Results for the year ended 30 June 2020
17 September 2020
Kier Group plc
Results for the year ended 30 June 2020
Kier Group plc (the "Company" or the "Group"), a leading construction and infrastructure services company, announces its results for the year ended 30 June 2020 (the "year").
Key Points
· Results reflect 9 months of good strategic progress and 3 months impact of COVID-19
o Revenue:
§ Group revenue and share of joint ventures of £3.5 billion (FY19: £4.1 billion)
o Operating profit:
§ Operating profit before adjusting items is £41m (FY19: £86m), after direct COVID-19 costs of £45m
§ Reported loss £(196)m (FY19: £(204)m)
o Free cash flow of £66m (FY19: £(89)m)
o Net debt at 30 June 2020 of £310m (FY19: £167m), average month-end net debt of £436m (FY19: £422m)
§ Includes reduction of £45m in supply-chain financing
· Significant progress on operational and financial turnaround strategy
o Annualised run rate cost savings of at least £100m by 30 June 2021
o Performance Excellence programme progressing well
· Strong order book
o Stable order book of £7.9 billion at 30 June 2020, underpinned by contract wins
o Well placed to benefit from UK Government spending through established frameworks and other opportunities
· Continued focus on "fixing" the balance sheet
o Focus on deleveraging through cash generation, sale of Living and potential equity raise
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Key Financial Highlights - Continuing Operations |
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Year to 30 June 2020 |
Year to 30 June 2019 2 |
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Adjusted results |
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|
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Revenue (£m) 3 |
3,476 |
4,091 |
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Operating profit (£m) 1 |
41.4 |
85.7 |
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Operating margin |
1.2% |
2.1% |
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Profit before tax (£m) 1 |
16.9 |
61.4 |
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Basic earnings per share (note 9) |
15.3p |
30.9p |
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Net debt (£m) 4 |
310.3 |
167.2 |
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Average month-end net debt (£m)
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436 |
422 |
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Reported |
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|
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Group revenue (£m) |
3,423 |
3,951 |
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(Loss) from operations (£m) |
(195.6) |
(203.5) |
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(Loss) before tax (£m) |
(225.3) |
(229.5) |
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Basic earnings per share (note 9) |
(106.2)p |
(146.9)p |
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Dividend per share |
- |
4.9p |
1 Stated before adjusting items of £213.3m (2019: £264.4m) and amortisation of acquired intangible assets of £23.7m (2019: £24.8m).
2 Restated for the classification of the Living division as a discontinued operation.
3 Revenue of the Group and its share of joint ventures.
4 Disclosed net of the effect of hedging instruments and excludes leases - see note 11 to the interim financial statements.
Andrew Davies, Chief Executive, said:
" This financial year has been a difficult one for the Group. The progress made in the first nine months, despite challenging market conditions, reflected the successful execution of many elements of our strategic plan, as we began to experience the benefits of the decisive cost reduction actions taken. The effects of COVID-19 adversely impacted the Group's performance in the final three months of the financial year, as the business adapted to working under revised site operating procedures. I would like to thank all my dedicated Kier colleagues for their commitment and resilience over the course of the year, many of whom have played a significant role in providing essential public services during the pandemic.
As explained in 2019, Kier needs substantial restructuring, but has great potential. Whilst first half volumes were lower, this was anticipated as significant contracts concluded and frameworks transitioned. The decisive cost saving measures allowed profits to improve despite these reductions in revenues. As a result, the Group was trading in line with expectations in the period up to 31 March 2020. However the effects of COVID-19 has reduced the amount of work we were able to undertake in the key final quarter of the financial year and costs have increased. Revenues therefore decreased by 15% and adjusted operating profits have reduced to £41m. The working capital implications of the reduced volumes in the final quarter as compared to 2019 resulted in the Group needing to agree a number of relaxations to its agreements with its lenders.
During the year we have recognised substantial one-off costs, including the costs associated with the reorganisation of our Southern Regional Building business stream and associated with the cost reduction programmes, our engagement with the Group's lenders, as well as the fees associated with the execution of our strategy.
The new senior management team continues to focus on driving a range of strategic and operational actions throughout the Group. We are also beginning to experience the benefits of the changes in the Group's culture which are being driven by Performance Excellence.
Whilst the Group anticipates that the effects of COVID-19 will continue, the strategic actions being implemented by the new senior management team are designed to ensure Kier is well placed to benefit from the proposed substantial increase in UK infrastructure investment. We have a strong orderbook, and the current year has started in line with our expectations. "
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Further Information: Kier Group plc |
+44 (0) 1767 355 096 |
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Kier Press office |
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FTI Consulting |
+44 (0) 20 3727 1340 |
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Richard Mountain / Nick Hasell |
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There will be a webcast and a call for analysts and investors at 10:30 a.m. The details are:
Webcast https://www.investis-live.com/kier/5f5b3b5d17395d1000311ecf/otra
United Kingdom: 0800 640 6441
United Kingdom (Local): 020 3936 2999
All other locations: +44 20 3936 2999
Conference password: 472909
Cautionary Statement
This announcement does not constitute an offer of securities by the Company. Nothing in this announcement is intended to be, or intended to be construed as, a profit forecast or a guide as to the performance, financial or otherwise, of the Company or the Group whether in the current or any future financial year. This announcement may include 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 ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''plans'', ''target'', ''aim'', ''may'', ''will'', ''would'', ''could'' or ''should'' or, in each case, their negative or other variations or comparable terminology. They may appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the directors, the Company or the Group concerning, amongst other things, the operating results, financial condition, prospects, growth, strategies and dividend policy of the Group or the industry in which it operates. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond the Company's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual operating results, financial condition, dividend policy or the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement. In addition, even if the operating results, financial condition and dividend policy of the Group, or the development of the industry in which it 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. Important factors that could cause these differences include, but are not limited to, general economic and business conditions, industry trends, competition, changes in government and other regulation, changes in political and economic stability and changes in business strategy or development plans and other risks.
Other than in accordance with its legal or regulatory obligations, the Company does not accept any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
Principal Risks and Uncertainties
You are advised to read the section headed ''Principal risks and uncertainties'' in the Company's Annual Report and Accounts for the year ended 30 June 2020 for a discussion of the factors that could affect the Group's future performance and the industry in which it operates.
About Kier
Kier is a leading UK construction and infrastructure services group. The services we offer to our clients fit in to two core market propositions; Construction and Infrastructure Services.
We provide specialist design and build capabilities and the knowledge, skills and intellectual capital of our people ensure we are able to project manage and integrate all aspects of a project.
We take pride in bringing specialist knowledge, sector-leading experience and fresh thinking to create workable solutions for our clients across the country.
Together, we have the scale and breadth of skills of a major company, while retaining a local focus and pride that comes from never being far from our clients, through a network of offices spanning across England, Wales, Scotland and Northern Ireland.
For further information and to subscribe to our news alerts, please visit: www.kier.co.uk
Follow us on Twitter: @kiergroup
Connect with us on LinkedIn: Kier Group
Results Summary
Revenues in the year fell 15% to £3,476m, primarily due to the effects of COVID-19 on the last three months as well as the challenging market conditions through the year affecting both Construction and Infrastructure Services, where revenues were down 15% and 10%, respectively. This was in part due to several long-term investment programmes concluding in the year, including the Road Investment Strategy 1, but these have been offset by new project wins that result in our order book remaining flat at £7.9bn.
Group operating results, both before and after adjusting items, reflect these revenue reductions and the impact of direct related COVID-19 costs offsetting the benefits made through the realisation of significant overhead cost savings and the inclusion of £9m arising from the IFRS16 accounting change. The realisation of cost savings, along with the progress made in the delivery of the strategic priorities, has resulted in restructuring related charges of £156m in the year, which the Group has classified as an adjusting item.
Group net debt at 30 June 2020 was £310m. This performance represented a cash outflow from 30 June 2019, which was largely caused by the volume declines resulting from the effects of COVID-19; a reduction in the Kier Early Payment Scheme (KEPS) utilisation of £45m; substantial payments required to access future benefits of the cost saving programme, being partially offset by deferring VAT and PAYE payments; and significant reductions in discretionary spend, including capex. Average month-end net debt for the period was £436m, an increase of £14m from FY19.
Strategy
In June 2019, we announced the results of our strategic review, which concluded that the Group needed to further simplify its structure, better allocate its capital resources, identify additional steps to improve cash generation and reduce net debt. During the year, we made further appointments to our strengthened management team in line with these strategic priorities.
Our core businesses, Construction, Highways, Infrastructure and Utilities, are inherently cash generative and operate under long-term frameworks through which we have the opportunity to tender for a range of projects, providing good visibility of future work with an appropriate risk profile.
Complementing our Construction business, Housing Maintenance has, over the period, continued to seek opportunities with housing associations, local authorities and private landlords for planned maintenance contracts, including fire safety works. The International business, which principally operates in Dubai, has continued to tender selectively for new work.
Through the 2019 strategic review, we also concluded that several of our businesses were not operating in a way that was compatible with the Group's cash flow capital objectives :
· Residential: Kier Living is a strong business but has limited operational synergies with other parts of the Group. There is a new management team in place who have reorganised the business into a smaller more cash focused operation. The sales process is now progressing, having been paused in light of COVID-19;
· Property: we have continued to take steps to ensure that the capital allocated to this business remains at an appropriate level and is effectively deployed;
· Environmental Services: we have now substantially exited this business; and
· Facilities Management: following the conclusion of several contracts during the period, we have rationalised the business, which now seeks to identify synergistic opportunities with the Construction business for the benefit of the Group.
Cost Saving Programme
To support the delivery of the strategic priorities of the Group we have made a number of structural changes, including increasing the level of divisional accountability, removing a number of layers of management and significantly reducing the central overhead as a result of actions, including outsourcing our IT and fleet management functions.
These changes resulted in the Group's headcount reducing by c.1,700 overall and we expect that this reduction in headcount, along with the delivery of our other strategic actions, will enable the Group to realise annual run rate cost savings of at least £100m by 30 June 2021 as compared to the 2018 financial year. We are reorganising our estate, including moving our London office to a smaller location and have closed our former headquarters at Tempsford Hall in Bedfordshire.
Performance Excellence
In order to introduce a consistent approach in how we develop and manage our people, as well as manage our processes, projects, costs and our future ways of working, we launched Performance Excellence, which is progressing well.
As part of Performance Excellence, we also launched our new Operating Framework in January 2020, which sets out the governance structure within which the Group operates. It also provides clarity on key roles and responsibilities and, alongside the new Code of Conduct, guides the behaviours expected from those who work for Kier.
In January 2020, we also launched the Group's new values: collaborative, trusted, and focused.
· Collaborative - We enjoy what we do and work closely with clients, stakeholders and each other to reach innovative solutions.
· Trusted - We deliver what we promise. At all times we act safely, ethically, we care for the environment and communities we work in.
· Focused - We are clear in our approach. We are disciplined and thorough in how we work and deliver for our clients and customers.
Customers and winning new work
We remained focused on winning work through our long-standing client relationships and regionally based operations. Our rigorous customer satisfaction programme shows that our scores have remained stable; our consistently high level of customer satisfaction remains at 92% and our net promoter score improved to 55 (FY19: 48). During the year:
Ø Our Construction business was awarded places on 16 long-term frameworks worth up to £38bn, across a number of sectors, including health, education and justice;
Ø Our Highways business was successful winning contracts with clients including Surrey County Council, Northamptonshire County Council and Birmingham Highways Limited; and
Ø We have also won work in the regulated sector, including being appointed as a partner in the Openreach Network Services Agreement to carry out network delivery works and have renewed a contract with Virgin Media to deliver telecoms infrastructure.
The Group's order book at 30 June 2020 was £7.9bn (30 June 2019: £7.9bn), as we continue to win new work in our chosen markets.
The Group has won a number of contracts since 1 July 2020, including being awarded the Highways England Area 4 highways maintenance and response contract and contracts totalling £170m for the construction or renovation of 13 schools.
Supply chain
We have also focused on maintaining and growing relationships with our key stakeholders, including our supply-chain, m any of whom are long-term partners of Kier. We were pleased to confirm that, in our latest Payment Practices and Reporting Regulations submission covering the period from 1 January 2020 to 30 June 2020, the Group's aggregate average payment days remained consistent at 38 days and the percentage of payments made to suppliers within 60 days increased from 81% to 84%, in each case compared to the six months period to 31 December 2019. We are committed to further improvements in our payment practices and continue to work with both customers and suppliers to achieve this. The actions taken by the Group has also resulted in 92% of registered entities being reinstated on to the Prompt Payment Code.
COVID-19
The Group's management and colleagues focused throughout the unprecedented COVID-19 pandemic on ensuring that, wherever it was safe to do so the Group's activities remained safe and operational. Following a review of all our sites, we implemented new Site Operating Procedures (SOP), which followed Government guidance, to allow our teams, customers and suppliers to operate safely in the light of social distancing requirements. Strong relationships with our key customers and debt providers ensured we maintained good liquidity levels during this challenging period.
In a typical year, May and June are strong trading months for the Group. The effects of the pandemic included:
· Reduced site productivity as a result of implementing the revised SOP;
· Delayed starts on new sites; and
· Additional costs being incurred in responding to the pandemic.
These factors each affected the Group's turnover, profit and working capital in the final quarter of the financial year. The UK-wide lockdown resulted in a significantly lower number of completions in Kier Living.
Throughout COVID-19, our teams continued to build and maintain the UK's highways networks, deliver vital maintenance to peoples homes, build schools and hospitals, deliver critical national infrastructure and provide key services to the water, gas, power, telecoms and rail sectors. We also delivered three surge hospitals across the UK. Furthermore, we invested in new technology to alter the way we work, which included developing a process to robotically place cones on road surfaces prior to commencing works in our Highways business, removing the requirement to have two operatives working together.
Alongside all areas of the Group responding positively to the challenge, we also implemented self-help measures including:
· Asking c.6,500 employees to take a temporary pay reduction for the three months to 30 June 2020. These reductions depended on seniority and ranged between 7.5% to 25%;
· Furloughing c.2,000 employees through the period. As at 31 July 2020, no colleagues remained on furlough leave;
· Following agreement with HMRC, deferring certain taxation payments; and
· Bringing forward the closure of our former headquarters at Tempsford Hall in Bedfordshire to 30 April 2020 from the previously announced date of 30 June 2020.
Management changes
We have appointed a number of new members of the senior management team. Alongside the appointment of a new Chief Financial Officer, the team has been strengthened through the appointment of new Group Managing Directors for the Construction and Highways businesses and central support functions have been enhanced through the appointment of new HR, IT, Commercial and Procurement Directors and a new Group Financial Controller.
Board changes
There have been a number of changes in the composition of the Board over the year.
Simon Kesterton was appointed as the Chief Financial Officer on 26 September 2019. Following Matthew Lester's appointment as Chairman on 1 January 2020, Heather Rabbatts and Clive Watson were appointed as Non-Executive Directors and, respectively, as the Chairs of the Remuneration Committee and the Risk Management and Audit Committee (the RMAC) on 30 March 2020.
During the year, a number of Directors stood down from the Board: Bev Dew (Finance Director), Claudio Veritiero (Chief Operating Officer), Adam Walker (Chair of the RMAC), Phil Cox (Chairman) and Constance Baroudel (Chair of the Remuneration Committee).
In May 2020, we announced that Kirsty Bashforth would not be seeking re-election at the Annual General Meeting (the AGM) in 2020. We would like to thank Kirsty for her contribution in six years on the Board and, in particular, as the Chair of the Safety, Health and Environment Committee since 2018. In September, we announced that Alison Atkinson would be joining the Board and as the Chair of the Safety, Health and Environment Committee on 15 December 2020. We look forward to working with Alison.
Annual General Meeting
The Company will hold its Annual General Meeting (AGM) on 17 December 2020. The Notice of AGM, which will confirm the time, location and arrangements for the meeting, will be sent to shareholders in due course.
Safety, Health and Environment ('SHE')
The safety, health and wellbeing of our employees and suppliers remain of paramount importance. The Group's average 12-month Accident Incident Rate (AIR) (112) and average 12-month Average Accident Incident Rate (AAIR) (363) increased, by c.32% and c.9%, respectively, as compared to the equivalent figures for the 2019 financial year. However, the Group's AIR and AAIR as at 30 June 2020 of (87) and (307), respectively, each decreased by c.16% as compared to the equivalent figures at 30 June 2019.
