GLOBALFOUNDRIES
Annual Report 2013

Plain-text annual report

Securing your world G4S plc Annual Report and Accounts 2013 Investing in sustainable, profi table growth. In this report Financial highlights STRATEGIC REPORT Financial highlights Overview Chairman’s statement Chief Executive Offi cer’s review Strategic report overview G4S at a glance Market review Business model Strategic execution Key performance indicators Business review Risk management Principal risks Corporate social responsibility GOVERNANCE Board of directors Executive committee Corporate governance report Audit committee report Directors’ remuneration report Directors’ report Directors’ responsibilities IFC 1 2 4 8 10 12 14 16 26 28 34 36 42 48 50 52 61 64 80 83 95 84 90 94 FINANCIAL STATEMENTS Chief Financial Offi cer’s review Independent auditor’s report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of fi nancial position Consolidated statement of cash fl ow Notes to the consolidated fi nancial statement Parent company balance sheet Parent company reconciliation of movements in equity shareholders’ funds 143 Notes to the parent company fi nancial statements 98 142 96 97 144 95 UNDERLYING REVENUE UNDERLYING PBITA1 £7.4bn (2012: £7.0bn) £442m (2012: £430m2) TOTAL REVENUE TOTAL PBITA3 £7.4bn (2012: £7.2bn) £56m(2012: £364m) UNDERLYING EPS TOTAL EPS 14.7p (2012: 15.8p) (24.9)p (2012: 2.9p) CASH GENERATED BY CONTINUING OPERATIONS £460m (2012: £337m) DIVIDEND PER SHARE 8.96p (2012: 8.96p) A full review of our fi nancial performance is set out in the Chief Financial Offi cer’s review on pages 84 to 89. EU IFRS fi nancial statements are on pages 94 to 141. The strategic report has been approved by the board, see page 83. SHAREHOLDER INFORMATION Notice of Annual General Meeting Recommendation and explanatory notes relating to business to be conducted at the Annual General Meeting on 6 June 2013 Group fi nancial record General information 151 154 158 160 1 To clearly present underlying performance, specifi c items have been excluded and separately disclosed – see page 86. 2 2012 underlying results are presented at constant exchange rates and have been restated for the adoption of IAS19 (2011). 2012 PBITA has been re-presented to exclude PBITA from businesses subsequently classifi ed as discontinued, one off credits, profi ts on disposal and the prior year effect of the review of assets and liabilities in 2013 – see page 86. 3 Including specifi c items. See page 86 for details. Overview Strategic report A market led strategy to deliver sustainable shareholder value G4S is the leading global integrated security company, specialising in the provision of security products, services and solutions. Our strategy is market led. We satisfy our customers’ needs by understanding their strategic objectives and designing and delivering innovative solutions which support their goals. Our aim is to create sustainable shareholder value through excellence in customer service, operations and fi nancial management. See pages 8 to 27 for more information Annual Report and Accounts 2013 G4S plc 1 Chairman’s statement Putting strong foundations in place John Connolly Chairman A YEAR OF CHANGE 2013 was always going to be a year of change. Some board changes involving executive and non-executive directors had been planned and the foundations for those changes had been laid in 2012. Nick Buckles, who had been chief executive of the group since 2005, stepped down as CEO in May. He was succeeded by Ashley Almanza, a high quality, respected executive with extensive international business experience, who became group CEO on 1 June 2013. Mr Almanza had joined the group earlier in the year as CFO following the retirement of Trevor Dighton from that role. In May, the UK Ministry of Justice (“MoJ”) announced concerns in relation to billing practices on our electronic monitoring contracts in England and Wales and commenced a review of all MoJ contracts held by G4S. At the same time, the Cabinet Offi ce initiated a review of all our major UK Government contracts – the Cross Government Review. In response to the concerns raised by the MoJ, we appointed an independent law fi rm and external accountants to look into the matter on behalf of the board. We also co-operated with the MoJ and Cabinet Offi ce reviews. Both the MoJ review and the Cabinet Offi ce review have now been completed and we reached settlement of claims raised in relation to electronic monitoring and two other contracts in England. “ This is my second chairman’s statement in a G4S annual report and it is fair to say that it marks the completion of a year no less challenging than my fi rst. 2013 was a year during which the group underwent a great deal of change, at both board and senior management level, and also in some of the ways we conduct our business.” DIVIDEND PER SHARE 8.96p (2012: 8.96p) 2 G4S plc Annual Report and Accounts 2013 Strategic report REVENUE BY BUSINESS SERVICE (%) 9 16 Cash solutions Secure solutions Care & Justice services 75 FINANCIAL PERFORMANCE The group operates in many parts of the world and continues to provide critical services to thousands of customers to the highest standards. This underlying strength of the business was refl ected in the company’s performance for 2013. Underlying revenue growth of 5.8% was underpinned by 16% growth in emerging markets. Cash generated by continuing operations increased by 36%. To strengthen the group's fi nancial position, we raised approximately £343 million net via a placing of new shares in August. Together with a disposals programme which has, to date, generated £124 million, and a strong focus on cash fl ow management, this will enable us to reduce our debt and to invest in sustainable, profi table growth. We have a clear strategic plan and the board believes that the business has signifi cant growth opportunities and positive prospects. The directors therefore propose a fi nal dividend of 5.54p (DKK 0.4954) per share, payable on 13 June 2014. With an interim dividend of 3.42p (DKK 0.2972) per share paid on 18 October 2013, the total dividend for the year will amount to 8.96p per share, the same as for 2012. On behalf of the board I would like to thank the 618,000 employees who make up the group for their hard work and dedication in 2013 and their focus on doing what they do well. It is with confi dence that I look forward to capturing the value in 2014 of all the groundwork that has been done in 2013. John Connolly Chairman The UK Government is one of the group’s largest customers and so repairing the relationship and rebuilding our reputation, particularly in the UK market, has rightly been at the forefront of the work of the executive team and of the board. This will take time and forms part of a wider transformation plan launched by the group CEO, which includes organisational and process changes designed to strengthen customer focus, governance and contract management and control. This transformation process is something which the UK Government has been keen to see, but it is important to stress that it is something which was already in progress and not just in the UK. SO WHAT CHANGED IN 2013? We welcomed fi ve new members to the board during the year. Three of them are non-executive directors: Adam Crozier and Paul Spence, who joined the board in January, and Tim Weller, who joined in April; whilst Bo Lerenius and Lord Condon retired from the board in June. There were also changes to the executive board members. In addition to Nick Buckles' departure in May, Trevor Dighton stood down as CFO at the end of April and left the board in June. Ashley Almanza joined on 1 May as CFO before taking on the role of chief executive offi cer from 1 June. Himanshu Raja was appointed CFO in October. In a fairly short space of time the make-up of the board has changed signifi cantly, so it has been important to ensure that it retains the right combination of knowledge of the group as well as expertise which is relevant to the business. I believe we have a board which is diverse in composition and well suited to the task; covering a broad spectrum in terms of professional background, experience, nationality and gender. As announced previously, we undertook a thorough review of the group’s risk management function and systems in the fi rst half of 2013. The Risk Committee reviewed the fi ndings of the review, and implemented a number of recommendations. The Risk Committee was constituted as a full board committee in 2013 to strengthen support to the board in discharging its responsibilities regarding the maintenance of a framework of effective controls to enable risk to be assessed and managed. The review process also led to important changes to the risk function and the implementation of a new risk management framework described in more detail on pages 36 to 41 of the Strategic Report. In addition, the Risk Committee reviews and reports to the board on the risk aspects of major developments that affect the group and major contracts which the group enters into. As reported in the CEO’s review, we have embarked upon a group- wide transformation responding to the signifi cant issues identifi ed over the last 18 months as the new executive team set the business on track for future profi table growth. This plan has embraced a bottom up business and strategy review bringing in a wide range of new senior executives in key roles, restructuring a number of businesses, a portfolio review of the group’s businesses and a comprehensive review of fi nancials and fi nancial disciplines. Importantly the board approved management’s extensive proposals for new processes and disciplines emphasising our key values around customer focus and integrity. This part of the transformation along with the above mentioned emphasis on risk management will contribute to meeting the requirements of our key UK customer, UK Government, around corporate renewal. We have taken on board the lessons we have learned from the challenges of 2013 and a great deal of effort continues to be focused on ensuring that we have the right people and the appropriate systems and processes in place to ensure the group’s long-term success. I believe we are on the right track. Annual Report and Accounts 2013 G4S plc 3 Chief Executive Offi cer’s review Focused on sustainable, profi table growth Ashley Almanza Group Chief Executive Offi cer “ This has been an extremely challenging year for G4S. We have taken clear action to address long-standing issues and have introduced wide-ranging changes to strengthen our business. We can now look to the future with increasing confi dence, focusing on the growing demand for G4S services that underpins our plans to deliver sustainable, profi table growth.” A YEAR OF CHANGE I was delighted to join G4S in May 2013 and to take up the role of group CEO in June. In my fi rst few months, I travelled around the group, meeting senior managers and colleagues working in different regions and at many levels in our organisation and I also had the opportunity to visit some of our operations and customers. This confi rmed my view that G4S has considerable unrealised potential. In order to address that potential in a focused and disciplined way, we conducted a strategy and business review, evaluating our position and prospects in each of our key markets around the world. While the review confi rmed the strength of our global market positions, it also identifi ed the need for wide ranging changes which, over time, we expect to transform the group’s ability to deliver sustainable, profi table growth. 4 G4S plc Annual Report and Accounts 2013 Strategic report GROUP STRATEGY G4S is the world’s leading global, integrated security company, specialising in the provision of security products, services and solutions to customers across six continents. Our strategy is market led – everything begins with the customer. We seek to understand our customers’ strategic and commercial objectives and from there we design and deliver solutions which support those objectives. Our aim is simple and clear; it is to create sustainable shareholder value through the consistent delivery of excellence in three areas: customer service, operational performance and fi nancial management. As noted above, the strategic review we conducted in 2013 identifi ed the need for wide-ranging changes which we have captured in the form of a number of strategic priorities. I’m pleased to report that progress has been made in each of these areas: Strategic focus and portfolio management At the start of the year we were operating in more than 125 countries with several lines of business in each country. By assessing the strategic fi t, performance and prospects of each of these businesses, we identifi ed 35 businesses which required action to be taken to realise full value for shareholders, through turn-around, restructuring or disposal. As a result, we are actively managing the group’s portfolio, divesting a number of non-core businesses, and have generated cash proceeds of £124 million to date. Our work in this area continues and, subject to value accretive terms being achieved, we may make further disposals. Organic investment Our review concluded that we were under-investing in organic growth and technology and innovation. The group is now investing an additional £15 to £20 million in 2014 to strengthen sales and business development capability and to extend our technology and innovation across the group – both important catalysts for future growth. Balance sheet fl exibility Given the scale and quality of our organic growth opportunity and the level of net debt at the start of the year, we raised £343 million through the successful placing of 140.9 million new shares. Capital discipline and Risk management The group’s capital allocation and contract review processes have been strengthened to ensure that all investment opportunities compete for capital in a single ‘pool’ and are evaluated against a stringent set of economic and risk criteria. People Our review identifi ed the need to strengthen our resource and capability in a number of key areas of the business. Over the past nine months, we have signifi cantly strengthened our senior management, with 28 new appointments to the global leadership team. Group values Our group values underpin the reputation and long-term value of the group. We have updated and reinforced awareness and understanding of our group values to ensure that we conduct our business to the highest standards. We are enhancing health and safety across the group by standardising safety management systems and embedding health and safety objectives in individual performance contracts. Competitive strengths Our review concluded that our competitive position needed to be strengthened in a number of key markets. During the second half of the year we established major restructuring programmes, with detailed plans to invest £68 million over 2013 and 2014 and these are now being implemented. We expect the economic, fi nancial and performance benefi ts to be realised over the next 12 to 36 months. Cost leadership We recognised the growing importance of cost leadership and following systematic benchmarking we established a number of effi ciency programmes. These include focus on direct labour effi ciency, organisational effi ciency, vehicle route planning and telematics, IT standardisation, procurement and shared services. Performance management We re-defi ned our performance measures and incentives, putting in place measures and performance management processes which focus on customers’ needs, sustainable profi t and cash fl ow. I believe this provides clear and strong alignment between management priorities and shareholder value. While we still have much to do, I have been enormously encouraged by the positive engagement from colleagues across the group who have embraced these changes and demonstrated extraordinary commitment to our customers and to G4S. I’m grateful for their skill and dedication, which remain critical to our success. STRATEGIC EXECUTION To see in more detail how we plan to deliver our focused strategy to deliver sustainable, profi table growth please see pages 8 to 27. Strategic report Strategic execution People and values AT THE HEART OF OUR STRATEGY G4S HAS A DEDICATED WORKFORCE OF OVER 618,000 EMPLOYEES AROUND THE WORLD (%) Africa Asia & Middle East Latin America Europe North America UK & Ireland 6 9 19 11 12 43 G4S employees by region as at end Dec 2013. Our culture is defi ned by our values, beliefs and behaviours. We seek to embed our values in all aspects of our operations and they form part of our recruitment, development and review processes. Managers and employees are encouraged and expected to behave in line with the group’s values and to speak up when witnessing behaviour which does not meet our standards. OUR GROUP VALUES: SUPPORTING OUR STRATEGY Customer focus – We have close, open relationships with our customers which generate trust and we work in partnership for the mutual benefi t of our organisations. Best people – We employ the best people, develop their competence, provide opportunity and inspire them to live our values. Integrity – We can always be trusted to do the right thing. Expertise – We develop and demonstrate our expertise through our innovative approach to creating and delivering the right solution. Performance – We seek to improve performance year on year to create long-term sustainability. Teamwork and collaboration – We collaborate for the benefi t of our customers and G4S. Safety fi rst – We prioritise safety management to protect the health and well-being of our colleagues and those around us. In 2014, we have introduced a new value to focus specifi cally on the safety of our colleagues and those around us. This is supported by a number of key safety initiatives and campaigns designed to increase awareness of health and safety matters, learn from best practice and prevent health and safety incidents. See pages 44 and 45 for further information on health and safety initiatives. 