We remain highly cash generative and with the recent renewal of our £1.1bn revolving credit facility we remain in a strong financial position to help drive future growth.
We have achieved our sixth consecutive year of underlying revenue and profit growth since the group was formed in 2004 and we have grown dividends by 292% over the same period.
Basis of accounting
The financial statements are presented in accordance with applicable law and International Financial Reporting Standards, as adopted by the European Union (“adopted IFRSs”). The group’s significant accounting policies are detailed in note 3 in the Notes to the consolidated financial statements in the Financial statements and those that are most critical and/or require the greatest level of judgement are discussed in note 4.
The overall results are commented upon by the chairman in his statement and operational trading is discussed in the operating review. Profit from operations before amortisation of acquisition-related intangible assets and acquisition-related expenses (PBITA) amounted to £527m, an increase of 5.4% on the £500m in 2009 and an increase of 4% at constant exchange rates.
Included within PBITA is £5m (2009: £1m) in respect of the group’s share of profit from associates, principally from the business of Space Gateway in the US which provides safety services to NASA and from MW-All Star, also in the US, which joined the group in 2009 as part of the acquisition of All Star International.
Acquisitions and acquisition-related intangible assets
Investment in acquisitions in the year amounted to £65m. This comprises a cash outlay of £42m and deferred consideration of £23m. This investment generated goodwill of £46m and other acquisition-related intangible assets of £14m. In addition, the group incurred acquisition costs of £4m which have been expensed.
The group undertook several acquisitions in the year, the most significant of which were the purchase of the controlling interest in SSE Do Brasil Ltda, the parent company of Instalarme Soluções Eletrônica Ltda (“Instalarme”), an electronic software and hardware integration company in Brazil, Plantech Engenharia e Sistemas Ltda (“Plantech”), a leading integrator in the Brazilian security systems market and the entire share capital of Skycom (Pty) Ltd (“Skycom”), a market leader in the South African security systems market.
In addition, the group increased its holding in an Argentine business.
The group undertook several acquisitions in the prior year, the most significant of which were Adesta LLC, a leading US systems integrator in the design and operation of security systems and command and control centres for government and regulated services, acquired on 31 December 2009 for $66m, and All Star International, one of the premier facilities management and base operations support companies providing services to the US Government, acquired on 23 November 2009 for $59.9m.
Other acquisitions in the prior year included the purchase of controlling interests in SecPoint Security Limited, a security solutions business in Ghana; Sunshine Youth Services, a juvenile justice business in the US; CL Systems Limited, a cash solutions business in Greater China; SecuraMonde, a cash solutions business in the UK; NSSC, a US risk consulting business in the nuclear power industry and the public sector; and Hill & Associates, Asia’s leading provider of specialist risk mitigation consulting services.
In addition, the group completed the buy-outs of non-controlling interests in certain businesses in New Markets during the prior year.
The contribution made by acquisitions to the results of the group during the year is shown in note 17
The charge for the year for the amortisation of acquisition-related intangible assets other than goodwill amounted to £88m. Goodwill is not amortised. Acquisition-related intangible assets included in the consolidated statement of financial position at 31 December 2010 amounted to £2,147m goodwill and £286m other.
Finance income was £98m and finance costs £203m, giving a net finance cost of £105m. Net interest payable on net debt was £96m. This is an increase of 8% over the 2009 cost of £89m due principally to the increase in the group’s average gross debt. The group’s average cost of gross borrowings in 2010 was 4.8% compared to 4.7% in 2009. The cost based on prevailing interest rates at 31 December 2010 was 4.2% compared to 4.5% at 31 December 2009. Also included within financing are other net interest costs of £3m (2009: £7m), and a net cost of £6m (2009: £19m) in respect of movements in the group’s net retirement benefit obligations.
The taxation charge of £102m provided upon profit from operations before amortisation of acquisition-related intangible assets and acquisition-related expenses, represents a tax rate of 24%, compared to 26% in 2009. The cash tax rate is 20% compared to 17% in 2009. The group’s target is to further reduce the effective tax rate in the short-term. This will be driven by the gradual reduction in UK corporation tax rates, the ongoing rationalisation of the group’s legal structure and the elimination of fiscal inefficiencies. The amortisation of acquisition-related intangible assets gives rise to the release of the related proportion of the deferred tax liability established when the assets were acquired, amounting to £25m.
