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CPI Capita Plc

13.19
-0.13 (-0.98%)
Last Updated: 16:24:01
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Capita Plc LSE:CPI London Ordinary Share GB00B23K0M20 ORD 2 1/15P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  -0.13 -0.98% 13.19 13.19 13.23 13.43 12.91 13.20 7,305,206 16:24:01
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Business Services, Nec 3.01B 74.8M 0.0444 2.99 223.53M

Capita PLC Annual Financial Report

10/04/2017 4:45pm

UK Regulatory


 
TIDMCPI 
 
10 April 2017 
 
                                  Capita plc 
                                (the "Company") 
 
Annual Financial Report 
 
In compliance with Disclosure and Transparency Rule 4.1, the Company announces 
the publication of its Annual Financial Report for the year ended 31 December 
2016. Pursuant to Listing Rule 9.6.1, a copy of this document has been 
submitted to the National Storage Mechanism and will shortly be available for 
inspection at http://www.hemscott.com/nsm.do. The document is also available on 
the Company's website: www.capita.com. 
 
Additional Information 
 
A condensed set of the Company's financial statements and information on 
important events that have occurred during the financial year and their impact 
on the financial statements, were included in the preliminary results 
announcement released on 2 March 2017. That information, together with the 
information set out below, which is extracted from the Annual Report and 
Accounts 2016, is provided in accordance with Disclosure and Transparency Rule 
6.3.5. This information should be read in conjunction with the Company's 
preliminary results announcement. This announcement is not a substitute for 
reading the full Annual Report and Accounts 2016. 
 
Risk management 
 
Capita is not a risk averse business and seeks to leverage growth from 
its appetite to risk. But given the importance and sensitivity of its work 
to its clients, key risks are identified and managed through its comprehensive 
Risk Management Framework. This is designed to bring management action to bear 
on uncomfortable or critical risk issues and trends, but also where there is 
sufficient 'gap' between our residual risk level and our appetite, to identify 
and act on opportunities arising, thus making for profitable growth. 
 
A key feature of Capita's historic growth has been its ever changing size and 
complexity. Each new sector and jurisdiction brings new considerations and the 
overall risk environment, within which we operate, continues to develop. 
 
Our Risk Management Framework facilitates business management to identify and 
manage their risks with a methodology which seeks to sit alongside routine 
management practices rather than entirely separate. This approach, undertaken 
in reference to 22 risk categories, and the appetite thresholds is reconfirmed 
on an annual basis by the Board. The reporting of the residual risk profiles is 
fed into governance at every level of the business for assessment and 
challenge. 
 
To provide a 'top down' assessment of risks to the overall Group, we further 
operate a set of 12 Corporate Risks which are higher level articulations of 
the key risks which the Board can track. Four of these represent areas which, 
if crystallising to a significant degree, could have an immediate, material 
detrimental impact on the corporate health of Capita. Eight are risks which can 
hamper profitable growth. These Corporate Risks are reviewed and confirmed by 
the Board annually and hence help populate our Principal risks on page 50. 
 
Our risk appetite 
 
In our Risk Management Framework we define risk appetite as the degree of risk 
the Group is prepared to accept in the pursuit of its objectives before 
specific action is deemed necessary to reduce it. In determining this, Capita 
reconciles two thresholds: 
 
  * A risk tolerance: defined as the bearable level of variation Capita is 
    willing to accept around specific objectives. 
 
  * A risk critical limit/concern: defined as the maximum risk Capita can bear 
    and remain effective in delivering its strategy. 
 
Capita has established the tolerance and critical limit/concern risk appetite 
to help the business to understand the relative significance of any of the 
business risks faced and better prioritise risk monitoring and control 
activities. Specifically, risk appetite helps determine the degree of control 
that needs to be applied to a particular area of risk. To focus risk reporting, 
emphasis is clearly given to the reporting of risks that are categorised at 
uncomfortable or critical limit to ensure appropriate action is being taken. 
 
Principal risk categories 
 
Corporate risks to the objectives of Capita plc 
 
We operate a total of 22 risk categories within the risk management framework 
which are kept under regular review. In accordance with provision C.2.1 of the 
2014 revised Code, the Directors confirm that they have carried out a robust 
assessment of the principal risks facing the Group, including those that would 
threaten its business model, future performance, solvency or liquidity. 
 
