Repayment of capital element of finance leases |
|
- |
(803) |
|
Repayment of loans |
9 |
(51,755) |
(1,119) |
|
Payment of lease liabilities |
9 |
(42,346) |
- |
|
New borrowings - finance leases |
|
- |
5,125 |
|
New borrowings - bank loan |
|
- |
124,065 |
|
Net cash flow from financing activities |
|
(146,861) |
(17,004) |
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents |
|
24,388 |
(7,737) |
|
Effect of exchange rates on cash and cash equivalents |
|
(6,949) |
1,580 |
|
Cash and cash equivalents at the beginning of the year |
9 |
200,442 |
206,599 |
|
Cash and cash equivalents at the year end |
9 |
217,881 |
200,442 |
1 Authorisation of Consolidated Financial Statements and statement of compliance with IFRS
The Consolidated Financial Statements of Computacenter plc (Parent Company or the Company) and its subsidiaries (the Group) for the year ended 31 December 2019 were authorised for issue in accordance with a resolution of the Directors on 11 March 2020. The Consolidated Balance Sheet was signed on behalf of the Board by MJ Norris and FA Conophy. Computacenter plc is a limited company incorporated and domiciled in England whose shares are publicly traded.
The Group's Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union as they apply to the Consolidated Financial Statements of the Group for the year ended 31 December 2019 and applied in accordance with the Companies Act 2006.
2 Summary of significant accounting policies
The accounting policies adopted are consistent with those of the previous financial year as disclosed in the 2018 Annual Report and Accounts except for lease accounting where the Group has adopted the new accounting standard, IFRS 16 'Lease' ('IFRS 16'), as it became effective for the Group from 1 January 2019.
IFRS 16 Leases (IFRS 16)
IFRS 16 introduced a single, on-balance sheet accounting model for lessees. As a result, the Group, as a lessee, has recognised right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. Lessor accounting remains similar to previous accounting policies.
Effective 1 January 2019, the Group adopted IFRS 16 using the modified retrospective approach and accordingly the information presented for FY 2018 has not been restated. It remains as previously reported under IAS 17 and related interpretations.
As permitted by IFRS 16, the Group has elected to adopt the following practical expedients on transition:
· not to capitalise a right-of-use asset or related lease liability where the lease expires before 31 December 2019;
· not to reassess contracts to determine if the contract contains a lease and not to separate lease and non-lease elements;
· to use hindsight in determining the lease term if the contract contains options to extend or terminate the lease;
· lease payments for contracts with a duration of 12 months or less and contracts for which the underlying asset is of a low value will continue to be expensed to the Consolidated Income Statement on a straight-line basis over the lease term;
· to exclude initial direct costs from the measurement of the right-of-use asset related to leases existing at 31 December 2018; and
· to apply the portfolio approach where a group of leases has similar characteristics.
Impact of adoption of IFRS 16
Consolidated Balance Sheet
On initial application, the Group has elected to record right-of-use assets based on the corresponding lease liability. Right-of-use assets and lease obligations of £120.6 million were recorded as of 1 January 2019. When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The average rate applied is 4.0 per cent.
The Group has recognised £110.9 million of right-of-use assets and £116.8 million of lease liability as at 31 December 2019.
Consolidated Income Statement
Under IFRS 16, the Group has seen a different categorisation of expense within the Consolidated Income Statement, as the IAS 17 operating lease expense is replaced by depreciation and interest costs. During the year ended 31 December 2019, the Group has recognised £40.3 million of depreciation costs and £3.7 million of interest costs from these leases and has seen a decrease of £42.3 million of operating lease rental expense. Had IAS 17 continued in operation during the period, Group profit before tax, on both an adjusted1 and statutory basis, would have been £1.7 million higher.
Consolidated Cash Flow Statement
The change in presentation because of the adoption of IFRS 16 has seen an improvement in 2019 of cash flow generated from operating activities, offset by a corresponding decline in cash flow from financing activities. There is no overall cash flow impact from the adoption of IFRS 16.
Reconciliation between the Group's operating lease commitments and lease liability
The following table reconciles the Group's operating lease commitments as a lessee at 31 December 2018, as previously disclosed in the Financial Statements, to the lease obligations recognised on initial application of IFRS 16 at 1 January 2019:
|
|
£'000 |
|
|
|
|
Operating lease commitments at 31 December 2018 as disclosed in the Financial Statements |
137,032 |
|
Discounted using the incremental borrowing rate at 1 January 2019 |
(9,913) |
|
Recognition exemption for leases of low-value assets and with less than 12 months of lease term at transition |
(18,378) |
|
Other adjustment relating to implementation of IFRS 16 |
3,098 |
|
Total additional lease liabilities recognised on adoption of IFRS 16 |
111,839 |
|
Existing finance lease liabilities at 31 December 2018 |
8,767 |
|
Lease liabilities recognised at 1 January 2019 |
120,606 |
Accounting policies
Group as lessee
Recognition of a lease
The contracts are assessed by the Group, to determine whether a contract is, or contains a lease. In general, arrangements are a lease when all of the following apply:
· It conveys the right to control the use of an identified asset for a certain period in exchange for consideration;
· The Group have substantially all economic benefits from the use of the asset; and
· The Group can direct the use of the identified asset.
The policy is applied to contracts entered into, or changed, on or after 1 January 2019. The Group has elected to separate the non-lease components and elected to apply several practical expedients as stated above. In cases where the Group acts as an intermediate lessor, it accounts for its interests in the head-lease and the sub-lease separately.
Measurement of a right-of-use asset and lease liability
Right-of-use asset
As at 1 January 2019, the Group measured the right-of-use asset at cost, which included the following:
· the initial amount of the lease liability adjusted for any lease payments made at or before 1 January 2019;
· any lease incentives received; and
· any initial direct costs incurred by the Group as well as an estimate of costs to be incurred by the Group in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the lease contract. Cost for dismantling, removing or restoring the site on which it is located and/or the underlying asset is only recognised when the Group incurs an obligation to do so.
The right-of-use asset is depreciated over the lease term, using the straight-line method.
Lease liability
As at 1 January 2019, the lease liability is initially measured at the present value of the unpaid lease payments, discounted using the interest rate implicit in the lease, or if the rate cannot be readily determined, the Group's incremental borrowing rate. Lease payments included in the measurement comprise of fixed payments, variable lease payments that depend on an index or a rate, amounts to be paid under a residual value guarantee and lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option as well as penalties for early termination of a lease, if the Group is reasonably certain to terminate early. If there is a purchase option present, this will be included if the Group is reasonably certain to exercise the option.
Leases of low-value assets and short-term
Leases of low-value assets (<£5,000) and short-term with a term of 12 months or less are not required to be recognised on the Consolidated Balance Sheet and payments made in relation to these leases are recognised on a straight-line basis in the Consolidated Income Statement.
Effective for the year ending 31 December 2020
No new standards, interpretations and amendments not yet effective are expected to have a material effect on the Group's future financial statements.
2.1. Basis of preparation
The summary financial information set out above does not constitute the Group's statutory Consolidated Financial Statements for the years ended 31 December 2019 or 2018. Statutory Consolidated Financial Statements for the Group for the year ended 31 December 2018, prepared in accordance with adopted IFRS, have been delivered to the Registrar of Companies and those for 2019 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of any emphasis without qualifying their opinion and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
The summary financial information for the year ended 31 December 2019 has been prepared by the directors based upon the results and position that are reflected in the Consolidated Financial Statements of the Group.
The Consolidated Financial Statements are prepared on the historical cost basis other than derivative financial instruments, which are stated at fair value.
The Consolidated Financial Statements are presented in pound sterling (£) and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.
2.2. Basis of consolidation
The Consolidated Financial Statements comprise the Financial Statements of the Parent Company and its subsidiaries as at 31 December each year. The Financial Statements of subsidiaries are prepared for the same reporting year as the Parent Company, using existing GAAP in each country of operation. Adjustments are made on consolidation for differences that may exist between the respective local GAAPs and IFRS.
All intra-Group balances, transactions, income and expenses and profit and losses resulting from intra-Group transactions have been eliminated in full.