Disposals and discontinued operations
The group disposed of its cash solutions business in Taiwan on 15 July 2010 and of Travel Logistics Limited, a UK expeditor of travel documents, on 24 September 2010.
During the prior year the group disposed of its manned security business in France on 28 February 2009. In addition, during the prior year the group disposed of a number of small businesses, including the captive insurance business in Luxembourg on 23 December 2009, as well as discontinuing the systems installation business in Slovakia.
The total consideration from business disposals in 2010 was £13m.
The loss from discontinued operations in 2010 of £9m relates to the post-tax trading of discontinued businesses and costs related to business disposals made in prior years.
The loss attributable to discontinued operations in 2009 comprised a profit of £6m in respect of post-tax trading of discontinued businesses and a loss of £13m in respect of the disposals made in the previous year.
Profit for the year
Profit for the year was £245m, compared to £219m in 2009. The increase represents the £27m increase in PBITA, the £9m decrease in net interest cost and the £1m decrease in the tax charge, less the £5m increase in amortisation of acquisition-related intangible assets, the £4m acquisition-related costs and the £2m increase in loss from discontinued operations.
Profit attributable to non-controlling interests was £22m in 2010, an increase on £17m for 2009, reflecting non-controlling partner shares in the group’s organic and acquisitive growth, less a reduction in non-controlling shares in net profits consequent upon the group increasing its interests in certain subsidiaries.
Earnings per share
Basic earnings per share from continuing and discontinued operations was 15.9p compared to 14.4p for 2009. These earnings are unchanged when calculated on a fully diluted basis, which allows for the potential impact of outstanding share options. Adjusted earnings, as analysed in note 16, excludes the result from discontinued operations, amortisation of acquisition-related intangible assets, acquisition-related costs, and retirement benefit obligations financing items, all net of tax, and better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. Adjusted earnings per share was 21.6p, an increase of 7% on 20.2p for 2009.
The directors recommend a final dividend of 4.73p (DKK 0.4082) per share. This represents an increase of 14% upon the final dividend for the year to 31 December 2009 of 4.16p (DKK 0.3408) per share. The interim dividend was 3.17p (DKK 0.2877) per share and the total dividend, if approved, will be 7.90p (DKK 0.6959) per share, representing an increase of 10% over the 7.18p (DKK 0.5624) per share total dividend for 2009.
The proposed dividend cover is 2.7 times (2009: 2.8 times) on adjusted earnings. The group’s intention is that dividends will continue to increase broadly in line with normalised adjusted earnings.
The primary cash generation focus of group management is on the percentage of operating profi t converted into cash. From 2007, the group’s target conversion rate was raised from 80% to 85%. Operating cash flow, as defined for management purposes, was as follows:
Overall operating cash generation for the year was good, as a result of the maintenance of fi nancial discipline across the organisation.
The management operating cash flow calculation is reconciled to the net cash from operating activities as disclosed in accordance with IAS 7 Cash Flow Statements as follows:
The group’s free cash flow, as defined by management, is analysed as follows:
Free cash flow is reconciled to the total movement in net debt as follows:
Net debt represents the group’s total borrowings less cash, cash equivalents and liquid investments. The components of net debt are detailed in note 39.
Financing and treasury activities
The group’s treasury function is responsible for ensuring the availability of cost-effective finance and for managing the group’s financial risk arising from currency and interest rate volatility and counterparty credit. Treasury is not a profit centre and is not permitted to speculate in financial instruments. The treasury department’s policies are set by the board. Treasury is subject to the controls appropriate to the risks it manages. These risks are discussed in note 33.
The group’s funding position is strong, with sufficient headroom against available committed facilities with no debt maturing before 2013.
The group’s primary source of finance is a £1.1bn multicurrency revolving credit facility provided by a consortium of lending banks at a margin of 0.80% over LIBOR and maturing on 10 March 2016.
The group also has $550m in financing from the private placement of unsecured senior loan notes on 1 March 2007, maturing at various dates between 2014 and 2022 and bearing interest at rates between 5.77% and 6.06%. The fixed interest rates payable have been swapped into floating rates for the term of the notes, at an average margin of 0.60% over LIBOR.
On 15 July 2008, the group completed a further $514m and £69m private placement of unsecured senior loan notes, maturing at various dates between 2013 and 2020 and bearing interest at rates between 6.09% and 7.56%. The proceeds of the issue were used to reduce drawings against the previous revolving credit facility. $265m of the US dollar receipts have been swapped into sterling for the term of the notes.