The Board also operates 12 corporate risks which represent the principal risks 
to the objectives of Capita plc (our 'top down' risks). Our risk governance 
process maps the output of the 22 categories ('bottom up' risks) against these 
corporate risks and thus ensures these are monitored on an ongoing basis across 
all levels of the business. 
 
1. Significant failures in internal systems of control 
 
Description 
 
A material failure in Capita's business processes may result in unanticipated 
financial loss or reputation damage. 
 
2016 Mitigation and Outlook 
 
Capita operates a framework of internal control designed to minimise the risk 
of unanticipated operational failure, financial loss or damage to our 
reputation. 
 
Like any major business, risk incidents and control breakdowns can lead to 
isolated issues - for example fraud incidents and operational risk incidents. 
Whilst 2016 has seen a number of these limited incidents, they remained well 
below a level of materiality which would cause a concern to the Board. We 
continue to seek that business management are actively engaged in maintaining 
an appropriate control environment, supported by risk functions led by the 
Group risk and compliance Director, with independent assurance from Group 
internal audit. In some businesses there is also use of external certifications 
and agreed upon procedure reviews to assure the control frameworks. 
 
2. Lack of corporate financial stability 
 
Description 
 
The effective management of its financial exposures and access to finance is 
central to preserving Capita's profitability. 
 
The Group is exposed to financial market risks and may be impacted negatively 
by matters such as loss of economic priced funding and extreme forex 
volatility. 
 
2016 Mitigation and Outlook 
 
Capita continually invests in the improvement of its systems and processes in 
order to ensure sound financial management. 
 
The Group manages treasury risk through monitoring day to day liquidity as well 
as carefully managed funding of our acquisition strategy. Capita has been able 
to successfully raise new funds at a competitive rate throughout the year. 
 
However, 2016 has seen a deterioration of business performance during the 
second half of the year. This deterioration has had an effect on financial 
performance of the Group and a higher debt ratio. 
 
The Board has acknowledged the need to bring the debt ratio back into Capita's 
medium-term target ratio of 2x to 2.5x and has launched a number of initiatives 
to address this through 2017. These include the planned sale of the majority of 
the Asset Services division and our specialist recruitment businesses. Open and 
regular communication with its lending institutions takes place. 
 
3. Failures in information security controls 
 
Description 
 
Capita must protect its customer and corporate data and have in place loss 
prevention and detection measures. 
 
A significant breach of security could impact the Group's ability to operate 
and deliver against its business objectives. 
 
2016 Mitigation and Outlook 
 
Capita takes measures ranging from physical and logical access controls to 
encryption, or equivalent technologies, raising employee awareness and 
monitoring of key partners to manage its information security risks. 
 
2016 has seen heightened 'cyber risk' and Capita is not alone in facing an 
increase in recorded attacks. However, those attacks have to date not led to 
material breaches. Incidents, where they do occur, are reviewed for root cause 
analysis and we work with our business partners and national agencies to 
promote further corporate cooperation. 
 
We are investing more resource into the evolving threats and enhanced 
regulatory framework. Further investment has been made in threat intelligence, 
security management and reviews of our systems. 
 
4. Legal/regulatory risk 
 
Description 
 
Capita plc is subject to regulation primarily under UK legislation. 
 
The regimes which apply to the Group's business include, but are not limited 
to: Financial Services, Communication Services, and Energy Market. 
 
The Group is also subject to generally applicable legislation including, but 
not limited to: anti-bribery, consumer protection, data protection and 
taxation. 
 
2016 Mitigation and Outlook 
 
The Group's ability to operate or compete effectively could be adversely 
affected by the introduction of new laws, policies or regulations, changes in 
the interpretation or application of existing laws, policies and regulations or 
the outcome of regulatory investigations. 
 
The Group manages these risks through active engagement in the regulatory 
processes that affect the Group's business. 
 
The Group actively seeks to identify and meet its regulatory obligations and to 
respond to emerging requirements. For example, in Financial Services: 
compliance controls and processes are in place in the Group's financial 
services businesses. Interaction with the relevant regulatory authorities is 
coordinated between the businesses compliance team, Group Risk and Legal 
departments. The Group maintains appropriate oversight and reporting, supported 
by training, to provide assurance that it is compliant with regulatory 
requirements. 
 