16 G4S plc Annual Report and Accounts 2013 Annual Report and Accounts 2013 G4S plc 17 WELFARE TO WORK To date, G4S Welfare to Work has helped 35,077 long-term unemployed people in the UK into jobs. We estimate this has saved the UK tax payer more than £120 million per annum. The vast majority of people that we have assisted had been out of work for at least nine months, with many having been out of work for a number of years. Annual Report and Accounts 2013 G4S plc 5 Chief Executive Offi cer’s review continued FINANCIAL PERFORMANCE Demand for our services remained strong in 2013, particularly in emerging markets where our revenue rose by 16%. Underlying profi t before interest, tax and amortisation (PBITA) was £442 million and cash generated by operations increased by 36% to £460 million, primarily refl ecting improved working capital management which is described in more detail in the chief fi nancial offi cer’s review. Our emerging market businesses in Africa, Latin America, Asia and the Middle East, converted strong revenue growth into very strong profi t progression and underlying PBITA from these businesses rose by 25% to £216 million. Our developed market businesses posted PBITA of £270 million as our businesses in Europe, UK and Ireland suffered from a weak trading environment, unsatisfactory service delivery in some areas and an uncompetitive cost structure. In the US, our sales in technology and secure solutions were adversely impacted by cuts in Federal government spending. We have established restructuring programmes in all of these businesses and, as previously mentioned, made a provision for £68 million to cover the cost of these programmes. Having performed an extensive review of our UK Government contracts we were pleased to conclude a settlement agreement with the Ministry of Justice (MoJ). Under this agreement we will refund approximately £96 million for amounts overbilled on three contracts and will compensate the UK tax payer for £12.5 million costs incurred by the UK Government. We believe that the settlement, together with other actions we are taking, will help us to maintain our position as a strategic supplier to the UK Government. During the year, we conducted a comprehensive fi nancial review of our assets and liabilities and major contracts. These reviews, together with the MoJ settlement and our restructuring programmes, resulted in a £386 million charge to profi ts during 2013. This contributed to a net loss of 24.9 pence per share and to a reduction in the book value of the group's net assets from £1,231 million to £919 million. Having completed these reviews, we now have a solid baseline against which we can measure our progress. The resulting total PBITA for the year was £56 million (2012: £364 million). Underlying EPS was 14.7p against 15.8p in 2012 and total loss per share was 24.9p, compared with earnings per share of 2.9p in 2012. The group’s share placing, cash proceeds from portfolio disposals and improved operating cash fl ow all helped to offset investment and other demands on our cash fl ow and we ended the year with net debt of £1.5 billion compared with £1.8 billion at the start of the year. HEALTH AND SAFETY During 2013, fi fty-fi ve colleagues lost their lives in the line of duty, principally as a result of attacks by third parties and road traffi c accidents. Their loss is deeply felt by their families and their colleagues and is a matter of great concern for everyone at G4S. This has caused us to re-double our efforts to mitigate the risks faced each day by many of our colleagues. The Group Executive team is leading a programme to strengthen safety leadership and safety practices across the group, including: – Critical country reviews: conducting detailed assessments and developing mitigation plans in those countries and operations where we have identifi ed the greatest risks. – Establishing a new group wide standard for health and safety management systems. – Health and safety resource: We made a number of new appointments across the group and at the beginning of 2014 we had 110 dedicated health and safety professionals, assisting us to reduce health and safety risks. – Safety leadership training and awareness is now mandatory for all senior managers. In addition, each member of the Group Executive team (and each of their teams) has specifi c health and safety performance objectives in 2014. – In support of our health and safety programme, we have established a new group value called Safety First. We work in an inherently hazardous industry and health and safety is an enduring priority for me and my management team. Our deepest desire is to see every employee return to his or her family unharmed at the end of each day and we will always remain committed to that objective. CORPORATE SOCIAL RESPONSIBILITY For more information see our Corporate Social Responsibility Report 2013. Investing in sustainable, profitable growth. Securing your world G4S plc Corporate Social Responsibility Report 2013 See page 42 for more information 6 G4S plc Annual Report and Accounts 2013 Strategic report GROUP VALUES We updated and strengthened our group values, particularly in light of events surrounding our electronic monitoring contracts with the UK Ministry of Justice which are being investigated by the Serious Fraud Offi ce (SFO). We commissioned an independent review of these contracts by a global law fi rm which has found no evidence of criminal wrongdoing. We have also cooperated with the SFO to support its work. With strong sponsorship from the Group Executive team, we are rolling out a programme in 2014 which is designed to strengthen understanding of, and compliance with, our group values. This programme addresses the values described opposite and includes training for senior managers and specifi c objectives in their 2014 performance contracts. We developed and launched a new human rights policy and guidance for managers in 2013. Given the services we provide and the sometimes challenging environments in which we work, this was a signifi cant priority for the Group Executive. Every two years, we conduct a group-wide management and employee survey. Feedback from our workforce is an important element of our management process and in 2013, 384,000 colleagues responded to our global employee survey, providing us with a rich source of information about the business and our people which we are able to use in developing our plans and employee engagement programmes. OUTLOOK The outlook for the group is positive. There is strong demand for G4S’ services across the world, particularly in emerging markets, and we have a clear and focused strategy to address this demand. We have taken clear action to address long-standing issues and have introduced wide-ranging changes to strengthen our business. We can now look to the future with increasing confi dence, focusing on the growing demand for G4S’ services that underpins our plans to deliver sustainable, profi table growth. That confi dence is refl ected in the board’s recommendation to maintain the dividend. Ashley Almanza Group Chief Executive Offi cer GROUP VALUES: SUPPORTING OUR STRATEGY CUSTOMER FOCUS We have close, open relationships with our customers which generate trust and we work in partnership for the benefi t of our organisations. BEST PEOPLE We employ the best people, develop their competence, provide opportunity and inspire them to live our values. INTEGRITY We can always be trusted to do the right thing. EXPERTISE We develop and demonstrate our expertise through our innovative approach to creating and delivering the right solutions. PERFORMANCE We seek to improve performance year on year to create long-term sustainability. TEAMWORK AND COLLABORATION We collaborate for the benefi t of our customers and G4S. SAFETY FIRST We prioritise safety management to protect the health and well-being of our colleagues and those around us. Annual Report and Accounts 2013 G4S plc 7 Strategic report overview These pages provide an overview of the Strategic report as approved by the G4S board (see page 83). STRATEGY With operations on six continents and 618,000 employees, we are the leading global integrated security company. Our strategy is market led. We satisfy our customers’ needs by understanding their strategic objectives and designing and delivering innovative solutions which support their goals. Details of our strategic execution are set out on pages 16 to 27. MARKET LED CUSTOMER FOCUSED SUSTAINABLE EXECUTION: PEOPLE, INVESTMENT, EXCELLENCE PEOPLE AND VALUES INVESTMENT IN ORGANIC GROWTH, CUSTOMER SERVICE AND OPERATIONAL EXCELLENCE LEVERAGING OUR CAPABILITIES, TECHNOLOGY AND BEST PRACTICE WORLDWIDE PORTFOLIO AND PERFORMANCE MANAGEMENT DISCIPLINED FINANCIAL MANAGEMENT Strategic execution pages 16 to 27 OUR CUSTOMERS, SERVICES AND MARKETS % of 2013 revenue by: REGION 22 19 6 22 21 10 Africa Asia Middle East Latin America Europe North America UK & Ireland BUSINESS SERVICE CUSTOMERS 9 16 5 24 29 75 Cash solutions Secure solutions Care & Justice services 19 8 32 2 8 Government Financial institutions Utilities Transport Ports & airports Leisure Retail Major corporates Consumers Our strategy is customer focused across a wide range of industries and commercial and government customers. We have a diverse range of services to meet our customers' requirements and have a broad geographic footprint to meet demand for security around the world. G4S at a glance page 10 8 G4S plc Annual Report and Accounts 2013 Strategic report PERFORMANCE 2013 was a year of consolidation for the group as we dealt with long-standing issues and made wide-ranging changes to strengthen the group and laid foundations to support sustainable, profi table growth. FINANCIAL KPIs UNDERLYING REVENUE (£bn) UNDERLYING PBITA1 (£m) CASH GENERATED BY CONTINUING OPERATIONS (£m) UNDERLYING EPS1,3 (pence per share) 10 8 6 4 2 0 7.0 7.4 4302 442 500 400 300 200 100 0 460 337 600 500 400 300 200 100 0 20 16 12 8 4 0 15.8 14.7 12 13 12 13 12 13 12 13 1 To clearly present underlying performance, specifi c items have been excluded and separately disclosed – see page 86. 2 2012 underlying results are presented at constant exchange rates and have been restated for the adoption of IAS 19 (2011). 2012 PBITA has been re-presented to exclude PBITA from businesses subsequently classifi ed as discontinued, one-off credits, profi ts on disposal and the prior year effect of the review of assets and liabilities in 2013 – see page 86. 3 Total loss per share was 24.9p (2012: earnings per share 2.9p) – see page 87 for details. NON-FINANCIAL KPIs HR STANDARDS AND KPIs In 2014, performance contracts for senior managers focus on fi nancial performance, but also on personal objectives aligned to areas of focus such as: – health and safety – business development – people and organisation – values – operational excellence and customer service KPIs page 26/CFO’s review page 84 We believe strong employee relationships help deliver excellent customer service. To ensure that G4S delivers on its commitments to employees, businesses are required to report monthly on key metrics relating to: – health and safety – industrial relations – recruitment and employee retention CORPORATE RESPONSIBILITY It is our responsibility to make sure our impact on society is a positive one. We make a difference by helping people live and work in safe and secure environments. In 2013, we improved our risk management and programme assurance framework to ensure we properly evaluate all areas of how we do business. 2013 HIGHLIGHTS: – Materiality review of CSR issues – Launched human rights framework for all businesses – Launch of road safety campaign called Driving Force Rules OUR FOCUS AREAS 2014 PRIORITIES INTEGRITY COMMUNITYY PEOPLE ENVIRONMENT BUSINESS ETHICS AND ANTI-CORRUPTION HEALTH & SAFETY HUMAN RIGHTS CSR page 42 or visit www.g4s.com/csr Annual Report and Accounts 2013 G4S plc 9 G4S at a glance G4S is the leading global integrated security company SECURE SOLUTIONS The secure solutions business covers a wide range of services, including: Risk services and consultancy Security systems Monitoring and response Risk management consultancy services including personal protection, training, mine detection and clearance services Access control, CCTV, intruder alarms, fi re detection, video analytics and security and building systems technology integration Key holding, mobile security patrol and response services and alarm receiving and monitoring facilities Secure facilities services Welfare to work programme Manned security services Integrated facilities services for entire sites or estates for commercial customers and governments Assisting long term unemployed people into work Trained and vetted security offi cers CARE & JUSTICE SERVICES Care & justice services is part of secure solutions and offers highly specialised services to central and local governments and government agencies and authorities: Juvenile and adult custody Prisoner escorting Asylum services Electronic monitoring Police services Management of all aspects of a facility and those held within the facility – similar centres are also used for the detention of asylum applicants Transportation of prisoners and asylum applicants between courts, police stations and custody and asylum centres Management of housing provision and other services for asylum applicants Electronic tagging and monitoring of offenders at home or in the community Back offi ce support functions for police forces, support for front line policing including the provision of custody suite services and forensic medical services CASH SOLUTIONS The cash solutions business covers a wide range of services including: Outsourcing cash management Managing cash on behalf of fi nancial institutions including cash transportation, high security cash centres, Cash consulting ATM management Retail cash management International transportation Cash transportation counting and reconciling cash, fi tness sorting of notes for use in automated teller machines (ATMs), counterfeit detection and removal, redistribution of cash to bank branches, ATMs and retail customers Provision of consultancy services to central banks and commercial banks on overall cash management strategy, bank note production and security and all aspects of cash cycle effi ciency Managing ATMs on behalf of banks, retailers and independent ATM providers – including cash forecasting, cash transportation and reconciliation services, fi rst line maintenance and ATM engineering services Provision of systems and hardware which provide an automated cash offi ce for retail sites to improve security of cash, electronic audit trails of takings and a real time view of retail cash balances Bespoke international transportation and insurance of currency, gems and other valuables Secure transportation of cash using high security vehicles, fully vetted and trained personnel and purpose-built technology to transport, protect, count and reconcile cash to customer records 10 G4S plc Annual Report and Accounts 2013 Strategic report CONTRACTS AND RELATIONSHIPS G4S has a very diverse contract portfolio. The duration of contracts varies from annual sporting events to 25-year private prison contracts. In cash solutions, most contracts are annual, with those contracts requiring a higher capital intensity being usually fi ve years in duration or longer. In practice many relationships become long-term and result in contracts being renewed year after year. See page 33 for more information CUSTOMERS (SECURE SOLUTIONS) (% of revenue) 6 33 28 10 6 42 2 9 Government* Financial institutions Utilities Transport Ports & airports Leisure Retail Major corporates Consumers * Including care & justice services. MARKET AND STRATEGY G4S is a global provider with a top three position in around 80 of the 100 manned security markets in which we operate. As one of the few global security companies, our main international competitors in developed markets tend to be regional and international companies operating in one market segment such as security, systems or facilities. There are also many local security companies operating in developed and emerging markets. We aim to: – Use our expertise, service delivery and integration together with our geographic coverage to differentiate our business to customers – Drive outsourcing and enhance the value of traditional security services through greater use of technology (see page 25) Revenue £5,567m (2012: £5,314m) MARKET AND STRATEGY Care & justice services delivers more than 10% of secure solutions revenue. While the care & justice services market is concentrated primarily in the UK, US, Australia and New Zealand, we see a number of countries exploring the possibility of outsourcing these services to the private sector. The market structure is typically consolidated on the supply side with a small number of providers. Larger companies are usually better equipped to deliver such highly specialised services. Revenue £653m (2012: £553m) MARKET AND STRATEGY G4S is the market leader or number two in 57 of our 61 secure cash transportation markets. Our main international competitors are Loomis and Brink’s in most developed markets and local companies in emerging markets. Our cash solutions business is integrated into our wider organisation and processes through shared customers, management structures and systems in many countries. The market is highly regulated, often by central banks, and the business requires complex infrastructure and signifi cant expertise. We aim to: – Play a key role in the management of the cash cycle on behalf of central banks, commercial banks and retailers, allowing them to focus on their core business – Use our developed market cash cycle expertise and track record to encourage central bank and fi nancial institution outsourcing in emerging markets – Continue the roll-out of innovative technology such as CASH360™ for retail customers (see page 25) Revenue £1,208m (2012: £1,157m) See page 33 for more information CUSTOMERS (CASH SOLUTIONS) (% of revenue) 17 20 63 Financial institutions Retailers Other Annual Report and Accounts 2013 G4S plc 11 Market review The market opportunity GLOBAL SECURITY MARKET BY REGION ($m) According to market research consultancy Freedonia Inc, global demand for private security services will increase between 2011 and 2016 by 7.3% annually to $213 billion. Growth drivers include GDP and population growth, regulation and crime levels. 