During the year, we relaunched our campaign to raise awareness of doing the safety basics rigorously and effectively.
Sustainability
Our impact on the environment is also a key part of our new strategy. We have launched our new environmental framework "Building for a Sustainable World", which concentrates on two key components; environmental sustainability and social sustainability.
Our sustainability approach aims to create a resilient, purpose driven business by safeguarding three vital features: a resilient environment; a resilient community (workforce, supplier and customer base) and resilient profits.
Our new framework outlines that we are committed to preventing environmental and social harm, as well as replenishing our natural systems and renewable resources and having a positive impact on the communities and environments in which we operate.
Operational Review
Construction
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Year ended 30 June 2020 |
Year ended 30 June 2019 |
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Revenue (£m) |
1,588 |
1,849 |
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Adjusted operating profit (£m)1 |
36.1 |
67.2 |
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Adjusted operating margin |
2.3% |
3.6% |
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Reported operating (loss) / profit (£m) |
(58.9) |
23.1 |
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Order book (£bn) |
2.3 |
2.6 |
· Awarded places on 16 frameworks worth up to £38bn lasting typically four years
· Projects won in key markets -13 school projects worth £170m
· 86% of orders secured for FY21
The Construction segment comprises the Regional Building business, the Strategic Projects business, the complementary Housing Maintenance business, as well as the International business. It covers the UK, delivering schools, hospitals, defence facilities and amenities centres of local authorities, councils and the private sector.
Revenue decreased 15% and adjusted operating profit decreased by 46%, primarily due to the impact of the challenging market conditions and the effects of COVID-19 on both productivity of open sites and delays in starting new sites. Contract wins continued to be awarded including securing places on the new £1.5bn YORBuild Major Works Framework and seven lots of the £2bn Hyde Main Contractor Framework. We are well placed to benefit from the £5bn "New Deal" opportunities announced by the Government which focus on areas such as health, education and custodial services, where the Group has specialist expertise.
Resulting from a strategic review of the segment in the year the operations of several regions were restructured which resulted in headcount reductions, the exit from certain market sectors and the closure of a regional office. These actions resulted in costs of £95.0m being incurred within adjusting items.
Our Strategic Projects business continued to work on the RAF Lakenheath project and on the £250m new prison at Wellingborough, which utilises innovative modular building techniques allowing a more standardised approach. The business continued to focus on the defence, science, commercial, custodial and aviation sectors, which are expected also to benefit from recent Government announcements.
Housing Maintenance specialises in working in occupied properties, delivering maintenance, repairs, fire safety and compliance services. Revenue and profit performance were both below last year. The business now operates under a new simplified operating structure and this, combined with significant changes to contract delivery, gives clear visibility of future work. The business should benefit from recent Government announcements such as the £2bn Green Homes Grant and £1bn Building Safety Fund .
The Dubai-based International business traded well in the period and its more rigorous bidding process resulted in a profit increase in the year.
Infrastructure Services
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Year ended 30 June 2020 |
Year ended 30 June 2019 |
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Revenue (£m) |
1,506 |
1,669 |
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Adjusted operating profit (£m) 1 |
31.3 |
53.3 |
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Adjusted operating margin |
2.1% |
3.2% |
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Reported operating profit / (loss) (£m) |
9.4 |
(3.3) |
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Order book (£bn) |
4.6 |
4.3 |
1 Stated before adjusting items
· Key contract awards include £160m eight-year Area 4 maintenance and response contract from Highways England;
· Reappointed by Virgin to deliver telecoms infrastructure; and
· Early works and contract mobilisation have commenced on HS2, with construction currently expected to start later in 2020
The Infrastructure Services segment comprises the Highways, Infrastructure and Utilities and Rail businesses.
Results were adversely affected by the continuing change in the mix of work in the Highways business from maintenance to lower margin capital projects. The transition to the 2020-2025 AMP7 regulatory period adversely affected the performance of the Utilities business in the year. Trading in the Utilities business in the last three months of the year was adversely affected by the effects of COVID-19.
The Highways business builds and maintains roads for Highways England and a number of district and county councils. The business continued to win work at both national and local levels, including the Area 4 maintenance and response contract, as well as local highway wins with Surrey, Northampton County Councils and Birmingham Highways Ltd. During the year, two of our Smart Motorway projects, the M20 and M23 were delivered and we remain on track to successfully deliver a third project on the M6.
The Infrastructure business delivers major and complex infrastructure and civil engineering projects, including the HS2 project in joint venture with Eiffage, Ferrovial and BAM Nuttall and the Luton DART rail system in joint venture with VolkerFitzpatrick. Revenue and profit were less than in FY19, primarily due to phasing on some new projects and COVID-19 related delays. Following the Government's HS2 announcement giving notice to proceed, early works and contract mobilisation have continued, with construction expected to start later in 2020.
The Utilities business delivers long-term contracts providing construction and maintenance services to the water, energy, rail and telecommunications sectors. During the year, this business primarily focused on margin enhancement and, therefore, exited some lower return contracts, resulting in revenue and profit being less than in FY19. The business has been awarded key contracts with new clients including being appointed as a partner in the Openreach Network Services Agreement to carry out network delivery works , with Yorkshire Water, for capital works, and has renewed its contract with Virgin Media to deliver telecoms infrastructure . The business pipeline for high-quality, long-term infrastructure works is strong.
Adjusting items of £21.9m predominantly relate to restructuring charges incurred in the year; the prior year reported losses include costs related to acquisitions in previous years.
Other
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|
Year ended 30 June 2020 |
Year ended 30 June 2019 2 |
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Revenue (£m) |
370 |
585 |
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Adjusted operating profit (£m) 1 |
5.1 |
12.3 |
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Adjusted operating margin |
1.4% |
2.1% |
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Reported operating (loss) (£m) |
(14.3) |
(66.3) |
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Order book (£bn) |
1.0 |
1.0 |
The Other segment comprises the businesses which are expected to be divested, exited or restructured, or are being evaluated, namely, the Property, Environmental Services and Facilities Management businesses.
The Property business invests and develops schemes and sites across the UK. Adjusted operating profit decreased principally due to delays in the completion of certain projects and its reduced access to capital. Management is reviewing options to further release capital from this business.
The Facilities Management business provides management and maintenance solutions for its clients. Consistent with our strategy, we have rationalised the business, which now seeks to identify synergistic opportunities with the Construction business for the benefit of the Group.
The Environmental Services business provides waste collection and recycling services. Revenues were less than in FY19 although losses significantly reduced as we exited contracts. We have substantially exited the business, with only two contracts remaining, together with the Pure Recycling business.
Adjusting items of £19.4m have been incurred implementing Group strategic objectives.
1 Stated before adjusting items
2 Restated for the classification of the Living division as a discontinued operation.
Corporate
|
|
Year ended 30 June 2020 |
Year ended 30 June 2019 |
|
Adjusted operating loss (£m)1 |
(31.1) |
(47.1) |
|
Reported operating loss (£m) |
(131.8) |
(157.0) |
1 Stated before adjusting items
The Corporate segment comprises the costs of the Group's central functions. During the year, there was a reduction in these costs, following the implementation of the Group's cost reduction programme. The cost of implementing these cost savings, and advisor costs resulted in charges totalling £100.7m which have been classified as an adjusted item.
Kier Living
The results for Kier Living for the period are classified as discontinued, including the restatement of the prior period comparatives. Kier Living's adjusted loss after tax for the year was £12.8m (FY19: £36.2m profit), as the business was adversely affected by site closures in the fourth quarter of the financial year, following the outbreak of COVID-19.
Summary and outlook
The first nine months of the year reflected the progress in the steps which had been taken to simplify the Group. We substantially exited our Environmental Services business, reduced capital in our Property business and significantly reduced our cost base. We continue to expect our cost saving programme to deliver at least £100m of annual run rate savings by 30 June 2021. We strengthened the management team, launched our Performance Excellence programme across the Group and published our new Operating Framework, both of which are underpinned with a refreshed set of values, and all of which aim to drive future profits and cash flows. Despite decisive management actions taken to mitigate the effects of COVID-19, trading in the final quarter was adversely affected by the pandemic, notably in the key months of May and June, and this resulted in net debt being higher than forecast.
Whilst the Group anticipates that the effects of COVID-19 will continue, the strategic actions being implemented throughout the Group are designed to ensure Kier is well placed to deliver value from its strong order book and benefit from the proposed substantial increase in UK infrastructure investment. We do not anticipate material restructuring costs in FY21 and having agreed relaxations with the Group's lenders under its principal debt facilities the new management remains focused on delivering the Group's strategic objectives. Consistent with this, the current year has started in line with our expectations.
Financial Review
Introduction
As reported in the announcement of 5 March 2020, the results for the first six months of the financial year showed that good progress against the strategic objectives had been made. During this period, the results reflected the decisive cost actions that the Group had taken. The Group was also making steady progress on its objective of reducing net debt, with average month-end net debt for the period to 31 December 2019 being £395m, a reduction of £27m as compared to the prior year comparative period.
However, during the fourth quarter of the financial year, the Group's operations were adversely affected by COVID-19. Despite the majority of the Group's sites remaining open throughout the fourth quarter, the pandemic had a significant adverse impact on the Group. A period of site closures, reduced productivity through the implementation of social distancing measures and delays to project starts impacted volumes. In addition, the Group has incurred a number of charges driven by the COVID-19 outbreak.
Decisive management actions in the fourth quarter mitigated against the impact of the pandemic, protecting the Group's liquidity and profitability. The Group has continued to deliver critical national infrastructure projects and provide services across a range of sectors with, on average, c.80% of the Group's sites remaining open during the period. However, overall COVID-19 had a material impact on the Group's operations and on the results for the year ended 30 June 2020.
Throughout the period, the Group has incurred restructuring charges, to help simplify the Group, remove layers of management, and significantly reduce central overheads. New management in Living and Construction have undertaken regional strategic reviews, including the closure of offices, sectors and charges relating to the recoverability of assets following implementation of the new strategy and the challenging COVID-impacted market conditions.
The Group remains well placed to benefit from recent Government announcements which highlight the UK's infrastructure being at the centre of the government's economic growth strategy, and the orderbook remains strong at £7.9bn, which is flat against the prior year.
Summary of financial performance
|
|
Adjusted 1 results - continuing operations |
Reported results - continuing operations |
||||
|
|
Adjusted |
Adjusted 3 |
|
Reported |
Reported 3 |
|
|
|
30 June 20 |
30 June 19 |
% change |
30 June 20 |
30 June 19 |
% change |
|
|
|
|
|
|
|
|
|
Revenue (£ m ) - Total |
3 ,475.6 |
4,106.0 |
(15.4) |
3 ,475.6 |
4,106.0 |
(15.4) |
|
Revenue (£ m ) - Excluding JV's |
3 ,422.5 |
3,951.1 |
(13.4) |
3 ,422.5 |
3,951.1 |
(13.4) |
|
|
|
|
|
|
|
|
|
Profit/(loss) from operations (£m) 2 |
41.4 |
85.7 |
(51.7) |
(195.6) |
(203.5) |
( 3.9 ) |
|
|
|
|
|
|
|
|
|
Profit/(loss) before tax (£m) |
16.9 |
61.4 |
(72.5) |
(225.3) |
(229.5) |
(1.8) |
|
|
|
|
|
|
|
|
|
Earnings / (loss) per share (p) |
15.3 |
30.9 |
(50.5) |
(106.2) |
(146.9) |
( 27.7 ) |
|
|
|
|
|
|
|
|
|
Net Debt (£m) - at 30 Jun 20 |
(310.3) |
(167.2) |
|
|
|
|
|
Net Debt (£m) - average month end |
(436.0) |
(422.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Orderbook (£bn) |
7. 9 |
7.9 |
|
|
|
|
1 Reference to 'Adjusted' excludes adjusting items, see page 12.
2 Adjusted profit from operations of £41.4m, includes the impact of direct COVID-19 related costs of £35.3m and additional Holiday Pay accrual of £10m.
3 Comparative information has been re-presented to classify the Living division as a discontinued operation, see note 10.
Revenue from continuing operations
|
|
2020 £m |
|
Revenue for the year ended 30 June 2019 |
4,106.0 |
|
Construction |
(129.6) |
|
Infrastructure |
(99.2) |
|
Strategic exits |
(81.3) |
|
Property |
(60.4) |
|
Other volume impacts including COVID-19 |
(260.0) |
|
Revenue for the year ended 30 June 2020 |
3,475.6 |
The Group traded in line with expectations for the nine-month period to 31 March 2020. The above table shows our estimate of the impact of COVID-19 on our businesses performance and our estimate of the challenging market conditions of the first nine months.
The outbreak of COVID-19 substantially impacted revenue in the last quarter of FY20. Lower volumes were noted due to site closures, lower productivity through the adoption of social distancing measures and a delay in site starts and transaction completions. The impact in our Scottish sites was also substantial, as this country enforced a more stringent lockdown compared to other parts of the UK in which the Group operates.
In addition, revenues were behind prior year in Construction and Infrastructure, which was in line with management expectations, and driven by the challenging market conditions.
As part of the Group's strategic review, a decision was made to exit various contracts and refrain from obtaining new work in our non-core segment, reducing revenue generation accordingly. This includes the wind-down of our Environmental Services business and the completion of a number of Facilities Management contracts.
Adjusted Profit from continuing operations
|
|
2020 £m |
|
Operating profit for the year ended 30 June 2019 |
85.7 |
|
Volume/price/mix changes (includes COVID-19 impact) |
(33.4) |
|
Reduction in Property profitability including impairments |
(17.3) |
|
Cost inflation |
(2.4) |
|
Management cost saving actions |
64.8 |
|
COVID-19 direct costs |
(35.3) |
|
Holiday pay accrual |
(10.0) |
|
Impact of IFRS 16 adoption |
9.3 |
|
Benefit from IFRS 15 adoption unwind |
(20.0) |
|
Operating profit for the year ended 30 June 2020 |
41.4 |
The reduction in non-COVID-19 related revenue noted above coupled with challenging market conditions and the mix of work in certain divisions impacted profitability.
The Group has recognised reduced profitability in its Property division, driven by the reduced capital investment, reduced returns and impairments, in line with the strategy outlined by the Board.
Offsetting the reduction in profitability driven by lower volumes, the management actions taken to reduce the Group's cost base has resulted in a material reduction in overhead costs and improved profitability by c.£65m including £10m benefit from exiting loss-making contracts. The anticipated full year run-rate savings generated from these initiatives are expected to be at least £100m in FY21.
Unsurprisingly, the impact of COVID-19 has impacted profitability through a reduction in volumes and the incurring of additional direct costs. The Group has also accounted for a one-off holiday accrual driven by the pandemic, which management expects to unwind in future periods.
The Group's operating profit also benefited from the adoption of IFRS 16, the new accounting standard for leases which was adopted in the year. This standard replaces operating lease payments with depreciation and amortisation of capitalised assets. The second year of the application of IFRS 15 has resulted in a £20m profit reduction.
Assets held for sale and discontinued operations
Following the Group's 2019 strategic review, the Board concluded that Kier Living is not compatible with the Group's working capital objectives and that it would seek to sell the business. Accordingly, the assets and liabilities of Kier Living were classified as held for sale, with assets of £191.9m and liabilities of £81.9m at 30 June 2020. These assets have been written down to their fair value less costs to sale and a non-cash fair value charge of £51.6m has been recorded in the year. In addition, restructuring charges and exit costs totalling £37.0m net of tax have been incurred in respect of the exit of various regions and sectors.
The results for Kier Living for the period are classified as discontinued, including restatement of the prior period comparatives. Kier Living's adjusted loss after tax for the period was £12.8m (FY19: £36.2m profit) as the business was adversely impacted by site closures in the fourth quarter of the financial year driven by COVID-19 restrictions.
Earnings per share
Earnings per share ("EPS"), before adjusting items, from continuing operations were earnings of 15.3p (FY19: 30.9p earnings). EPS, after adjusting items, from continuing operations were losses of 106.2p (FY19: 146.9p losses).
Alternative performance measures
During the year, the Directors have reviewed the previous accounting presentation for disclosing certain items as 'exceptional' on the income statement. The Directors have considered the requirements of applicable accounting standards, along with additional guidance relating to alternative performance measures ("APM"), and have concluded that the Group will move away from using its previous disclosure on the face of the Group's income statement. The Directors consider that it would be more appropriate to present an income statement that shows the Group's statutory results only.