2016 has seen a number of historic compliance and legal issues reach, or near, 
resolution. These include a fine from the Central Bank of Ireland and the 
ongoing enforcement investigation by the FCA into the operation of the 
'Connaught' Fund in 2008-2009. 
 
We continue to develop our regulatory controls to reflect the varied regulatory 
regimes but also in response to the increased focus by governments and 
regulators on 'Corporate Conduct'. For example, work is underway to position 
ourselves for the implementation of the EU Data Protection Regulation, the 
Criminal Finances Bill and the requirements of the Prevention of Modern Slavery 
Act. 
 
5. Adverse financial/business performance 
 
Description 
 
Adverse performance against business plans can impact the wider corporate 
position and undermine investor confidence. It can also impact our ability to 
invest in future growth. 
 
2016 Mitigation and Outlook 
 
Reporting on financial performance is provided on a monthly basis to executive 
management and the Board. 
 
2016 has seen a materially lower performance by several Capita businesses, 
particularly in the second half of the year. There are a number of factors for 
this including a deterioration in business confidence in a number of our key 
sectors following the EU referendum and a series of sector specific issues 
around our specialist recruitment business and some IT businesses. Not all of 
these were risks that management identified as material in the first half of 
2016 and this has meant that mitigating actions by management were not as 
timely as the Board would have planned. 
 
The consequent lower than predicted profits for 2016 are a result of the 
combination of these separate issues and this was disclosed to investors 
through market announcements in September and December. 
 
An immediate learning from the second half of 2016 was that the forecasting 
processes used within the businesses, ultimately feeding through to the Group 
view, were in need of refresh and the management discipline in their execution 
required refocussing. This is likely a result of the rapid growth of the 
business and consequent greater number of input reports where lower level 
forecast errors/assumptions could roll up to a greater effect than when the 
systems and processes were first deployed when Capita was smaller. 
 
Work in 2017 will focus on how these financial performance risks can be given 
greater transparency, through clearer and more timely disclosure and thus allow 
for contemporaneous action. 
 
6. Failure to innovate 
 
Description 
 
It is important that Capita is able to stay at the forefront of the industry by 
identifying emerging trends, developing strategies to exploit competitive 
opportunities and question the status quo, striving for continuous improvement 
in all areas of activity. 
 
Capita continues to monitor and engage with industry, sector and stakeholder 
groups on developments in key service and product areas. 
 
2016 Mitigation and Outlook 
 
Capita has a central futures team, who primarily look to harness intelligence, 
insight and new technologies and processes to deliver real value to our 
clients, and work alongside sector and capability experts embedded in business 
across the Group. 
 
Capita consistently deploys leading edge technologies and methodologies 
developed both by external suppliers and partners and by our own businesses. 
The Group has a clear transformation governance framework to provide a 
consistent process to manage change within our client organisations. Executive 
management continue to develop strategies built on considering a wide range of 
possible directions for the business sectors in which we operate, and the 
products and services that the Group delivers to its stakeholders. 
 
7. Increased internal business complexity 
 
Description 
 
Capita has consistently managed the pace of change, diversity and increasing 
scope of our business activities. However, where we take on major contracts 
with inherent complexity this increases the operational risk of failure to 
manage multiple complex contract requirements effectively with potentially 
adverse consequences. 
 
Contract benefits may not be fully realised, costs of service delivery may 
increase, or business as usual activities do not perform in line with 
expectations. 
 
2016 Mitigation and Outlook 
 
The Congestion Charge, NHS PCSE and RPP are examples of complex projects which 
have proved challenging for Capita but where actions have been taken to react 
to any shortfalls to client expectations. These projects prove challenging 
because of their inherent complexity and whilst any operational issues are not 
welcome, there is often a recognition from the client of the complexity 
involved. Given Capita's appetite for these complex projects remains, lessons 
from key projects are folded back into the bidding, planning and execution 
phases. A new initiative within our Transformation Team to better assess the 
levels of complexity and how best to address the 'unknowns' as well as the 
'knowns' is designed to help mitigate risks in this area in 2017. 
 
8. Adverse changes in national, international political landscape 
 
Description 
 
Capita operates and owns assets in a steadily increasing number of geographic 
regions and, as a result, is exposed to a wide range of political environments. 
The majority of its operations remain in the UK. 
 