Subsidiaries are consolidated from the date on which the Group obtains control and cease to be consolidated from the date on which the Group no longer retains control. Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that is not held by the Group and is presented separately within equity in the Consolidated Balance Sheet, separately from Parent shareholders' equity.
2.2.1. Foreign currency translation
Each entity in the Group determines its own functional currency and items included in the Financial Statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the Consolidated Balance Sheet date. All differences are taken to the Consolidated Income Statement.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction.
The functional currencies of the material overseas subsidiaries are euro (€), US dollar ($), South African rand (ZAR) and Swiss franc (CHF). The Group's presentation currency is pound sterling. As at the reporting date, the assets and liabilities of these overseas subsidiaries are translated into the presentation currency of the Group at the rate of exchange ruling at the balance sheet date and their Consolidated Income Statements are translated at the average exchange rates for the year. Exchange differences arising on the retranslation are recognised in the Consolidated Statement of Comprehensive Income. On disposal of a foreign entity, the deferred cumulative amount recognised in the Consolidated Statement of Comprehensive Income relating to that particular foreign operation is recognised in the Consolidated Income Statement.
2.3. Revenue
Revenue is recognised to the extent of the amount which is expected to be received from customers as consideration for the transfer of goods and services to the customer.
In multi-element contracts with customers where more than one good (Technology Sourcing) or service (Professional Services and Managed Services) is provided to the customer, analysis is performed to determine whether the separate promises are distinct performance obligations within the context of the contract. To the extent that this is the case, the transaction price is allocated between the distinct performance obligations based upon relative standalone selling prices. The revenue is then assessed for recognition purposes based upon the nature of the activity and the terms and conditions of the associated customer contract relating to that specific distinct performance obligation.
The following specific recognition criteria must also be met before revenue is recognised:
2.3.1. Technology Sourcing
The Group supplies hardware and software (together as 'goods') to customers that is sourced from and delivered by a number of suppliers.
Technology Sourcing revenue is recognised at a point in time, when control of the goods have passed to the customer, usually on despatch.
Payment for the goods is generally received on industry standard payment terms.
Technology Sourcing principal versus agent recognition
Management is required to exercise its judgement in the classification of certain revenue contracts for Technology Sourcing revenue recognition on either an agent or principal basis.
Because the identification of the principal in a contract is not always clear, Management will make a determination by evaluating the nature of our promise to our customer as to whether it is a performance obligation to provide the specified goods or services ourselves, in that we are the principal, or to arrange for those goods or services to be provided by the other party, where we are the agent. We determine whether we are a principal or an agent for each specified good or service promised to the customer by evaluating the nature of our promise to the customer against a non-exhaustive list of indicators that a performance obligation could involve an agency relationship:
· Evaluating who controls each specified good or service before that good or service is transferred to the customer;
· The vendor retains primary responsibility for fulfilling the sale;
· We take no inventory risk before or after the goods have been ordered, during shipping or on return;
· We do not have discretion to establish pricing for the vendor 's goods limiting the benefit we can receive from the sale of those goods; and
· Our consideration is in the form of a usually predetermined commission.
2.3.2 Professional Services
The Group provides skilled professionals to customers either on a 'resource on demand' basis or operating within a project framework.
For those contracts which are 'resource on demand', where the revenue is billed on a timesheet basis, revenue is recognised based on monthly invoiced amounts as this corresponds to the service delivered to the customer and the satisfaction of the Company's performance obligations.
For contracts operating within a project framework, revenue is recognised based on the transaction price with reference to the costs incurred as a proportion of the total estimated costs (percentage of completion basis) of the contract. Under either basis, Professional Services revenue is recognised over time.
If the total estimated costs and revenues of a contract cannot be reliably estimated, revenue is recognised only to the extent that costs have been incurred and where the Group has an enforceable right to payment as work is being performed.
A provision for forecast excess costs over forecasted revenue is made as soon as a loss is foreseen (see note 2.13.1 to the summary financial information within this announcement for further detail).
Unbilled Professional Services revenue is classified as a contract asset and is included within accrued income in the Consolidated Balance Sheet.
Unearned Professional Services revenue is classified as a contract liability and is included within deferred income in the Consolidated Balance Sheet. Payment for the Services, which are invoiced monthly, are generally on industry standard payment terms.
2.3.3 Managed Services
The Group sells maintenance, support and management of customers' IT infrastructures and operations.
Managed Services revenue is recognised over time, throughout the term of the contract, as services are delivered. The specific performance obligations and invoicing conditions in our Managed Services contracts are typically related to the number of calls, interventions or users that we manage and therefore the customer simultaneously receives and consumes the benefits of the services as they are performed. Revenue is recognised based on monthly invoiced amounts as this corresponds to the service delivered to the customer and the satisfaction of the Company's performance obligations.
Unbilled Managed Services revenue is classified as a contract asset and is included within accrued income in the Consolidated Balance Sheet.
Unearned Managed Services revenue is classified as a contract liability and is included within deferred income in the Consolidated Balance Sheet.
Amounts invoiced relating to more than one year are deferred and recognised over the relevant period. Payment for the services is generally on industry standard payment terms.
If the total estimated costs and revenues of a contract cannot be reliably estimated, revenue is recognised only to the extent that costs have been incurred and where the Group has an enforceable right to payment as work is being performed. A provision for forecast excess costs over forecasted revenue is made as soon as a loss is foreseen (see note 2.12.1 to the summary financial information within this announcement for further detail). On occasion, the Group may have a limited number of Managed Services contracts where revenue is recognised on a percentage of completion basis, which is determined by reference to the costs incurred as a proportion of the total estimated costs of the contract (see note 3.1.1 to the summary financial information within this announcement for further detail).
Costs of obtaining and fulfilling revenue contracts
The Group operates in a highly competitive environment and is frequently involved in contract bids with multiple competitors, with the outcome usually unknown until the contract is awarded and signed.
When accounting for costs associated with obtaining and fulfilling customer contracts, the Group first considers whether these costs fit within a specific IFRS standard or policy. Any costs associated with obtaining or fulfilling revenue contracts which do not fall into the scope of other IFRS standards or policies are considered under IFRS 15. All such costs are expensed as incurred other than the two types of costs noted below:
1. Win fees - The Group pays 'win fees' to certain employees as bonuses for successfully obtaining customer contracts. As these are incremental costs of obtaining a customer contract, they are capitalised along with any associated payroll tax expense to the extent they are expected to be recovered. These balances are presented within prepayments in the Consolidated Balance Sheet. The win fee balance that will be realised after more than 12 months is disclosed as non-current.
2. Fulfilment costs - The Group often incurs costs upfront relating to the initial set-up phase of an outsourcing contract, which the Group refers to as Entry Into Service. These costs do not relate to a distinct performance obligation in the contract, but rather are accounted for as fulfilment costs under IFRS 15 as they are directly related to the future performance on the contract. They are therefore capitalised to the extent that they are expected to be recovered. These balances are presented within prepayments in the Consolidated Balance Sheet.
Both win fees and Entry Into Service costs are amortised on a straight-line basis over the contract term, as this is materially equivalent to the pattern of transfer of services to the customer over the contract term. The amortisation charges on win fees and Entry Into Service costs are recognised in the Consolidated Income Statement within administration expenses and cost of sales, respectively.
Any bid costs incurred by the Group's Central Bid Management Engines are not capitalised or charged to the contract, but instead directly charged to selling, general and administrative expenses as they are incurred. These costs associated with bids are not separately identifiable nor can they be measured reliably as the Group's internal bid team's work across multiple bids at any one time.
2.3.4. Finance income
Income is recognised as interest accrues.
2.3.5. Operating lease income
Rental income arising from operating leases is accounted for on a straight-line basis over the lease term.
2.4. Exceptional items
The Group presents those material items of income and expense as exceptional items which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better elements of financial performance in the year, so as to facilitate comparison with prior years and to assess better trends in financial performance.