The Directors, however, still believe it is appropriate to disclose those items which are one-off, material or non-recurring in size or nature. The Group will be disclosing as supplementary information an 'adjusted profit' APM. The Directors consider doing so clarifies the presentation of the financial statements and better reflects the internal management reporting and is therefore consistent with the requirements of IFRS 8.
A reconciliation of reported to adjusted operating profit is provided below:
|
|
Operating (loss) / profit |
(Loss) / profit before tax |
|||
|
|
2020 £m |
2019 |
2020 £m |
2019 |
|
|
Reported loss from continuing operations |
(195.6) |
(203.5) |
(225.3) |
(229.5) |
|
|
Amortisation of acquired intangible assets |
23.7 |
24.8 |
23.7 |
24.8 |
|
|
Costs associated with previous acquisitions |
5.0 |
29.3 |
5.0 |
29.3 |
|
|
Restructuring and related charges |
156.1 |
56.1 |
156.1 |
56.1 |
|
|
Preparation for business divestment or closure |
33.6 |
120.4 |
33.6 |
120.4 |
|
|
Exceptional contract losses |
- |
49.9 |
- |
49.9 |
|
|
Other |
18.6 |
8.7 |
23.8 |
10.4 |
|
|
Adjusted profit from continuing operations |
41.4 |
85.7 |
16.9 |
61.4 |
|
Additional information about these items is as follows:
·
Amortisation of acquired intangible assets 23.7m (FY19: £24.8m):
Comprises the amortisation of acquired contract rights primarily relating to the acquisitions of May Gurney in 2013, Mouchel in 2015 and McNicholas in 2017. These charges have no future cash impact.
· Costs associated with previous acquisitions 5.0m (FY19: £29.3m):
The Group has recognised a 5.0m charge in the period in respect of the McNicholas acquisition and its subsequent integration. These non-recurring costs have now been completed. The charges have resulted in a cash outflow in the period of £5.0m.
· Restructuring and related charges 156.1m (FY19: £56.1m):
The Group has incurred restructuring costs in the period totalling 156.1m. This includes 29.5m in respect of employee exit costs associated with cost saving programmes and from strategic decisions taken to reduce headcount. Costs of £61.5m have been incurred following the decision to restructure the Southern Build UK business, including a £28.3m charge relating to the recoverability of assets following implementation of the new strategy and the challenging COVID-impacted market conditions. Fees of £31.7m have been incurred in undertaking and implementing the conclusions of the strategic review announced in June 2019 and the cost reductions described above. £22.2m of property related impairment charges have been recognised during the period and £2.4m of previous impairment charges have been released in relation to the relocation and closure of corporate offices. £11.1m of one-off costs have been incurred in preparation for outsourcing Fleet and IT activities.
Of this total restructuring costs of £156.1m, £22.9m relates to impairments of non-current assets, £38.4m is held within accruals and provisions, £5.0m is a reduction of receivables, £31.3m a reduction in inventories and the remainder resulted in a cash outflow in the period.
· Costs relating to the preparation of businesses for sale 33.6m (FY19: £120.4m):
Fair value adjustments of £14.8m have been made to properties in the Retail and Student sectors following the strategic decision to exit these markets. Costs of £3.8m in relation to contracts which the Group have exited (or will be exited in the near future) have been incurred in the FM and DABS businesses. In addition, costs of £7.8m have been incurred in relation to the disposal of parts of the business, primarily Living. The remaining charges relate to other business closure and sales costs.
Of this total, £11.5m has resulted in a cash outflow in the period, £13.4m relates to inventory write downs, £4.8m relates to the impairment of non-current assets with the remaining £4.0m being held within accruals.
· Other costs £18.6m (FY19: £8.7m)
Other costs include £7.6m in respect of legal related items, including fire compliance and cladding claims that have been incurred, the remaining balance is in respect of rebates and other charges following a review of the carrying value of central balances. Of the £18.6m, £6.7m has been written off against debtors, £9.7m is held in accruals and provisions and the remainder is cash.
In addition to the £237.0m of adjusted charges incurred from continuing operations, £88.6m of charges, net of tax, have been incurred from discontinued operations. This includes a fair value impairment of the net assets held for sale of the Living division of £51.6m with the remainder relating to the exit of various regions.
Finance charges
Bank interest has remained stable at £24.9m (FY19: £24.7m). Finance costs now includes £7.2m of costs relating to interest and finance charges for lease liabilities as a result of the implementation of IFRS 16. Under the previous GAAP, finance lease charges were significantly lower (FY19: £0.2m).
Segmental Reporting
From 1 July 2019, the Group changed its reporting format to focus on two market positions of 'Construction' and Infrastructure Services'. This is the basis on which the Group reports its primary segmental information for the year ended 30 June 2020. The Group is simplifying its portfolio by selling or substantially exiting the following activities which are deemed to be 'non-core' and are now presented as 'Other': Property, Facilities Management and Environmental Services. 'Corporate' includes unrecovered overheads and the charge for defined benefit pension schemes.
Balance sheet
Net assets
The Group had net assets of 240.8m at 30 June 2020 (FY19: 519.6m).
Goodwill
The Group held intangible assets of 720.6m (FY19: £766.7m), of which goodwill represented 536.7m (FY19: £536.7m). The Group completed its review of goodwill as at 30 June 2020, assuming a pre-tax discount rate derived from a weighted average cost of capital of 9.72%, and concluded that no impairment was required.
The Infrastructure Services CGU comprises £516.3m of the total goodwill balance. Whilst no impairment is noted and management believe the discounted cashflows applied is underpinned by the orderbook and current pipeline prospects, this CGU is sensitive to changes in key assumptions. The key assumptions in the value in use calculations are the forecast revenues and operating margins, the discount rates applied to future cash flows and the terminal growth rate assumptions applied.
Deferred tax asset
Given the reported losses recorded over the last two financial years, the Group has a deferred tax asset of £111.0m recognised at 30 June 2020 (FY19: £47.7m). Based on the Group's forecasts, it is considered probable that this will be utilised over a reasonable timeframe.
Working capital
During the year there was a total £44.7m reduction in the utilisation of the Kier Early Payment Scheme ("KEPS") of which £25m was related to the discontinued operation Kier Living . T he Group is actively reducing the KEPS scheme, paying the supply chain more quickly and not applying as much working capital management around reporting periods as has been seen in prior periods. We anticipate that the re-shaped Group, following the implementation of the strategic actions, will continue to improve working capital profile in the medium-term.
|
|
2020 £m |
|
Net debt as at 30 June 2019 |
(167) |
|
Adjusted EBITDA before COVID |
126 |
|
IFRS 16 |
- |
|
Working capital |
(55) |
|
Net capex |
(8) |
|
JV dividends less profits |
19 |
|
Other free cash flow items |
9 |
|
Net interest & tax |
(25) |
|
Free cash flow |
66 |
|
Net COVID impact |
(74) |
|
Adjusting items |
(93) |
|
Sales proceeds |
14 |
|
Discontinued operations |
(42) |
|
Other |
(14) |
|
Net debt as at 30 June 2020 |
(310) |
Government support
As of 30 June, there was total tax deferred of £78.8m. This comprises £25.1m of VAT deferred in accordance with HMRC guidance and payable 31 March 2021. The balance of £54.7m is subject to a Time To Pay agreement with HMRC with the amount being cleared by the end of the 2021 financial year.
Contract assets & liabilities
Contract assets represents the Group's right to consideration in exchange for works which has already been performed. Similarly, a contract liability is recognised when a customer pays consideration before work is performed. As at 30 June 20, current contract assets totalled £249.7m, down from £466.0m as at 30 June 2019. The reduction in volume in Q4 FY20 driven by the COVID-19 pandemic reduced the Group's ability to operate in certain divisions and geographical locations via site closures, delays and social distancing measures. This reduced volume in Q4 in turn reduced the contract asset and contract liability balances as at 30 June 2020.
Retirement benefits obligation
Kier operates a number of defined benefit pension schemes. At 30 June 2020, the reported surplus, which is the difference between the aggregate value of the schemes' assets and the present value of their future liabilities, was 38.8m (FY19: £19.5m surplus), before accounting for deferred tax.
In agreeing the triennial valuation of the Group's main schemes, and due to the impact on COVID-19, the Group has agreed a revised deficit recovery programme whereby £26m will become payable by 5 December 2020, and deficit repayments of £9m per calendar year will being from July 2021, until the end of the recovery plan.
Accounting policies
The Group's annual consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS'). One new accounting standard was adopted by Kier during the period, namely, IFRS 16 ('Leases'). Other than this standard, there have been no significant changes to the Group's accounting policies during the period.
The main impact of IFRS 16 has been to move the Group's larger, longer-term operating leases, primarily in respect of property, onto the balance sheet, with a consequential increase in non-current assets and lease obligations. Operating lease charges in respect of these leases, previously included in administrative expenses, have been replaced by depreciation and interest costs. The cash flow associated with these leases has not changed.
The Group has transitioned to IFRS 16 using the modified retrospective approach whereby the cumulative impact of applying the standard is accounted for as an adjustment to equity at the start of the accounting period in which it is first applied (i.e. 1 July 2019).
IFRS 16 has introduced a new category of non-current assets for 'right-of-use assets' associated with leases. At the date of initial application of IFRS 16, the carrying value of the Group's right-of-use assets was less than the additional lease borrowings that came on to the balance sheet.
Additional lease liabilities of £193.7m have been brought onto the balance sheet along with associated right-of-use assets of £176.3m (including £4.9m of assets previously classified as property, plant and equipment held under finance leases). In addition, prepaid rental amounts of £2.3m, accruals of £0.2m and onerous lease provisions of £4.4m have been removed from the balance sheet and a deferred tax asset of £3.4m was recognised in respect of the transitional adjustments. The net impact of these adjustments is a debit to opening reserves at 1 July 2019 of £16.6m.
In respect of the income statement for the year ended 30 June 2020, depreciation and interest charges under IFRS 16 were £2.2m less than the operating lease expenses that would have been charged under the previous leases accounting standard. Due to the differing methods of calculation, the impairment of the right-of-use assets under IFRS 16 were £1.1m less than the onerous lease provision that would have been calculated under the previous accounting standards. Therefore, had IFRS 16 not been introduced, total profit before tax would have been £3.3m lower than the reported figure for the year.
Previously, Kier has not included finance lease liabilities within its measure of net debt, due to their asset-backed nature. Therefore, whilst IFRS 16 has brought additional lease liabilities onto the balance sheet, the standard has had no effect on the Group's net debt measure, which has been calculated consistently with previous reporting periods.
Treasury facilities
Bank finance
The Group has committed debt facilities of 891.9m with a further 20m of uncommitted overdrafts. Bank debt will mature in July 2022 and US private placement notes mature between 2020 and 2024. The Group repaid debt of 30m during the period.
Supply chain finance
The Group offers its supply chain in the Construction and the Residential businesses the opportunity to participate in KEPS. The balance owed on this facility is included in trade creditors. The balance at 30 June 2020 was £125.5m (FY19: £170.2m).
Financial instruments
The Group's financial instruments comprise cash and liquid investments. The Group, largely through its PFI and Property joint ventures, enters into derivative transactions (principally interest rate swaps) to manage interest rate risks arising from its operations and its sources of finance. The US dollar denominated USPP notes have been hedged with fixed cross-currency swaps at inception to mitigate the foreign exchange risk. The Group does not enter into speculative transactions. There are minor foreign currency risks arising from the Group's operations.
The Group has a limited number of international operations in different currencies. Currency exposure to international assets is hedged through inter-company balances and borrowings, so that assets denominated in foreign currencies are matched, as far as possible, by liabilities. Where there may be further exposure to currency fluctuations, forward exchange contracts are completed to buy and sell foreign currency.
Going concern
The Board is required to consider the Group's ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.
The Group was trading in line with the Board's expectations through the financial year up to 31 March 2020 and had made good progress against the strategic objectives announced in June 2019. To support the delivery of these strategic objectives, the Group has made a number of structural changes (including a material reduction in the Group's headcount), as summarised in this announcement. The Group expects that the reduction in the Group's headcount and the delivery of the other strategic objectives will enable it to realise annual run rate savings of at least £100m by 30 June 2021, as compared to the 2018 financial year.
In the fourth quarter of the financial year, however, the Group's performance was adversely affected by the effects of the COVID-19 pandemic. Although the Group's sites remained open through this period, with a number of decisive management actions taken to mitigate against the majority of the effect of the pandemic, COVID-19 has adversely affected the Group's revenue and resulted in it incurring additional costs. This has resulted in a lower level of profitability for the 2020 financial year and an increase in the Group's net debt position.
At 30 June 2020, the Group had £892m of unsecured committed facilities, £20m of uncommitted overdrafts and £125m drawn against uncommitted supply chain financing facilities. In order to provide financial flexibility for the Group following COVID-19, the Group:
· Agreed waivers with its lenders in respect of the financial covenants within the Group's principal debt facilities for the test period ended 30 June 2020;
· Has agreed revised financial covenants under its principal debt facilities which will apply for the going concern period;
· Agreed with HMRC a deferral of the payment of certain amounts in respect of VAT and PAYE until March and June 2021, respectively; and
· Has agreed with its pension trustees a material reduction in the scheme deficit repayments.
The current trading environment remains uncertain, principally due to the potential impact of COVID-19, which makes forecasting challenging.
The Directors have reviewed the Group's short-term cash flow forecasts to 31 December 2021 (the going concern period), which have been prepared using certain key assumptions and include a number of stressed, but plausible, downside scenarios. These scenarios include a consideration of the risks which may arise to the Group's available liquidity and its ongoing compliance with the revised financial covenants within the Group's principal debt facilities as a result of or in light of the following factors or circumstances:
· The availability of supply-chain finance;
· Potential reductions in trading volumes;
· Potential margin erosion;
· Risks in respect of certain specific projects;
· The Group's ability to conclude its cost reduction plan as forecast; and
· The completion of the sale of Kier Living, following the delay in the sale process which was due, in particular, to COVID-19.
The impact that a second wave of COVID-19 would have on the Group's cashflows, using the financial impact of the initial outbreak as the basis of the assessment, was also considered.
The Board also considered the macro-economic and political risks affecting the UK economy, including Brexit. Brexit has the potential to disrupt the Group's operations, particularly in relation to materials, people and the supply-chain. The Group has established a 'Brexit task force' and has in place business continuity plans to mitigate the risks associated with Brexit. The Board noted that the Group's forecasts are underpinned by a significant proportion of revenue that is either secured or considered probable, often as part of long-term framework agreements, and that the Group operates primarily in sectors such as health, education and utilities, which are considered likely to remain largely unaffected by macro-economic factors. In addition, significant cost reduction actions have already been taken to improve the Group's profitability.
The Board considered the Group's ability to manage its working capital, in order to mitigate the potential impact on the Group's liquidity over the forecast period, in particular at the lowest point under the downside scenarios in the Spring of 2021, in the event of circumstances described above taking place. This, together with the agreements with the lenders and the pension trustees, and the other measures which have been taken during the year mean that the Group would be expected to continue to have available liquidity headroom under its existing finance facilities and operate within the revised financial covenants over the going concern period.
As a result, the Board is satisfied that the Group has sufficient financial resources to continue to operate for a period of at least 12 months and therefore, it has adopted the going concern basis in preparing the Group's 2020 financial statements.
Viability statement
The UK Corporate Governance Code requires the Board to explain how it has assessed the prospects of the Group, over what period it has done so and why it considers that period to be appropriate.
Assessment period
Consistent with the practice of previous years, the Board has assessed the prospects of the Group over a period of three years from 30 June 2020, taking account of its current position and the potential impact of the Group's principal risks and uncertainties (the PRUs) which will be set out in the Company's 2020 Annual Report and certain other risks referred to below. The Board has identified a three-year period as being a period over which it believes it is able to forecast the Group's performance with reasonable certainty, principally because:
· The Group's internal forecasting covers a three-year period;
· The tender process and delivery programme for a number of the Group's projects can, together, take a period of up to approximately three years; and
· The visibility of the Group's secured work and bidding opportunities can reasonably be assessed over a three-year period.
Assessment process
The work required to support the viability statement was undertaken by management, with the assistance of external advisers with respect to certain elements of the work (including stress-testing management's forecasts).