100,000 80,000 60,000 40,000 20,000 0 Emerging markets expected to represent more than 50% of the global market by 2021 ASIA PACIFIC NORTH AMERICA WESTERN EUROPE LATIN AMERICA AFRICA & M/EAST EASTERN EUROPE 2006 2011 2016 2021 Source: Freedonia World Security Services report January 2013 excluding residential security. 12 G4S plc Annual Report and Accounts 2013 Strategic report Our market positions We have a truly global business with large established market positions in developed markets and outstanding positions in fast growing emerging markets. Our emerging market businesses accounted for 37% of group revenues in 2013 and 44% of profi ts. NORTH AMERICA UK & IRELAND EUROPE G4S North America is predominantly an integrated secure solutions business for commercial customers, with some government contracts including juvenile detention services and border protection. It has recently launched an innovative cash management solution for retail customers, CASH360™ (see page 25), and is selling its classifi ed US Government business. We employ around 54,000 colleagues in North America. G4S Revenues Total security market size in 2011* 18% $44bn G4S UK & Ireland is the UK’s leading security provider of cash and secure solutions with a broad range of expertise covering specialist event security, government outsourcing, including care and justice services, and cash solutions. The region employs 39,000 people. G4S Europe has activities in Scandinavia, Benelux, Southern Europe, Eastern Europe and Central Asia. It has 67,000 employees and strong market positions in cash solutions and around 20% of revenues are security systems related. G4S Revenues Total security market G4S Revenues Total security market size in 2011* 22% $7bn size in 2011* 22% $37bn Developed markets Emerging markets No presence LATIN AMERICA AFRICA G4S is a leading integrated cash solutions and secure solutions provider for commercial customers across Latin America and government customers in Brazil, with Brazil, Colombia and Argentina being its largest markets in the region by revenue. We employ around 74,000 colleagues in Latin America. G4S is the largest provider of integrated security solutions in the region, with operations in 25 African countries with more than 118,000 employees. We focus on core sectors in the region, particularly telecommunications, aviation, mining, oil & gas, embassies and ports as well as post-confl ict humanitarian work with government agencies and NGOs. ASIA MIDDLE EAST G4S is the leading security provider in the Asia Middle East region with operations in 32 countries and employing 266,000 people. Our largest countries by revenue are India, Saudi Arabia and Australia. G4S Revenues Total security market G4S Revenues Total security market G4S Revenues Total security market size in 2011* 10% $15bn 7% size in 2011* $8bn size in 2011* 21% $39bn * Source: Freedonia and G4S estimates excluding residential security. Annual Report and Accounts 2013 G4S plc 13 Business model Robust business model Our business model is market led; everything begins with the customer. We seek to understand our customers’ strategic and commercial objectives so that we can design and deliver security solutions which support them. Our aim is to create sustainable shareholder value through the consistent achievement of excellence in three areas: customer service, operational performance and fi nancial management. PERFORMANCE DELIVERY SOLUTIONS DESIGN CUSTOMER UNDERSTANDING MARKET DEMAND SCALE & CAPABILITIES We foster a high performance culture which focuses on service excellence, operational management and fi nancial performance. High performance leads to strong customer relationships, motivated employees and achievement of strategic goals – critical elements of delivering sustainable, profi table growth. By analysing customer needs and bringing together our expertise in market sectors, technology, project management and service delivery we design solutions which help our customers to manage risks, improve service, protect people and assets and achieve their own organisational objectives. Understanding customer needs is central to our success. This enables us to align our organisational objectives to those of the customer and means we can help our customers to be successful. See pages 10 and 11 for our customer segments. Delivering high service levels across our core services helps us to deepen customer partnerships over the long-term and creates opportunities to work with customers to meet their existing and increasingly complex security needs. There is strong demand for our core services of secure solutions, cash solutions and care & justice services across the world. See pages 10 and 11 for our market positions. With 618,000 dedicated employees and operations in 120 countries, our ability to deploy skilled staff on a global basis to support local and international customers is central to our business model. This coverage means we can share learning and experiences across our markets to the benefi t of our customers and our business. We work in line with relevant international standards and strive to achieve consistent high quality employee engagement, health and safety, training and ethical business practices across our operations. Part of the group strategy is to design and deliver more sophisticated security solutions for customers for both secure solutions and cash solutions. In many of the countries in which we operate, there is still great potential to sell more complex solutions which tend to have longer contract terms and higher margins. G4S CASH SOLUTIONS: UNIQUE BREADTH AND REACH i n g r a m & y t i v e g n o l l y, t i x e p m o c g n i s a e r c n I Outsourcing services 14 ATM maintenance 33 ATM replenishment Cash processing Secure transportation 47 57 61 Number of businesses around the world 14 G4S plc Annual Report and Accounts 2013 Strategic report Closely aligned to our values PERFORMANCE We seek to improve performance year on year to create long-term sustainability. EXPERTISE We develop and demonstrate our expertise through our innovative approach to creating and delivering the right solutions. TEAMWORK & COLLABORATION We collaborate for the benefi t of our customers and G4S. CUSTOMER FOCUS We have close, open relationships with our customers which generate trust and we work in partnership for the benefi t of our organisations. SAFETY FIRST INTEGRITY BEST PEOPLE We prioritise safety management to protect the health and well-being of our colleagues and those around us. We can always be trusted to do the right thing. We employ the best people, develop their competence, provide opportunity and inspire them to live our values. G4S SECURE SOLUTIONS: POSITIONED FOR FUTURE DEVELOPMENT i n g r a m & y t i v e g n o l l y, t i x e p m o c g n i s a e r c n I Risk services 10 15 18 System software/integration Consultancy services Monitoring & response System install & maintenance Manned security 71 81 100 Number of G4S countries around the world Annual Report and Accounts 2013 G4S plc 15 Strategic execution People and values AT THE HEART OF OUR STRATEGY G4S HAS A DEDICATED WORKFORCE OF OVER 618,000 EMPLOYEES AROUND THE WORLD (%) Africa Asia & Middle East Latin America Europe North America UK & Ireland 6 9 19 11 12 43 G4S employees by region as at end Dec 2013. Our culture is defi ned by our values, beliefs and behaviours. We seek to embed our values in all aspects of our operations and they form part of our recruitment, development and review processes. Managers and employees are encouraged and expected to behave in line with the group’s values and to speak up when witnessing behaviour which does not meet our standards. OUR GROUP VALUES: SUPPORTING OUR STRATEGY Customer focus – We have close, open relationships with our customers which generate trust and we work in partnership for the benefi t of our organisations. Best people – We employ the best people, develop their competence, provide opportunity and inspire them to live our values. Integrity – We can always be trusted to do the right thing. Expertise – We develop and demonstrate our expertise through our innovative approach to creating and delivering the right solutions. Performance – We seek to improve performance year on year to create long-term sustainability. Teamwork and collaboration – We collaborate for the benefi t of our customers and G4S. Safety fi rst – We prioritise safety management to protect the health and well-being of our colleagues and those around us. In 2014, we have introduced a new value to focus specifi cally on the safety of our colleagues and those around us. This is supported by a number of key safety initiatives and campaigns designed to increase awareness of health and safety matters, learn from best practice and prevent health and safety incidents. See pages 44 and 45 for further information on health and safety initiatives. 16 G4S plc Annual Report and Accounts 2013 Strategic report WELFARE TO WORK To date, G4S Welfare to Work has helped 35,077 long-term unemployed people in the UK into jobs. We estimate this has saved the UK tax payer more than £120 million per annum. The vast majority of people that we have assisted had been out of work for at least nine months, with many having been out of work for a number of years. Annual Report and Accounts 2013 G4S plc 17 Strategic execution G4S CASH SOLUTIONS We are one of the leading cash solutions companies in the world and are either number one or two in secure cash transportation in 57 of the 61 countries in which we operate. For example, across the Asia Middle East region, we provide customers with a broad range of services including servicing and replenishing over 38,000 ATM and cash deposit machines. 18 G4S plc Annual Report and Accounts 2013 Strategic report Investment in customer service, operational excellence and organic growth LARGE, GROWING SALES PIPELINE We benefi t from structural growth in the demand for our products and services around the world and that is refl ected in our sales pipeline, which currently stands at £5 billion per annum. We are in many more markets than our competitors – typically with higher emerging market exposure. We have higher value added services in our portfolio, and there is potential for us to extend our high value services into more of our markets. We continue to innovate through the use of technology and process know-how to create new products and services. We are investing in improving our sales systems, customer account management, sales leadership and sales resource in some of our core markets in order to service strong market demand. £2.9bn Leads and prospects (unrisked) £1.3bn Bidding £0.8bn Negotiation As at March 2014. Annual Report and Accounts 2013 G4S plc 19 Strategic execution G4S HAS AVIATION OPERATIONS IN MORE THAN 40 COUNTRIES, FOR OVER 80 AIRLINES AND FOR 120 AIRPORTS Aviation contracts won in 2013 included Charleroi airport in Belgium, renewed contracts with British Airways, and renewal and extension of the Dubai airport security contract. 20 G4S plc Annual Report and Accounts 2013 Strategic report Leveraging our capabilities worldwide REVENUE BY REGION (%) 22 19 6 22 21 10 Africa Asia Middle East Latin America Europe North America UK & Ireland Growth potential 5% to 8% REVENUE FROM KEY SECTORS (£m) £1,014m 1,014 821 1,200 1,000 800 600 400 200 0 12 13 We have a truly global business with established market positions in developed markets and strong positions in rapidly growing emerging markets. Our emerging markets businesses account for 37% of group sales today and this proportion is expected to increase in the future. Overall, we believe that the scale and quality of the global market opportunity supports organic growth potential of around 5% to 8% per annum for the foreseeable future. We invest in developing security services in sectors where security and safety are strategically important to customers – such as ports, mining, oil and gas and aviation. Through our investment in these sectors we have seen combined revenues increase over 23% during the year and these have more than doubled since 2009 to over £1 billion in 2013. We are now working to further embed this sector expertise within our regional structure. For more information see www.g4s.com/sectors Annual Report and Accounts 2013 G4S plc 21 Strategic execution Portfolio and performance management FORECAST G4S PBITA IN 2016 BY COUNTRY Cumulative PBITA (%) 100 80 60 40 20 0 62 COUNTRIES CONTRIBUTE 95% OF 2016 PBITA 1 11 21 31 41 51 61 71 81 91 101 111 Country 2016 PBITA High to Low Rigorous measurement and monitoring of our performance is vital to ensuring we are delivering sustainable profi table growth. During 2013, we conducted a “bottom-up” analysis of all of our businesses, forecasting their performance out to 2016. The results showed that 62 countries were expected to contribute 95% of the total PBITA expected in 2016. Number of businesses 2013 Rev (£m) 2013 PBITA (£m) 2013 Margin (%) Proceeds to date (£m) November 2013 31 March 2014 35 26 425.6 13.3 214.2 12.3 3.1 5.8 0.0 30.0 Looking at the materiality of contribution (growth, PBITA, cash generation and turnaround potential), we identifi ed 35 businesses which required action to be taken to realise full value for shareholders through turn around, restructuring or disposal. We have made good progress, selling or closing six businesses and restructuring three during 2013 and early 2014. In the process, together with the sale of the Canada cash solutions and Colombia secure archiving businesses we generated net proceeds of £124 million. We expect further progress will be made in 2014 with the remaining businesses which are under review. By actively managing our business portfolio, we can ensure that we maintain our strategic focus – deploying our capital and best people to the best opportunities (see CEO review page 4). We are also strengthening the link between performance and reward (see Directors' remuneration report pages 64 to 72). The group’s budget is set in the context of the longer-term business plan which supports our strategy. From December 2013, each of our senior managers across the group has a performance contract which clearly defi nes how he or she (and his or her team) will contribute to the overall success of the group. 22 G4S plc Annual Report and Accounts 2013 Strategic report SHELL In September 2013, G4S signed a strategic global framework agreement with Shell International Limited to provide security solutions to the energy and petrochemicals company on a call off basis potentially in more than 30 countries. The fi ve-year contract, with the option of a further two years, is one of the group’s largest global framework contracts. Annual Report and Accounts 2013 G4S plc 23 Strategic execution SYMMETRY Our Symmetry product is an access control and building management system. It is used by nearly every major industry and secures everything from a two-door building to large corporations spread across the globe. The system can easily be expanded as a company grows and includes integrated video, intrusion and threat level management, workfl ow designs and intelligent controllers. 