2.5. Adjusted1 measures
The Group uses a number of non-Generally Accepted Accounting Practice (non-GAAP) financial measures in addition to those reported in accordance with IFRS. The Directors believe that these non-GAAP measures, listed below, assist in providing additional useful information on the underlying trends, performance and position of the Group. The non-GAAP measures also used to enhance the comparability of information between reporting periods by adjusting for nonrecurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Group's performance.
Consequently, non-GAAP measures are used by the Directors and management for performance analysis, planning, reporting and incentive-setting purposes and have remained consistent with prior year.
These non-GAAP measures comprise of:
Adjusted operating profit or loss, adjusted profit or loss before tax, adjusted tax, adjusted profit or loss for the year, adjusted earnings per share and adjusted diluted earnings per share are, as appropriate, each stated before: exceptional and other adjusting items including gain or loss on business disposals, gain or loss on disposal of investment properties, expenses related to material acquisitions, amortisation of acquired intangibles, utilisation of deferred tax assets (where initial recognition was as an exceptional item or a fair value adjustment on acquisition), and the related tax effect of these exceptional and other adjusting items, as Management do not consider these items when reviewing the underlying performance of the Segment or the Group as a whole. Additionally, adjusted gross profit or loss and adjusted operating profit or loss includes the interest paid on customer-specific financing (CSF) which Management considers to be a cost of sale.
A reconciliation between key adjusted and statutory measures is provided in the Group Finance Director 's Review which details the impact of exceptional and other adjusting items when comparing to the non-GAAP financial measures in addition to those reported in accordance with IFRS. Further detail is also provided within note 4 to the summary financial information included within this announcement, Segment information.
2.6. Impairment of assets
The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset 's recoverable amount. Where an asset does not have independent cash flows, the recoverable amount is assessed for the cash-generating unit (CGU) to which it belongs. Certain other corporate assets are unable to be allocated against specific CGUs. These assets are tested across an aggregation of CGUs that utilise the asset. The recoverable amount is the higher of the fair value less costs to sell and the value-in-use of the asset or CGU. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the Consolidated Income Statement in those expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset 's or CGU's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. As the Group has no assets carried at revalued amounts, such reversal is recognised in the Consolidated Income Statement.
2.7. Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.
Depreciation, down to residual value, is calculated on a straight-line basis over the estimated useful life of the asset as follows:
· freehold buildings: 25-50 years
· short leasehold improvements: shorter of seven years and period to expiry of lease
· fixtures and fittings
· head office: 5-15 years
· other: shorter of seven years and period to expiry of lease
· office machinery and computer hardware: 2-15 years
· motor vehicles: three years
· Right-of-use assets: over respective lease term
Freehold land is not depreciated. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Consolidated Income Statement in the year the item is derecognised.
2.8. Leases
Group as lessee - from 1 January 2019
Recognition of a lease
The contracts are assessed by the Group, to determine whether a contract is, or contains a lease. In general, arrangements are a lease when all of the following apply:
· it conveys the right to control the use of an identified asset for a certain period in exchange for consideration;
· the Group have substantially all economic benefits from the use of the asset; and
· the Group can direct the use of the identified asset.
The policy is applied to contracts entered into, or changed, on or after 1 January 2019. The Group has elected to separate the non-lease components and elected to apply several practical expedients as stated above. In cases where the Group acts as an intermediate lessor, it accounts for its interests in the head-lease and the sub-lease separately.
Measurement of a right-of-use asset and lease liability
Right-of-use asset
The Group measures the right-of-use asset at cost, which includes the following:
· the initial amount of the lease liability adjusted for any lease payments made at or before 1 January 2019;
· any lease incentives received; and
· any initial direct costs incurred by the Group as well as an estimate of costs to be incurred by the Group in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the lease contract. Cost for dismantling, removing or restoring the site on which it is located and/or the underlying asset is only recognised when the Group incurs an obligation to do so.
The right-of-use asset is depreciated over the lease term, using the straight-line method.
Lease liability
The lease liability is initially measured at the present value of the unpaid lease payments, discounted using the interest rate implicit in the lease, or if the rate cannot be readily determined, the Group's incremental borrowing rate. Lease payments included in the measurement comprise of fixed payments, variable lease payments that depend on an index or a rate, amounts to be paid under a residual value guarantee and lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option as well as penalties for early termination of a lease, if the Group is reasonably certain to terminate early. If there is a purchase option present, this will be included if the Group is reasonably certain to exercise the option.
Leases of low-value assets and short-term
Leases of low-value assets (<£5,000) and short-term with a term of 12 months or less are not required to be recognised on the Consolidated Balance Sheet and payments made in relation to these leases are recognised on a straight-line basis in the Consolidated Income Statement.
Group as lessee - until 31 December 2018
Assets held under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments.
Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the Consolidated Income Statement on a straight-line basis over the lease term.
2.9. Intangible assets
2.9.1. Software and software licences
Software and software licences include computer software that is not integral to a related item of hardware. These assets are stated at cost less accumulated amortisation and any impairment in value. Amortisation is calculated on a straight-line basis over the estimated useful life of the asset. Currently software is amortised over four years.
The carrying values of software and software licences are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount.
2.9.2. Software under development
Costs that are incurred and that can be specifically attributed to the development phase of management information systems for internal use are capitalised and amortised over their useful life, once the asset becomes available for use.
2.9.3. Other intangible assets
Intangible assets acquired as part of a business combination are carried initially at fair value. Following initial recognition intangible assets are carried at cost less accumulated amortisation and any impairment in value. Intangible assets with a finite life have no residual value and are amortised on a straight-line basis over their expected useful lives with charges included in administrative expenses as follows:
· order back log: three months
· existing customer relationships: 10-15 years
· tools and technology: seven years.
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
2.9.4. Goodwill
Business combinations are accounted for under IFRS 3 Business Combinations using the acquisition method. Any excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the Consolidated Balance Sheet as goodwill and is not amortised. Any goodwill arising on the acquisition of equity accounted entities is included within the cost of those entities.
After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired.
For the purpose of impairment testing, goodwill is allocated to the related CGU monitored by Management, usually at business Segment level or statutory Company level as the case may be. Where the recoverable amount of the CGU is less than its carrying amount, including goodwill, an impairment loss is recognised in the Consolidated Income Statement.
2.10. Inventories
Inventories are carried at the lower of weighted average cost and net realisable value after making allowance for any obsolete or slow-moving items. Costs include those incurred in bringing each product to its present location and condition, on a First-In, First-Out basis.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale.
2.11. Financial assets
Financial assets are recognised at their fair value, which initially equates to the sum of the consideration given and the directly attributable transaction costs associated with the investment. Subsequently, the financial assets are measured at either amortised cost or fair value depending on their classification under IFRS 9. The Group currently holds only debt instruments. The classification of these debt instruments depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows.
2.11.1. Trade and other receivables
Trade receivables, which generally have 30- to 90-day credit terms, are initially recognised and carried at their original invoice amount less an allowance for any uncollectable amounts. The Group sometimes uses debt factoring to managing liquidity and, as a result, the business model for Trade receivables is that they are held for the collection of contractual cash flows, which are solely payments of principal and interest, and for selling. As a result, IFRS 9 requires that, subsequent to initial recognition, they are measured at fair value through other comprehensive income (except for the recognition of impairment gains and losses and foreign exchange gains and losses, which are recognised in profit or loss). The trade receivables are derecognised on receipt of cash from the factoring party. Given the short lives of the trade receivables, there are generally no material fair value movements between initial recognition and the derecognition of the receivable.
The Group assesses for doubtful debts (impairment) using the expected credit losses model as required by IFRS 9. For trade receivables, the Group applies the simplified approach which requires expected lifetime losses to be recognised from the initial recognition of the receivables.
2.11.2. Current asset investments
Current asset investments comprise deposits held for a term of greater than three months from the date of deposit and which are not available to the Group on demand. The business model for current asset investments is that they are held for the collection of contractual cash flows, which are not solely payments of principal and interest. As a result, subsequent to initial measurement, current asset investments are measured at fair value with fair value movements recognised in profit and loss.