The following is a summary of the key elements of the assessment process:
· The model used as the basis of the assessment included a number of key assumptions (please see 'Key assumptions' below) and was subject to stress-testing (please see 'Stress-testing' below);
· The process considered the Group's current performance and future prospects, strategy, the PRUs and the mitigation of the PRUs;
· The process included a review of certain other risks relating to the Group, including macro-economic and political risks affecting the UK economy, (for example, Brexit), and risks relating to the Group's trading, the Group's pensions, the availability of the Group's finance facilities, systemic margin erosion, the execution of the Group's strategy, the supply-chain and certain project-specific risks; and
· The process assessed the continuing impact of COVID-19, including the impact of a second wave within the assessment period.
Key assumptions
The key assumptions within the model used to support the viability statement include:
· The Living business is not sold in the review period.
· The Group maintains its position as one of the leading providers of construction and infrastructure services to Government and regulated entities;
· No payment of dividends over the review period;
· The Group's supply-chain finance facility is retained at the same level as at 30 June 2020;
· The Group operates within its financial covenants under its principal debt facilities during the review period;
· The Group's revolving credit facility is re-financed on substantially the same terms (noting that it is currently scheduled to expire in June 2022);
· The Group's Schuldshein loans and USPP notes are repaid on their respective maturity dates during the review period; and
· The Group makes payments to the pension schemes in line with the revised deficit recovery plan.
Stress-testing
Management assessed the financial impact of a number of severe but plausible "downside" scenarios (both individually and in combination) by overlaying them against the three-year business plan. These scenarios included:
· An adverse impact on the Group's forecasts, included a lower than forecast volume, an erosion of forecast margins and a reduction in the win rate of any revenue which is to be obtained;
· A second wave of COVID-19, which results a similar national lockdown to the one applied with respect to the initial outbreak;
· A certain level of loss-making contracts having an impact on the Group's reported profit and cash over the review period;
· The removal of the Group's supply-chain finance facility, which is uncommitted; and
· The application of certain, additional macro-economic factors which may impact the Group, including Brexit.
COVID-19
Significant judgement was required to assess the impact of a second wave of COVID-19 on the three-year plan. The key assumptions used in this assessment were driven by the impact of the initial outbreak on the Group the timing of a second wave, and the period of lockdown.
The agreements with the lenders and the pension trustees, as summarised above under 'Going concern', in addition to the other measures which have been taken during the year, mean that, if there was a second wave of COVID-19, the Group would be expected to continue to have available liquidity headroom under its existing finance facilities.
Viability statement
The Board therefore has a reasonable expectation that the Group has adequate resources to continue to operate and to meet its liabilities as they fall due across the three-year review period.
|
Consolidated income statement |
Kier Group plc |
|
For the year ended 30 June 20 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
20192 |
|
Continuing operations |
Notes |
|
£m |
£m |
|
Revenue |
|
|
|
|
|
Group and share of joint ventures |
|
|
3,475.6 |
4,106.0 |
|
Less share of joint ventures |
2 |
|
(53.1) |
(154.9) |
|
Group revenue |
|
|
3,422.5 |
3,951.1 |
|
Cost of sales |
|
|
(3,220.4) |
(3,659.7) |
|
Gross profit |
|
|
202.1 |
291.4 |
|
Ad ministrative expenses |
|
|
(391.7) |
(504.6) |
|
Share of post-tax results of joint ventures |
|
|
(6.6) |
10.1 |
|
Profit/(loss) on disposal of joint ventures and subsidiaries |
|
|
0.6 |
(0.4) |
|
Loss from operations |
2 |
|
(195.6) |
(203.5) |
|
Finance income |
|
|
6.7 |
0.2 |
|
Finance costs |
6 |
|
(36.4) |
(26.2) |
|
Loss before tax |
2 |
|
(225.3) |
(229.5) |
|
Taxation |
7 |
|
53.4 |
35.7 |
|
Loss for the year from continuing operations |
2 |
|
(171.9) |
(193.8) |
|
Discontinued operations |
|
|
|
|
|
Loss for the year from discontinued operations (attributable to equity holders of the parent) |
10 |
|
(101.4) |
(15.4) |
|
Loss for the year |
2 |
|
(273.3) |
(209.2) |
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Owners of the parent |
|
|
(273.3) |
(209.6) |
|
Non-controlling interests |
|
|
- |
0.4 |
|
|
|
|
(273.3) |
(209.2) |
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
Basic loss per share |
|
|
|
|
|
From continuing operations |
9 |
|
(106.2)p |
(146.9)p |
|
From discontinued operations |
9 |
|
(62.7)p |
(11.6)p |
|
Total |
|
|
(168.9)p |
(158.5)p |
|
Diluted loss per share |
|
|
|
|
|
From continuing operations |
9 |
|
(106.2)p |
(146.9)p |
|
From discontinued operations |
9 |
|
(62.7)p |
(11.6)p |
|
Total |
|
|
(168.9)p |
(158.5)p |
|
|
|
|
|
|
|
Supplementary information |
|
|
|
|
|
Adjusted1 operating profit |
3 |
|
41.4 |
85.7 |
|
Adjusted1 profit |
3 |
|
16.9 |
61.4 |
|
Adjusted1 earnings per share |
9 |
|
15.3p |
30.9p |
|
Adjusted1 diluted earnings per share |
9 |
|
15.3p |
30.9p |
1 Reference to 'adjusted' excludes adjusting items, see notes 1 and 3.
2 Comparative information has been re-presented to classify the Living division, which is held for sale at 30 June 2020, as a discontinued operation, see note 10. This has had no impact on the statutory reported results for the year ended 30 June 2019.
|
Consolidated statement of comprehensive income |
Kier Group plc |
|
For the year ended 30 June 20 20
|
|
|
|
|
|
|
|
Notes |
|
2020 £m |
20191 |
|
Loss for the year |
|
|
(273.3) |
(209.2) |
|
|
|
|
|
|
|
Items that may be reclassified subsequently to the income statement |
|
|
|
|
|
Share of joint venture fair value movements on cash flow hedging instruments |
|
|
(0.3) |
0.2 |
|
Fair value gain on cash flow hedging instruments |
|
|
5.7 |
8.6 |
|
Fair value movements on cash flow hedging instruments recycled to the income statement |
|
|
(2.3) |
(4.3) |
|
Deferred tax charge on fair value movements on cash flow hedging instruments |
|
|
(0.7) |
(0.7) |
|
Foreign exchange gain on long-term funding of foreign operations |
|
|
1.0 |
0.9 |
|
Foreign exchange translation differences |
|
|
0.1 |
- |
|
Foreign exchange movements recycled to the income statement |
6 |
|
3.3 |
(0.7) |
|
Total items that may be reclassified subsequently to the income statement |
|
|
6.8 |
4.0 |
|
|
|
|
|
|
|
Items that will not be reclassified to the income statement |
|
|
|
|
|
Re-measurement of defined benefit liabilities |
5 |
|
(6.2) |
(22.9) |
|
Deferred tax credit on actuarial losses on defined benefit liabilities |
|
|
6.4 |
3.9 |
|
Total items that will not be reclassified to the income statement |
|
|
0.2 |
(19.0) |
|
|
|
|
|
|
|
Other comprehensive income/(losses) for the year |
|
|
7.0 |
(15.0) |
|
|
|
|
|
|
|
Total comprehensive loss for the year |
|
|
(266.3) |
(224.2) |
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Equity holders of the parent |
|
|
(266.3) |
(224.6) |
|
Non-controlling interests - continuing operations |
|
|
- |
0.4 |
|
|
|
|
(266.3) |
(224.2) |
|
|
|
|
|
|
|
Total comprehensive loss attributable to equity shareholders arises from: |
|
|
|
|
|
Continuing operations |
|
|
(164.9) |
(209.2) |
|
Discontinued operations |
|
|
(101.4) |
(15.4) |
|
|
|
|
(266.3) |
(224.6) |
1 Comparative information has been re-presented to classify the Living division, which is held for sale at 30 June 2020, as a discontinued operation, see note 10. This has had no impact on the statutory reported results for the year ended 30 June 2019.
|
Consolidated statement of changes in equity |
Kier Group plc |
|
For the year ended 30 June 20 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
Share capital £m |
Share premium £m |
Capital redemption reserve £m |
Accumulated losses £m |
Cash flow hedge reserve £m |
Translation reserve £m |
Merger reserve £m |
Equity attributable to owners of the parent £m |
Non-controlling interests £m |
Total equity £m |
|
At 30 June 2018 |
|
1.0 |
435.0 |
2.7 |
27.6 |
(5.0) |
3.3 |
134.8 |
599.4 |
1.7 |
601.1 |
|
Impact of adopting IFRS 15 |
|
- |
- |
- |
(60.8) |
- |
0.2 |
- |
(60.6) |
- |
(60.6) |
|
At 1 July 2018 |
|
1.0 |
435.0 |
2.7 |
(33.2) |
(5.0) |
3.5 |
134.8 |
538.8 |
1.7 |
540.5 |
|
(Loss)/profit for the year |
|
- |
- |
- |
(209.6) |
- |
- |
- |
(209.6) |
0.4 |
(209.2) |
|
Other comprehensive (loss)/income |
|
- |
- |
- |
(19.0) |
3.8 |
0.2 |
- |
(15.0) |
- |
(15.0) |
|
Dividends paid |
8 |
- |
- |
- |
(52.6) |
- |
- |
- |
(52.6) |
(1.6) |
(54.2) |
|
Issue of own shares |
|
0.6 |
249.3 |
- |
- |
- |
- |
- |
249.9 |
- |
249.9 |
|
Share-based payments |
13 |
- |
- |
- |
7.2 |
- |
- |
- |
7.2 |
- |
7.2 |
|
Sale of own shares |
|
- |
- |
- |
0.4 |
- |
- |
- |
0.4 |
- |
0.4 |
|
At 30 June 2019 |
|
1.6 |
684.3 |
2.7 |
(306.8) |
(1.2) |
3.7 |
134.8 |
519.1 |
0.5 |
519.6 |
|
Impact of adopting IFRS 16 |
17 |
- |
- |
- |
(16.6) |
- |
- |
- |
(16.6) |
- |
(16.6) |
|
At 1 July 2019 |
|
1.6 |
684.3 |
2.7 |
(323.4) |
(1.2) |
3.7 |
134.8 |
502.5 |
0.5 |
503.0 |
|
Loss for the year |
|
- |
- |
- |
(273.3) |
- |
- |
- |
(273.3) |
- |
(273.3) |
|
Other comprehensive income |
|
- |
- |
- |
0.2 |
2.4 |
4.4 |
- |
7.0 |
- |
7.0 |
|
Dividends paid |
8 |
- |
- |
- |
- |
- |
- |
- |
- |
(0.4) |
(0.4) |
|
Share-based payments |
13 |
- |
- |
- |
5.4 |
- |
- |
- |
5.4 |
- |
5.4 |
|
Purchase of own shares |
|
- |
- |
- |
(0.9) |
- |
- |
- |
(0.9) |
- |
(0.9) |
|
At 30 June 2020 |
|
1.6 |
684.3 |
2.7 |
(592.0) |
1.2 |
8.1 |
134.8 |
240.7 |
0.1 |
240.8 |
The numbers in the table above are shown net of tax as applicable.
Under the terms of a fully underwritten rights issue, ordinary shareholders of the Company on the register at the close of business on 30 November 2018 were offered 64,455,707 new ordinary shares of 1 pence each on the basis of 33 new ordinary shares for every existing 50 ordinary shares held. The new shares were fully subscribed on 20 December 2018, resulting in proceeds on issue of £249.9m, net of expenses of £13.7m, that were charged against the share premium account.
|
Consolidated balance sheet |
Kier Group plc |
|
A t 30 June 2020
|
|
|
|
|
|
|
|
Notes |
|
2020 £m |
|
|
Non-current assets |
|
|
|
|
|
Intangible assets |
14 |
|
720.6 |
766.7 |
|
Property, plant and equipment |
|
|
42.3 |
57.3 |
|
Right-of-use assets |
17 |
|
100.9 |
- |
|
Investment properties |
|
|
49.8 |
- |
|
Investments in and loans to joint ventures |
|
|
105.6 |
237.9 |
|
Capitalised mobilisation costs |
|
|
1.9 |
3.3 |
|
Deferred tax assets |
|
|
111.0 |
47.7 |
|
Contract assets |
|
|
28.8 |
25.2 |
|
Trade and other receivables |
|
|
32.9 |
29.0 |
|
Retirement benefit assets |
5 |
|
99.5 |
58.4 |
|
Other financial assets |
|
|
30.0 |
22.1 |
|
Non-current assets |
|
|
1,323.3 |
1,247.6 |
|
Current assets |
|
|
|
|
|
Inventories |
|
|
60.0 |
217.9 |
|
Contract assets |
|
|
249.7 |
466.0 |
|
Trade and other receivables |
|
|
236.4 |
372.9 |
|
Corporation tax receivable |
|
|
12.5 |
9.1 |
|
Other financial assets |
|
|
- |
2.0 |
|
Cash and cash equivalents |
11 |
|
413.9 |
311.7 |
|
Current assets |
|
|
972.5 |
1,379.6 |
|
Assets held for sale as part of a disposal group |
10 |
|
196.7 |
14.6 |
|
Total assets |
|
|
2,492.5 |
2,641.8 |
|
Current liabilities |
|
|
|
|
|
Borrowings |
11 |
|
(61.6) |
(30.3) |
|
Finance lease obligations |
17 |
|
- |
(1.1) |
|
Lease liabilities |
17 |
|
(33.1) |
- |
|
Trade and other payables |
12 |
|
(957.5) |
(1,311.0) |
|
Contract liabilities |
|
|
(108.7) |
(134.0) |
|
Provisions |
|
|
(20.8) |
(25.0) |
|
Current liabilities |
|
|
(1,181.7) |
(1,501.4) |
|
Liabilities held for sale as part of a disposal group |
10 |
|
(81.7) |
(1.5) |
|
Non-current liabilities |
|
|
|
|
|
Borrowings |
11 |
|
(689.8) |
(473.6) |
|
Finance lease obligations |
|
|
- |
(2.0) |
|
Lease liabilities |
17 |
|
(139.8) |
- |
|
Trade and other payables |
|
|
(46.5) |
(39.5) |
|
Retirement benefit obligations |
5 |
|
(60.7) |
(38.9) |
|
Provisions |
|
|
(51.5) |
(65.3) |
|
Non-current liabilities |
|
|
(988.3) |
(619.3) |
|
Total liabilities |
|
|
(2,251.7) |
(2,122.2) |
|
Net assets |
2 |
|
240.8 |
519.6 |
|
Equity |
|
|
|
|
|
Share capital |
|
|
1.6 |
1.6 |
|
Share premium |
|
|
684.3 |
684.3 |
|
Capital redemption reserve |
|
|
2.7 |
2.7 |
|
Accumulated losses |
|
|
(592.0) |
(306.8) |
|
Cash flow hedge reserve |
|
|
1.2 |
(1.2) |
|
Translation reserve |
|
|
8.1 |
3.7 |
|
Merger reserve |
|
|
134.8 |
134.8 |
|
Equity attributable to owners of the parent |
|
|
240.7 |
519.1 |
|
Non-controlling interests |
|
|
0.1 |
0.5 |
|
Total equity |
|
|
240.8 |
519.6 |
|
Consolidated cash flow statement |
Kier Group plc |
|
For the year ended 30 June 20 20
|
|
|
|
|
|
|
|
Notes |
|
2020 |
20191,2 |
|
Cash flow from operating activities |
|
|
|
|
|
Loss before tax - continuing operations |
|
|
(225.3) |
(229.5) |
|
Loss before tax - discontinued operations |
|
|
(101.4) |
(15.4) |
|
Net finance cost |
|
|
29.7 |
28.2 |
|
Share of post-tax trading results of joint ventures |
|
|
0.2 |
(30.7) |
|
Normal cash contributions to pension fund in excess of pension charge |
|
|
0.2 |
0.3 |
|
Equity settled share-based payments charge |
|
|
5.4 |
7.2 |
|
Amortisation of intangible assets and mobilisation costs |
|
|
36.9 |
38.7 |
|
Impairment of assets held for sale |
|
|
57.0 |
47.8 |
|
Research and development expenditure credit |
|
|
(10.2) |
(7.8) |
|
Depreciation charges |
|
|
7.6 |
15.5 |
|
Depreciation and impairment of right-of-use assets |
|
|
46.0 |
- |
|
(Profit)/loss on disposal of joint ventures and subsidiaries |
|
|
(0.6) |
0.4 |
|
Loss/(profit) on disposal of property, plant and equipment and intangible assets |
|
|
4.9 |
(0.2) |
|
Operating cash outflows before movements in working capital and pension deficit contributions |
|
|
(149.6) |
(145.5) |
|
Deficit contributions to pension fund |
|
|
(25.0) |
(24.2) |
|
Decrease in inventories |
|
|
44.2 |
58.8 |
|
Decrease in receivables |
|
|
108.1 |
110.2 |
|
Decrease/(increase) in contract assets |
|
|
212.2 |
(42.7) |
|
Decrease in payables |
|
|
(278.6) |
(42.4) |
|
Decrease in contract liabilities |
|
|
(20.5) |
(61.4) |
|
(Decrease)/increase in provisions |
|
|
(4.0) |
22.8 |
|
Cash outflow from operating activities |
|
|
(113.2) |
(124.4) |
|
Dividends received from joint ventures |
|
|
28.9 |
31.4 |
|
Interest received |
|
|
6.7 |
0.2 |
|
Income tax received |
|
|
5.9 |
10.1 |
|
Net cash outflow from operating activities |
|
|
(71.7) |
(82.7) |
|
Cash flows from investing activities |
|
|
|
|
|
Proceeds from sale of property, plant and equipment |
|
|
1.6 |
- |
|
Proceeds from sale of subsidiaries and joint ventures, net of cash disposed |
|
|
14.1 |
18.7 |
|
Purchase of property, plant and equipment |
|
|
(3.8) |
(11.6) |
|
Purchase of intangible assets |
|
|
(4.0) |
(19.8) |
|
Purchase of capitalised mobilisation costs |
|
|
(0.8) |
(0.9) |
|
Acquisition of subsidiaries, net of cash acquired |
|
|
- |
(29.0) |
|
Investment in joint ventures |
|
|
(14.2) |
(52.0) |
|
Classification to assets held for sale |
|
|
(0.1) |
(2.2) |
|
Net cash used in investing activities |
|
|
(7.2) |
(96.8) |
|
Cash flows from financing activities |
|
|
|
|
|
Issue of shares |
|
|
- |
249.9 |
|
(Purchase)/sale of own shares |
|
|
(0.9) |
0.4 |
|
Interest paid |
|
|
(34.9) |
(24.3) |
|
Principal elements of lease payments (2019: Finance lease repayments) |
|
|
(40.4) |
(4.5) |
|
Drawdown of borrowings |
|
|
274.7 |
- |
|
Repayment of borrowings |
|
|
(30.3) |
(39.2) |
|
Loan repayment from joint ventures |
|
|
9.4 |
31.3 |
|
Settlement of derivative financial instruments |
|
|
(0.5) |
- |
|
Dividends paid to equity holders of the parent |
8 |
|
- |
(52.6) |
|
Dividends paid to non-controlling interests |
|
|
(0.4) |
(1.6) |
|
Net cash from financing activities |
|
|
176.7 |
159.4 |
|
Increase/(decrease) in cash, cash equivalents and overdraft |
|
|
97.8 |
(20.1) |
|
Effect of change in foreign exchange rates |
|
|
4.4 |
0.9 |
|
Opening cash, cash equivalents and overdraft |
|
|
311.7 |
330.9 |
|
Closing cash, cash equivalents and overdraft |
11 |
|
413.9 |
311.7 |
|
|
|
|
|
|
|
Supplementary information |
|
|
|
|
|
Adjusted cash flow from operating activities |
3 |
|
(19.7) |
(63.6) |
1 Comparative information has been re-presented to classify the Living division, which is held for sale at 30 June 2020, as a discontinued operation, see note 10. This has had no impact on the statutory reported results for the year ended 30 June 2019.