24 G4S plc Annual Report and Accounts 2013 Strategic report Technology & innovation 2013 SECURITY SYSTEMS REVENUE (%) 6 6 10 18 12 Africa Asia Middle East Latin America Europe North America UK & Ireland 48 Our technology products and services are focused on the deployment of customer-facing security systems and software which is designed to protect customers and their assets and to provide customers with management information to achieve their objectives, typically through revenue enhancement, cost reduction or risk management. There are areas of technology excellence in parts of G4S with proven intellectual property. This presents us with the opportunity to leverage this know-how more widely across the group including in emerging markets which currently account for 28% of the group’s systems revenue. In addition, we develop technology and know-how to ensure that we deliver our commitments to customers effi ciently. o l o g y n In-store te c h Cash cycle s o ft C a s h s e c u r i t y CASH360™ CASH 360 Monitoring a n d maintena n c e w a r e t n e m e s g e a vic n a ser Cash m CASH360™ CASH360™ is one of our customer-facing technology solutions, providing an end-to-end cash management solution to G4S’ retail customers. Launched in 2010, it now has around 3,000 customers with more than 5,400 solutions sold across four continents. South Africa, the Netherlands and Belgium grew between 34% and 101% in 2013. During 2013, we also launched CASH360™ in the United States. Annual Report and Accounts 2013 G4S plc 25 Strategic execution KEY PERFORMANCE INDICATORS Disciplined fi nancial management FINANCIAL KPIs The group measures its performance on an underlying basis as, in the board’s opinion, this provides the most meaningful analysis of the group’s performance. The CFO review on pages 84 to 89 sets out the commentary on the total performance for the year. The group’s fi nancial key performance indicators (KPIs) are revenue growth, operating cash fl ow, PBITA and EPS. UNDERLYING REVENUE* (£bn) UNDERLYING PBITA1 (£m) CASH GENERATED BY CONTINUING OPERATIONS (£m) 4302 442 10 8 6 4 2 0 7.0 7.4 500 400 300 200 100 0 460 337 600 500 400 300 200 100 0 12 13 12 13 12 13 Underlying revenues grew 5.8% to £7.4bn including the contribution from acquisitions in 2012 and 2013. G4S revenues grew 4.7%* organically in 2013. Organic growth was assisted by strong growth in emerging markets of 14% but partly offset by weak macroeconomic conditions in Europe (see page 31). Based on the structural growth characteristics of our markets and strong customer demand for our services, we aim to achieve organic growth of between 5% and 8% per year in the long-term. See page 19 for a description of our investment in organic growth. * (excluding the Olympics contract). See pages 84 to 89 for more information We are focused on delivering sustainable, profi table growth. PBITA measures how successful a company is at generating profi t from its operating activities (before taking into account interest, tax and amortisation of acquisition-related intangible assets). In 2013, PBITA grew 2.8% despite challenges in some developed markets, helped by a strong performance in emerging markets. Operating cash fl ow measures how successful the business is at managing its operating capital. We are focused on improving all areas of the operating cash cycle. 1 To clearly present underlying performance, specifi c items have been excluded and separately disclosed – see page 86. 2 2012 underlying results are presented at constant exchange rates and have been restated for the adoption of IAS19 (2011). 2012 PBITA has been re-presented to exclude PBITA from businesses subsequently classifi ed as discontinued, one-off credits, profi ts on disposal and the prior year effect of the review of assets and liabilities in 2013 – see page 86. 26 G4S plc Annual Report and Accounts 2013 Strategic report NON-FINANCIAL KPIs HR STANDARDS AND KPIs Managers across the group are also incentivised to achieve additional objectives which are agreed on an individual basis and are usually linked to business plan milestones. In 2014, performance contracts of senior managers focus on fi nancial performance, but also on personal objectives aligned to the following areas: We believe that strong employee relationships help to deliver excellent customer service. Our businesses are required to report monthly on key metrics relating to: Health and safety People and organisation Operational excellence and customer service Business development Values Health and safety Industrial relations Employee retention Recruitment rates All objectives and targets are focused on driving sustainable profi table growth. See pages 42 to 47 for some of our key CSR KPIs and our progress against them in 2013. More detail can also be found in the 2013 G4S CSR report. UNDERLYING EPS1, 3 (pence per share) 15.8 14.7 20 16 12 8 4 0 12 13 Underlying earnings were £214 million in 2013 (2012: £222 million) down 3.6%. With the average number of ordinary shares up 3.5% to 1,452 million (2012: 1,403 million) underlying EPS declined 7% compared to 2012, to 14.7 pence. 3 Total loss per share was 24.9p (2012: earnings per share 2.9p) – see page 87 for details. Annual Report and Accounts 2013 G4S plc 27 Business review 2013 Business review G4S is managed through a functional and geographic organisational structure. EXECUTIVE COMMITTEE For more details of the group executive team please see pages 50 and 51. 1 2 3 4 5 6 7 8 9 10 1. Ashley Almanza Chief Executive Offi cer 2. Eddie Aston Regional CEO – UK & Ireland 3. Andy Baker Regional President – Africa 4. Irene Cowden Group HR Director 5. Grahame Gibson Regional CEO – Americas (North America and Latin America) 6. Graham Levinsohn Regional CEO – Europe 7. Søren Lundsberg- Nielsen Group General Counsel 8. Himanshu Raja Group Chief Financial Offi cer 9. Dan Ryan Regional CEO – Asia and Middle East 10. Debbie Walker Group Communications Director 2013 FINANCIAL PERFORMANCE BY REGION REVENUE (%) PBITA (%) 22 19 6 22 21 10 Africa Asia Middle East Latin America Europe North America UK & Ireland 25 12 8 26 Africa Asia Middle East Latin America Europe North America UK & Ireland 10 19 28 G4S plc Annual Report and Accounts 2013 Strategic report UNDERLYING FINANCIAL PERFORMANCE The group's segmental analysis of underlying performance is set out below, adjusting for the effect of the review of the carrying value of assets and liabilities as set out on page 86. At constant exchange rates Revenue £m PBITA £m Africa Asia Middle East Latin America Emerging Markets Europe North America UK & Ireland Developed Markets Total Group before Head offi ce costs Head offi ce costs Total Group 20131 486 1,567 717 2,770 1,648 1,358 1,652 4,658 20122 Change % 11.7% 435 17.7% 1,331 16.6% 615 16.3% 2,381 (1.6%) 1,674 0.4% 1,352 2.2% 1,617 0.3% 4,643 7,428 7,024 5.8% 7,428 7,024 5.8% 20131 39 129 48 216 92 56 122 270 486 (44) 442 20122 Change % 30.0% 24.0% 23.1% 24.9% (14.8%) (17.6%) (5.4%) (11.5%) 30 104 39 173 108 68 129 305 Margins % 20131 8.0% 8.2% 6.7% 7.8% 5.6% 4.1% 7.4% 5.8% 20122 6.9% 7.8% 6.3% 7.3% 6.5% 5.0% 8.0% 6.6% 478 (48) 430 1.7% 6.5% 6.8% 2.8% 6.0% 6.1% Organic growth 7% 18% 11% 14% (2%) 0% 1% 0% 5% 5% Footnotes 1 and 2 also apply to pages 30 to 32. 1 To clearly present underlying performance, specifi c items have been excluded and separately disclosed – see page 86. 2 2012 underlying results are presented at constant exchange rates and have been restated for the adoption of IAS19 (2011). 2012 PBITA has been re-presented to exclude PBITA from businesses subsequently classifi ed as discontinued, one off credits, profi ts on disposal and the prior year effect of the review of assets and liabilities in 2013 – see page 86. TOTAL FINANCIAL PERFORMANCE The group’s segmental analysis of statutory results is presented below and is consistent with note 6 of the consolidated fi nancial statements (page 106). The impact of the review of assets and liabilities and restructuring costs are excluded from both the current year and the prior year statutory results. The prior year statutory results exclude the impact of the Olympics revenue consistent with the disclosure in note 6. Revenue £m PBITA £m At constant exchange rates Africa Asia Middle East Latin America Emerging Markets Europe North America UK & Ireland Developed Markets Total Group before Head offi ce costs Head offi ce costs Total Group at constant exchange rates Foreign exchange Total Group at actual exchange rates 20133 486 1,567 717 2,770 1,648 1,358 1,652 4,658 20124 Change % 11.7% 435 17.7% 1,331 16.6% 615 16.3% 2,381 (1.6%) 1,674 0.4% 1,352 1.7% 1,625 0.2% 4,651 7,428 7,032 5.6% 7,428 – 7,032 (8) 5.6% 7,428 7,024 5.8% 20133 39 129 48 216 92 56 122 270 486 (44) 442 – 442 20124 Change % 14.7% 22.9% 4.3% 16.8% (19.3%) (23.3%) (15.9%) (18.7%) 34 105 46 185 114 73 145 332 Margins % 20133 8.0% 8.2% 6.7% 7.8% 5.6% 4.1% 7.4% 5.8% 20124 7.8% 7.9% 7.5% 7.8% 6.8% 5.4% 8.9% 7.1% 517 (47) 470 – 470 (6.0%) (6.4%) 6.5% 7.4% (6.0%) 6.0% 6.7% (6.0%) 6.0% 6.7% Organic growth 7% 18% 11% 14% (2%) 0% 1% 0% 5% 5% 3 To clearly present underlying performance, specifi c items have been excluded and disclosed separately – refer to page 86 for a reconciliation to total results. 4 2012 results are reported here at constant exchange rates (but reconciled to actual rates), exclude specifi c items but are presented before the impact of the review of assets and liabilities in 2013. Annual Report and Accounts 2013 G4S plc 29 Business review continued All tables show underlying performance at constant exchange rates. AFRICA Revenue £m PBITA £m 20131 486 20122 Change % 11.7% 435 20131 39 20122 Change % 30.0% 30 In Africa revenues grew 12% and organic growth was 7%. PBITA increased 30%, benefi ting from overhead effi ciency and restructuring programmes. The acquisition of Deposita in January 2013 and the addition of CASH360™ devices and ATM engineering services to our cash solutions business in South Africa have enabled us to sell comprehensive end-to-end solutions in that market. We are now positioned as the market leading cash solutions business in South Africa and are able to deploy this capability into African and other markets. Across the region, new contracts won include the Port of Tangiers in Morocco, Anglogold in Ghana, Tenke Mining in DRC, a FM contract with Rio Tinto and a secure solutions contract with the United Nations in Southern Sudan. ASIA MIDDLE EAST Revenue £m PBITA £m 20131 1,567 20122 Change % 17.7% 1,331 20131 129 20122 Change % 24.0% 104 Revenue growth in Asia Middle East was very strong at 18% and PBITA increased 24%, refl ecting a greater contribution from our care & justice services businesses in Australia and New Zealand, improved profi tability in our risk services businesses in Iraq and Afghanistan and a strong profi t improvement across the Middle East. Revenue growth accelerated in the second-half of the year due partly to a step-up in service volumes at the Manus Island processing centre. Following the Australian elections held in September 2013 and the change in government, we were advised that the Manus Island contract would end in March 2014. We won demining and risk management contracts to service a number of international oil companies in Iraq and won or started a number of secure solutions contracts in the UAE for key customers including the Abu Dhabi Education Council, Etisalat, Formula 1, the Road Transport Authority and Dubai airport. The group has strong market positions across Africa and a healthy product portfolio to support sales in 2014, especially in the areas of cash management, manned security and technology solutions. The bidding pipeline in Africa is diverse and includes sectors such as fi nancial services, mining, embassies and other government agencies, with increasing numbers of both multi-country and larger scale bids. The region is continuing its restructuring programme into other parts of Africa in 2014 and is recruiting additional talent to ensure the region has the capacity to address the market opportunities. We began investing in our technology sales and delivery capability in the Middle East so that we are able to deploy our proven products and expertise in delivering comprehensive electronic security solutions to clients. Our business in Saudi Arabia won important contracts in the banking, ports and real estate sectors. Across the region we are systematically reviewing organisational structures and business processes. This review is well advanced in India, the largest country in the region, and is enabling us to streamline operations, reduce layers of management and overhead and to invest in sales and operational capability. 30 G4S plc Annual Report and Accounts 2013 See footnotes on p.29 Strategic report LATIN AMERICA Revenue £m PBITA £m 20131 717 20122 Change % 16.6% 615 20131 48 20122 Change % 23.1% 39 Revenue growth in Latin America was 17% and PBITA increased by 23% despite economic challenges in the region, including a slow down in economic growth in Brazil, with a rigorous price increase programme to mitigate infl ation and government mandated wage increases. Following the appointment of a new Regional President, Martin Alvarez, in October 2013 we have continued to build management capacity across the region. EUROPE Revenue £m PBITA £m 20131 1,648 20122 Change % (1.6%) 1,674 20131 92 20122 Change % (14.8%) 108 Our European management team has recently been strengthened with the appointment of Graham Levinsohn as Regional CEO, with effect from November 2013. In Europe revenue declined by 1.6% driven by challenging market conditions primarily in secure solutions in the Netherlands and in Eastern Europe, with growth in Western Europe secure solutions and cash solutions offset by declines in most Eastern European markets. PBITA was 15% lower, adversely impacted by wage infl ation and by the closure of 23 prisons and other cost reductions by the Ministry of Justice in the Netherlands. During 2014 we will be seeking to improve alignment between salary and price increases in Eastern Europe. In the fourth quarter, we accelerated our restructuring programme to reduce our cost structure and strengthen our competitive positions in a number of key markets. The programme includes the rationalisation of management and back-offi ce structures and over the course of 2013 and 2014 we plan to invest £23 million in the Netherlands, Belgium, Greece, Finland and other countries. The region has early revenue momentum into 2014, with new contract wins and solid customer retention. Secure solutions contract wins include contracts for Charleroi airport in Belgium and Google in Finland, partly offsetting the loss of a Finnish retail customer. In January 2014, we renewed a nine year cash solutions contract with the Dutch Railways. In care & justice services, our pipeline is strong and our Austrian business began a £5 million per annum immigration contract for 15 years in December 2013. We also won an electronic monitoring contract in Bulgaria and an Agip-Shell security contract in Kazakhstan. Organic revenue growth was 11% with a number of contract wins in the ports, car manufacturing, transportation, fi nancial services, government and extractives sectors in Latin America. We sold our Colombia secure archiving business for £34 million in 2013. Our cash solutions businesses in Europe performed well overall. A strong performance was achieved in Belgium and in the Netherlands including a number of new retail contracts and CASH360™ gains offset by contract losses in the fi rst-half of the year in Finland and the Baltics. G4S cash solutions supported the smooth introduction of the Euro in Latvia towards the end of the year. In January 2014, G4S won the majority of Geldservice Nederland’s (GSN) cash solutions business in the Netherlands for fi ve years, valued at c€50m per annum. GSN serves the major banks in the Netherlands and is their provider of cash counting, handling and logistics, including the maintenance of cash devices. Revenues for the security systems business, which accounts for around 20% of European secure solutions revenues, remained broadly in line with 2012. Systems contract wins include a maintenance contract for the European parliament in Luxembourg and a major systems contract with Lego in Hungary. The region has an increased focus on security and cash solutions technology, with the aim of deploying our proven technology solutions from elsewhere in the group into key European markets. The region made good progress on its portfolio review, selling its Slovakian cash solutions business in 2013. The sale of our Norway business for £29 million was also agreed in 2013 and completed in January 2014. We have a diverse European contract pipeline with areas such as ports, aviation, transportation and healthcare being particularly strong. Our investment in sales and business development capability is designed to sustain and strengthen this pipeline over time. Annual Report and Accounts 2013 G4S plc 31 Business review continued NORTH AMERICA Revenue £m PBITA £m 20131 1,358 20122 Change % 0.4% 1,352 20131 56 20122 Change % (17.6%) 68 Revenues in the North America region grew 0.4% and organic growth overall was broadly unchanged with 2% growth in US commercial security and 10% growth in youth services offset by US Federal sequestration reducing new and additional federal government work in secure solutions and in the G4S Technology business. Against a background of uncertain US Government spending, commercial contract wins remain robust with major contract awards from Amazon, Bank of New York, Simon Malls, Navistar, Liberty Mutual, MetLife, Georgia Pacifi c, the Millstone (Dominion) nuclear power plant in the US and more recently Toronto Hydro, Imperial Oil, and PTI in Canada. PBITA for the region was 18% lower, impacted by sales mix, with lower revenues in the technology businesses (Federal spending impact) and reduced border patrol volumes. Results in 2012 also benefi ted from one-off protest protection work for banks. Our US technology business has been restructured to increase sales in the commercial sector. UK & IRELAND Revenue £m PBITA £m 20131 1,652 20122 Change % 2.2% 1,617 20131 122 20122 Change % (5.4%) 129 We have reorganised the UK & Ireland region into market-facing business units of cash solutions, secure solutions, central government solutions, facilities management and outsourced services and we continued to make a number of new management appointments to senior line and function roles. There was revenue growth of 2% in UK & Ireland, with organic growth of 1%, principally due to good growth in the police outsourcing and utilities businesses offset by lower revenues in Ireland and the UK cash solutions business. PBITA was 5.4% lower due to revenue mix, particularly from lower revenues in the UK cash solutions business. As discussed previously, signifi cant restructuring programmes are being implemented in UK cash solutions, Ireland cash solutions and secure solutions covering branch networks (Ireland and UK cash solutions), organisational design and operational labour effi ciency. Overhead headcount was reduced by more than 5% in the second-half of 2013. The cost of restructuring is £34 million and is expected to pay back within the next two years. UK contracts won during 2013 include being selected by the Department for Work & Pensions (DWP) to manage the Child Maintenance Options Contact Centre Service, provision of security at the G8 Summit in June, Pennine Hospital facilities management, and our fi rst contract to provide secure patient transport services under a three-year contract with Northumberland, Tyne and Wear NHS Foundation Trust. Other recent contract awards include Derbyshire and Nottinghamshire Police Forensic Medical Services and Avon and Somerset police custody suites. 