2.11.3. Cash and cash equivalents
Cash and short-term deposits in the Consolidated Balance Sheet comprise cash at bank and in hand, and short-term deposits with an original maturity of three months or less. Cash is held for the collection of contractual cash flows which are solely payments of principal and interest and therefore is measured at amortised cost subsequent to initial recognition.
For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents consist of cash and short-term deposits as defined above, net of outstanding bank overdrafts, where there is a legal right of set off.
2.12. Financial liabilities
Financial liabilities are initially recognised at their fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.
The subsequent measurement of financial liabilities is at amortised cost, unless otherwise described below:
2.12.1. Provisions (excluding Restructuring provision)
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an out flow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost.
Customer contract provisions
A provision for forecast excess costs over forecasted revenue is made as soon as a loss is foreseen.
Management continually monitor the financial performance of contracts, and where there are indicators that a contract could result in a negative margin, the future financial performance of that contract will be reviewed in detail. If, after further financial analysis, the full financial consequence of the contract can be reliably estimated, and it is determined that the contract is potentially loss-making, then the best estimate of the losses expected to be incurred until the end of the contract will be provided for (see note 3.1.1 to the summary financial information within this announcement for further detail).
The Group applies IAS 37 in its assessment of whether contracts are considered onerous and in subsequently estimating the provision. An agenda decision published by the IFRS Interpretations Committee outlined that the current wording of IAS 37 allows for two interpretations of what can constitute 'unavoidable' costs when determining whether a contract is onerous. One of the acceptable interpretations noted by the Committee is in line with our current practice, which is to consider costs such as overhead allocations as 'unavoidable'. The matter has been put on the agenda for future discussion at the IFRS Interpretations Committee, with a view to drafting clarifications to IAS 37. Until there is clarity on this matter, we have concluded that our current approach, that considers total estimated costs (i.e. directly attributable variable costs and fixed allocated costs) as included in the assessment of whether the contract is onerous or not and in the measurement of the provision, remains appropriate.
2.12.2. Restructuring provisions
The Group recognises a 'restructuring' provision when there is a programme planned and controlled by Management that changes materially the scope of the business or the manner in which it is conducted.
Further to the Group's general provision recognition policy, a restructuring provision is only considered when the Group has a detailed formal plan for the restructuring identifying, as a minimum; the business or part of the business concerned; the principal locations affected; the location, function and approximate number of employees who will be compensated for terminating their services; the expenditures that will be under taken and when the plan will be implemented.
The Group will only recognise a specific restructuring provision once a valid expectation in those affected that it will carry out the restructuring by star ting to implement that plan or announcing its main features to those affected by it.
The Group only includes incremental costs associated directly with the restructuring within the restructuring provisions such as employee termination benefits and consulting fees. The Group specifically excludes from recognition in a restructuring provision any costs associated with ongoing activities such as the costs of training or relocating staff that are redeployed within the business and costs for employees who continue to be employed in ongoing operations, regardless of the status of these operations post restructure.
2.12.3. Pensions and other post-employment benefits
The Group operates a defined contribution pension scheme available to all UK employees. Contributions are recognised as an expense in the Consolidated Income Statement as they become payable in accordance with the rules of the scheme. There are no material pension schemes within the Group's overseas operations.
The Group has an obligation to make a one-off payment to French employees upon retirement, the Indemnités de Fin de Carrière (IFC).
French employment law requires that a company pays employees a one-time contribution when, and only when, the employee leaves the Company on retirement at the mandatory age. This is a legal requirement for all businesses who incur the obligation upon departure, due to retirement, of an employee.
Typically, the retirement benefit is based on length of service of the employee and his or her salary at retirement. The amount is set via a legal minimum, but the retirement premiums can be improved by the collective agreement or employment contract in some cases. In Computacenter France, the payment is based on accrued service and ranges from one month of salary after five years of service to 9.4 months of salary after 47 years of service.
If the employee leaves voluntarily at any point before retirement, all liability is extinguished, and any accrued service is not transferred to any new employment.
Management continues to account for this obligation according to IAS 19 (revised).
2.13. Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:
· the rights to receive cash flows from the asset have expired; or
· the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or
· the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired.
2.14. Derivative financial instruments and hedge accounting
The Group uses foreign currency forward contracts to hedge its foreign currency risks associated with foreign currency fluctuations affecting cash flows from forecasted transactions and unrecognised firm commitments.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for under taking the hedge. The documentation includes identification of both the hedging instrument and, the hedged item or transaction and then the economic relationship between the two, including whether the hedging instrument is expected to offset changes in cash flow of the hedged item. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows. The Group designates the full change in the fair value of the forward contract (including forward points) as the hedging instrument. Forward contracts are initially recognised at fair value on the date that the contract is entered into and are subsequently remeasured at fair value at each reporting date. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. Forward contracts are recorded as assets when the fair value is positive and as liabilities when the fair value is negative.
For the purposes of hedge accounting, hedges are classified as cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability, a highly probable forecast transaction, or the foreign currency risk in an unrecognised firm commitment.
Cash flow hedges that meet the criteria for hedge accounting are accounted for as follows: the effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the Consolidated Income Statement in administrative expenses.
Amounts recognised within other comprehensive income are transferred to the Consolidated Income Statement, within administrative expenses, when the hedged transaction affects the Consolidated Income Statement, such as when the hedged financial expense is recognised.
If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in equity is transferred to the Consolidated Income Statement within administrative expenses. If the hedging instrument mature or is sold, terminated or exercised without replacement or rollover, any cumulative gain or loss previously recognised within Consolidated Other Comprehensive Income remains within Consolidated Other Comprehensive Income until after the forecast transaction or firm commitment affects the Consolidated Income Statement.
Any other gains or losses arising from changes in fair value on forward contracts are taken directly to administrative expenses in the Consolidated Income Statement.
2.15. Taxation
2.15.1. Current tax
Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
2.15.2. Deferred income tax
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements, with the following exceptions:
· where the temporary difference arises from the initial recognition of goodwill or from an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
· in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
· deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available in the future against which the deductible temporary differences, carried forward tax credits or tax losses, can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted, or substantively enacted, at the balance sheet date.
Income tax is charged or credited directly to the statement of comprehensive income if it relates to items that are credited or charged to the statement of comprehensive income. Otherwise, income tax is recognised in the Consolidated Income Statement.
2.16. Share-based payment transactions
Employees (including Executive Directors) of the Group can receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares ('equity-settled transactions').
The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted. The fair value is determined by utilising an appropriate valuation model. In valuing equity-settled transactions, no account is taken of any performance conditions as none of the conditions set are market-related.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ('vesting date').
The cumulative expense recognised for equity-settled transactions at each reporting date, until the vesting date, reflects the extent to which the vesting period has expired and the Directors' best estimate of the number of equity instruments that will ultimately vest. The Consolidated Income Statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. As the schemes do not include any market-related performance conditions, no expense is recognised for awards that do not ultimately vest.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share (see note 8 to the summary financial information included within this announcement).
The Group has an employee share trust for the granting of non-transferable options to Executive Directors and senior management. Shares in the Group held by the employee share trust are treated as investment in own shares and are recorded at cost as a deduction from equity.
2.17. Own shares held
Computacenter plc shares held by the Group are classified in shareholders' equity as 'own shares held' and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to reserves. No gain or loss is recognised in the performance statements on the purchase, sale, issue or cancellation of equity shares.
2.18. Fair value measurement
The Group measures certain financial instruments at fair value at each balance sheet date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
3 Critical accounting estimates and judgements
The preparation of the Consolidated Financial Statements requires Management to exercise judgement in applying the Group's accounting policies. It also requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses.
Due to the inherent uncertainty in making these critical judgements and estimates, actual outcomes could be different.
During the year, Management set aside time to consider the critical accounting estimates and judgements for the Group. This process included reviewing the last reporting period's disclosures, the key judgements required on the implementation of forthcoming standards such as IFRS 16 and the current period's challenging accounting issues. Where Management deemed an area of accounting to be no longer a critical estimate or judgement, an explanation for this decision is found in the relevant accounting notes to the summary financial information.