2 £31.3m has been represented in the comparative information from financing activities to investing activities for loan repayments from joint ventures.
|
Notes to the financial statements |
Kier Group plc |
|
1 Accounting policies
|
|
|
|
|
|
|
|
Reporting entity
Kier Group plc (the Company) is a public limited company which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The address of its registered office is 81 Fountain Street, Manchester, M2 2EE. The preliminary consolidated financial statements (financial statements) for the year ended 30 June 2020 comprise the Company and its subsidiaries (together referred to as the Group) and the Group's interest in jointly controlled entities.
Basis of preparation
The financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, and the principles of International Financial Reporting Standards (IFRS) as adopted by the European Union but do not comply with the full disclosure requirements of these standards.
The unaudited financial information contained in this announcement does not constitute the Company's statutory accounts as at and for the year ended 30 June 2020, but is derived from those statutory accounts, which have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation. The Company's statutory accounts as at and for the year ended 30 June 2020 will be delivered to the Registrar of Companies following the Company's Annual General Meeting on 13 November 2020. Accordingly, the financial information for 2020 is presented as unaudited in this announcement.
Going concern
The Board is required to consider the Group's ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.
The Group was trading in line with the Board's expectations through the financial year up to 31 March 2020 and had made good progress against the strategic objectives announced in June 2019. To support the delivery of these strategic objectives, the Group has made a number of structural changes (including a material reduction in the Group's headcount), as summarised in this announcement. The Group expects that the reduction in the Group's headcount and the delivery of the other strategic objectives will enable it to realise annual run rate savings of at least £100m by 30 June 2021, as compared to the 2018 financial year.
In the fourth quarter of the financial year, however, the Group's performance was adversely affected by the effects of the COVID-19 pandemic. Although the Group's sites remained open through this period, with a number of decisive management actions taken to mitigate against the majority of the effect of the pandemic, COVID-19 has adversely affected the Group's revenue and resulted in it incurring additional costs. This has resulted in a lower level of profitability for the 2020 financial year and an increase in the Group's net debt position.
At 30 June 2020, the Group had £892m of unsecured committed facilities, £20m of uncommitted overdrafts and £125m drawn against uncommitted supply chain financing facilities. In order to provide financial flexibility for the Group following COVID-19, the Group:
· Agreed waivers with its lenders in respect of the financial covenants within the Group's principal debt facilities for the test period ended 30 June 2020;
· Has agreed revised financial covenants under its principal debt facilities which will apply for the going concern period;
· Agreed with HMRC a deferral of the payment of certain amounts in respect of VAT and PAYE until March and June 2021, respectively; and
· Has agreed with its pension trustees a material reduction in the scheme deficit repayments.
The current trading environment remains uncertain, principally due to the potential impact of COVID-19, which makes forecasting challenging.
The Directors have reviewed the Group's short-term cash flow forecasts to 31 December 2021 (the going concern period), which have been prepared using certain key assumptions and include a number of stressed, but plausible, downside scenarios. These scenarios include a consideration of the risks which may arise to the Group's available liquidity and its ongoing compliance with the revised financial covenants within the Group's principal debt facilities as a result of or in light of the following factors or circumstances:
· The availability of supply-chain finance;
· Potential reductions in trading volumes;
· Potential margin erosion;
· Risks in respect of certain specific projects;
· The Group's ability to conclude its cost reduction plan as forecast; and
· The completion of the sale of Kier Living, following the delay in the sale process which was due, in particular, to COVID-19.
The impact that a second wave of COVID-19 would have on the Group's cashflows, using the financial impact of the initial outbreak as the basis of the assessment, was also considered.
The Board also considered the macro-economic and political risks affecting the UK economy, including Brexit. Brexit has the potential to disrupt the Group's operations, particularly in relation to materials, people and the supply-chain. The Group has established a 'Brexit task force' and has in place business continuity plans to mitigate the risks associated with Brexit. The Board noted that the Group's forecasts are underpinned by a significant proportion of revenue that is either secured or considered probable, often as part of long-term framework agreements, and that the Group operates primarily in sectors such as health, education and utilities, which are considered likely to remain largely unaffected by macro-economic factors. In addition, significant cost reduction actions have already been taken to improve the Group's profitability.
The Board considered the Group's ability to manage its working capital, in order to mitigate the potential impact on the Group's liquidity over the forecast period, in particular at the lowest point under the downside scenarios in the Spring of 2021, in the event of circumstances described above taking place. This, together with the agreements with the lenders and the pension trustees, and the other measures which have been taken during the year mean that the Group would be expected to continue to have available liquidity headroom under its existing finance facilities and operate within the revised financial covenants over the going concern period.
As a result, the Board is satisfied that the Group has sufficient financial resources to continue to operate for a period of at least 12 months and therefore, it has adopted the going concern basis in preparing the Group's 2020 financial statements.
Significant accounting policies
Except for IFRS 16 and IFRIC 23 as described below, the accounting policies applied by the Group in these interim financial statements are consistent with those applied by the Group in its financial statements as at, and for the year ended, 30 June 2019. The Group has applied IFRS 16 'Leases' effective for the year ended 30 June 2020. The standard has been applied retrospectively at 1 July 2019 by adjusting the opening balance sheet at that date. The comparative year has not been restated. Further details on the transitional impact on adoption of these standards is described in note 17.
IFRIC 23 'Uncertainty over income tax treatments' is also effective for the first time for the year ended 30 June 2020. IFRIC 23 clarifies the accounting for uncertainties in income taxes. The new accounting guidance has not caused the Group to make any adjustment to its tax balances on adoption, i.e. the Group has not recognised any new or de-recognised any existing tax balances as a result of IFRIC 23.
The Group has considered the impact of IBOR reform on its hedge accounting. The Group has elected to early adopt amendments to IAS 39, IFRS 9, and IFRS 7 'Interest Rate Benchmark Reform' issued in September 2019. In accordance with the transition provisions, the amendments have been adopted retrospectively to hedging relationships that existed at the start of the reporting. The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR reform. The adoption of these amendments has not had a material impact on these financial statements.
Segmental reporting
From 1 July 2019, the Group changed its reporting format to focus on two market positions of 'Infrastructure Services' and 'Construction'. This is the basis on which the Group reports its primary segmental information for the year ended 30 June 2020. The Group is simplifying its portfolio by selling or substantially exiting the following activities which are deemed to be 'non-core' and are now presented as 'Other': Property, Facilities Management and Environmental Services. 'Corporate' includes unrecovered overheads and the charge for defined benefit pension schemes. The change in reporting structure has also resulted in a change to the Group's previously reported cash generating units ('CGU').
In accordance with IAS 36 'Impairment of Assets' the Group has reallocated the carrying value of the Group's goodwill as at 1 July 2019 to each of the Group's new CGUs as follows:
|
|
£m |
|
Infrastructure Services |
516.3 |
|
Construction |
20.4 |
|
Other |
- |
|
|
536.7 |
Segment information is based on the information provided to the Chief Executive, together with the Board, who is the chief operating decision maker . The segments are strategic business units with separate management and have different core customers and offer different services.
The accounting policies of the operating segments are the same as those of the Group. The Group evaluates segment information based on profit or loss from operations before adjusting items, interest and income tax expense. The segment results that are reported to the Chief Executive include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Adjusting items
IAS 1 permits an entity to present additional information for specific items to enable users to better assess the entity's financial performance.
During the year, the Directors have reviewed the previous accounting presentation for disclosing certain items as exceptional on the income statement. The Directors have considered the requirements of applicable accounting standards, along with additional guidance around Alternative Performance Measures ('APM') and have concluded that the Group will move away from using its previous disclosure on the face of the Group's income statement. The Directors consider that it would be more appropriate to present an income statement that shows the Group's statutory results only.
The Directors however still believe it is appropriate to inform users regarding various items and disclose those items which are deemed one-off, material or non-recurring in size or nature and a decision has been made to align to internal management reporting as the Directors consider it makes the Financial Statements presentation clearer to the users of the accounts. As such, the Group is disclosing as supplementary information an 'Adjusted Profit' APM which is reconciled to statutory profit in the Notes to the Financial Statements and is consistent with IFRS 8 segmental reporting.
Separate presentation of these items is intended to enhance understanding of the financial performance of the Group in the particular year under review and the extent to which results are influenced by material unusual and/or non-recurring items. The Directors review segmental results on an adjusted items basis when analysing the performance of operating segments.
The Directors exercise judgement in determining the classification of certain items as adjusting using quantitative and qualitative factors. In assessing whether an item is an adjusting item, the Directors give consideration, both individually and collectively, as to an item's size, the specific circumstances which have led to the item arising and if the item is likely to recur, or whether the matter forms part of a group of similar items.
Amortisation of acquired intangible assets and certain financing costs are also included as adjusting items on the basis of being ongoing non-cash items generated from acquisition related activity.
A full reconciliation from statutory numbers to adjusted profit measures has been presented in note 3. As a result of the Group's change in its APM, a review of the prior year has been conducted to align to the revised presentation. No restatement of prior year numbers is required as the Directors believe all material items in the prior year which were classified as an exceptional item would be included in the new definition of an adjusting item. Similarly, no material prior year items have been highlighted which meet the new adjusting Items definition that did not meet the previous exceptional items definition.
The Group presents revenue including that from joint venture arrangements as an alternative performance measure. The Directors believe this is a useful measure as it provides visibility over the scale of the Group's operations, particularly within its Property business where a significant proportion of developments are set up in joint ventures.
2 Segmental reporting
|
|
|
|
|
|
|
|||
|
For the year ended 30 June 2020 Continuing operations |
Infrastructure Services £m |
Construction £m |
Other £m |
Corporate £m |
Group £m |
|||
|
Revenue1 |
|
|
|
|
|
|||
|
Group and share of joint ventures |
1,506.2 |
1,588.1 |
370.4 |
10.9 |
3,475.6 |
|||
|
Less share of joint ventures |
- |
- |
(53.1) |
- |
(53.1) |
|||
|
Group revenue |
1,506.2 |
1,588.1 |
317.3 |
10.9 |
3,422.5 |
|||
|
|
|
|
|
|
|
|||
|
Loss for the year |
|
|
|
|
|
|||
|
Operating profit/(loss) before adjusting items5 |
31.3 |
36.1 |
5.1 |
(31.1) |
41.4 |
|||
|
Adjusting items5 |
(21.9) |
(95.0) |
(19.4) |
(100.7) |
(237.0) |
|||
|
Profit/(loss) from operations |
9.4 |
(58.9) |
(14.3) |
(131.8) |
(195.6) |
|||
|
Net finance costs2 |
(1.5) |
(0.7) |
(11.1) |
(16.4) |
(29.7) |
|||
|
Profit/(loss) before tax from continuing operations |
7.9 |
(59.6) |
(25.4) |
(148.2) |
(225.3) |
|||
|
Taxation |
|
|
|
|
53.4 |
|||
|
Loss for the year from continuing operations |
|
|
|
|
(171.9) |
|||
|
Loss for the year from discontinued operations |
|
|
|
|
(101.4) |
|||
|
Loss for the year |
|
|
|
|
(273.3) |
|||
|
|
|
|
|
|
|
|||
|
Balance sheet |
|
|
|
|
|
|||
|
Operating assets3 |
895.7 |
415.4 |
273.4 |
267.4 |
1,851.9 |
|||
|
Operating liabilities3 |
(385.2) |
(609.6) |
(111.6) |
(312.2) |
(1,418.6) |
|||
|
Net operating assets/(liabilities)3 |
510.5 |
(194.2) |
161.8 |
(44.8) |
433.3 |
|||
|
Cash, cash equivalents and borrowings |
346.2 |
392.2 |
(206.8) |
(869.1) |
(337.5) |
|||
|
Net financial assets |
- |
- |
- |
30.0 |
30.0 |
|||
|
Net assets/(liabilities) excluding net assets held for sale |
856.7 |
198.0 |
(45.0) |
(883.9) |
125.8 |
|||
|
Net assets held for sale |
|
|
|
|
115.0 |
|||
|
Net assets |
|
|
|
|
240.8 |
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
For the year ended 30 June 2019 4 Continuing operations |
Infrastructure Services £m |
Construction £m |
Other £m |
Corporate £m |
Group £m |
|
|
Revenue1 |
|
|
|
|
|
|
|
Group and share of joint ventures |
1,669.1 |
1,849.3 |
584.7 |
2.9 |
4,106.0 |
|
|
Less share of joint ventures |
- |
- |
(154.9) |
- |
(154.9) |
|
|
Group revenue |
1,669.1 |
1,849.3 |
429.8 |
2.9 |
3,951.1 |
|
|
|
|
|
|
|
|
|
|
Loss for the year |
|
|
|
|
|
|
|
Operating profit/(loss) before adjusting items5 |
53.3 |
67.2 |
12.3 |
(47.1) |
85.7 |
|
|
Adjusting items5 |
(56.6) |
(44.1) |
(78.6) |
(109.9) |
(289.2) |
|
|
Profit/(loss) from operations |
(3.3) |
23.1 |
(66.3) |
(157.0) |
(203.5) |
|
|
Net finance costs2 |
(1.4) |
6.9 |
(19.7) |
(11.8) |
(26.0) |
|
|
(Loss)/profit before tax from continuing operations |
(4.7) |
30.0 |
(86.0) |
(168.8) |
(229.5) |
|
|
Taxation |
|
|
|
|
35.7 |
|
|
Loss for the year from continuing operations |
|
|
|
|
(193.8) |
|
|
Loss for the year from discontinued operations |
|
|
|
|
(15.4) |
|
|
Loss for the year |
|
|
|
|
(209.2) |
|
|
|
|
|
|
|
|
|
|
Balance sheet |
|
|
|
|
|
|
|
Operating assets3 |
1,033.5 |
507.7 |
614.7 |
135.5 |
2,291.4 |
|
|
Operating liabilities3 |
(403.1) |
(749.2) |
(314.4) |
(150.1) |
(1,616.8) |
|
|
Net operating assets/(liabilities)3 |
630.4 |
(241.5) |
300.3 |
(14.6) |
674.6 |
|
|
Cash, cash equivalents and borrowings |
267.4 |
362.2 |
(372.7) |
(449.1) |
(192.2) |
|
|
Net financial assets |
- |
- |
- |
24.1 |
24.1 |
|
|
Net assets/(liabilities) excluding net assets held for sale |
897.8 |
120.7 |
(72.4) |
(439.6) |
506.5 |
|
|
Net assets held for sale |
|
|
|
|
13.1 |
|
|
Net assets |
|
|
|
|
519.6 |
|
|
|
|
|
|
|
|
|
1 Revenue is stated after the exclusion of inter-segmental revenue. Over 90% of the Group's revenue is derived from UK based customers.