The political risks associated with operating across a broad number of 
jurisdictions and markets could affect the Group's ability to manage or retain 
interests in its business activities and could have a material adverse effect 
on the profitability, or, in extreme cases, viability of one or more of its 
services. 
 
2016 Mitigation and Outlook 
 
Political risk is managed through diversification of sectors and operations, 
continuous monitoring of key UK and international policies, and focus on the 
public sector and trade association relations. 
 
The EU referendum in June presented a shock to many observers and whilst Capita 
had been shadowing the developments running up to the vote, like many firms it 
could not have predicted the result or the ensuing political turmoil in the UK. 
 
The main downstream impact of Brexit has been experienced in the lack of major 
central government outsourcing contracts coming to market whilst Departments 
focus on the Brexit process and the performance of certain Capita businesses 
with exposure to sectors who have faced the most uncertainty after the vote. 
 
Capita will actively track the developments of how the UK exits the EU and how 
its businesses remaining in EU jurisdictions (such as Ireland, Germany and 
Poland) can leverage opportunity. 
 
We maintain a watching brief on the political landscape in all of the 
geographies we operate in and the impact any change of government will have on 
our markets. 
 
9. Operational issues leading to reputational risk 
 
Description 
 
Capita's reputation, and that of our clients, could be damaged by a significant 
adverse event leading to a loss of trust and confidence amongst our 
stakeholders. 
 
This could lead to contract retention risks, financial loss, and in the most 
significant of circumstances, direct cost of redress. 
 
The widespread use of social media increases this risk. 
 
2016 Mitigation and Outlook 
 
Capita has a well proven reputational management and response process. Close 
links with the business units and a central team allow for rapid reaction to 
any issues.         A number of operational issues across certain businesses 
and contracts in 2016 have required ongoing support. Group PR work with Group 
Risk and other functions to address issues as they are raised. 
 
10. Operational IT risk 
 
Description 
 
The services that Capita provides to its stakeholders are reliant on a robust 
and resilient technical infrastructure. 
 
A failure in the operation of the Group's key systems or infrastructure, on 
which the Group relies, could cause a failure of service to our clients, 
impacting contractual obligations and negatively affecting our brand. 
 
2016 Mitigation and Outlook 
 
Capita makes significant investment in technology infrastructure to ensure that 
it continues to support the growth of the business and has a robust monitoring 
process of core systems and services. 
 
Performance issues and management change in our IT Services Division have 
frustrated the improvement plans the Board had planned. The delineation of 
focus between first class service delivery to our businesses and also to our 
external client base has been, at times, stretching and this is now being 
addressed through management changes and remedial actions 
 
The transfer of experienced Capita management to this area from other 
businesses within the Group and the commitment of the Board to address the 
issues which have come to the fore in 2016 will deliver better outcomes and 
provide the growth platform the businesses require. In the meantime, the Board 
monitors this area as one of its critical risks. 
 
11. Failure to effectively manage Group's talent and human resources 
 
Description 
 
People at Capita are critical to the Group's ability to meet the needs of its 
stakeholders and achieve its goals as a business. 
 
Failure to attract or retain suitable employees across the business could limit 
the Group's ability to deliver its business plan commitments. 
 
2016 Mitigation and Outlook 
 
Capita's most valuable asset is its people, and investing in the training and 
development of those people, and supporting future talent development is a 
Board priority. 
 
Capita champions diversity and develops talent through a number of activities, 
including Graduate apprenticeship programmes, a mentoring scheme, Capita 
Academy education and a leadership development programme. The cost reduction 
actions and restructuring in Q4 2016 and Q1 2017 will inevitably cause some 
impact on staff morale and care will be taken to minimise the potential impact 
of this on any service. The Board accepts that such organisational and people 
changes raise people and other risks and are closely monitoring to ensure early 
identification of any issues arising during the process. 
 
12. Weaknesses in acquisition and contracting life cycle 
 
Description 
 
Capita acquisitions and client contracting fail to generate anticipated revenue 
growth, synergies and/or cost savings. 
 
2016 Mitigation and Outlook 
 
Capita performs pre-transaction due diligence and closely monitors actual 
performance to ensure we are meeting operational and financial targets. 
 
