TIDMKIE
RNS Number : 2892Z
Kier Group PLC
17 September 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 GBP3.5 billion
(FY19: GBP4.1 billion)
o Operating profit:
-- Operating profit before adjusting items is GBP41m (FY19:
GBP86m), after direct COVID-19 costs of GBP45m
-- Reported loss GBP(196)m (FY19: GBP(204)m)
o Free cash flow of GBP66m (FY19: GBP(89)m)
o Net debt at 30 June 2020 of GBP310m (FY19: GBP167m), average
month-end net debt of GBP436m (FY19: GBP422m)
-- Includes reduction of GBP45m in supply-chain financing
-- Significant progress on operational and financial turnaround strategy
o Annualised run rate cost savings of at least GBP100m by 30 June 2021
o Performance Excellence programme progressing well
-- Strong order book
o Stable order book of GBP7.9 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
Key Financial Highlights - Continuing Operations
Year to
Year to 30 June 2019
30 June 2020 (2)
Adjusted results
Revenue (GBPm) (3) 3,476 4,091
Operating profit (GBPm) (1) 41.4 85.7
Operating margin 1.2% 2.1%
Profit before tax (GBPm) (1) 16.9 61.4
Basic earnings per share (note
9) 15.3p 30.9p
Net debt (GBPm) (4) 310.3 167.2
Average month-end net debt (GBPm) 436 422
Reported
Group revenue (GBPm) 3,423 3,951
(Loss) from operations (GBPm) (195.6) (203.5)
(Loss) before tax (GBPm) (225.3) (229.5)
Basic earnings per share (note
9) (106.2)p (146.9)p
Dividend per share - 4.9p
(1) Stated before adjusting items of GBP213.3m (2019: GBP264.4m)
and amortisation of acquired intangible assets of GBP23.7m (2019:
GBP24.8m).
(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
GBP41m. 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. "
Further Information:
Kier Group plc +44 (0) 1767 355 096
Kier Press office
FTI Consulting +44 (0) 20 3727 1340
Richard Mountain / Nick Hasell
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 GBP3,476m, 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
GBP7.9bn.
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 GBP9m
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 GBP156m in the year, which the Group has classified as an
adjusting item.
Group net debt at 30 June 2020 was GBP310m. 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 GBP45m; 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 GBP436m, an increase of
GBP14m 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
GBP100m 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 GBP38bn, 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 GBP7.9bn (30 June
2019: GBP7.9bn), 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 GBP170m
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
Year ended Year ended
30 June 2020 30 June 2019
Revenue (GBPm) 1,588 1,849
Adjusted operating profit (GBPm)(1) 36.1 67.2
Adjusted operating margin 2.3% 3.6%
Reported operating (loss) / profit
(GBPm) (58.9) 23.1
Order book (GBPbn) 2.3 2.6
-- Awarded places on 16 frameworks worth up to GBP38bn lasting typically four years
-- Projects won in key markets -13 school projects worth GBP170m
-- 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 GBP1.5bn YORBuild
Major Works Framework and seven lots of the GBP2bn Hyde Main
Contractor Framework. We are well placed to benefit from the GBP5bn
"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
GBP95.0m being incurred within adjusting items.
Our Strategic Projects business continued to work on the RAF
Lakenheath project and on the GBP250m 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 GBP2bn Green Homes Grant and GBP1bn 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
Year ended Year ended
30 June 2020 30 June 2019
Revenue (GBPm) 1,506 1,669
Adjusted operating profit (GBPm)
1 31.3 53.3
Adjusted operating margin 2.1% 3.2%
Reported operating profit / (loss)
(GBPm) 9.4 (3.3)
Order book (GBPbn) 4.6 4.3
1 Stated before adjusting items
-- Key contract awards include GBP160m 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 GBP21.9m predominantly relate to
restructuring charges incurred in the year; the prior year reported
losses include costs related to acquisitions in previous years.
Other
Year ended
Year ended 30 June 2019
30 June 2020 2
Revenue (GBPm) 370 585
Adjusted operating profit (GBPm)
1 5.1 12.3
Adjusted operating margin 1.4% 2.1%
Reported operating (loss) (GBPm) (14.3) (66.3)
Order book (GBPbn) 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 GBP19.4m 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 Year ended
30 June 2020 30 June 2019
Adjusted operating loss (GBPm)1 (31.1) (47.1)
Reported operating loss (GBPm) (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 GBP100.7m 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 GBP12.8m (FY19: GBP36.2m 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
GBP100m 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 GBP395m, a reduction of
GBP27m 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 GBP7.9bn, which is flat against the
prior year.