3.1. Critical estimates
Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the year in which the estimates are revised and in any future years affected. The areas involving significant risk resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
3.1.1. Services revenue recognition and contract provisions
Percentage of completion revenue recognition
On occasion, the Group accounts for certain Services contracts using the percentage of completion method, recognising revenue by reference to the stage of completion of the contract which is determined by actual costs incurred as a proportion of total forecast contract costs. This method places considerable importance on accurate estimates of the extent of progress towards completion of the contract and may involve estimates on the scope of services required for fulfilling the contractually defined obligations. These significant estimates include total contract costs, total contract revenues, contract risks, including technical risks, and other assumptions. Under the percentage of completion method, the changes in these estimates and assumptions may lead to an increase or decrease in revenue recognised at the balance sheet date with the in-year revenue recognition appropriately adjusted as required. When the outcome of the contract cannot be estimated reliably, revenue is recognised only to the extent that expenses incurred are eligible to be recovered. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration.
The key judgements are the extent to which revenue should be recognised and also, where total contract costs are not covered by total contract revenue, the extent to which an adjustment is required.
Contract provisions
During the year, Management held a number of 'difficult' contracts under review that were considered to be performing below expectation.
The number of contracts under review fluctuated during the year between seven and 12 (2018: seven and 12). Each contract was subject to a detailed review to consider the reasons behind the lower than anticipated performance and the potential accounting impacts related effect on revenue recognition estimates and contract provisions.
For a limited number of these 'difficult' contracts, where there was no immediate operational or commercial remedy for the performance, a range of possible outcomes for the estimate of the total contract costs and total contract revenues was considered to determine whether a provision is required and, if so, the best estimate of the provision.
The revenue recognised in the year from these contracts under review was approximately £31.5 million (2018: £30.1 million). The range of potential scenarios considered by management in respect of these specific contracts resulted in a reduction in margins, recognised in 2019 of [£23.7] million (2018: £13.6 million), in the year. At 31 December 2019, based on Management 's best estimate, there was a provision of £7.8 million (2018: £16.4 million) against future losses with the total costs to complete on these contracts estimated at £54.7 million (2018: £76.9 million).
The key judgements are determining which contracts are considered 'difficult' and estimating the provision from the range of possible outcomes.
3.2. Critical judgements
Judgements made by Management in the process of applying the Group's accounting policies, that have the most significant effect on the amounts recognised in the Consolidated Financial Statements, are as follows:
3.2.1. Exceptional items
Exceptional items remain a core focus of Management with the recent Alternative Performance Measure regulations providing further guidance in this area.
Management is required to exercise its judgement in the classification of certain items as exceptional and outside of the Group's adjusted results. The overall goal of Management is to present the Group's underlying performance without distortion from one-off or non-trading events regardless of whether they are favourable or unfavourable to the underlying result.
To achieve this, Management have considered the materiality, infrequency and nature of the various items classified as exceptional this year against the requirements and guidance provided by IAS 1, our Group accounting policies and the recent regulatory interpretations and guidance.
In reaching their conclusions, Management consider not only the effect on the overall underlying Group performance but also where an item is critical in understanding the performance of its component Segments which is of relevance to investors and analysts when assessing the Group result and its future prospects as a whole.
Further details of the individual exceptional items, and the reasons for their disclosure treatment, are set out in note 6 to the summary financial information included within this announcement.
3.2.2. Bill-and-hold
The Group generates some of its revenue through its 'bill-and-hold' arrangement with its customers. This arises when the customer is invoiced but the product is not shipped to the customer until a later date, in accordance with the customer's request in a written agreement. In order to determine the appropriate timing of revenue recognition, it is assessed whether control has transferred to the customer.
A bill-and-hold arrangement is only put in place when customer lacks the physical space to store the product or the product previously ordered is not yet needed in accordance with the customer's schedule, the customer wants to guarantee supply of identical product. In order to determine the bill-and-hold arrangements, the following criteria must be met;
a) the reason for the bill-and-hold arrangement must be substantive (for example: the customer has requested the arrangement);
b) the product must be identified separately as belonging to the customer;
c) the product currently must be ready for physical transfer to the customer; and
d) the entity cannot have the ability to use the product or to direct it to another customer.
Judgement is required to determine if all of the criteria (a) to (d) has been met to recognise a bill-and-hold sale. This is determined by segregation and readiness of inventory, review of customer requests, test of a sample of orders in order to assess whether the accounting policy had been correctly applied to recognise a bill-and-hold sale.
3.3. Change in critical estimates and critical judgements
During the year, Management reassessed the critical estimates and critical judgements. Technology Sourcing principal versus agent recognition was taken out as the level of judgement involved for this does not elevate to a critical judgement in the current year. Management spent a reduced amount of time on this judgement, after spending a greater amount of time due to the adoption of IFRS 15 in the prior year. Bill-and-hold has been included in the current year within critical judgements due to an increased volume of bill-and-hold transactions and hence is elevated to a critical judgement.
4 Segment information
Due to the acquisitions made in 2018, Management has further reviewed the way it reported Segmental performance to the Board and the Chief Executive Officer, who is the Group's Chief Operating Decision Maker ('CODM'), during the first half of the year. As a result of this analysis the Board has adopted a new Segmental reporting structure for the year ended 31 December 2019.
In accordance with IFRS 8 Operating Segments, the Group has identified five revised operating Segments:
· UK;
· Germany;
· France;
· USA; and
· International.
In the new USA Segment, the Group has now added a fifth operating Segment which comprises the business acquired in 2018 and the existing USA operations which transfer in from the International Segment.
The UK Segment now includes the TeamUltra trading operations from the International Segment reflecting the fact that the majority of the work performed by TeamUltra is either on UK customers or for UK bids. The TeamUltra operations have been absorbed into the UK trading entity, reflecting the importance of the capability to the UK business. This has also resulted in the combination of the previously separate cash-generating units for these businesses as, post-absorption, this is now the level that the ongoing operation is assessed at. The re-acquisition of R.D. Trading Limited has been added to the UK Segment in the year as the business primarily serves our UK customer base.
The International Segment now comprises a core 'Rest of Europe' presence with key trading operations in Belgium, the Netherlands and Switzerland along with the international Global Service Desk locations in South Africa, Spain, Hungary, Mexico, Poland, Malaysia, India and China. During the year, Computacenter Switzerland acquired PathWorks GmbH. ('PathWorks'), a value added reseller, based in Neudorf (Luzern), Switzerland. This acquisition allows us to add Technology Sourcing to our existing Swiss portfolio completing the Group's Source, Transform and Manage offering. The Global Service Desk locations have limited external revenues, and a cost recovery model that suggests better than breakeven margins to ensure compliance with transfer pricing regulations.
The French and German Segments remain unchanged from that reported at 31 December 2018.
Certain expenses, such as those for the Board and related public company costs; Group Executive members not aligned to a specific geographic trading entity; and the cost of centrally funded strategic corporate initiatives that benefit the whole Group, are not allocated to individual Segments because they are not directly attributable to any single Segment. Accordingly, these expenses continue to be disclosed as a separate column, 'Central Corporate Costs', within the segmental note included within this announcement.
This new segmental reporting structure is the basis on which internal reports are provided to the Chief Executive Officer, as the CODM, for assessing performance and determining the allocation of resources within the Group.
Segmental performance is measured based on external revenues, adjusted1 gross profit, adjusted1 operating profit/(loss) and adjusted1 profit/(loss) before tax.
The change in Segmental reporting has no impact on reported Group numbers.
To enable comparisons with prior year performance, historical Segment information for the year ended 31 December 2018 are restated in accordance with the revised Segmental reporting structure. All discussion within this Annual Report and Accounts on Segmental results reflects this revised structure and the resultant prior period restatements.