2 Interest was (charged)/credited to the divisions at a notional rate of 4.0%.
3 Net operating assets/(liabilities) excludes cash, cash equivalents, bank overdrafts, borrowings, financial assets and liabilities, assets and liabilities classified as held for sale and interest-bearing inter-company loans.
4 Prior year comparative information re -presented to show the new reporting segment s focused on the Group's t wo market positions of Infrastructure Services and Construction, see note 1, and Living as a discontinued operation, which is held for sale at 30 June 2020, see note 10.
5 See note 1 and 3 for adjusting items.
3 Adjusting items
The Group's policy in respect of Adjusting items is described in note 1. These items are explained in detail below:
|
|
Operating (loss)/ profit |
(Loss)/profit before tax |
||
|
|
2020 £m |
20191 |
2020 £m |
20191 |
|
Reported loss from continuing operations |
(195.6) |
(203.5) |
(225.3) |
(229.5) |
|
Amortisation of acquired intangible assets |
23.7 |
24.8 |
23.7 |
24.8 |
|
Costs associated with previous acquisitions |
5.0 |
29.3 |
5.0 |
29.3 |
|
Restructuring and related charges |
156.1 |
56.1 |
156.1 |
56.1 |
|
Preparation for business divestment or closure |
33.6 |
120.4 |
33.6 |
120.4 |
|
Exceptional contract losses |
- |
49.9 |
- |
49.9 |
|
Other |
18.6 |
8.7 |
23.8 |
10.4 |
|
Adjusted profit from continuing operations |
41.4 |
85.7 |
16.9 |
61.4 |
1 Comparative information has been re-presented to classify the Living division as a discontinued operation, which is held for sale at 30 June 2020, see note 10.
a) Amortisation of acquired intangible assets
|
|
2020 £m |
2019 |
|
Amortisation of intangible assets and deferred consideration |
(23.7) |
(24.8) |
b) Costs associated with previous acquisitions
|
|
2020 £m |
2019 |
|
McNicholas acquired contract provision and exit costs1 |
- |
(21.5) |
|
Integration costs relating to the McNicholas acquisition2 |
(8.5) |
(11.8) |
|
Release of deferred and contingent consideration3 |
- |
4.0 |
|
McNicholas acquired contract settlement4 |
3.5 |
- |
|
Total |
(5.0) |
(29.3) |
1 Provision to WIP and exit costs in relation to a contract acquired with McNicholas in respect of a major customer. The charge was considered to be an adjusting item in FY19 on the basis of its size and the fact that these assets were acquired, as a result of which the associated income has never been recorded by the Group.
2 Costs incurred to integrate the McNicholas acquisition into the Utilities business including significant double-running of people and lease costs. These are considered to be adjusting items on the basis of their size, the fact that they relate to a major acquisition and that these are non-recurring costs that have now come to an end in FY20.
3 The Group released contingent consideration in FY19 relating to the McNicholas acquisition which is not payable.
4 Revenue received in settlement of a contract acquired with McNicholas.
c) Restructuring and related charges
The Group has incurred significant restructuring charges relating to costs of organisational change associated with the Group's cost saving programmes and, latterly, the Group's Strategic Review programme announced following the appointment of Andrew Davies as CEO. These are discussed further in the Financial Review. These are considered to be adjusting items on the basis of their size and the fact that they relate to significant changes to the Group's activities, property portfolio and workforce.
|
|
2020 £m |
2019 |
|
Restructure of Regional Southern Build business1 |
(61.5) |
- |
|
Redundancy costs2 |
(29.5) |
(38.4) |
|
Professional advisor fees and other costs incurred implementing non-people initiatives3 |
(34.2) |
(13.3) |
|
Lease impairments (June 2019: onerous lease)4 |
(14.4) |
(4.4) |
|
Costs in preparation for outsourcing arrangements5 |
(11.1) |
- |
|
Property impairment6 |
(5.4) |
- |
|
Total |
(156.1) |
(56.1) |
1 The Group has undertaken a strategic review of its Regional Southern Build business resulting in the restructuring of management, closure of offices and closure of certain sectors. This process also included charges relating to the recoverability of assets following implementation of the new strategy and the challenging COVID-impacted market conditions.
2 Costs in respect of roles made redundant as a result of cost saving programmes and from strategic decisions taken to reduce headcount in a number of the Group's principal operating divisions following the announcement of the strategic review.
3 The Group incurred various costs in running the restructuring activities during the year. These included the professional adviser fees, incremental costs of teams involved in the management of the restructuring activities and costs incurred implementing non-people initiatives.
4 The Group has incurred impairment charges on a corporate office lease of £16.8m, which are being exited as part of the cost saving programme. Another corporate office lease that was previously impaired by £3.8m (FY19: £4.4m onerous lease provision) is to be utilized instead. The remaining lease impairment on this office was released in HY20 (£3.5m) which was offset by refurbishment costs of £1.1m.
5 The Group has outsourced its Fleet and IT services during the year, incurring £8.3m of costs. This includes one-off set up costs and dual-running costs.
6 As part of its restructuring programme the Group has closed its head office, which is now held as an investment property. As a result, an impairment charge of £5.4m has been recognised.
d) Costs incurred in the disposal of operations or in preparation for business divestment or closure
The Group has incurred various charges driven by the change in strategic direction of the Group and the decision to exit certain divisions deemed non-core to its ongoing operations. Most of these charges are non-cash and are considered to be adjusting items on the basis that they relate to a major restructuring of the Group following the Strategic Review that took place in 2019.
|
|
2020 £m |
2019 |
|
Business closure and sales costs1 |
(32.0) |
(23.1) |
|
Impairment of goodwill and other assets2 |
- |
(47.8) |
|
Environmental Waste contract termination provision3 |
- |
(26.8) |
|
Impairment of ERP computer software4 |
(4.7) |
(7.3) |
|
Reversal of impairment of ERP computer software4 |
3.1 |
- |
|
Fair value impairment of Assets Held for Sale - note 10 |
- |
(8.4) |
|
Loss on disposal of subsidiaries, joint-ventures and other assets, with associated fees5 |
- |
(7.0) |
|
Total |
(33.6) |
(120.4) |
1 Following the announcement of the Group's intention to exit parts of the Group, a number of charges have been recognised. These include costs of £14.8m in Property, £1.6m in Facilities Management and £2.1m in Kier Business Services during the period in relation to closure activities (FY19: £2.9m) as well as advisors' fees of £7.8m in relation to disposal activities to date. A further £1.7m has been incurred in respect of impairing mothballed land. FY19 costs included £14.8m for exiting contracts, onerous contract charges of £3.6m, and an impairment of software of £5.5m.
2 A non-cash impairment of goodwill (£8.0m) and other assets (£39.8m) was made in FY19 to the Group's previous Developments & Housing CGU, following the decision to dispose of various non-core divisions. See note 14 for the goodwill and other intangible impairments.
3 In securing the termination of its largest loss-making environmental waste contract in FY19, the Group has agreed to pay the local authority £27.3m over a period of six years. The Group agreed to this payment to help it exit the Environmental business by reducing a significant future central overhead that would have otherwise still been needed to service the loss-making contract.
4 A cost of £4.7m (FY19: £7.3m) was written-off due to software functionality which will no longer be utilised within the Group. Software previously impaired will instead be utilised and so this element of prior year impairment has been reversed.
5 FY19 cost comprises advisors' fees associated with divestments along with the loss on disposal of Unity (£1.9m), gain on the disposal of the Group's pension administration business (£2.5m) and loss on disposal of KHSA Limited (£1.4m).
e) Exceptional contract losses
The charges in relation to Broadmoor and Mersey Gateway were classified as an adjusting item in FY19 on the basis of the highly material size of the charges incurred in the current and prior years. In the view of the Directors, both of these contract losses were also considered adjusting items on the basis that they arose from contractual arrangements that would not typically be agreed to by the respective businesses.
|
|
2020 £m |
2019 |
|
Broadmoor Hospital1 |
- |
(43.5) |
|
Mersey Gateway 2 |
- |
(6.4) |
|
Total |
- |
(49.9) |
1 The Group incurred significant and one-off losses in FY19 relation to the Broadmoor Hospital development project in respect of future recoveries of costs from the client and other third parties.
2 The Group incurred significant and one-off charges in FY19 in relation to the completion of the Mersey Gateway project.
f) Other adjusting items
Other adjusting items are analysed below:
|
|
2020 £m |
2019 |
|
Net financing costs 1 |
(5.2) |
(1.7) |
|
Central charges and other items 2 |
(8.9) |
- |
|
Procurement charge 3 |
(2.1) |
(17.2) |
|
Legal compliance 4 |
(7.6) |
- |
|
Pension increase exchange pension gain (net of fees) - note 5 |
- |
14.6 |
|
GMP Pension charge - note 5 |
- |
(6.1) |
|
Total before tax |
(23.8) |
(10.4) |
1 Net financing costs relate to discount unwinding of acquired intangible assets and the recycling of foreign exchange from the translation reserve in respect of the Caribbean operations.
2 Central charges and other items include a number of write offs that were recognised following a detailed review of certain carrying values. These are not considered to be part of the underlying performance of the business and so have been highlighted as adjusting items.
3 The Group incurred a material charge in FY19 in relation to certain aged receivables, driven by a management review of contractual terms following the impact of the changing credit market. This review was driven by the changing commercial landscape, as a result of which, management has determined that the assets should be written off. The charge is deemed an adjusting item on the basis of its size. In FY20, additional costs not identified in the prior year review were written off and a consistent treatment has been adopted.
4 The Group has incurred £7.6m of costs in relation to legal claims, including £4.2m of costs in complying with new fire compliance regulations. The legal claims relate to incidents that occurred out of period but were notified to the Group within the year and so are considered to be adjusting items.
g) Discontinued operations
Adjusting items within discontinued operations are analysed below:
|
|
2020 £m |
2019 |
|
Fair value adjustment of Kier Living - note 10 |
(51.6) |
- |
|
Closure costs relating to non-core businesses1 |
(29.0) |
- |
|
Rationalisation costs2 |
(2.6) |
(0.3) |
|
Inventory write downs3 |
(5.4) |
- |
|
Impairment of residential development sites4 |
- |
(50.0) |
|
Loss on disposal of assets5 |
- |
(1.3) |
|
Total after tax |
(88.6) |
(51.6) |
1 Costs incurred in respect of Living's decision to exit the various regions.
2 Rationalisation costs primarily consist of roles made redundant as a result of cost saving programmes and from strategic decisions taken to reduce headcount in a number of the Group's principal operating divisions following the announcement of the Strategic Review.
3 During the period a number of sites were closed resulting in costs being capitalised which are not recoverable through future sales, and hence an impairment charge has been taken against this inventory.
4 This impairment charge was triggered in FY19 by the Group's decision to dispose of its Living division and the subsequent decision to sell certain mothballed land banks. Previously the Group had intended to develop these sites and had therefore maintained a carrying value of these assets above their market valuations at £60.0m, on a development value basis.
5 Loss on disposal in FY19 of Living's shared equity portfolio (£1.3m).
h) Adjusted cash flow
|
|
2020 £m |
2019 |
|
Reported cash outflow from operating activities |
(113.2) |
(124.4) |
|
Cash outflow from operating activities (adjusting items) |
93.5 |
60.8 |
|
Adjusted cash outflow from operating activities |
(19.7) |
(63.6) |
4 COVID-19
The COVID-19 pandemic has had a significant impact on the Group, both operationally and financially. Decisive management actions led to Kier implementing the following self-help measures:
· Temporarily closed all sites to ensure that we could operate safely. Through the application of Site Operating Procedures issued by the Construction Leadership Council we were able to keep about 80% of our sites open throughout the period. Currently all sites are now open.
· Asked c.6,500 employees to take a temporary pay reduction for the three months to 30 June 2020. These reductions depended on seniority and ranged between 7.5% to 25%.
· The Group furloughed c. 2,000 employees through the period. As at 31 July 2020 no employees were left on furlough.
· The Group also deferred various taxation payments during the period as allowed by the Government.
· All discretionary spend including capital expenditure was reduced to a minimum.
· The closure of the former headquarters at Tempsford Hall in Bedfordshire was brought forward to 30 April 2020 from the previously announced date of 30 June 2020.
· Through strong relationships with the members of our banking syndicate and other debt providers they all agreed waivers to the Group's financial covenants for the year ended 30 June 2020.
· Paused reducing the Kier Early Payment Scheme ('KEPS').
The impact of COVID-19 on the Group, including the actions detailed above, has been considered in the preparation of these financial statements. These considerations have included assessing the impact of the pandemic of the following areas:
· Valuation of costs in relation to COVID-19
· Critical accounting estimates and judgements
· Going concern assessment
· Goodwill impairment assessment
· Classification of Tempsford Hall asset
· Classification of assets held for sale
· Recognition and disclosure of Government grants
· Calculation of expected credit losses
Classification of costs in relation to COVID-19
The Group has incurred a number of one-off, non-recurring costs in relation to COVID-19 which have had a detrimental impact on the results of the Group for the year ended 30 June 2020. Although these costs meet the definition of an adjusting item in accordance with the Group's accounting policy set out in note 1, management have taken into account the guidance issued by the Financial Reporting Council ("FRC") in May 2020 and after careful consideration has decided to not classify these as adjusting items.
The impact of these items is as follows:
|
|
2020 £m |
|
Direct COVID-19 costs |
35.3 |
|
Holiday pay accrual |
10.0 |
|
Total |
45.3 |
|
|
|
Direct COVID-19 costs are analysed as follows:
|
|
2020 £m |
|
Incremental direct costs |
15.3 |
|
Costs relating to staff on furlough / isolation |
3.8 |
|
Property provisions |
8.0 |
|
Settlement adjustments |
4.6 |
|
Other |
3.6 |
|
Total |
35.3 |
Incremental direct costs - the Group has incurred a number of incremental direct costs in order to enable it to continue to work through the pandemic. These costs include additional Personal Protective Equipment, additional mobilisation and demobilisation costs in relation to work that ceased during the period of lockdown, and costs to enable effective social distancing, such as additional portacabins, additional transport and the inefficiencies arising from operating within the new operating procedures.
Costs relating to staff on furlough/isolation - whilst the Group has utilised the furlough scheme, a number of costs associated with furloughed staff were not able to be reclaimed. These costs included social security costs and vehicles and plant allocated to those furloughed individuals. In addition, staff who were isolating as a result of COVID-19 were not covered by the scheme.
Property provisions - the uncertainty in the property market as a result of COVID-19 has caused property valuations to fall, which has had a knock-on effect on the valuation of development stock and the investment property held in joint ventures.