On 9 March 2009, the group obtained a BBB credit rating from Standard & Poor’s. This credit rating supported the group’s inaugural transaction in the public bond market, a £350m note issued on 13 May 2009 bearing an interest rate of 7.75% and maturing in 2019.
At 31 December 2010 the group had uncommitted facilities of £575m.
The group’s net debt at 31 December 2010 of £1,426m represented a gearing of 90%. The group headroom at 31 December 2010 was £552m. The group has sufficient capacity to finance current investment plans.
The group’s investments and borrowings at 31 December 2010 were, with the exception of the issue of private placement notes in July 2008 and public notes in May 2009, at variable rates of interest linked to LIBOR and Euribor, with the group’s exposure being predominantly to interest rate risk in US dollar and euro. The group’s interest risk policy requires treasury to fix a proportion of this exposure on a sliding scale utilising interest rate swaps. The maturity of these interest rate swaps at 31 December 2010 was limited to four years. The market value of the Loan Note-related pay-variable receive-fixed swaps outstanding at 31 December 2010, accounted for as fair value hedges, was a gain of £55m. The market value of the pay-fixed receive-variable swaps and the pay-fixed receive‑fixed cross-currency swaps outstanding at 31 December 2010, accounted for as cash flow hedges, was a net gain of £23m.
The group has many overseas subsidiaries and associates denominated in various different currencies. Treasury policy is to manage significant translation risks in respect of net operating assets using foreign currency denominated loans, where possible. The group no longer uses foreign exchange contracts to hedge the residual portion of net assets not hedged by way of loans. The group believes cash flow should not be put at risk by these instruments in order to preserve the carrying value of net assets, given the changed liquidity environment following the global credit crisis. At 31 December 2010, the group’s US dollar and euro net assets were approximately 65% and 60% respectively hedged by foreign currency loans.
Exchange differences on the translation of foreign operations included in the consolidated statement of comprehensive income amount to a gain of £41m (2009: loss of £64m). These differences are net of a £27m loss (2009: £27m) on the retranslation of net debt and a £nil cash outflow (2009: £10m) from forward exchange contracts.
To assist the efficient management of the group’s interest costs and its short-term deposits, overdrafts and revolving credit facility drawings, the group operates a global cash management system. At 31 December 2010, more than 130 group companies participated in the pool. Debit and credit balances of £230m were held within the cash pool and were offset for reporting purposes.
Retirement benefit obligations
The group’s primary defined benefit retirement benefit scheme is in the UK, but it also operates such schemes in a number of other countries, particularly in Europe and North America. The latest full actuarial assessment of the three sections of the UK scheme was carried out at 5 April 2009. The three sections of the UK scheme are the Group 4 scheme (approximately 8,000 members), the Securicor scheme (approximately 20,000 members) and the GSL scheme (approximately 2,000 members) acquired in 2008. This assessment and those of the group’s other schemes have been updated to 31 December 2010. The group’s funding shortfall on the valuation basis specified in IAS19 Employee Benefits was £265m before tax or £191m after tax (2009: £328m and £236m respectively).
The valuation of gross liabilities has barely changed during 2010, with a £32m reduction in liabilities arising from the announcement by the government that pension increases will be in line with CPI rather than RPI, accounted for as a credit to the statement of comprehensive income, offset by the impact of the unwinding of the discount on the liabilities.
The net impact of actuarial changes is very small. The lower discount rate of 5.5% (2009: 5.7%) and an updating of the mortality assumptions following from the full actuarial valuation have increased liabilities. But the lower inflation assumption and lower than previously assumed pay increases during 2010 have decreased liabilities. Assets have increased in value during the year, in line with the previous assumption, and additional company contributions of £33m were paid into the schemes.
The group believes that, over the very long term in which retirement benefits become payable, investment returns should eliminate the deficit reported in the schemes in respect of past service liabilities. However, in recognition of the regulatory obligations upon pension fund trustees to address reported deficits, the group has agreed a new deficit recovery plan with the trustees during the year. The new plan will see additional cash contributions made to the scheme of approximately £35m in 2011 with modest annual increments thereafter.
The group’s policies regarding risk management and corporate governance are set out in the Corporate Governance Statement .
The directors are confident that, after making enquiries and on the basis of current financial projections and available facilities, they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.