Segmental performance for the years ended 31 December 2019 and 31 December 2018 were as follows:
Year ended 31 December 2019
|
|
UK £'000 |
Germany £'000 |
France £'000 |
USA £'000 |
International £'000 |
Central Corporate £'000 |
Total £'000 |
|
Revenue |
|
|
|
|
|
|
|
|
Technology Sourcing revenue |
1,142,746 |
1,366,392 |
457,454 |
732,009 |
123,626 |
- |
3,822,227 |
|
Services revenue |
|
|
|
|
|
|
|
|
Professional Services |
117,685 |
207,038 |
23,844 |
13,512 |
4,004 |
- |
366,083 |
|
Managed Services |
321,175 |
370,232 |
81,633 |
27,634 |
63,795 |
- |
864,469 |
|
Total Services revenue |
438,860 |
577,270 |
105,477 |
41,146 |
67,799 |
- |
1,230,552 |
|
Total revenue |
1,581,606 |
1,943,662 |
562,931 |
773,155 |
191,425 |
- |
5,052,779 |
|
|
|
|
|
|
|
|
|
|
Results |
|
|
|
|
|
|
|
|
Adjusted1 gross profit |
221,208 |
260,677 |
68,195 |
69,493 |
43,541 |
- |
663,114 |
|
Administrative expenses |
(156,673) |
(176,199) |
(55,884) |
(60,369) |
(35,358) |
(27,139) |
(511,622) |
|
Adjusted1 operating profit/(loss) |
64,535 |
84,478 |
12,311 |
9,124 |
8,183 |
(27,139) |
151,492 |
|
Adjusted1 net interest |
(1,286) |
(1,987) |
(524) |
(871) |
(573) |
- |
(5,241) |
|
Adjusted1 profit/(loss) before tax |
63,249 |
82,491 |
11,787 |
8,253 |
7,610 |
(27,139) |
146,251 |
|
Exceptional items: |
|
|
|
|
|
|
|
|
· unwinding of discount relating to acquisition of a subsidiary |
|
|
|
|
|
|
(825) |
|
· costs relating to acquisition of a subsidiary |
|
|
|
|
|
|
(94) |
|
Total exceptional items |
|
|
|
|
|
|
(919) |
|
Amortisation of acquired intangibles |
|
|
|
|
|
|
(4,374) |
|
Statutory profit before tax |
|
|
|
|
|
|
140,958 |
Year ended 31 December 2019
|
|
Total £'000 |
|
Adjusted1 operating profit |
151,492 |
|
Add back interest on CSF |
- |
|
Amortisation of acquired intangibles |
(4,374) |
|
Exceptional items |
(94) |
|
Statutory operating profit |
147,024 |
|
|
UK £'000 |
Germany £'000 |
France £'000 |
USA £'000 |
International £'000 |
Central Corporate £'000 |
Total £'000 |
|
Other Segment information |
|
|
|
|
|
|
|
|
Property, plant and equipment |
57,496 |
112,074 |
14,353 |
12,013 |
16,389 |
- |
212,325 |
|
Intangible assets |
54,035 |
16,678 |
108 |
93,696 |
11,153 |
- |
175,670 |
|
|
|
|
|
|
|
|
|
|
Capital expenditure: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
13,482 |
34,891 |
2,574 |
5,449 |
8,707 |
- |
65,103 |
|
Software |
7,903 |
616 |
13 |
- |
205 |
- |
8,737 |
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment (excluding right-of-use asset) |
9,968 |
6,356 |
1,788 |
748 |
2,596 |
- |
21,456 |
|
Depreciation of right-of-use asset |
3,056 |
27,007 |
4,076 |
2,224 |
3,903 |
- |
40,266 |
|
Amortisation of software |
5,616 |
1,187 |
45 |
- |
321 |
- |
7,169 |
|
|
|
|
|
|
|
|
|
|
Share-based payments |
5,089 |
1,417 |
119 |
150 |
- |
- |
6,775 |
Year ended 31 December 2018
|
|
UK £'000 |
Germany £'000 |
France £'000 |
USA £'000 |
International £'000 |
Central Corporate £'000 |
Total £'000 |
|
Revenue |
|
|
|
|
|
|
|
|
Technology Sourcing revenue |
1,157,916 |
1,330,616 |
393,769 |
238,600 |
56,680 |
- |
3,177,581 |
|
Services revenue |
|
|
|
|
|
|
|
|
Professional Services |
118,900 |
166,471 |
18,914 |
13,763 |
3,867 |
- |
321,915 |
|
Managed Services |
334,578 |
375,591 |
80,568 |
20,718 |
41,619 |
- |
853,074 |
|
Total Services revenue |
453,478 |
542,062 |
99,482 |
34,481 |
45,486 |
- |
1,174,989 |
|
Total revenue |
1,611,394 |
1,872,678 |
493,251 |
273,081 |
102,166 |
- |
4,352,570 |
|
|
|
|
|
|
|
|
|
|
Results |
|
|
|
|
|
|
|
|
Adjusted1 gross profit |
205,708 |
231,191 |
55,655 |
27,007 |
28,697 |
- |
548,258 |
|
Administrative expenses |
(147,467) |
(164,332) |
(48,601) |
(22,666) |
(21,238) |
(25,188) |
(429,492) |
|
Adjusted1 operating profit/(loss) |
58,241 |
66,859 |
7,054 |
4,341 |
7,459 |
(25,188) |
118,766 |
|
Adjusted1 net interest |
(158) |
45 |
(162) |
(200) |
(55) |
- |
(530) |
|
Adjusted1 profit/(loss) before tax |
58,083 |
66,904 |
6,892 |
4,141 |
7,404 |
(25,188) |
118,236 |
|
Exceptional items: |
|
|
|
|
|
|
|
|
· unwinding of discount relating to acquisition of a subsidiary |
|
|
|
|
|
|
(417) |
|
· costs relating to acquisition of a subsidiary |
|
|
|
|
|
|
(5,240) |
|
Total exceptional items |
|
|
|
|
|
|
(5,657) |
|
Amortisation of acquired intangibles |
|
|
|
|
|
|
(4,451) |
|
Statutory profit before tax |
|
|
|
|
|
|
108,128 |
The reconciliation for adjusted1 operating profit to statutory operating profit as disclosed in the Consolidated Income Statement is as follows:
Year ended 31 December 2018
|
|
Total £'000 |
|
Adjusted1 operating profit |
118,766 |
|
Add back interest on CSF |
293 |
|
Amortisation of acquired intangibles |
(4,451) |
|
Exceptional items |
(5,240) |
|
Statutory operating profit |
109,368 |
|
|
UK £'000 |
Germany £'000 |
France £'000 |
USA £'000 |
International £'000 |
Central Corporate Costs £'000 |
Total £'000 |
|
Other Segment information |
|
|
|
|
|
|
|
|
Property, plant and equipment |
41,505 |
50,558 |
5,612 |
1,099 |
7,493 |
- |
106,267 |
|
Intangible assets |
51,730 |
18,444 |
148 |
105,732 |
8,559 |
- |
184,613 |
|
|
|
|
|
|
|
|
|
|
Capital expenditure: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
12,103 |
30,408 |
867 |
60 |
2,004 |
- |
45,442 |
|
Software |
4,870 |
730 |
166 |
- |
169 |
- |
5,935 |
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment (excluding right-of-use asset) |
7,910 |
7,287 |
1,630 |
260 |
2,293 |
- |
19,380 |
|
Depreciation of right-of-use asset |
- |
- |
- |
- |
- |
- |
- |
|
Amortisation of software |
9,449 |
1,275 |
50 |
- |
203 |
- |
10,669 |
|
|
|
|
|
|
|
|
|
|
Share-based payments |
5,034 |
1,334 |
57 |
- |
- |
- |
10,977 |
Charges for the amortisation of acquired intangibles and utilisation of deferred tax assets (where initial recognition was an exceptional item or a fair value adjustment on acquisition) are excluded from the calculation of adjusted1 operating profit. This is because these charges are based on judgements about their value and economic life, are the result of the application of acquisition accounting rather than core operations, and whilst revenue recognised in the Consolidated Income Statement does benefit from the underlying technology that has been acquired, the amortisation costs bear no relation to the Group's underlying ongoing operational performance. In addition, amortisation of acquired intangibles is not included in the analysis of Segment performance used by the CODM.
Information about major customers
Included in revenues arising from the UK Segment are revenues of approximately £317 million (2018: £277 million) which arose from sales to the Group's largest customer. For the purpose of this disclosure, a single customer is considered to be a group of entities known to be under common control. This customer consists of entities under control of the UK Government.