Settlement adjustments - one of the impacts of COVID-19 has been the additional risk created in respect of collecting outstanding debtor balances. The Group focused on the collection of outstanding debts during the pandemic and in securing the cash agreed to settlement adjustments in total of £4.6m.
In addition to the direct costs, the Group has also incurred a significant increase in its holiday pay accrual. During the period of lockdown employees took minimal holiday, either due to being on furlough or not being able to travel. The Group amended its policy to allow additional holiday to be carried forward into the next holiday year and as a result an additional holiday pay accrual of £10m was required.
The Group has also incurred incremental indirect costs as a result of COVID-19 which have not been included within the table above. For example, the impact on the valuation of contract work-in-progress and the recoverability of receivables.
Critical accounting estimates and judgements, including going concern and goodwill impairment
COVID-19 has introduced unprecedented economic uncertainty and has led to increased uncertainty particularly in forecasting future financial performance. A full reforecasting exercise was performed in July 2020 which incorporated the expected impact of COVID-19 on future periods, and these forecasts have been used in assessing going concern and goodwill impairment amongst other things. However, given the increased uncertainty that COVID-19 has brought to forecasting, there has been significant judgement applied when performing this exercise.
Additionally, given the level of judgement and estimation involved in assessing the future profitability of contracts, it is reasonably possible that outcomes within the next financial year may be different from management's assumptions and could require a material adjustment to the carrying amounts of contract assets and onerous contract provisions.
Classification of assets
In December 2019, the Group assessed that it had met the criteria of IFRS 5 to hold its Living business as an asset held for sale and to present the results of that business as discontinuing operations. Following the UK being put into lockdown in March 2020, the formal sale process was put on hold although informal discussions continued with interested parties. The Board's commitment to selling the business remains and it is considered highly probable that this will take place in the next six to twelve months. As a result, management has continued to classify the business as an asset held for sale in these financial statements.
However, due to the uncertainties in the market resulting from COVID-19 the decision has been taken to impair the fair value of the disposal group to £110.0m, resulting in an impairment of £51.6m being charged to the income statement.
One of the management decisions taken in response to COVID-19 was to accelerate the closure of its former headquarters, Tempsford Hall. As at 30 June 2020 the property had been vacated and mothballed. The property has been transferred from property, plant and equipment to investment properties and a valuation exercise performed to ascertain its fair value. As a result, an impairment of £5.4m has been recorded in the income statement.
The Foley Street property remains vacant and although it is being actively marketed, the COVID pandemic has meant that the Central London property market remains subdued. Management has reassessed the onerous lease provision that has been made against Foley Street and has concluded that the property is likely to be let within 12 months. The market rent in the onerous lease calculation has also been updated to reflect the latest best estimate.
Government grants
During the year the Group received Government grants in the form of the Coronavirus Job Retention Scheme ("CJRS"), a scheme put in place to help businesses through the ongoing COVID-19 situation.
Under the CJRS, grant income may be claimed in respect of certain costs to the Group of furloughed employees. During the year the Group claimed £9.0m through this scheme. The CJRS income reflects the costs incurred in the year ended 30 June 2020 that are eligible to be included in CJRS grant claims to the extent the Group considers there to be reasonable certainty that the grant will be received.
Both the benefits of the CJRS and the temporary salary reductions have not been included in the table above.
Deferral of HMRC payments
During the period the Group was able to defer payment of both its VAT and PAYE/NI liabilities that arose during the fourth quarter of the year.
£25.1m of VAT has been deferred and is payable by 31 March 2021. A further £54.7m of tax liabilities are subject to a Time To Pay agreement with HMRC with the amount due to be cleared by the end of the 2021 financial year.
5 Retirement benefit obligations
|
|
|
|
|
|
The amounts recognised in the financial statements in respect of the Group's defined benefit schemes are as follows:
|
|
|
|
|
|
|
2020 |
|
|
|
Kier Group Pension Scheme |
May Gurney Pension Scheme £m |
Mouchel Pension Schemes1, 2 £m |
McNicholas Pension Scheme |
Total £m |
|
Opening surplus/(deficit) |
|
39.4 |
1.4 |
(14.6) |
(6.7) |
19.5 |
|
Credit/(charge) to income statement |
|
1.0 |
0.1 |
(0.5) |
(0.1) |
0.5 |
|
Employer contributions |
|
12.4 |
2.0 |
9.4 |
1.2 |
25.0 |
|
Actuarial gains/(losses) |
|
37.0 |
(8.7) |
(32.4) |
(2.1) |
(6.2) |
|
Closing surplus/(deficit) |
|
89.8 |
(5.2) |
(38.1) |
(7.7) |
38.8 |
|
Comprising: |
|
|
|
|
|
|
|
Total market value of assets |
|
1,300.5 |
83.5 |
526.4 |
27.5 |
1,937.9 |
|
Present value of liabilities |
|
(1,210.7) |
(88.7) |
(564.5) |
(35.2) |
(1,899.1) |
|
Net surplus/(deficit) |
|
89.8 |
(5.2) |
(38.1) |
(7.7) |
38.8 |
|
Related deferred tax (liability)/asset |
|
(17.1) |
1.0 |
7.2 |
1.5 |
(7.4) |
|
Net pension asset/(liability) |
|
72.7 |
(4.2) |
(30.9) |
(6.2) |
31.4 |
|
Presentation of net surplus/(deficit) above in the Consolidated balance sheet: |
|
|
|
|
|
|
|
Retirement benefit assets |
|
89.8 |
- |
9.7 |
- |
99.5 |
|
Retirement benefit obligations |
|
- |
(5.2) |
(47.8) |
(7.7) |
(60.7) |
|
Net surplus/(deficit) |
|
89.8 |
(5.2) |
(38.1) |
(7.7) |
38.8 |
|
|
|
|
|
|
|
2019 |
|
|
|
Kier Group Pension Scheme |
May Gurney Pension Scheme £m |
Mouchel Pension Schemes1, 2 £m |
McNicholas Pension Scheme |
Total £m |
|
Opening surplus/(deficit) |
|
25.2 |
(1.1) |
(8.8) |
(7.4) |
7.9 |
|
Credit/(charge) to income statement3, 4 |
|
11.7 |
(0.5) |
(0.6) |
(0.3) |
10.3 |
|
Employer contributions |
|
12.2 |
1.8 |
9.0 |
1.2 |
24.2 |
|
Actuarial (losses)/gains |
|
(9.7) |
1.2 |
(14.2) |
(0.2) |
(22.9) |
|
Closing surplus/(deficit) |
|
39.4 |
1.4 |
(14.6) |
(6.7) |
19.5 |
|
Comprising: |
|
|
|
|
|
|
|
Total market value of assets |
|
1,189.8 |
81.0 |
492.6 |
26.0 |
1,789.4 |
|
Present value of liabilities |
|
(1,150.4) |
(79.6) |
(507.2) |
(32.7) |
(1,769.9) |
|
Net surplus/(deficit) |
|
39.4 |
1.4 |
(14.6) |
(6.7) |
19.5 |
|
Related deferred tax (liability)/asset |
|
(6.7) |
(0.2) |
2.5 |
1.1 |
(3.3) |
|
Net pension asset/(liability) |
|
32.7 |
1.2 |
(12.1) |
(5.6) |
16.2 |
|
Presentation of net surplus/(deficit) above in the Consolidated balance sheet: |
|
|
|
|
|
|
|
Retirement benefit assets |
|
39.4 |
1.4 |
17.6 |
- |
58.4 |
|
Retirement benefit obligations |
|
- |
- |
(32.2) |
(6.7) |
(38.9) |
|
Net surplus/(deficit) |
|
39.4 |
1.4 |
(14.6) |
(6.7) |
19.5 |
1 This comprises of schemes in a net surplus and net deficit position: £9.7m surplus and £47.8m deficit (2019: £17.6m surplus and £32.2m deficit).
2 The Mouchel figures comprise four individual schemes (Mouchel Superannuation Fund, Mouchel Staff Pension Scheme, Mouchel Business Services Limited Pension Scheme (Final Salary Section) and EM Highways Prudential Platinum Scheme) which have been grouped together because they were purchased as part of the Mouchel Group. The composition of these schemes has not changed since the prior year.
3 On 26 October 2018, the High Court ruled in the Lloyds Banking Group case that pension schemes must equalise Guaranteed Minimum Pensions (GMP) between male and female members. Amounts charged to the income statement for the year to 30 June 2019 include an adjusting item of £6.1m for GMP charges.
4 In 2019, the Group launched a member options exercise, offering a Pension Increase Exchange (PIE) to members of the Kier Group Pension Scheme and the Mouchel Business Services Limited Pension Scheme. The initiative was carried out with support from the Trustees of the pension schemes, in order to provide more flexibility and choice for members, reduce risk, and reduce cost in the Group's defined benefit pension schemes. A gain of £16.1m was recognised as an adjusting item in the year to 30 June 2019.
6 Finance costs
|
|
2020 £m |
2019 |
|
Bank interest |
(24.9) |
(24.7) |
|
Interest and finance charges for lease liabilities (2019: Finance leases) |
(7.2) |
(0.2) |
|
Recycling of translation reserve |
(3.3) |
- |
|
Discount unwind |
(1.7) |
(1.9) |
|
Pension credit |
0.7 |
0.6 |
|
Total |
(36.4) |
(26.2) |
7 Taxation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 £m |
20191 £m |
|
Loss before tax |
(225.3) |
(229.5) |
|
Add: tax on joint ventures included above |
(1.4) |
- |
|
Adjusted loss before tax |
(226.7) |
(229.5) |
|
Current tax |
(0.8) |
(5.3) |
|
Deferred tax |
54.2 |
43.4 |
|
Overseas tax |
- |
(2.4) |
|
Total income tax credit in the income statement |
53.4 |
35.7 |
|
Tax on joint ventures |
1.4 |
- |
|
Effective tax credit |
54.8 |
35.7 |
1 Comparative information has been re-presented to classify the Living division as a discontinued operation, which is held for sale at 30 June 2020, see note 10.
The taxation credit has been calculated at 24.2% (2019: 15.6%) of adjusted loss before tax, being profits adjusted for the Group's share in equity accounted joint ventures and excluding adjusting items.
8 Dividends
|
Amounts recognised as distributions to equity holders in the year:
|
|
|
|
|
2020 £m |
2019 |
|
Final dividend for the year ended 30 June 2019 of nil (2018: 46.0 pence) |
- |
44.7 |
|
Interim dividend for the year ended 30 June 2020 of nil (2019: 4.9 pence) |
- |
7.9 |
|
|
- |
52.6 |
The Group's focus on cash generation and reducing net debt has required a suspension in dividend payments for the second half of FY19 and the whole of FY20.
9 Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of profit and earnings per share, as reported in the income statement, to profit and earnings per share before adjusting items is set out below. The disclosure is made to illustrate the impact of adjusting items .
|
|
|
|
2020 |
|
|
2019 Restated 2 |
|
|
|
Basic £m |
Diluted £m |
|
Basic £m |
Diluted £m |
|
(Loss)/earnings |
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
|
|
|
Loss (after tax and non-controlling interests), being net losses attributable to equity holders of the parent |
|
(171.9) |
(171.9) |
|
(194.2) |
(194.2) |
|
Impact of adjusting items 1 net of tax: |
|
|
|
|
|
|
|
Amortisation of intangible assets - net of tax credit of £4.5m (2019: £4.2m) |
|
19.2 |
19.2 |
|
20.5 |
20.5 |
|
Acquisition discount unwind - net of tax credit of £0.3m (2019: £0.3m) |
|
1.2 |
1.2 |
|
1.4 |
1.4 |
|
Other adjusting items 1 - net of tax credit of £35.8m (2019: £51.4m) |
|
176.2 |
176.2 |
|
213.1 |
213.1 |
|
Earnings from continuing operations before adjusting items 1 |
|
24.7 |
24.7 |
|
40.8 |
40.8 |
|
Discontinued operations |
|
|
|
|
|
|
|
(Losses)/earnings (after tax and non-controlling interests), being net profits attributable to equity holders of the parent |
|
(12.8) |
(12.8) |
|
36.2 |
36.2 |
|
Adjusting items from discontinued operations |
|
(88.6) |
(88.6) |
|
(51.6) |
(51.6) |
|
Loss from discontinued operations |
|
(101.4) |
(101.4) |
|
(15.4) |
(15.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
million |
million |
|
million |
million |
|
Weighted average number of shares used for earnings per share |
|
161.8 |
161.8 |
|
132.2 |
132.2 |
|
|
|
|
|
|
|
|
|
|
|
Basic |
Basic |
|
Basic |
Basic |
|
(Loss)/earnings per share |
|
pence |
pence |
|
pence |
pence |
|
Continuing operations |
|
|
|
|
|
|
|
Loss (after tax and non-controlling interests), being net losses attributable to equity holders of the parent |
|
(106.2)
|
(106.2)
|
|
(146.9) |
(146.9) |
|
Impact of adjusting items 1 net of tax: |
|
|
|
|
|
|
|
Amortisation of intangible assets - net of tax credit |
|
11.9 |
11.9 |
|
15.5 |
15.5 |
|
Acquisition discount unwind - net of tax credit |
|
0.7 |
0.7 |
|
1.1 |
1.1 |
|
Other adjusting items - net of tax credit |
|
108.9 |
108.9 |
|
161.2 |
161.2 |
|
Earnings from continuing operations before adjusting items |
|
15.3 |
15.3 |
|
30.9 |
30.9 |
|
Discontinued operations |
|
|
|
|
|
|
|
(Losses)/earnings (after tax and non-controlling interests), being net profits attributable to equity holders of the parent |
|
(7.9) |
(7.9) |
|
27.4 |
27.4 |
|
Adjusting items from discontinued operations |
|
(54.8) |
(54.8) |
|
(39.0) |
(39.0) |
|
Loss from discontinued operations |
|
(62.7) |
(62.7) |
|
(11.6) |
(11.6) |
|
Total earnings/(losses) per share |
|
|
|
|
|
|
|
Statutory |
|
(168.9) |
(168.9) |
|
(158.5) |
(158.5) |
|
Before adjusting items 1 |
|
7.4 |
7.4 |
|
58.3 |
58.3 |
1 See note 3 for reference to adjusting items.
2 Re-presented to show the Living Division, which is held for sale at 30 June 2020, as a discontinued operation, see note 10.
10 Assets and liabilities held for sale and discontinued operations
a) Assets held for sale
In June 2019, the Group announced the results of its strategic review and concluded that the Group needed to simplify its structure, better allocate its capital resources and reduce net debt. It was concluded that Kier Living is not compatible with the Group's working capital objective and accordingly, the Directors decided to dispose of the division. During FY20, a formal sales process commenced, and the assets and liabilities were classified as held for sale. The assets have been impaired to fair value less cost to sell of £110.0m. The sale process was delayed due to COVID-19 but is now progressing well and expected to complete within the next 6-12 months.
In December 2018, the Group began a formal sales process to dispose of its interest in Pure Recycling Warwick Limited ('Pure'). The sales process has been delayed but is expected to complete within the next 12 months. The assets were impaired to fair value less cost to sell of £5.0m.
The Group's investment in its joint venture interest in Kier Hammersmith Limited ('KHL') of £8.4m was classified as held for sale at 30 June 2019. The disposal was completed on 26 September 2019.
|
Assets of disposal group classified as held for sale |
2020 £m |
2019 |
|
Investments in and loans to joint ventures |
52.2 |
8.4 |
|
Inventories |
114.7 |
- |
|
Trade and other receivables |
22.2 |
0.1 |
|
Other assets |
7.6 |
6.1 |
|
Total |
196.7 |
14.6 |
|
Liabilities of disposal group classified as held for sale |
2020 £m |
2019 |
|
Trade and other payables |
(59.9) |
(1.5) |
|
Other liabilities |
(21.8) |
- |
|
Total |
(81.7) |
(1.5) |
b) Discontinued operations
Results for Kier Living for the year are classified as discontinued. Prior year results of Kier Living are also restated.
|
Results of discontinued operations |
2020 £m |
2019 |
|
Revenue |
79.9 |
170.6 |
|
Share of post-tax results of joint ventures |
10.0 |
20.6 |
|
Operating costs |
(95.3) |
(152.8) |
|
Operating (loss)/profit |
(5.4) |
38.4 |
|
Finance cost |
(7.3) |
(2.2) |
|
(Loss)/profit before tax and adjusting items |
(12.7) |
36.2 |
|
Tax |
(0.1) |
- |
|
(Loss)/profit for the year |
(12.8) |
36.2 |
|
Adjusting items net of tax1 |
(88.6) |
(51.6) |
|
Loss for the year from discontinued operations after tax |
(101.4) |
(15.4) |
1 See note 3.
11 Cash, cash equivalents, overdraft and borrowings
|
|
|
|
|
|
2020 £m |
2019 |
|
Net debt consists of: |
|
|
|
Cash and cash equivalents - bank balances and cash in hand |
413.9 |
311.7 |
|
Borrowings due within one year |
(61.6) |
(30.3) |
|
Borrowings due after one year |
(689.8) |
(473.6) |
|
Impact of cross-currency hedging |
27.2 |
25.0 |
|
Net debt |
(310.3) |
(167.2) |
Average month-end net debt was £436m (2019: £422m). Net debt excludes lease liabilities (2019: finance lease obligations).