Summary of financial performance
Adjusted (1) results Reported results - continuing
- continuing operations operations
----------------------------------
Adjusted Reported
Adjusted (3) Reported (3)
30 June 30 June 30 June 30 June
20 19 % change 20 19 % change
--------- --------- --------- ---------- ---------- ----------
Revenue (GBP m ) -
Total 3 ,475.6 4,106.0 (15.4) 3 ,475.6 4,106.0 (15.4)
Revenue (GBP m ) -
Excluding JV's 3 ,422.5 3,951.1 (13.4) 3 ,422.5 3,951.1 (13.4)
Profit/(loss) from
operations (GBPm) ( 3.9
(2) 41.4 85.7 (51.7) (195.6) (203.5) )
Profit/(loss) before
tax (GBPm) 16.9 61.4 (72.5) (225.3) (229.5) (1.8)
Earnings / (loss) ( 27.7
per share (p) 15.3 30.9 (50.5) (106.2) (146.9) )
Net Debt (GBPm) -
at 30 Jun 20 (310.3) (167.2)
Net Debt (GBPm) -
average month end (436.0) (422.0)
Orderbook (GBPbn) 7. 9 7.9
---------------------- --------- --------- --------- ---------- ---------- ----------
(1) Reference to 'Adjusted' excludes adjusting items, see page
12.
(2) Adjusted profit from operations of GBP41.4m, includes the
impact of direct COVID-19 related costs of GBP35.3m and additional
Holiday Pay accrual of GBP10m.
(3) Comparative information has been re-presented to classify
the Living division as a discontinued operation, see note 10.
Revenue from continuing operations
2020
GBPm
----------------------------------------- --------
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
GBPm
----------------------------------------------------------- -------
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.GBP65m including GBP10m benefit from
exiting loss-making contracts. The anticipated full year run-rate
savings generated from these initiatives are expected to be at
least GBP100m 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 GBP20m 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 GBP191.9m and
liabilities of GBP81.9m 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 GBP51.6m has been recorded in the year. In
addition, restructuring charges and exit costs totalling GBP37.0m
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 GBP12.8m (FY19: GBP36.2m 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 2019 2020 2019
GBPm GBPm GBPm GBPm
--------------------------------------------- --------- -------- -------- --------
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 GBP23.7m (FY19: GBP24.8m):
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 GBP5.0m (FY19: GBP29.3m):
The Group has recognised a GBP5.0m 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
GBP5.0m.
-- Restructuring and related charges GBP156.1m (FY19: GBP56.1m):
The Group has incurred restructuring costs in the period
totalling GBP156.1m. This includes GBP29.5m in respect of employee
exit costs associated with cost saving programmes and from
strategic decisions taken to reduce headcount. Costs of GBP61.5m
have been incurred following the decision to restructure the
Southern Build UK business, including a GBP28.3m charge relating to
the recoverability of assets following implementation of the new
strategy and the challenging COVID-impacted market conditions. Fees
of GBP31.7m have been incurred in undertaking and implementing the
conclusions of the strategic review announced in June 2019 and the
cost reductions described above. GBP22.2m of property related
impairment charges have been recognised during the period and
GBP2.4m of previous impairment charges have been released in
relation to the relocation and closure of corporate offices.
GBP11.1m of one-off costs have been incurred in preparation for
outsourcing Fleet and IT activities.
Of this total restructuring costs of GBP156.1m, GBP22.9m relates
to impairments of non-current assets, GBP38.4m is held within
accruals and provisions, GBP5.0m is a reduction of receivables,
GBP31.3m a reduction in inventories and the remainder resulted in a
cash outflow in the period.
-- Costs relating to the preparation of businesses for sale GBP33.6m (FY19: GBP120.4m):
Fair value adjustments of GBP14.8m have been made to properties
in the Retail and Student sectors following the strategic decision
to exit these markets. Costs of GBP3.8m 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 GBP7.8m 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, GBP11.5m has resulted in a cash outflow in the
period, GBP13.4m relates to inventory write downs, GBP4.8m relates
to the impairment of non-current assets with the remaining GBP4.0m
being held within accruals.
-- Other costs GBP18.6m (FY19: GBP8.7m)
Other costs include GBP7.6m 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 GBP18.6m, GBP6.7m has been written off against
debtors, GBP9.7m is held in accruals and provisions and the
remainder is cash.
In addition to the GBP237.0m of adjusted charges incurred from
continuing operations, GBP88.6m 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 GBP51.6m with the remainder relating to the exit of various
regions.
Finance charges
Bank interest has remained stable at GBP24.9m (FY19: GBP24.7m).