5 Revenue
Revenue recognised in the Consolidated Income Statement is analysed as follows:
|
|
2019 £'000 |
2018 £'000 |
|
Revenue by Type |
|
|
|
Technology Sourcing revenue |
3,822,227 |
3,177,581 |
|
Services revenue |
|
|
|
Professional Services |
366,083 |
321,915 |
|
Managed Services |
864,469 |
853,074 |
|
Total Services revenue |
1,230,552 |
1,174,989 |
|
Total revenue |
5,052,779 |
4,352,570 |
Contract balances
The following table provides the information about contract assets and contract liabilities from contracts with customers.
|
|
31 December 2019 £'000 |
1 January £'000 |
|
Trade and other receivables |
996,462 |
1,180,394 |
|
Contract assets, which are included in 'prepayments' |
5,959 |
6,451 |
|
Contract assets, which are included in 'accrued income' |
94,030 |
101,899 |
|
Contract liabilities, which are included in 'deferred income' |
174,258 |
143,080 |
The Group has implemented an expected credit loss impairment model with respect to contract assets using the simplified approach. Contract assets have been grouped on the basis of their shared risk characteristics and a provision matrix has been developed and applied to these balances to generate the loss allowance. The majority of these contract asset balances are with blue chip customers and the incidence of credit loss is low. There has therefore been no material adjustment to the loss allowance under IFRS 9.
Significant changes in contract assets and liabilities
Contract assets are balances due from customers under long-term contracts as work is performed and therefore a contract asset is recognised over the period in which the performance obligation is fulfilled. This represents the Group's right to consideration for the services transferred to date. Amounts are generally reclassified to contract receivables when these have been certified or invoiced to a customer.
Win fees and fulfilment costs are included in prepayments balance above. Refer to 2.3.3 for accounting policy of these costs. The Consolidated Income Statement impact of win fees was a recognition of a net cost in FY2019 of £0.2 million with a corresponding credit to tax of £0.05 for the year. As at 31 December 2019, the win fee balance was £6.0 million. The Consolidated Income Statement impact of fulfilment costs was a recognition of a net cost in FY2019 of £0.05 million with a corresponding credit to tax of £0.05 million for the year. As at 31 December 2019, the fulfilment costs balance was £6.6 million. No impairment loss was recorded for win fees or fulfilment costs during the year.
Revenue recognised in the reporting period from accrued income balance was £2.8 million with a credit to foreign exchange of £5.1 million. No impairment loss was recorded for accrued income during the year.
Revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period was £96.8 million. Revenue recognised in the reporting period from performance obligations satisfied or partially satisfied in previous periods was £nil. Partially satisfied performance obligations continue to incur revenue and costs in the period.
Remaining performance obligations (Work in hand)
Contracts which have remaining performance obligations as at 31 December 2019 and 31 December 2018 are set out in the table below. The table below discloses the aggregate transaction price relating to those unsatisfied or partially unsatisfied performance obligations, excluding both (a) amounts relating to contracts for which revenue is recognised as invoiced and (b) amounts relating to contracts where the expected duration of the ongoing performance obligation is one year or less.
Managed Services
|
|
Within £m |
Within £m |
Within £m |
Within £m |
Five years £m |
Total £m |
|
As at 31 December 2019 |
588 |
317 |
198 |
70 |
34 |
1,207 |
|
As at 31 December 2018 |
613 |
323 |
216 |
146 |
48 |
1,346 |
The average duration of contracts is between one to five years, however some contracts will vary from these typical lengths. Revenue is typically earned over these varying timeframes, however more of the revenue noted above is expected to be earned in the short term.
6 Exceptional items
|
|
2019 £'000 |
2018 £'000 |
|
Operating profit |
|
|
|
Costs relating to acquisition of a subsidiary |
(94) |
(5,240) |
|
Exceptional operating loss |
(94) |
(5,240) |
|
Interest cost relating to acquisition of a subsidiary |
(825) |
(417) |
|
Loss on exceptional items before taxation |
(919) |
(5,657) |
|
|
|
|
|
Income tax |
|
|
|
Tax credit on exceptional items |
39 |
1,353 |
|
Tax credit relating to acquisition of a subsidiary |
839 |
3,091 |
|
Loss on exceptional items after taxation |
(41) |
(1,213) |
2019: Included within the current year are the following exceptional items:
· An exceptional operating loss during the year of £0.1 million resulted from residual costs directly relating to the acquisition of FusionStorm. These costs were non-operational in nature, material in size and unlikely to recur and have therefore been classified as outside our adjusted1 results. The current year loss resulted from social charges relating to the severance payment for the FusionStorm Chief Executive Officer and has been treated as an exceptional item for consistency with the disclosure in the year to 31 December 2018. A further £0.8 million relating to the unwinding of the discount on the deferred consideration for the purchase of FusionStorm has been removed from the adjusted1 net finance expense and classified as exceptional interest costs.
· A credit of £0.04 million arising from the tax benefit on the FusionStorm exceptional acquisition costs has been recognised as tax on the above exceptional item. A further tax credit of £0.8 million was recorded due to post-acquisition activity in FusionStorm, related to the transaction, which has resulted in an in-year tax benefit. This activity was settled by the vendor, out of the consideration paid, via post-acquisition capital contributions to FusionStorm. As this credit was related to the acquisition and not operational activity within FusionStorm, is of a one-off nature and material to the overall tax result, it was classified as an exceptional tax item.
2018: Included within the prior year are the following exceptional items:
· An exceptional loss during the year of £5.2 million resulted from costs directly relating to the acquisition of FusionStorm. These costs include a severance payment for the FusionStorm Chief Executive Officer, agreed as part of the acquisition, advisor fees and a finder's fee that was paid on completion of the transaction. These costs are non-operational in nature, material in size and unlikely to recur and have therefore been classified as outside our adjusted1 results. A further £0.4 million relating to the unwinding of the discount on the deferred consideration for the purchase of FusionStorm has been removed from the adjusted1 net finance expense and classified as exceptional interest costs.
· A credit of £1.4 million arising from the tax benefit on the FusionStorm exceptional acquisition costs has been recognised as tax on the above exceptional items. A further tax credit of £3.1 million was recorded due to post-acquisition activity in FusionStorm, related to the transaction, which has resulted in a material in-year tax benefit. This activity included settlement of phantom stock awards, deal bonus and change of control payments which were settled by the vendor, out of the consideration paid, via post-acquisition capital contributions to FusionStorm. As this credit was related to the acquisition and not operational activity within FusionStorm, is of a one-off nature and material to the overall tax result, it was classified this as an exceptional tax item.
7 Income tax
a) Tax on profit from ordinary activities
|
|
2019 £'000 |
2018 £'000 |
|
Tax charged in the Consolidated Income Statement |
|
|
|
Current income tax |
|
|
|
UK corporation tax |
13,213 |
12,528 |
|
Foreign tax |
|
|
|
- operating results before exceptional items |
26,724 |
20,942 |
|
- exceptional items |
(878) |
(4,444) |
|
Total foreign tax |
25,846 |
16,498 |
|
Adjustments in respect of prior years |
(460) |
148 |
|
Total current income tax |
38,599 |
29,174 |
|
|
|
|
|
Deferred tax |
|
|
|
Operating results before exceptional items: |
|
|
|
- origination and reversal of temporary differences |
311 |
(1,830) |
|
- adjustments in respect of prior years |
487 |
(145) |
|
Total deferred tax |
798 |
(1,975) |
|
|
|
|
|
Tax charge in the Consolidated Income Statement |
39,397 |
27,199 |
b) Reconciliation of the total tax charge
|
|
2019 £'000 |
2018 £'000 |
|
Accounting profit before income tax |
140,958 |
108,128 |
|
|
|
|
|
At the UK standard rate of corporation tax of 19 per cent (2018: 19 per cent) |
26,782 |
20,544 |
|
Expenses not deductible for tax purposes |
1,474 |
987 |
|
Non-deductible element of share-based payment charge |
432 |
589 |
|
Adjustments in respect of current income tax of previous years |
266 |
(384) |
|
Effect of different tax rates of subsidiaries operating in other jurisdictions |
8,876 |
6,736 |
|
Other differences |
32 |
(334) |
|
Overseas tax not based on earnings |
1,604 |
1,390 |
|
Tax effect of income not taxable in determining taxable profit |
(69) |
(2,427) |
|
Deferred tax not recognised on current year losses |
- |
98 |
|
At effective income tax rate of 27.9 per cent (2018: 25.2 per cent) |
39,397 |
27,199 |
c) Tax losses
Deferred tax assets of £2.0 million (2018: £4.2 million) have been recognised in respect of losses carried forward.