32 G4S plc Annual Report and Accounts 2013 In the United States we continued to see increasing interest in our retail cash solutions product, CASH360™, with two small contracts awarded recently. The implementation of the Affordable Care Act in the US has been delayed for large businesses. We do not expect it to have a material impact on G4S as the majority of our US employee healthcare plans are already broadly compliant. Overall, the North American business has a strong contract pipeline with over £500 million in near-term opportunities across all sectors and a visible long-term contract pipeline of around £1.2 billion. Good progress was made in the region on rationalising the portfolio. We sold our cash solutions business in Canada for £60 million in January 2014. Against the backdrop of a highly competitive commercial security market, we won new contracts with key commercial customers such as a security contract with Bank of America, a new global framework agreement with Shell covering 30 countries and we retained our security contract with British Airways. The UK events security business successfully supported the UK Police Service of Northern Ireland (PSNI) at the G8 Summit held at Lough Erne in Northern Ireland in June, delivering a range of specialised security solutions. In cash solutions, we retained important contracts with HSBC and Barclays and have expanded our outsourcing partnership with Lloyds Banking Group, taking over the management of their Edinburgh cash processing centre. We reached full and fi nal settlement with the UK Government on the electronic monitoring contract and two smaller contracts and have made signifi cant progress on our programme of corporate renewal in the UK. The renewal programme is embedded within our overall corporate programme and is not anticipated to give rise to signifi cant additional cost. See footnotes on p.29 Strategic report SERVICE LINE OPERATING REVIEW Secure solutions At constant exchange rates Revenue Organic growth PBITA Margin % Emerging markets £m 20131 2,235 15% 158 7.1% 20122 Change % 1,918 16.5% 8% 119 6.2% 32.8% 0.9% Developed markets £m 20131 3,985 0% 213 5.3% 20122 Change % 3,949 0.9% 7% 235 6.0% (9.4%) (0.7%) 20131 6,220 5% 371 6.0% The secure solutions businesses delivered 6% growth in revenue driven by 17% growth in emerging markets and a solid performance in developed markets. Trading conditions in some developed markets, in particular in Europe, remain challenging and we have begun restructuring these businesses to strengthen business performance in the medium term. Lower US Federal government spending affected our secure solutions and systems businesses and our US systems business has been restructured to increase sales in the commercial sector. Emerging markets grew strongly across all regions and increased PBITA 33% helped by contract mix, price increases and cost effi ciencies. Total % 20122 Change % 5,867 7% 354 6.0% 4.8% 0.0% 6.0% Cash solutions At constant exchange rates Revenue Organic growth PBITA Margin % Emerging markets £m 20131 535 12% 58 10.8% 20122 Change % 462 15.8% 8% 54 11.7% 7.4% (0.9%) Developed markets £m 20131 673 (3%) 57 8.5% 20122 Change % 695 (3.2%) (1%) 70 10.1% (18.6%) (1.6%) Total % 20122 Change % 1,157 4.4% 3% 124 10.7% (7.3%) (1.2%) 20131 1,208 3% 115 9.5% The cash solutions business grew by 4% with 16% revenue growth in emerging markets offset by a decline in developed markets, principally due to a weaker performance in the UK and Ireland cash solutions businesses. These businesses are being restructured and we expect an improved performance in 2014. Emerging markets PBITA grew 7% notwithstanding new dual vendor policies for major Malaysian banks and price competition in Colombia. 1 To clearly present underlying performance, specifi c items have been excluded and separately disclosed – see page 86. 2 2012 underlying results are presented at constant exchange rates and have been restated for the adoption of IAS19 (2011). 2012 PBITA has been re-presented to exclude PBITA from businesses subsequently classifi ed as discontinued, one-off credits, profi ts on disposal and the prior year effect of the review of assets and liabilities in 2013 – see page 86. Annual Report and Accounts 2013 G4S plc 33 Risk management Managing risk effectively Our aim is to deeply embed risk management disciplines which support effective strategy execution OUR RISKS The market sectors in which G4S provides security services present unique operational and health and safety risks which must be managed effectively in order to provide value to customers and to protect our employees. The breadth of countries in which G4S operates, together with continuing uncertainty of global economic conditions, also presents fi nancial control and commercial risks similar to those of other multinational companies. HOW WE MANAGE OUR RISKS Our risks are captured in a global risk reporting information system. These risks are reviewed and updated twice a year by the operating companies. The Group Executive Committee and Board Risk Committee review the most signifi cant risks on a regular basis and the board regularly reviews the overall impact of these major risks on the group’s activities. WHAT WE DID IN 2013 As announced by the board in September 2012, G4S started a thorough review of its risk management processes and systems during 2013 and will continue to make further improvements during 2014. During the year the company established a Board Risk Committee and created a separate risk management function for the group, appointing a group director of risk and programme assurance and a group head of risk. These responsibilities were previously undertaken by the group head of internal audit. The new Board Risk Committee appointed Deloitte to conduct a review of the group’s risk management processes and then charged the group director of risk and programme assurance to develop a plan to respond to the fi ndings and recommendations. During the year, Regional Risk and Audit Committees were established to be responsible for assessing risk at a regional level and for monitoring the mitigation of risk and addressing internal and external audit matters at a regional level. WHAT WE WILL DO IN 2014 Regional Risk and Audit Committees will meet quarterly, the fi rst meetings having taken place in January 2014. A new approach to assessing risks has been defi ned and during 2014 this is being implemented across the business, supported by an updated risk management information system. This system will better support the risk identifi cation, assessment and action tracking process as well as providing enhanced risk reporting at all levels of the group. As a service business many of our risks stem from the contract bidding, mobilisation and service delivery lifecycle. In the fi rst quarter of 2014, new processes for contract take-on and on-going assurance will be implemented to give greater scrutiny to the delivery of the group’s most complex contracts. Based on contract style, complexity and risk profi le, these processes will ensure that, at all stages throughout the lifecycle, expert challenge, oversight and approval are given at regional, group or board level as appropriate. Our goal in making these changes is to embed more deeply an effective risk management culture to support strategy execution and to provide enhanced governance over critical business decisions. ENTERPRISE RISK MANAGEMENT GOVERNANCE MODEL Operating companies Regional Risk and Audit Committees Executive Risk Committee Board Risk Committee Board Audit Committee Board Our operating companies identify and assess the risks to their business objectives and plan appropriate mitigating actions. These are recorded in our group-wide risk management tool. Risk and Audit Committees in each region meet quarterly to review regional level risks; review progress of mitigating actions; and to review audit reports, fi nancial control status reports, internal fi nancial reviews and balance sheet integrity and any accounting judgements. The Executive Risk Committee meets three times per year and considers the group’s principal residual risks and the progress of mitigating actions. The Board Risk Committee meets three times per year to set the group’s risk appetite; to assess the group’s principal residual risks; and to assess progress on the improvements being made to enterprise risk management. The Board Audit Committee meets four times per year to ensure that the group’s control framework is operating effectively. The board has the ultimate responsibility for assuring our risk management processes. It reviews our most critical risks and controls, either directly or through its Risk and Audit Committees. 34 G4S plc Annual Report and Accounts 2013 Strategic report LINES OF DEFENCE 3rd Line: Internal independent assurance 2nd Line: Control & oversight functions 1st Line: Business operations & support Executive Risk Committee Regional Risk, Audit & Executive Committees EXTERNAL AUDIT Group Executive Committee Board, Audit & Risk Committees We employ three lines of defence to control and manage risks across the group. The responsibility for the fi rst line sits with the managers of our businesses, whether line management or fi nancial support. The senior management team within each business is responsible for implementing and maintaining appropriate controls across their business to ensure the standards expected by the group, our customers and other stakeholders are met. The business managers are supported by oversight functions at both regional and group level including Risk, Finance and Legal which together make up the second line of defence. The third line is designed to detect or prevent unexpected outcomes and comprises the group risk and internal audit functions. Together these provide independent assurance over the design and operation of controls. As part of its annual programme of work, the internal audit function conducts regular reviews of risk management processes and gives advice and recommendations on how to improve the control environment. Our external auditors provide independent oversight of the entire process. CONTRACT RISK MANAGEMENT GOVERNANCE MODEL Bid risk assessment Bid approval Contract mobilisation On-going contract assurance Group internal audit Board Internal audit conducts audits of selected contracts. The board will undertake occasional reviews of the most signifi cant contracts. Based on the commercial scale and level of risk, contracts are subject to regular on-going scrutiny at regional or group level. Based on fi nancial, legal, reputational and operational risk criteria, the opportunity is referred to the region, group or board for review and approval. Appropriate challenge is given to the bid’s customer value proposition, commercial terms and risk mitigation strategy. The expected risk return of the bid is assessed before approval is given or withheld. Based on the complexity and risk profi le of mobilisation, appropriate methodologies and project management resources are applied. Key contractual requirements and risk mitigation strategies are mapped to accountable contract managers. Annual Report and Accounts 2013 G4S plc 35 Principal risks What are the key risks faced by G4S? During January 2014 the Regional Risk and Audit Committees met to agree the regional principal residual risks. These meetings were facilitated by group risk management and identifi ed the risks to each region’s strategic business objectives and to on-going business operations. The meetings were informed by the country level risks recorded in the group’s risk management systems. Group risk management and the CFO consolidated these risks and identifi ed common themes and regional risks which were material to the group. These group principal residual risks were reviewed and approved by the Executive Risk Committee and the Risk Committee of the board. The potential impact of each risk was assessed on a 1 to 5 scale against fi ve criteria: strategy, fi nancial, reputation, service delivery, and health and safety, with the highest score being the overall impact. The likelihood of each risk over the next year, or to three year strategic goals, was also assessed on a 1 to 5 scale. The risks detailed in the following pages are those which in aggregate scored 3.5 or higher on both impact and likelihood. Detailed descriptions are provided of each risk, its movement since last year, its potential impact and the mitigation strategies being employed by the group. Movement since 2012 Risk description Mitigation CULTURE & VALUES There has been a strong emphasis from the board, the CEO and the group executive committee on the importance of the company’s values underpinning everything we do. Progress has been made in this area, but reinforcing the core values across a diverse and globally spread workforce takes considerable effort. G4S provides security to people, premises and valuable assets. In its care & justice services businesses it also provides services which interact with detainees, victims of crime, those on state assistance, vulnerable people and other members of the public. This requires our staff to conduct themselves with the utmost integrity. We operate in 120 countries around the world with a diversity of local and national cultures. These factors mean that having a strong set of corporate values that unite the organisation, deeply embedded in our culture, is of particular importance. If we fail to behave in accordance with the high standards that we set ourselves there is a risk that we will not deliver on our commitment to customers, and fail to comply with legislation and international standards. We may also compromise the safety and security of our employees and the assets or people that we are protecting. This can lead to penalties, failure to renew contracts and ultimately reduced profi tability and damage to our global brand and reputation. We have in place high ethical standards and policies which we expect our staff to observe globally and these are reinforced through awareness and training programmes and monitored through audit, whistle- blowing and trading reviews. Senior managers’ performance contracts and bonuses are in part based upon adherence to our values. During 2013, our new CEO and the executive team has reiterated the importance of our values in delivering customer service and sustainable shareholder value. During 2014 we will be examining our HR processes to ensure that they fully support our values; we are refreshing our whistle-blowing policy; and we will continue to reinforce the group values at every opportunity. Compliance with the values is assessed through performance reviews, trading reviews, business self-assessments and audit. 