Any divergence from these plans will result in management action to improve 
performance and minimise the risk of service penalties or financial impact. 
 
Executive management and the Board receive regular reports on the status of 
acquisitions and bid and contract activities, with formal review supported by 
commercial management and Group internal audit. 
 
The integration of businesses through 2016 has, in the main, been well handled 
with the integration of Capita Europe a good example of integrating systems and 
policies in light of differing regulatory and legal requirements but also 
maintaining key controls and growth. 
 
However, lessons learned from less successful contracting and integration 
during 2016 have been fed back into the process to identify improvements for 
future growth. 
 
Related party transactions 
 
Compensation of key management personnel 
 
 
                                       2016            2015 
 
                                        GBPm              GBPm 
 
Short term employment benefits         11.1            11.9 
 
Pension                                 0.3            0.2 
 
Share based payments                    0.8            6.0 
 
Total                                  12.2            18.1 
 
Gains on share options exercised in the year by Capita plc executive directors 
were GBP6.2m (2015: GBP4.3m) and by key management personnel GBP4.5m (2015: GBP3.2m), 
totalling GBP10.7m (2015: GBP7.5m). 
 
During the year, the Group rendered administrative services to Smart DCC Ltd, a 
wholly owned subsidiary which is not consolidated. The Group received GBP40.3m 
(2015: GBP29.5m) of revenue for these services. As at the year end the amounts 
receivable in relation to these services were GBP7.6m (2015: GBP6.0m). The services 
are procured by Smart DCC on an arm's length basis under the DCC licence. The 
services are subject to review by Ofgem to ensure that all costs are 
economically and efficiently incurred by Smart DCC. 
 
Capita Pension and Life Assurance Scheme is a related party of the Group. 
Transactions with the Scheme are disclosed in note 32 - Employee benefits. 
 
The following companies are substantial shareholders in the Company and 
therefore a related party of the Company (in each case, for the purposes of the 
Listing Rules of the UK Listing Authority). 
 
The number of shares held on 17 February 2017 was as below: 
 
Shareholder                                                    No. of shares 
                    % of voting rights 
 
Veritas Asset Management LLP* 
 81,163,342                                           12.17 
 
Woodford Investment Management LLP                            72,080,139 
                                          10.80 
 
Invesco Asset Management 
        65,536,317                                             9.82 
 
The Capital Group Companies, Inc. 
60,297,424                                             9.04 
 
Baillie Gifford & Co 
Limited                                                50,632,716 
  7.59 
 
BlackRock Inc 
 
38,567,956                                             5.78 
 
*This includes the holding of Veritas Funds PLC 
 
Responsibility Statement of Directors in respect of the annual financial 
statements 
 
The Directors confirm that, to the best of their knowledge: 
 
 1. the financial statements prepared in accordance with the applicable set of 
    accounting standards, give a true and fair view of the assets, liabilities, 
    financial position and profit or loss of the Company and the undertakings 
    included in the consolidation as a whole; 
 
 2. the Directors' report, including content by reference, includes a fair 
    review of the development and performance of the business and position of 
    the Issuer and the undertakings included in the consolidation taken as a 
    whole, together with a description of the principal risks and uncertainties 
    that they face. 
 
Directors' statement on the annual report 
 
The Directors consider the annual report taken as a whole, to be fair, balanced 
and understandable and that it provides the information necessary for the 
shareholders to assess the Company's position and performance, business model 
and strategy. 
 
On behalf of the Board 
Francesca Todd 
Group Company Secretary 
 
1 March 2017 
 
Forward-looking statement 
 
The Directors present the annual report for the year ended 31 December 2016 
which includes the strategic report, governance and audited accounts for this 
year. Pages 1 to 105 of this annual report comprise a report of the Directors 
that has been drawn up and presented in accordance with English company law and 
the liabilities of the Directors in connection with that report shall be 
subject to the limitations and restrictions provided by such law. Where we 
refer in this report to other reports or material, such as a website address, 
this has been done to direct the reader to other sources of Capita plc 
information which may be of interest to the reader. Such additional materials 
do not form part of the report. 
 
Contact:  Francesca Todd, Group Company Secretary, 020 7202 0641 
 
 
 
END 
 

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April 10, 2017 11:45 ET (15:45 GMT)

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