In addition, at 31 December 2019, there were unused tax losses across the Group of £143.0 million (2018: £152.6 million) for which no deferred tax asset has been recognised. Of these losses, £39.8 million (2018: £40.1 million) arise in Germany and £103.2 million (2018: £112.5 million) arise in France. A significant proportion of the losses arising in Germany have been generated in statutory entities that no longer have significant levels of trade. The remaining unrecognised tax losses relate to other loss-making overseas subsidiaries.
d) Deferred tax
Deferred income tax at 31 December relates to the following:
|
|
Consolidated Balance Sheet |
|
Consolidated Income Statement and Consolidated Statement |
||
|
2019 £'000 |
2018 £'000 |
2019 £'000 |
2018 £'000 |
||
|
Deferred income tax assets |
|
|
|
|
|
|
Relief on share option gains |
5,300 |
4,868 |
|
432 |
(2,000) |
|
Other temporary differences |
6,575 |
4,887 |
|
(285) |
(277) |
|
Revaluations of foreign exchange contracts to fair value |
369 |
121 |
|
247 |
119 |
|
Losses available for offset against future taxable income |
1,343 |
4,167 |
|
(2,131) |
1,934 |
|
Gross deferred income tax assets |
13,587 |
14,043 |
|
|
|
|
Deferred income tax liabilities |
|
|
|
|
|
|
Revaluations of foreign exchange contracts to fair value |
809 |
738 |
|
(71) |
(555) |
|
Amortisation of intangibles |
15,272 |
16,727 |
|
1,186 |
(1,196) |
|
Gross deferred income tax liabilities |
16,081 |
17,465 |
|
|
|
|
Deferred income tax charge |
|
|
|
(622) |
(1,975) |
|
Net deferred income tax assets |
(2,494) |
(3,422) |
|
|
|
|
|
|
|
|
|
|
|
Disclosed on the Consolidated Balance Sheet |
|
|
|
|
|
|
Deferred income tax assets |
9,204 |
9,587 |
|
|
|
|
Deferred income tax liabilities |
(11,698) |
(13,009) |
|
|
|
|
Net deferred income tax liabilities |
(2,494) |
(3,422) |
|
|
|
At 31 December 2019, there was no recognised or unrecognised deferred income tax liability (2018: £nil) for taxes that would be payable on the unremitted earnings of the Group's subsidiaries as the Group expects that future remittances of earnings from its overseas subsidiaries will continue to be covered by relevant dividend exemptions. Where, following the departure of the UK from the European Union, the Group's European subsidiaries' unremitted earnings are no longer covered by a dividend exemption, appropriate mitigating steps are envisaged that would eliminate the incidence of withholding tax.
e) Impact of rate change
The main rate of UK Corporation tax is 19 per cent from 1 April 2017 and will be reduced to 17 per cent from 1 April 2020, as enacted in the Finance Act 2015. The deferred tax in these Consolidated Financial Statements reflects this.
8 Earnings per share
Earnings per share amounts are calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year (excluding own shares held).
To calculate diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential shares. Share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year are considered to be dilutive potential shares.
|
|
2019 £'000 |
2018 £'000 |
|
Profit attributable to equity holders of the Parent |
101,655 |
80,931 |
|
|
2019 £'000 |
2018 £'000 |
|
Basic weighted average number of shares (excluding own shares held) |
112,514 |
113,409 |
|
Effect of dilution: |
|
|
|
Share options |
1,655 |
1,984 |
|
Diluted weighted average number of shares |
114,169 |
115,393 |
|
|
2019 pence |
2018 pence |
|
Basic earnings per share |
90.3 |
71.4 |
|
Diluted earnings per share |
89.0 |
70.1 |
9 Analysis of changes in net funds
|
|
At 1 January 2019 £'000 |
Implementation of IFRS 16 £'000 |
Cash flows in year £'000 |
Non-cash flow £'000 |
Exchange differences £'000 |
At 31 December 2019 £'000 |
|
Cash and short-term deposits |
200,442 |
- |
24,388 |
- |
(6,949) |
217,881 |
|
Cash and cash equivalents |
200,442 |
- |
24,388 |
- |
(6,949) |
217,881 |
|
Bank loans |
(134,234) |
- |
51,755 |
- |
1,707 |
(80,772) |
|
Adjusted net funds3 (excluding CSF and lease liabilities) |
66,208 |
- |
76,142 |
- |
(5,241) |
137,109 |
|
CSF leases |
(8,928) |
8,928 |
- |
- |
- |
- |
|
Lease liabilities |
- |
(120,606) |
42,346 |
(43,793) |
5,287 |
(116,766) |
|
Total lease liabilities |
(8,928) |
(111,678) |
42,346 |
(43,793) |
5,287 |
(116,766) |
|
Net funds |
57,280 |
(111,678) |
118,488 |
(43,793) |
46 |
20,343 |
The financing cash flows included in the table above are repayment of bank loans of £51.8 million and lease liabilities of £42.3 million during the year. The repayment of lease liabilities also included interest payment of £3.7 million.
|
|
At 1 January 2018 £'000 |
Cash flows in year £'000 |
Non-cash flow £'000 |
Exchange differences £'000 |
At 31 December 2018 £'000 |
|
Cash and short-term deposits |
206,605 |
(7,743) |
- |
1,580 |
200,442 |
|
Bank overdraft |
(6) |
6 |
- |
- |
- |
|
Cash and cash equivalents |
206,599 |
(7,737) |
- |
1,580 |
200,442 |
|
Bank loans |
(10,667) |
(122,946) |
- |
(621) |
(134,234) |
|
Adjusted net funds3 (excluding CSF) |
195,932 |
(130,683) |
- |
959 |
66,208 |
|
CSF leases |
(4,745) |
(4,322) |
433 |
(294) |
(8,928) |
|
Total CSF |
(4,745) |
(4,322) |
433 |
(294) |
(8,928) |
|
Net funds |
191,187 |
(135,005) |
433 |
665 |
57,280 |
10 Related party transactions
During the year the Group entered into transactions, in the ordinary course of business, with related parties. Transactions entered into are as described below:
· Biomni provides the Computacenter e-procurement system used by many of Computacenter's major customers. An annual fee has been agreed on a commercial basis for use of the software for each installation. Both PJ Ogden and PW Hulme are Directors of and have a material interest in Biomni Limited
The table below provides the total amount of transactions that have been entered into with related parties for the relevant financial year:
|
|
2019 £'000 |
2018 £'000 |
|
Biomni Limited |
|
|
|
Sales to related parties |
32 |
23 |
|
Purchase from related parties |
654 |
838 |
|
Amounts owed to related parties |
6 |
- |
Terms and conditions of transactions with related parties
Sales to and purchases from related parties are made on terms equivalent to those that prevail in arm's-length transactions. Outstanding balances at the year end are unsecured and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables. The Group has not recognised any provision for doubtful debts relating to amounts owed by related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.
Compensation of key management personnel (including Directors)
The Board of Directors is identified as the Group's key management personnel. A summary of the compensation of key management personnel is provided below:
|
|
2019 £'000 |
2018 £'000 |
|
Short-term employee benefits |
2,447 |
1,791 |
|
Social security costs |
422 |
433 |
|
Share-based payment transactions |
2,623 |
1,367 |
|
Pension costs |
40 |
65 |
|
Total compensation paid to key management personnel |
5,532 |
3,656 |
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