Finance costs now includes GBP7.2m 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: GBP0.2m).
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 GBP240.8m at 30 June 2020 (FY19:
GBP519.6m).
Goodwill
The Group held intangible assets of GBP720.6m (FY19: GBP766.7m),
of which goodwill represented GBP536.7m (FY19: GBP536.7m). 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 GBP516.3m 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 GBP111.0m recognised
at 30 June 2020 (FY19: GBP47.7m). 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 GBP44.7m reduction in the
utilisation of the Kier Early Payment Scheme ("KEPS") of which
GBP25m 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
GBPm
------------------------------ ------
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 GBP78.8m. This
comprises GBP25.1m of VAT deferred in accordance with HMRC guidance
and payable 31 March 2021. The balance of GBP54.7m 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 GBP249.7m, down from GBP466.0m 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 GBP38.8m (FY19: GBP19.5m 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 GBP26m will become payable by 5
December 2020, and deficit repayments of GBP9m 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 GBP193.7m have been brought onto
the balance sheet along with associated right-of-use assets of
GBP176.3m (including GBP4.9m of assets previously classified as
property, plant and equipment held under finance leases). In
addition, prepaid rental amounts of GBP2.3m, accruals of GBP0.2m
and onerous lease provisions of GBP4.4m have been removed from the
balance sheet and a deferred tax asset of GBP3.4m 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
GBP16.6m.
In respect of the income statement for the year ended 30 June
2020, depreciation and interest charges under IFRS 16 were GBP2.2m
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 GBP1.1m 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 GBP3.3m 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 GBP891.9m with a
further GBP20m 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 GBP30m 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 GBP125.5m (FY19: GBP170.2m).
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 GBP100m 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 GBP892m of unsecured committed
facilities, GBP20m of uncommitted overdrafts and GBP125m 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
Financial Statements
for the year
ended 30 June
2020
For the year ended 30 June 20 20
2020 2019(2)
Continuing operations Notes GBPm GBPm
------------------------------------------------------------- ----- --------- ---------
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
Adjusted(1) operating profit 3 41.4 85.7
Adjusted(1) profit 3 16.9 61.4
Adjusted(1) earnings per share 9 15.3p 30.9p
Adjusted(1) 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
Financial Statements
for the year
ended 30 June
2020
For the year ended 30 June 20 20
2020 2019(1)
Notes GBPm GBPm
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
Financial Statements
for the year
ended 30 June
2020
For the year ended 30 June 20 20
Equity
Cash attributable
Capital flow to owners
Share Share redemption Accumulated hedge Translation Merger of Non-controlling Total
capital premium reserve losses reserve reserve reserve the parent interests equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------ ------- ------- ---------- ----------- ------- ----------- -------- ------------ --------------- -------
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
GBP249.9m, net of expenses of GBP13.7m, that were charged against
the share premium account.
Consolidated balance sheet Kier Group plc
Financial Statements
for the year
ended 30 June
2020
A t 30 June 2020
2020 2019
Notes GBPm GBPm
------------------------------------------------- ----- --------- ---------
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
Financial Statements
for the year
ended 30 June
2020
For the year ended 30 June 20 20
2020 2019(1,2)
Notes GBPm GBPm
--------------------------------------------------------- ------- ------- ---------
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) GBP31.3m 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
Financial Statements
for the year
ended 30 June
2020
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 GBP100m 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 GBP892m of unsecured committed
facilities, GBP20m of uncommitted overdrafts and GBP125m 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:
GBPm
------------------------- ------
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
Infrastructure
For the year ended 30 June 2020 Services Construction Other Corporate Group
Continuing operations GBPm GBPm GBPm GBPm GBPm
----------------------------------------------- -------------- ------------ ------- --------- ---------
Revenue(1)
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
items(5) 31.3 36.1 5.1 (31.1) 41.4
Adjusting items(5) (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 costs(2) (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 assets (3) 895.7 415.4 273.4 267.4 1,851.9
Operating liabilities (3) (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
----------------------------------------------- -------------- ------------ ------- --------- ---------
Infrastructure
For the year ended 30 June 2019 (4) Services Construction Other Corporate Group
Continuing operations GBPm GBPm GBPm GBPm GBPm