36 G4S plc Annual Report and Accounts 2013 Strategic report Increased risk Reduced risk No change Movement since 2012 Risk description Mitigation HEALTH & SAFETY There has been a heightened focus by the board, the CEO and the group executive committee on the importance of health and safety. The provision of security services, often in hostile or dangerous circumstances across such a broad diversity of countries, presents particular health and safety challenges. The protection of our staff, people in our care and third parties, including the public, is of utmost importance. The principal health and safety risks are work-related attacks and road traffi c accidents. In 2013, 55 (2012: 59) employees lost their lives. We are committed to strengthening our health and safety systems, processes and cultures. Fatalities and serious injuries to our staff impact not only the individuals concerned, but also their families, loved ones and other dependents. PEOPLE G4S’ human resource processes are well established and effective. Nevertheless, there will always be challenges in attracting and retaining employees. We are a people business and we take great care to ensure that we employ the best people to deliver quality services to our customers. As the largest employer listed on the London Stock Exchange, employing 618,000 people worldwide, and the largest security solutions provider in the world, our customers choose G4S because of the level of screening, training, integrity and trustworthiness. In a global and diverse business such as ours, there are risks associated with recruiting, robust screening, motivating, developing and training, as well as appropriately rewarding and retaining our critical talent. Failure to recruit and retain key managers and staff and to motivate and develop them can impact service delivery, customer retention and business management, which in turn can adversely affect our fi nancial performance. The Group Executive team is leading a programme to strengthen safety leadership and safety practices across the group, including: – Critical country reviews: conducting detailed assessments and developing mitigation plans in those countries and operations where we have identifi ed the greatest risks. – Establishing a new group wide standard for health and safety management systems. – Health and safety resource: We made a number of new appointments across the group and at the beginning of 2014 we had 110 dedicated health and safety professionals, assisting us to reduce health and safety risks. – Safety leadership training and awareness is now mandatory for all senior managers. In addition, each member of the Group Executive team (and each of their teams) has specifi c health and safety performance objectives in 2014. – In support of our health and safety programme, we have established a new group value called Safety First. We use rigorous recruitment, selection, screening and induction processes and standards to ensure that we employ the best people, with the right values, for the requisite roles. Standards are set by group human resources and measured and enforced through a combination of regular staff surveys, country self-assessments, monitoring of regional and country specifi c KPIs and independent audits: all driving constant improvements in processes. Attracting and developing the right talent is the key to our success and we have a process for identifying high potential employees and putting in place career development plans to promote them into more senior positions. We engage our employees through our PRIDE model: P R I D E rotect their basic needs espect them as individuals nvolve them in the business evelop their skills and potential ngage them fully Annual Report and Accounts 2013 G4S plc 37 Principal risks continued Movement since 2012 Risk description Mitigation BRAND/REPUTATION The nature of the services we provide means that we are often in the public eye. However, the issues which have arisen around a number of our high profi le contracts over the last two years have undermined the company’s brand and reputation, particularly as a trustworthy strategic supplier to the UK Government. MAJOR CONTRACTS The company’s strategy is to provide integrated security solutions to customers, which often results in taking on more complex contracts. The company is implementing improvements to bid assessment, programme management and assurance and new contract management processes. These will take time to bed in. The company’s brand is well known and associated with high quality security services around the world. However, recent events in the UK had an adverse impact on our reputation, in particular with the UK Government. Furthermore, as detailed in the chief executive’s review, our performance under certain UK electronic monitoring contracts was referred to the Serious Fraud Offi ce (SFO). There is a risk that until our reputation is suffi ciently repaired and the SFO investigation concluded, our sales pipeline could be impacted. The fi rst key step to repairing our reputation is rebuilding the confi dence of the UK Government in G4S as a strategic supplier. There is a risk that the changes we are implementing to this end take time to be accepted as suffi cient by the UK Government. We continue to cooperate fully with the SFO investigation. In addition, we have an on-going programme of corporate renewal. This is supported by the broader changes being made across the group to leadership, governance and contract management and assurance; as well as by the heightened focus on corporate values and ethics. In order to ensure timely progress this programme is being monitored directly by the group executive and the board and being independently reviewed by a fi rm of accountants on behalf of the UK Government. At individual region and country level there is a strong focus on delivering excellent customer service in order to protect and enhance our local brand and reputation. We are investing in the strengthening of our risk management, audit and customer service capacity. The company has tightened the criteria and level of scrutiny for regional and group level legal review of complex contracts during the bid cycle. The group has implemented a standardised approach to project management for complex mobilisations in the UK, which will be rolled out globally during 2014. External project management resource is utilised in cases when insuffi cient internal capability is in place. The group is also strengthening its processes for bid assessment, contract take-on and on-going contract assurance. The group has a number of long-term, complex, high value contracts with multi-national, government or other strategic customers. The company’s growth strategy includes a greater focus on higher value, and more technology-rich services. This will increase the complexity and individuality of customer requirements and contracts. For such contracts there are risks to the group accepting onerous contractual terms; mobilising contracts well; transitioning effectively from mobilisation to on-going contract management; delivering to contractual requirements; managing complex billing arrangements; managing contract change control; and managing sub-contractors. Failure to ensure effective contract take-on, mobilise successfully and manage complex contracts effectively throughout their lifecycles can impact customer satisfaction, reputation, revenue, cash fl ow, and profi tability. 38 G4S plc Annual Report and Accounts 2013 Strategic report Increased risk Reduced risk No change Movement since 2012 Risk description DELIVERY OF CORE SERVICE LINES Mitigation Our commitment to delivering sustainable growth and shareholder value is founded on delivering on our customer commitments. There is a continuous focus on this at the group executive. In addition, through the investments in the service excellence centres and within the regions and countries, we continued to make improvements in the processes and systems in many of our core businesses over the course of 2013. We deliver our core secure solutions services in 100 markets and our core secure cash transportation services in 61 markets. A number of these businesses have been acquired over time, resulting in cultural differences, varying degrees of operational maturity and a multiplicity of information systems. This can create risks around core operational service delivery and supporting functions. Failure to meet the service delivery requirements of our customers, because we have not implemented the right solutions or followed appropriate agreed procedures, can create risks around cash losses; attacks on our staff, subcontractors or third parties; and the non-delivery of the service level agreements and KPIs agreed with our customers. Additional risks relate to business resilience, control systems, and the availability of critical systems, facilities and people to perform contractually agreed services. This can lead to fi nancial penalties, and negatively impact customer retention and goodwill, to the detriment of fi nancial performance. LAWS & REGULATIONS The products and services we provide are subject to the ever-changing legal landscape across the many jurisdictions in which we operate, requiring constant monitoring and change to ensure compliance. G4S operates in many jurisdictions globally, within complex and diverse regulatory frameworks. An additional complexity arises from the extra- territorial reach of some of the legislation to which the company is subject. Risks include increasing litigation and class actions especially in the United States; bribery and corruption; obtaining operating licences; complying with local tax regulations; changes to employment legislation; complying with human rights legislation; and new or changed restrictions on foreign ownership. Risk also arises from new or changing regulations which require modifi cation of our processes and staff training. The necessary changes to ensure continued compliance with applicable laws and regulations, or not being compliant, have far reaching consequences, including higher costs from claims and litigation; inability to operate in certain jurisdictions, either through direct ownership or joint ventures; loss of management control; damage to our reputation; and loss of customer confi dence. We have developed the G4S Way, which defi nes best practice processes and standards for all aspects of service delivery with the aim of improving service excellence and margin. The G4S Way is being implemented globally across all our businesses. It sets out requirements for managing contract take-on and mobilisation; completion of risk assessments; management of security assignments at customer and site levels; and defi nes service delivery KPIs to measure compliance. Minimum guidelines have been set for key areas such as control room management; security offi cer communications; fl eet routing and scheduling; resource planning and staff rostering; and escalation procedures for duress/attack/ absence situations. Recent developments in our secure solutions business include deployment of our core operating system, Saturn, to effi ciently match our security offi cer deployment to customer requirements. In our cash solutions business we have put in place a dedicated risk management team to ensure robust risk analysis and rectifi cation of deviations from our minimum standards. Our countries are required to have business continuity and crisis management plans in place and to test them regularly. We are also making on-going improvements to the effi ciency and effectiveness of supporting and control systems. Each country in the group puts in place rigorous compliance policies, standards and controls, including training, to assure adherence to local laws, regulations and licence requirements. We review existing policies in light of changes to legislation and recent case law. The group has good procedures in place to ensure that our businesses are complying with anti-bribery & corruption legislation, including self-assessments; a training and awareness programme for staff in sensitive positions; an independent audit of the effectiveness of our procedures; and confi dential reporting hotlines. We build positive constructive relationships with governments and related agencies by engaging in the legislative process directly and through local trade associations. Our aim is to support governments to craft legislation that achieves its aims in relation to our industry in as effi cient and effective a way as possible. Annual Report and Accounts 2013 G4S plc 39 Principal risks continued Movement since 2012 Risk description Mitigation GROWTH STRATEGY The group has placed a greater emphasis on higher value solution development and sales, underpinned by technology. It will take time to mobilise and build the right capabilities to deliver this strategy. Our growth strategy is to leverage our expertise to expand our core service lines into more complex, outsourcing areas which increase long-term customer partnerships; to focus on organic growth opportunities with less reliance on acquisitions; and to leverage our expertise in security systems technology across key markets. There are risks that we will fail to optimise our product mix; fail to build the sales and solutions capability we need; fail to leverage our existing expertise and resources into the areas where we can best achieve organic growth targets; or that we will under-invest or invest in the wrong areas. Failing to create higher value solutions that differentiate us from local competitors could impact targeted growth in revenues and margins. We are investing in sales and business development resources to support growth and to strengthen our solution selling capability. We have established a single capital pool for all key investments and have revised our investment approval processes to approve only those capital requests that demonstrate an appropriate balance of risk and return. This is designed to ensure we make the right investments to support the strategy. A revised major bid assessment process has been implemented which will ensure that the key opportunities which underpin our growth strategy are properly positioned, resourced and managed. Rigorous trading and performance reviews for each business unit enable us to monitor progress against our strategic goals on a periodic basis. Our on-going capability review process will ensure we build the right skills needed to underpin the delivery of the strategy. GEO-POLITICAL Given the wide range of countries in which the group operates there will always be some with a degree of serious political instability. We take great care with our operations in these countries to monitor the situation closely and respond appropriately. We operate in 120 countries across the developed and developing world, with wide-ranging government and political systems, differing cultural landscapes, and varying degrees of rule of law; and within confl ict and post-confl ict zones. The risk factors range from political volatility, revolution, terrorism, military intervention and insurgency. The geo-political risks we face impact us in many ways: the health and safety of our staff and customers; the continued operation of our businesses; and the ability to secure our assets and recover our profi ts. We have a great deal of experience of operating in a wide range of diffi cult territories. We collaborate with our local partners and/or agents; conduct early risk assessments before and during security assignments; have robust operating procedures; and work closely with our local and global customers in managing the risks of operating in such environments. We have a global process for assessing the geo- political risks of different countries which determines the types of customers we will serve and the types of services we will provide. 40 G4S plc Annual Report and Accounts 2013 Strategic report Increased risk Reduced risk No change Movement since 2012 Risk description Mitigation INFORMATION SECURITY The sophistication of cyber hackers increases continuously and the heightened high profi le reputation of the group in the UK in particular make us a potential target. CASH LOSSES Through the work of the service excellence centres working with the regions, improvements have been made to processes and systems in many of our cash solutions businesses over the course of 2013. G4S has cyber security controls in place to protect information. In 2013, we appointed a group head of information security who has developed a strategy to improve our information security maturity. This strategy will be rolled out across the group to reduce the likelihood of a successful attack and to increase the ability of G4S to detect and respond to attacks. G4S has an obligation to safeguard the information that our customers, partners and employees entrust to our care. Given G4S' high profi le, we are at risk of cyber and physical attack by criminal organisations and individual hackers. Whilst we do have strong protection in place, the threat is increasing. If an attempt is successful, our information systems could be compromised or our information disclosed. A successful attack could result in: censure and fi nes by national governments; loss of confi dence in the G4S brand and reputation; specifi c loss of trust by clients, especially those in government and fi nancial sectors; disruption to service delivery and integrity, particularly in cash solutions operations. We have cash solutions businesses spread across the world responsible for cash held on behalf of our customers. We provide cash transportation from one site to another in high security vehicles, a range of cash management services including secure storage, counting, reconciliation and sorting of notes for ATMs, a range of ATM services and secure international transportation of cash and valuables. There are inherent risks in this business related to external attacks, internal theft and poor cash reconciliation. Cash losses can have a major impact for our customers and ourselves in respect of loss of profi t, increased cost of insurance and health and safety considerations for our staff and the public. Our cash solutions service excellence centre (SEC) works in collaboration with the regions to embed robust procedures into every cash business to mitigate cash losses. Innovative security defence products are in use, ranging from pavement box tracking to vehicle protection foam and protective pavement boxes. All cash transactions are subject to strict authorisation limits and we have very tightly controlled cash reconciliation procedures to ensure cash is fully accounted for and controlled and these procedures are subject to constant monitoring and audits. We also have a robust process to monitor all cash-related incidents through a team of security specialists and we ensure that lessons learned are shared through the SEC. Annual Report and Accounts 2013 G4S plc 41 Corporate social responsibility Why CSR matters to G4S G4S plays an important role in society. We make a difference by helping people to operate in a safe and secure environment where they can thrive and prosper. Our size and scale mean we touch the lives of millions of people across the world and we have a duty and desire to ensure the infl uence we have makes a positive impact on the people and communities in which we work. COMMUNITY – Social & economic impact – Community investment INTEGRITY COMMUNITY PEOPLE ENVIRONMENT – Energy & fuel effi ciency – Reducing carbon intensity ENVIRONMENT *OUR PRIORITY AREAS INTEGRITY – Business ethics and anti-corruption* – Human rights* – Risk assessment – Internal audit – Whistle-blowing and reporting PEOPLE – Health & safety* – Diversity & inclusion – Employee engagement – Training & development BUSINESS ETHICS AND ANTI-CORRUPTION HEALTH & SAFETY HUMAN RIGHTS See our CSR report for more information 42 G4S plc Annual Report and Accounts 2013 Why CSR matters to G4S CSR is an important differentiator for the group and we fi nd it increasingly important to customers as part of their process for evaluating and selecting a service partner – particularly given the sensitive nature of some of the services which customers require. Our approach to CSR provides our customers with confi dence that they are working with an organisation which respects laws and cultures, has high ethical standards, takes care of its employees and is a reliable and dependable partner. Our CSR strategy Every two years, we conduct a CSR materiality exercise which helps us to assess the current market environment, business challenges and most relevant CSR strategies. In 2013, we broadened the scope of this exercise to include a representative group of external commentators and stakeholders – seeking opinions from investors, NGOs and customers, in addition to our internal senior management and board members. This ensures that our strategies are aligned to stakeholder needs and the objectives of our business. The process highlighted three core priority areas for 2014 – business ethics and anti-corruption, health and safety and human rights. Whilst these are our three highest priority and most material issues, we continue to focus on all aspects of CSR. CSR management Refl ecting the value we place on CSR and on our reputation, our CSR Committee has been a full board committee since 2011, comprising a number of experienced non-executive directors who meet regularly to discuss CSR related matters. The committee is chaired by Clare Spottiswoode, a G4S non-executive director who has been a member of the CSR committee since 2010. Elements of our CSR strategy such as health and safety and human rights are also a regular subject for discussion at group executive committee and board meetings. Strategic report Safeguarding our integrity Integrity is one of the group’s core values. Being a responsible business partner, employer, customer or supplier is an important part of our strategy and forms an essential foundation on which we carry out our business. WHAT WE ARE DOING Business ethics To ensure that our employees understand how they can play their part in delivering high ethical standards across the group, we continue to reinforce a group-wide ethics code that sets out how we expect our employees to behave. The code is supplemented with a business ethics policy which provides a more detailed summary of the group’s ethical standards of operation. The code and policy are reviewed each year, to incorporate evolving legislation Human rights We recognise the growing importance of human rights as a material business issue and believe that G4S can play a positive role in respecting human rights around the world. Our business can contribute positively to the realisation of human rights through the range of services we offer to protect people. We also recognise that we have a duty to ensure that we are not at risk of violating human rights through the services we provide, the customers we work with and the suppliers we use and through the fair and appropriate treatment of our own employees and others who are in our care. Increasingly, customers and other key stakeholders are looking to companies such as G4S to demonstrate specifi c actions and practices which are aligned to internationally recognised human rights standards, such as the UN Guiding Principles on Business and Human Rights (2011), the Voluntary Principles on Security and Human Rights (2000), and the International Code of Conduct for Private Security Service Providers (2010). Our human rights framework aims to bring our existing practices into line with these standards and introduce new guidelines in areas which are not covered by existing policies and practices. Annual Report and Accounts 2013 G4S plc 43 Corporate social responsibility continued SAFEGUARDING OUR INTEGRITY How we’re performing During 2013 we: – Launched our human rights framework, based on the UN Guiding Principles on Business & Human Rights, introducing a systematic approach to human rights due diligence and risk assessment – Conducted external review of risk management processes and implemented an action plan to increase group resources and improve systems and processes – Established a board Risk Committee and a separate risk management function for the group – Updated the risk assessment of the group’s anti-bribery policies and controls – Completed 111 on-site internal audits to measure compliance with G4S standards and controls – Carried out an external review of internal audit with an action plan to increase audit staffi ng by 50% and expand its remit – Enhanced communication of the group’s Safe2Say whistle-blowing hotline through increased use of employee communications channels – Improved the categorisation and reporting of issues raised through whistle-blowing reporting processes Priorities for 2014 – Reinvigorate group values across all business practices and programmes – Update and re-launch business ethics policy and compliance programme – Continue to embed human rights risk assessment and due-diligence into our wider business processes – Embed improved risk management processes across the group – Implement governance, risk and compliance systems – Complete planned increase in internal audit staffi ng and expanded remit – Undertake audits of the group’s human rights policy and guidelines for our high risk countries – Complete a detailed review of whistle-blowing reporting arrangements covering the policy, process and systems – Implement improvements generated by internal audit and group risk management reviews 44 G4S plc Annual Report and Accounts 2013 Securing our people As a service provider, our customers rely on us to have a motivated and healthy workforce. Keeping our employees safe, looking after their interests and treating them fairly are therefore vital to our on-going success. Health and Safety As one of the world’s largest private employers, working in sectors where security and safety present a strategic risk, our responsibility to protect the health, safety and well-being of our employees is one of our highest priorities. “It is not acceptable to us that any colleague is injured or killed in the line of duty.” Ashley Almanza, CEO. We continue to focus on health and safety and have introduced a number of important critical review processes and improvements to specifi c practices in order to protect our employees in their workplace. These will continue to be a major area of focus for the group at every level in 2014. Employee engagement Our employee engagement strategy is based on the internally developed PRIDE model. P R I D E rotect their basic needs espect them as individuals nvolve them in the business evelop their skills and potential ngage them fully The strategy has been in place for a number of years and is the basis for our engagement policies and practices. To ensure that these policies are working and our employees are able to share their perceptions of the business and working environment, we conduct a global employee engagement survey every two years. Strategic report How we’re performing The most prevalent risks to the health and safety of our employees are from work-related attacks and road traffi c incidents. Although the total number of work-related fatalities has reduced since 2011, our aim is to eliminate them altogether. GENDER DIVERSITY (%) During 2013, we have: Board – Completed three further critical country reviews of health and safety – Introduced the Driving Force Rules campaign to promote safe Senior management driving, piloted in seven countries 9 2 281 30 – Improved incident reporting and investigation process Total employees 535,930 82,070 – Rolled out succession planning to all key management roles – Piloted online performance reviews in a number of businesses 0 20 40 60 80 100 – Completed two talent review processes, assessing over Male Female 1,300 managers – Continued extension of cultural awareness training tool – Partnership working to increase employment opportunities for disabled people and veterans – Completed a third global employment survey WORK-RELATED FATALITIES BY REGION 60 40 20 0 26 21 22 15 10 9 Africa Asia/ Middle East Latin America 2012 2013 59 55 3 4 Europe 3 1 North America UK & Ireland Total WORK-RELATED FATALITIES BY CATEGORY 60 40 20 0 59 55 18 17 20 17 21 21 Attack Non-attack Road Total 2012 2013 In 2013, over 380,000 employees shared their views of working for G4S. This represents a 62% response rate, up from 38% in 2011. Overall levels of engagement also improved from an average of 80% to 82%. Encouragingly, the number of favourable responses to questions related to health and safety showed the most positive increase since the last survey, although there is clearly a need for substantial further improvement. The results for the senior leadership survey were also positive, with 81% of senior managers participating and an overall favourable score of 83%. Priorities for 2014 – Establish a new group value called Safety First – to ensure absolute focus on health and safety in everything we do – Introduce performance related objectives linked to health and safety for our global leadership management group – Roll out induction training for new health and safety practitioners on G4S policies and practices – Complete further critical country reviews of health and safety – Roll out the Driving Force Rules campaign to all businesses – Continued monitoring of health and safety KPI data – Launch the revised senior leadership programme – Implement a new individual based development programme for people operating at a strategic level – Development and implementation of the senior management on-boarding tool – Extend the use of data captured on the talent management system – Review opportunities for embedding cultural awareness training – Increase diversity in talent pools and management population – Analyse results from the 2013 global employee engagement survey and continue to implement the actions arising from the survey – Continue to maintain good union and employee relations at all levels Annual Report and Accounts 2013 G4S plc 45 2012 316,000 161,000 115,000 23,500 2013 311,100 173,200 128,500 23,900 GHG EMISSIONS (Based on 94.5% measurement) Vehicles (inc refrigerants) Total buildings (inc refrigerants) Including electricity emissions of Air travel TOTAL GHG EMISSIONS (t/CO2e) 600,000 580,000 560,000 540,000 520,000 500,000 5 2009 2010 2011 2012 2013 CARBON INTENSITY Tonnes CO2e per £m turnover 2009 2010 2011 2012 2013 94.4 88.7 83.6 76.0 72.3 Priorities for 2014 – Continue to implement energy effi ciency strategies with the aim of reducing carbon intensity by at least 4.5% per annum For further details of our Climate Action Programme, please refer to our 2013 CSR Report or visit www.g4s.com/cap Corporate social responsibility continued Securing our environment Our customers and employees demonstrate increasing concern for environmental issues. Whilst our environmental impacts are not signifi cant relative to other businesses of comparable size, it remains important to us to be effi cient in the use of resources and, in doing so, curtail our greenhouse gas emissions. What we’re doing Since 2008 we have used WBCSD* and WRI GHG** protocols to measure our Scope 1 and 2 emissions – vehicle fl eet, fuel, refrigerants and electricity usage for G4S businesses over which we have fi nancial and operational control. In addition we have measured Scope 3 emissions from employee business air travel. The businesses that reported data in our 2013 GHG measurement represent 94.5% of the group’s operations, across an 11-month period. This level of measurement, including each of our main service types, allows us to calculate reliably the total GHG emissions for 100% of the group over a period of 12 months. How we’re performing The G4S total carbon footprint, extrapolated to 100% of the business equates to some 559,000 t/CO2e. Since we launched our climate action strategy in 2009, our carbon intensity has decreased by 23.5% per £m of revenue – exceeding our stated target of 20%. This reduction translates to a real reduction of 4.9% in carbon emissions against a 24.4% growth in the business during the same period, much of which includes carbon emissions from services which our customers have outsourced to G4S. This is a positive achievement which recognises the efforts made to increase the energy and fuel effi ciency of our business. * World Business Council for Sustainable Development. ** World Resources Institute greenhouse gas. 46 G4S plc Annual Report and Accounts 2013 Strategic report Securing our communities We recognise that our ability to provide a safe and secure environment around the world depends on the relationships we have with the communities and people with whom we work. We are therefore committed to working with charity and community partners to tackle issues which affect local communities, especially relating to health, education and welfare of young people. We have a long history of investing in the communities in which we live and work and to which we provide services and we recognise the importance of this role. What we’re doing We seek to make a positive impact on the local communities in which our employees, customers and suppliers live and work. The social and economic impact reaches well beyond our working environment and touches the lives of millions around the world. How we’re performing We conducted an academic study of the direct and indirect social and economic impacts of G4S in the UK, demonstrating support of 68,000 jobs across the country and a total gross added value of £1.95 billion contribution to the UK economy. Building on the partnerships and investment that we have made in previous years, in 2013 we: – launched G4S 4teen legacy community projects in Botswana, Colombia, Estonia, India, Nigeria, Philippines and Thailand following the conclusion of the six-year fl agship G4S 4teen programme – invested almost £2 million in charitable community programmes and welfare programmes for employees facing health or fi nancial hardship Comprising: – Provision of goods, services and fi nancial investment in more than 400 community programmes across 76 countries, with a combined value of almost £1.34 million – Investment of £647,500 in projects which support the long-term welfare and development of employees in developing countries Corporate Corporate donations of money Corporate donations of goods and services Employee Employee and third-party donations facilitated by G4S Employee volunteering facilitated by G4S Employee welfare and development 2013 2012 £931,900 £921,700 £406,500 £459,500 £92,900 £72,000 26,000 hours £647,500 30,000 hours £641,000 Priorities for 2014 – Complete the development and launch of new community programmes across each of our regions – Continue to build on wider community investment to demonstrate the impact on the people we strive to support – Continue to support the welfare and long-term development of employees facing hardship – Participate in further academic studies of the direct and indirect social and economic impacts of G4S within key markets Annual Report and Accounts 2013 G4S plc 47 Board of directors 1 2 3 4 5 1. JOHN CONNOLLY Non-executive director Chairman of the board Chairman – Nomination and Risk Committees Joined G4S board: June 2012 Key strengths and experience: Extensive experience of working in a global business environment and in sectors of strategic importance to the group. Developing the board and its governance of the group. A chartered accountant, John spent his career until May 2011 with global professional services fi rm Deloitte, was Global Chairman between 2007 and 2011, and prior to that Global Managing Director between 2003 and 2007. He was Senior Partner and CEO of the UK partnership from 1999 until his retirement from the partnership. Current external commitments: Chairman of AMEC plc and of a number of private companies. Beyond commercial business roles, he is on the Board of Governors of London Business School and a member of the CBI President’s Advisory Council. He is also chairman of the appeal board for The Centre for Children’s Rare Disease Research at Great Ormond Street Hospital. 2. ASHLEY ALMANZA Executive director Chief executive Member – Risk Committee Joined G4S board: May 2013 Key strengths and experience: Extensive board and executive management experience and strong track record working across international borders in complex businesses. Held a number of senior executive roles at BG Group from 1993 to 2012, including Chief Financial Offi cer from 2002 to 2011 and Executive Vice President from 2009 to 2012. As Executive Vice President he was accountable during 2009 and 2010 for the strategic and operational management of BG Group’s UK, European and Central Asian businesses. He also led a consortium of global companies through complex government negotiations in Central Asia. He holds an MBA from London Business School and was previously Chairman of the Hundred Group of Finance Directors. Current external commitments: Non-executive director of Schroders plc and Noble Corporation. 