12 Trade and other payables
|
|
|
|
|
|
2020 £m |
2019 |
|
Trade payables1 |
255.8 |
545.9 |
|
Accruals |
477.1 |
540.0 |
|
Sub-contract retentions |
35.0 |
45.0 |
|
Other taxation and social security2 |
131.4 |
74.6 |
|
Other payables |
58.2 |
105.5 |
|
|
957.5 |
1,311.0 |
1 Included within the trade and other payables balance is £125.5m (2019: £170.2m) relating to payments due to suppliers who are on bank-supported supply chain finance arrangements.
2 As of 30 June 2020, there was total tax deferred of £79.8m. This comprises £25.1m of VAT deferred in accordance with HMRC guidance and payable 31 March 2021. The balance of £54.7m is subject to a Time To Pay agreement with HMRC with the amount being cleared by the end of the 2021 financial year.
13 Share-based payments
The Group has established a long-term incentive plan ("LTIP") under which directors and senior employees can receive awards of shares subject to the Group achieving targets. Further details of the LTIP schemes were disclosed in the 2019 annual financial statements. No shares have vested under the LTIP schemes during the year (2019: 269,461 shares vested).
The Group has also established a SAYE Sharesave scheme. Options to acquire shares in the capital of Kier Group plc are granted to eligible employees who enter into a Sharesave contract, saving a regular sum each month. Participation in the scheme is offered to all employees of the Group who have been employed for a continuous period determined by the Board.
During the year, grants were made under the LTIP and Sharesave schemes as follows:
|
|
LTIP |
LTIP subject to a holding period |
LTIP |
Sharesave |
|
Grant date |
28 October 2019 |
28 October 2019 |
16 March 2020 |
13 November 2019 |
|
Shares granted |
10,959,826 |
2,265,801 |
515,465 |
7,199,823 |
|
Share price at grant |
£1.16 |
£1.16 |
£0.80 |
£0.87 |
|
Exercise price |
nil |
nil |
nil |
£1.01 |
|
Option life |
3 years |
3 years |
3 years |
3 years |
|
Holding period |
n/a |
2 years |
n/a |
n/a |
|
Expected volatility |
74.68% |
85.53% |
74.68% |
68.50% |
|
Dividend yield |
n/a |
n/a |
n/a |
0.00% |
|
Risk-free interest rate |
0.49% |
0.51% |
0.49% |
0.49% |
|
Value per option: |
|
|
|
|
|
LTIP - TSR element 1 |
76p |
- |
52p |
- |
|
LTIP - EPS and Net Debt:EBITDA element 2 |
116p |
- |
80p |
- |
|
LTIP subject to a holding period - TSR element 3 |
- |
66p |
- |
- |
|
LTIP subject to a holding period - EPS and Net Debt:EBITDA element 3 |
- |
101p |
- |
- |
|
Sharesave 2 |
- |
- |
- |
37p |
1 Based upon a stochastic model.
2 Based upon the Black-Scholes model.
3 LTIP awards provided to the Board directors are subject to a 2 year post vesting holding period. The Finnerty model has been used to estimate a discount for the lack of marketability of these shares.
The fair value of the TSR element incorporates an assessment of the number of shares that will be awarded, as the performance conditions are market conditions under IFRS 2 'Share-based payments'.
The performance conditions of the EPS and Net Debt:EBITDA elements are non-market conditions under IFRS 2. The fair value therefore does not include an assessment of the number of shares that will be awarded. Instead the amount charged for these elements is based on the fair value factored by a 'true up' for the number of awards that are expected to vest. The Group's share-based payment charge for the year was £5.4m (2019: £7.2m).
1 4 Goodwill and intangible assets
|
|
Goodwill |
Intangible
|
Computer |
Total |
|
Cost |
|
|
|
|
|
At 1 July 2018 |
560.2 |
274.5 |
151.6 |
986.3 |
|
Additions |
- |
- |
19.8 |
19.8 |
|
Disposals |
(10.7) |
(15.1) |
(15.6) |
(41.4) |
|
Transfers to assets held for sale |
(4.8) |
- |
(0.8) |
(5.6) |
|
At 30 June 2019 |
544.7 |
259.4 |
155.0 |
959.1 |
|
Additions |
- |
- |
4.0 |
4.0 |
|
Disposals |
- |
- |
(20.1) |
(20.1) |
|
Transfers to property, plant and equipment |
- |
- |
(8.7) |
(8.7) |
|
Transfers to assets held for sale |
(5.9) |
- |
(4.8) |
(10.7) |
|
At 30 June 2020 |
538.8 |
259.4 |
125.4 |
923.6 |
|
|
|
|
|
|
|
Accumulated amortisation and impairment |
|
|
|
|
|
At 1 July 2018 |
- |
(92.8) |
(31.3) |
(124.1) |
|
Charge for the year |
- |
(25.0) |
(15.3) |
(40.3) |
|
Disposals |
- |
7.0 |
2.8 |
9.8 |
|
Impairment1 |
(8.0) |
(0.2) |
(29.6) |
(37.8) |
|
At 30 June 2019 |
(8.0) |
(111.0) |
(73.4) |
(192.4) |
|
Charge for the year |
- |
(23.7) |
(11.0) |
(34.7) |
|
Disposals |
- |
- |
15.1 |
15.1 |
|
Transfers to assets held for sale |
5.9 |
- |
3.1 |
9.0 |
|
At 30 June 2020 |
(2.1) |
(134.7) |
(66.2) |
(203.0) |
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
At 30 June 2020 |
536.7 |
124.7 |
59.2 |
720.6 |
|
At 30 June 2019 |
536.7 |
148.4 |
81.6 |
766.7 |
1 As at 30 June 2019, following the Strategic Review, impairments were recognised of £8.0m to goodwill and £29.8m to other intangible assets.
Of the Group's £536.7m of goodwill, £516.3m relates to the Infrastructure Services cash generating unit ('CGU'). Following the annual impairment assessment for the year ended 30 June 2020, the recoverable amount of the Infrastructure Services CGU has been calculated as £32.6m above the carrying value of the CGU's assets, based on a value in use cash flow model. The model is discounted using a pre-tax rate that is derived from a weighted average cost of capital of 9.7% (2019: 10.1%). As at 30 June 2020, this CGU remains sensitive to a reasonably possible change in key assumptions, which would give rise to an impairment. The key assumptions in the value in use calculations are the forecast revenues and operating margins, the discount rates applied to future cash flows and the terminal growth rate assumptions applied.
15 Related parties
The Group has related party relationships with its joint ventures, key management personnel and pension schemes in which its employees participate.
There have been no significant changes in the nature of related party transactions since the last annual financial statements as at, and for the year ended, 30 June 2019.
Details of contributions made to the pension schemes by the Group are detailed in note 5.
16 Guarantees, contingent liabilities and contingent assets
The Company has given guarantees and entered into counter-indemnities in respect of bonds relating to certain of the Group's own contracts. The Company has also given guarantees in respect of certain contractual obligations of its subsidiaries and joint ventures, which were entered into in the normal course of business, as well as certain of the Group's other obligations (for example, in respect of the Group's finance facilities and its pension schemes). Financial guarantees over the obligations of the Company's subsidiaries and joint ventures are measured at fair value. The fair value measurement is based on the premium received from the joint venture or the differential in the interest rate of the borrowing including and excluding the guarantee. Performance guarantees are treated as a contingent liability until such time as it becomes probable that payment will be required under its terms.
Provisions are made for the Directors' best estimate of known legal claims, investigations and legal actions relating to the Group which are considered more likely than not to result in an outflow of economic benefit. If the Directors consider that a claim, investigation or action relating to the Group is unlikely to succeed, no provision is made. If the Directors cannot make a reliable estimate of a potential, material obligation, no provision is made but details of the claim are disclosed.
17 Changes in accounting policies
IFRS 16 'Leases'
The Group has adopted IFRS 16 'Leases' with effect from 1 July 2019 using the modified retrospective (cumulative catch-up) method, and as such comparative information has not been restated. The reclassifications and the adjustments arising from the new lease accounting rules are therefore recognised in the opening balance sheet on 1 July 2019.
The main impact of IFRS 16 has been to move the Group's larger, longer-term operating leases, primarily in respect of property, onto the balance sheet, with a consequential increase in non-current assets and lease obligations. The associated operating lease charges previously included in administrative expenses have been replaced by depreciation and interest costs.
The Group's financing covenants are linked to the accounting standards in force at the time the facilities were agreed (frozen GAAP).
Measurement of lease liabilities and right-of-use assets
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as at 1 July 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 3.86%.
The right-of-use assets associated with the vehicle, plant and the larger property leases were measured on a retrospective basis as if
the new rules had always been applied. Other right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 30 June 2019.
For leases previously classified as finance leases the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The measurement principles of IFRS 16 are only applied after that date. This did not result in any measurement adjustments immediately after the date of initial application.
Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
· Application of a single discount rate to a portfolio of leases with reasonably similar characteristics;
· Reliance on previous assessments on whether leases are onerous as an alternative to performing an impairment review. The Group has adjusted the carrying amount of the right-of-use asset at the date of initial application by the previous carrying amount of its onerous lease provisions at 30 June 2019 up to a maximum of the associated right-of-use asset value;
· Exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
· Hindsight has been used in determining the lease term where the contract contains options to extend or terminate the lease.
As a further practical expedient, the standard permits accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases. This practical expedient can be applied on a lease by lease basis. The Group has chosen to apply this practical expedient to its sundry plant and equipment leases but not its property or vehicle fleet lease portfolios (which form the bulk of its leases). The Group believes this approach will help comparability in the financial periods immediately following adoption of IFRS 16.
The Group has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4 'Determining whether an Arrangement contains a Lease'.
Lease liabilities reconciliation
|
|
Property |
Plant and machinery |
Total |
|
Future minimum lease payments under operating leases at 30 June 2019 1 |
167.5 |
52.1 |
219.6 |
|
Restatement 2 |
25.1 |
12.6 |
37.7 |
|
Future minimum lease payments under operating leases at 30 June 2019 (restated) |
192.6 |
64.7 |
257.3 |
|
Impact of discounting 3 |
(47.1) |
(3.9) |
(51.0) |
|
Non-lease components not recognised in the lease liability |
- |
(6.1) |
(6.1) |
|
Short-term leases |
- |
(1.0) |
(1.0) |
|
Low-value items |
- |
(1.5) |
(1.5) |
|
Adjustments as a result of a different treatment of extension and termination options |
(4.0) |
- |
(4.0) |
|
Additional lease liability at 1 July 2019 |
141.5 |
52.2 |
193.7 |
|
Finance lease liability at 30 June 2019 4 |
- |
3.1 |
3.1 |
|
Total lease liability at 1 July 2019 |
141.5 |
55.3 |
196.8 |
1 As disclosed in note 29 to the Group's Annual Report and Accounts for the year ended 30 June 2019. Amounts relate to non-cancellable leases and are undiscounted.
2 A detailed review of leases was undertaken as part of the adoption of IFRS 16 and as a result the future minimum lease payments under operating leases has been restated to reflect leases not previously identified and future rental increases that were excluded from the 2019 Annual Report.
3 Using the incremental borrowing rate at the date of initial application (1 July 2019).
4 As disclosed in note 22 to the Group's Annual Report and Accounts for the year ended 30 June 2019.
Adjustments recognised in the balance sheet on 1 July 2019
The change in accounting policy affected the following items in the balance sheet on 1 July 2019:
· Property, plant and equipment - decrease by £4.9m;
· Right-of-use assets - increase by £176.3m;
· Deferred tax assets - increase by £3.4m;
· Prepayments - decrease by £2.3m;
· Provisions - decrease by £4.4m;
· Lease liabilities - increase by £193.7m; and
· Accruals - decrease by £0.2m.
The net impact on retained earnings on 1 July 2019 was a decrease of £16.6m.
Impact of IFRS 16 on the income statement for the year ended 30 June 2020
|
|
|
|
Amounts without adoption of IFRS 16 |
|
Impact of adopting IFRS 16 |
|
As reported |
||||||
|
Continuing operations |
|
|
Before adjusting items |
Adjusting items (note 3) £m |
Total |
|
Before adjusting items |
Adjusting items (note 3) £m |
Total |
|
Before adjusting items |
Adjusting items (note 3) £m |
Total |
|
Profit/(loss) from operations |
|
|
32.1 |
(238.1) |
(206.0) |
|
9.3 |
1.1 |
10.4 |
|
41.4 |
(237.0) |
(195.6) |
|
Net finance costs |
|
|
(17.4) |
(5.2) |
(22.6) |
|
(7.1) |
- |
(7.1) |
|
(24.5) |
(5.2) |
(29.7) |
|
Profit/(loss) before taxation |
|
|
14.7 |
(243.3) |
(228.6) |
|
2.2 |
1.1 |
3.3 |
|
16.9 |
(242.2) |
(225.3) |
Depreciation and interest charges under IFRS 16 were £2.2m less than the operating lease expenses that would have been charged under the previous leases accounting standard. Due to the differing methods of calculation, the impairment of the right-of-use assets under IFRS 16 were £1.1m less than the onerous lease provision that would have been calculated under the previous accounting standards.
Lessor accounting
The Group did not need to make any adjustments to the accounting for assets held as lessor under operating leases as a result of the adoption of IFRS 16.
Accounting policy adopted
The Group has applied the following accounting policy in respect of leases from 1 July 2019.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
· Fixed payments (including in-substance fixed payments), less any lease incentives receivable;
· Variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date;
· Amounts expected to be payable by the Group under residual value guarantees;
· The exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
· Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee's incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
Most Group companies do not have any recent independent third-party financing to use as a starting point for the incremental borrowing rate. Therefore, the Group uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk, lease term, country, currency and security.
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following:
· The amount of the initial measurement of lease liability;
· Any lease payments made at or before the commencement date less any lease incentives received;
· Any initial direct costs; and
· Any restoration costs.
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset's useful life.
The Group has elected to use the following recognition exemptions, as permitted by the standard:
· Leases of low-value items - The Group has defined low value items as assets that have a value when new of less than c£5,000. Low value items comprise IT equipment and small items of plant.
· Short-term leases - Leases with a lease term of less than 12 months at inception.
For leases in the above categories, a lease liability or right-of-use asset is not recognised. Instead, the Group recognises the related lease payments as an expense on a straight-line basis over the lease term.
Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices.
Judgements and estimates
The lease liabilities that were brought onto the balance sheet on transition to IFRS 16 have been measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rates as at 1 July 2019. Some judgement has been required in determining the Group's incremental borrowing rates due to a lack of observable rates from recent independent third-party financing at the transition date. Had the discount rates used at 1 July 2019 been determined to be 0.5% higher than the rates used, it would have resulted in a reduction in lease liabilities of £5.5m at the transition date; whilst a 0.5% decrease in the discount rates used at transition would have resulted in an increase of £6.5m. However, in each case, the impact on reserves at the transition date would have been mitigated to a large extent by corresponding adjustments to the values of the associated right-of-use assets.
Another factor which affects the level of lease liabilities on the balance sheet is the lease term. IFRS 16 defines the lease term as the non-cancellable period of a lease, together with; periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. Therefore, judgement is sometimes required in determining whether the Group is reasonably certain to extend a lease in the future. With regard to the Group's 14 largest property leases (which account for 64% of the total lease liabilities and 88% of the property lease liabilities at the transition date) only 3 contain break or extension options. A change in assumptions to base the liability on the minimum and maximum possible periods for these leases would have resulted in a £1.7m reduction or £0.6m increase to the lease liability, respectively.
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