----------------------------------------------- -------------- ------------ ------- --------- ---------
Revenue(1)
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
items(5) 53.3 67.2 12.3 (47.1) 85.7
Adjusting items(5) (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 costs(2) (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 assets (3) 1,033.5 507.7 614.7 135.5 2,291.4
Operating liabilities (3) (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)/ (Loss)/profit
profit before tax
------------------------------------------------ ------------------ ------------------
2020 2019(1) 2020 2019(1)
GBPm GBPm GBPm GBPm
------------------------------------------------ -------- -------- -------- --------
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 2019
GBPm GBPm
-------------------------------------------------------------- ------- -------
Amortisation of intangible assets and deferred consideration (23.7) (24.8)
-------------------------------------------------------------- ------- -------
b) Costs associated with previous acquisitions
2020 2019
GBPm GBPm
------------------------------------------------------------- ------ -------
McNicholas acquired contract provision and exit costs(1) - (21.5)
Integration costs relating to the McNicholas acquisition(2) (8.5) (11.8)
Release of deferred and contingent consideration(3) - 4.0
McNicholas acquired contract settlement(4) 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 2019
GBPm GBPm
----------------------------------------------------------------- -------- -------
Restructure of Regional Southern Build business(1) (61.5) -
Redundancy costs(2) (29.5) (38.4)
Professional advisor fees and other costs incurred implementing
non-people initiatives(3) (34.2) (13.3)
Lease impairments (June 2019: onerous lease)(4) (14.4) (4.4)
Costs in preparation for outsourcing arrangements(5) (11.1) -
Property impairment(6) (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 GBP16.8m, which are being exited as part of the
cost saving programme. Another corporate office lease that was
previously impaired by GBP3.8m (FY19: GBP4.4m onerous lease
provision) is to be utilized instead. The remaining lease
impairment on this office was released in HY20 (GBP3.5m) which was
offset by refurbishment costs of GBP1.1m.
(5) The Group has outsourced its Fleet and IT services during
the year, incurring GBP8.3m 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 GBP5.4m 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 2019
GBPm GBPm
------------------------------------------------------- ------- --------
Business closure and sales costs(1) (32.0) (23.1)
Impairment of goodwill and other assets(2) - (47.8)
Environmental Waste contract termination provision(3) - (26.8)
Impairment of ERP computer software(4) (4.7) (7.3)
Reversal of impairment of ERP computer software(4) 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 fees(5) - (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 GBP14.8m in Property, GBP1.6m in Facilities
Management and GBP2.1m in Kier Business Services during the period
in relation to closure activities (FY19: GBP2.9m) as well as
advisors' fees of GBP7.8m in relation to disposal activities to
date. A further GBP1.7m has been incurred in respect of impairing
mothballed land. FY19 costs included GBP14.8m for exiting
contracts, onerous contract charges of GBP3.6m, and an impairment
of software of GBP5.5m.
(2) A non-cash impairment of goodwill (GBP8.0m) and other assets
(GBP39.8m) 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 GBP27.3m 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 GBP4.7m (FY19: GBP7.3m) 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 (GBP1.9m),
gain on the disposal of the Group's pension administration business
(GBP2.5m) and loss on disposal of KHSA Limited (GBP1.4m).
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 2019
GBPm GBPm
----------------------- ------- -------
Broadmoor Hospital(1) - (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 2019
GBPm GBPm
------------------------------------------------------ ------- -------
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 GBP7.6m of costs in relation to legal
claims, including GBP4.2m 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 2019
GBPm GBPm
-------------------------------------------------- ------- -------
Fair value adjustment of Kier Living - note 10 (51.6) -
Closure costs relating to non-core businesses(1) (29.0) -
Rationalisation costs(2) (2.6) (0.3)
Inventory write downs(3) (5.4) -
Impairment of residential development sites(4) - (50.0)
Loss on disposal of assets(5) - (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 GBP60.0m, on a development value basis.
(5) Loss on disposal in FY19 of Living's shared equity portfolio
(GBP1.3m).
h) Adjusted cash flow
2020 2019
GBPm GBPm
---------------------------------------------------------- -------- --------
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
GBPm
----------------------- ------
Direct COVID-19 costs 35.3
Holiday pay accrual 10.0
----------------------- ------
Total 45.3
----------------------- ------
Direct COVID-19 costs are analysed as follows:
2020
GBPm
------------------------------------------------- ------
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 GBP4.6m.
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
GBP10m 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 GBP110.0m, resulting in an impairment of
GBP51.6m 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 GBP5.4m 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 GBP9.0m 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.
GBP25.1m of VAT has been deferred and is payable by 31 March
2021. A further GBP54.7m 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 May Mouchel
Group Gurney Pension McNicholas
Pension Pension Schemes(1, Pension
Scheme Scheme 2) Scheme Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- --------- -------- ----------- ---------- ---------
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 May Mouchel
Group Gurney Pension McNicholas
Pension Pension Schemes(1, Pension
Scheme Scheme 2) Scheme Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- --------- -------- ----------- ---------- ---------
Opening surplus/(deficit) 25.2 (1.1) (8.8) (7.4) 7.9
Credit/(charge) to income statement(3, 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: GBP9.7m surplus and GBP47.8m deficit (2019: GBP17.6m
surplus and GBP32.2m 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 GBP6.1m 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 GBP16.1m was
recognised as an adjusting item in the year to 30 June 2019.
6 Finance costs
2020 2019
GBPm GBPm
----------------------------------------------------------- ------- -------
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 2019(1)
GBPm GBPm
------------------------------------------------ ------- -------
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 2019
GBPm GBPm
-------------------------------------------------------- ----- -----
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 Diluted Basic Diluted
GBPm GBPm GBPm GBPm
------------------------------------------------- ------- ------- ------- ---------
(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 GBP4.5m (2019: GBP4.2m) 19.2 19.2 20.5 20.5
Acquisition discount unwind - net of tax credit
of GBP0.3m (2019: GBP0.3m) 1.2 1.2 1.4 1.4
Other adjusting items (1) - net of tax credit
of GBP35.8m (2019: GBP51.4m) 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 GBP110.0m. 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 GBP5.0m.
The Group's investment in its joint venture interest in Kier
Hammersmith Limited ('KHL') of GBP8.4m was classified as held for
sale at 30 June 2019. The disposal was completed on 26 September
2019.
2020 2019
Assets of disposal group classified as held for sale GBPm GBPm
----------------------------------------------------- ----- -----
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
----------------------------------------------------- ----- -----
2020 2019
Liabilities of disposal group classified as held for sale GBPm GBPm
---------------------------------------------------------- ------ -----
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.
2020 2019
Results of discontinued operations GBPm GBPm
--------------------------------------------------------- ------- -------
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 tax(1) (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 2019
GBPm GBPm
------------------------------------------------------ ------- -------
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 GBP436m (2019: GBP422m). Net debt
excludes lease liabilities (2019: finance lease obligations).
12 Trade and other payables
2020 2019
GBPm GBPm
-------------------------------------- ----- -------
Trade payables(1) 255.8 545.9
Accruals 477.1 540.0
Sub-contract retentions 35.0 45.0
Other taxation and social security(2) 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
GBP125.5m (2019: GBP170.2m) 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
GBP79.8m. This comprises GBP25.1m of VAT deferred in accordance
with HMRC guidance and payable 31 March 2021. The balance of
GBP54.7m 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
subject to
a holding
LTIP period LTIP Sharesave
28 October 28 October 16 March 13 November
Grant date 2019 2019 2020 2019
Shares granted 10,959,826 2,265,801 515,465 7,199,823
Share price at grant GBP1.16 GBP1.16 GBP0.80 GBP0.87
Exercise price nil nil nil GBP1.01
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 GBP5.4m (2019: GBP7.2m).
1 4 Goodwill and intangible assets
Intangible
contract Computer
Goodwill rights software Total
GBPm GBPm GBPm GBPm
-------------------------------------------- ----------- ------------- ----------- --------
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
Impairment(1) (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 GBP8.0m to goodwill and GBP29.8m to
other intangible assets.
Of the Group's GBP536.7m of goodwill, GBP516.3m 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 GBP32.6m 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
Plant
Property and machinery Total
GBPm GBPm GBPm
-------------------------------------------------- ----------- ---------------- --------
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 GBP4.9m;
-- Right-of-use assets - increase by GBP176.3m;
-- Deferred tax assets - increase by GBP3.4m;
-- Prepayments - decrease by GBP2.3m;
-- Provisions - decrease by GBP4.4m;
-- Lease liabilities - increase by GBP193.7m; and
-- Accruals - decrease by GBP0.2m.
The net impact on retained earnings on 1 July 2019 was a
decrease of GBP16.6m.
Impact of IFRS 16 on the income statement for the year ended 30
June 2020
Amounts without
adoption of IFRS Impact of adopting
16 IFRS 16 As reported
Adjusting Adjusting Adjusting
Before items Before items Before items
adjusting (note adjusting (note adjusting (note
Continuing items 3) Total items 3) Total items 3) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- --------- ------- ---------- --------- ----- ---------- --------- -------
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 GBP2.2m
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 GBP1.1m 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 cGBP5,000.
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 GBP5.5m at the transition date; whilst a 0.5%
decrease in the discount rates used at transition would have
resulted in an increase of GBP6.5m. 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
GBP1.7m reduction or GBP0.6m increase to the lease liability,
respectively.
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