3. ADAM CROZIER Non-executive director Member – Audit and Nomination Committees Joined G4S board: January 2013 Key strengths and experience: Wide-ranging experience of business transformation in a number of public and private sector organisations in the media, logistics and retail sectors and serving FTSE 100 CEO. Started his career with Mars before joining the Daily Telegraph followed by Saatchi and Saatchi, where he became joint chief executive. He then became chief executive of the Football Association and was subsequently appointed chief executive of the Royal Mail Group, where he oversaw an extensive programme of modernisation and change to enable the business to compete in the UK and international marketplaces. Since April 2010 he has been chief executive of ITV plc and was a non-executive director of Debenhams plc until 2012. Current external commitments: Chief executive of ITV plc. 4. MARK ELLIOTT Non-executive director Senior independent director Chairman – Remuneration Committee Member – Nomination Committee Joined G4S board: September 2006 Key strengths and experience: Extensive international board and executive experience having held a number of senior management positions in IBM, including leadership of IBM’s operations in Europe, the Middle East and Africa with responsibility for operations in more than 110 countries. Has particular involvement with the group’s businesses in the Americas region. General Manager IBM Global Solutions; Managing Director of IBM Europe, Middle East and Africa; member of the board of IBAX, a hospital software company jointly owned by IBM and Baxter Healthcare; chairman of Reed Elsevier’s remuneration committee; chairman of the Dean’s Advisory Council of the Kelly School of Business, Indiana University. Current external commitments: Non-executive chairman of QinetiQ Group plc. 5. GRAHAME GIBSON Executive director Regional CEO – Americas Joined G4S board: April 2005 Key strengths and experience: Extensive knowledge of the group and its predecessor companies in many different markets and in a number of executive functions. In addition to his board role, is also CEO of the Americas region. Joined Group 4 in 1983, starting as fi nance director (UK) followed by a number of senior roles, including deputy managing director (UK), vice president (corporate strategy), vice president (fi nance and administration), vice president operations (central and south eastern Europe and UK) and chief operating offi cer of Group 4 Falck A/S. In 2004 he became the company’s divisional president for Americas and New Markets and was chief operating offi cer between 2005 and 2012. Current external commitments: Board member of the Ligue Internationale des Sociétés de Surveillance, the international association of leading security companies. 6. WINNIE KIN WAH FOK Non-executive director Member – CSR and Remuneration Committees Joined G4S board: October 2010 Key strengths and experience: International board and senior management experience with extensive knowledge of Asian markets and strong involvement in Scandinavia. Takes a particular interest in the group’s businesses in Asia. 48 G4S plc Annual Report and Accounts 2013 Governance 6 7 8 9 10 11 An auditor by training, was involved in management positions in fi nance, audit and corporate advisory work and a wide range of roles in asset management fi rms investing with a focus in Asia. Senior partner of EQT and CEO of EQT Partners Asia Limited; managing director of CEF New Asia Partners Limited. Current external commitments: Senior adviser to Foundation Administration Management Sweden AB; non-executive director of Volvo Car Corporation; non-executive director of SEB AB, Kemira Oyj and HOPU Investments Co Ltd. 7. HIMANSHU RAJA Executive director Chief fi nancial offi cer Member – Risk Committee Joined G4S board: October 2013 Key strengths and experience: Strong track record as a fi nancial executive in a global services business. Prior to joining G4S, Himanshu was CFO at Misys, and from 2010 to 2012 he was CFO of Logica plc. Himanshu worked for more than 10 years at BT Group in a number of divisional fi nance director roles including Chief Financial Offi cer of BT Global Services, BT Design, BT Operate and BT Wholesale. His early career included fi nance and systems roles at Worldcom International, UUNET and MFS. Himanshu is a qualifi ed chartered accountant and holds an honours degree in law. Current external commitments: None 8. MARK SELIGMAN Non-executive director Deputy chairman Chairman – Audit Committee Member – Remuneration Committee Joined G4S board: January 2006 Qualifi ed as a chartered accountant with Price Waterhouse. Senior roles at SG Warburg & Co Ltd and Barclays de Zoete Wedd; Head of UK Investment Banking at CSFB; Chairman of UK Investment Banking at Credit Suisse; member of the Credit Suisse Global Investment Banking Executive Board and senior adviser to Credit Suisse Europe. Current external commitments: Alternate member of the Panel on Takeovers and Mergers; member of the Regional Growth Fund Advisory Panel; non-executive director and audit committee chairman for BG Group plc; and senior independent director of Kingfi sher plc. 9. PAUL SPENCE Non-executive director Member – Audit, CSR and Risk Committees Joined G4S board: January 2013 Key strengths and experience: In-depth knowledge of outsourcing in both the public and private sectors and extensive international experience in key developing countries such as India, China and Brazil. A graduate of the Wharton School at the University of Pennsylvania with a degree in economics and decision sciences; served a 30-year career with Capgemini and its predecessors. Having started in the US and become managing partner of mid-Atlantic information and technology for Ernst & Young, he went on to gain signifi cant international experience for 16 years as managing partner of Ernst & Young Consulting Australia, CEO of Capgemini Ernst & Young in Asia and CEO Capgemini Ernst & Young UK. He then spent eight years serving on Capgemini’s executive management committee during which time his roles included deputy group CEO and CEO of Capgemini Global Outsourcing Services. Current external commitments: None Key strengths and experience: Extensive fi nancial and management experience having worked in the fi nancial services sector, with a focus on investment banking. Takes particular interest in the fi nancial performance of the company, including its fi nancing and transactional activity. 10. CLARE SPOTTISWOODE Non-executive director Chairman – CSR Committee Member – Remuneration Joined G4S board: June 2010 Key strengths and experience: Considerable experience in the public sector, the energy markets and the fi nancial services sector as well as setting up and managing her own businesses. Has particular involvement with the group’s businesses in the UK and Africa regions. A mathematician and economist by training, worked for the UK Treasury, director general of Ofgas, the UK gas regulator; policyholder advocate for Norwich Union’s with-profi ts policyholders at Aviva; non-executive director of Tullow Oil plc; and a member of the Independent Commission on Banking and the Future of Banking Commission. Current external commitments: Chairman of Gas Strategies Group, Energetix Group and Magnox Limited; non-executive director of Ilika plc, Enquest plc, RBC Europe Limited and BW Offshore Limited; and independent director of the Payments Council. 11. TIM WELLER Non-executive director Member – Audit and Risk Committees Joined the G4S Board: April 2013 Key strengths and experience: Signifi cant experience of the energy and utilities sectors and serving FTSE 100 CFO. An accountant by training, joined KPMG in 1985, rising to partnership in 1997 before joining Granada plc as director of fi nancial control. Between 2002 and 2010, he gained signifi cant further experience in the energy and utilities sectors holding CFO positions with Innogy (one of the UK’s leading integrated energy companies at the time), RWE Thames Water (the world’s third largest water and wastewater service company) and United Utilities Group PLC (a UK-based water and wastewater service company). He was Chief Financial Offi cer of Cable & Wireless Worldwide plc between 2010 and 2011. Current external commitments: CFO of Petrofac Limited, the FTSE100 international oil and gas service provider and a non-executive director of the Carbon Trust. Annual Report and Accounts 2013 G4S plc 49 Executive committee 1 2 3 4 5 OUR EXECUTIVE TEAM 2. EDDIE ASTON, REGIONAL CEO – 4. IRENE COWDEN, GROUP HR DIRECTOR G4S is managed through a functional and regional structure. Our structure enables us to deliver our strategic objectives, maintain a strong governance framework, develop integrated solutions, target key regional markets and build customer relationships. 1. ASHLEY ALMANZA, CHIEF EXECUTIVE OFFICER Ashley joined G4S as Group CFO in May 2013, and was promoted to Group CEO on 1 June 2013. Ashley held a number of senior executive roles at BG Group from 1993 to 2012, including Chief Financial Offi cer from 2002 to 2011 and Executive Vice President from 2009 to 2012. As Executive Vice President he was accountable, during 2009 and 2010, for the strategic and operational management of BG Group’s UK, European and Central Asian businesses which had combined annual profi ts of around $3 billion. He also led a consortium of global companies through complex government negotiations in Central Asia. Ashley is a non-executive director of Schroders plc and Noble Corporation. He holds an MBA from the London Business School and was previously Chairman of the Hundred Group of Finance Directors. UK & IRELAND Eddie joined G4S in July 2013 as Group Chief Operating Offi cer and was appointed Regional CEO of UK & Ireland in October 2013. Eddie held a number of senior executive roles at Deutsche Post DHL, where he worked for 13 years. Most recently he was CEO Global Sectors. His previous role was CEO Life Sciences and Public Sector, responsible for strategic and operational leadership of a multi-billion turnover business. He also held a variety of managing director roles at the business. 3. ANDY BAKER, REGIONAL PRESIDENT – AFRICA Andy joined G4S as regional president for G4S Africa in 2012. He has wide ranging experience of managing and building sustainable businesses across Africa, with a strong emphasis on technology and logistics. He joined G4S from Nashua Group, the second largest ICT business in South Africa, where he was Group Chief Executive Offi cer. Prior to this, he spent four years as Group Chief Operating Offi cer of Altech, a JSE listed technology group with revenues of $1.2bn and operations in 15 countries. He holds an MBA from Cranfi eld University. Irene has spent her career in HR management, specialising in employee relations, organisational development, talent management, employee engagement, compensation and health and safety matters. She has been involved in major change projects including the cultural and integration aspects of mergers and acquisitions, as well as large scale organisational change involving workforce restructuring, working in partnership with major trade unions. Irene has worked in the security industry for 36 years and has held director level positions at business unit, divisional and corporate level. She was appointed to the board of Securicor plc in 2002 as group HR director. Irene is a Fellow of the Chartered Institute of Personnel and Development (FCIPD). 5. GRAHAME GIBSON, REGIONAL CEO – AMERICAS Grahame has been involved in the security industry for 31 years, having joined Group 4’s UK operating company in 1983 as fi nance director. Since that time, Grahame has held a number of operational, management and board positions in the UK, USA, Denmark, the Netherlands and Austria. Grahame has broad experience of the security industry and management of businesses across a diverse range of cultures has been invaluable to the group throughout its development. Grahame joined the board of G4S plc in April 2005. Grahame is a board member of the Ligue Internationale des Sociétés de Surveillance. 50 G4S plc Annual Report and Accounts 2013 Governance 6 7 8 9 10 6. GRAHAM LEVINSOHN, REGIONAL CEO 8. HIMANSHU RAJA, GROUP CHIEF 10. DEBBIE WALKER, GROUP – EUROPE FINANCIAL OFFICER COMMUNICATIONS DIRECTOR Debbie is Group Communications Director, heading the corporate communications team which focuses on the group’s key audiences – investors, media, government, employees and customers. Debbie is also responsible for the group’s CSR and human rights strategies. Prior to the merger between Group 4 Falck and Securicor, Debbie was employed in a number of senior marketing and communications roles within the Securicor group from 1993 to 2004. Debbie is also vice chairman of the CBI South East Regional Council (the representative body for all CBI member companies based in the South East of England and the Thames Valley), having previously served as chairman for two years. Graham became Regional CEO – Europe in November 2013. Graham has more than 20 years’ experience in the security industry, having joined Securicor Cash Services in 1994 as general manager – marketing. Himanshu joined G4S in October 2013 as Group Chief Financial Offi cer. In addition to his role as CFO, the following functions also report to him: service excellence centres, risk management, group procurement and group IT. Since then, Graham has held a number of commercial and line management positions in both the cash and security lines of business. Graham was responsible for the creation of the UK cash centres outsourcing business in 2001 as managing director, before moving on to become divisional managing director for G4S Cash Services UK, and then regional president – Nordics. He became group strategy and development director in 2008 and joined the executive committee in 2010. Grahame is a fellow of the Chartered Institute of Marketing and a director of COESS. 7. SØREN LUNDSBERG-NIELSEN, GROUP GENERAL COUNSEL Søren began his career as a lawyer in Denmark and since 1984 he has had a wide range of legal experience as general counsel for international groups in Denmark, Belgium and the US before joining Group 4 Falck in 2001 as Group General Counsel. Søren has been involved in a wide range of successful mergers and acquisitions during his career, including the acquisition of Wackenhut and the Group 4 Falck merger with Securicor. Søren has overall responsibility for all internal and external legal services for G4S as well as the group’s insurance programme. Søren is a member of the Danish Bar and Law Society, a member of the advisory board of the Danish UK Chamber of Commerce and author of the book Executive Management Contracts, published in Denmark. He joined the group from Misys where, as CFO, he was responsible for fi nance, legal and commercial, facilities and procurement. Prior to Misys, Himanshu was CFO of Logica plc where he led the sale process that resulted in the company being acquired by CGI of Canada. Himanshu also held senior executive positions at BT Group where he worked for more than 10 years in a number of divisional fi nance director roles, including Chief Financial Offi cer of BT Global Services, BT Design, BT Operate and BT Wholesale. His early career included fi nance and systems roles at Worldcom International, UUNET and MFS Limited. Himanshu qualifi ed as a chartered accountant with Arthur Andersen and holds a law degree. 9. DAN RYAN, REGIONAL CEO – ASIA AND MIDDLE EAST Dan joined G4S in August 2010, from global logistics and transportation company Neptune Orient Lines (NOL), where he was a member of the group executive team and held a number of senior management positions including regional president roles for Greater China, Middle East and Europe during his 20-year career there. In his last position with the group, Dan led the project to review, redesign and transform NOL’s organisation across all its Americas divisions. Dan is a charter member of the Middle East Logistics/Supply Chain Management Forum, Hong Kong Liner Shipping Association and the American Chamber of Commerce – Shanghai. He holds an MBA from the University of Notre Dame in Indiana and a B.S. Finance, from California State University, Sacramento. Annual Report and Accounts 2013 G4S plc 51 Corporate governance report GOVERNANCE: CHAIRMAN’S LETTER John Connolly Chairman DEAR SHAREHOLDER, G4S is committed to achieving and maintaining the highest standards of corporate governance, as we believe that these are the necessary foundations on which the long-term success of the group is built. Trust, integrity and transparency are at the heart of what we do. My role is to lead the board and ensure that it has the appropriate balance of skills, experience, independence and knowledge of the company to ensure its effectiveness. As explained in my chairman’s statement on pages 2 and 3, 2013 has been a year of strong focus on board composition and in ensuring we have the right senior management team in place. I am pleased to report that the range of backgrounds, skills and experience of the new members of the board is already producing results. A strong emphasis was placed on ensuring that they have suffi cient knowledge of the company and the environment and conditions in which we operate. Details of inductions and professional development are found below. The role of the board is to challenge constructively and help develop the group’s strategy. The board took part in the thorough review of the strategy, which the new chief executive offi cer, Ashley Almanza, developed during the summer and which resulted in the adoption of the strategy for delivering the company’s objectives which is described in the Strategic Report. 2013 also saw us embark on a thorough review of our risk management framework, which has led to a number of changes aimed at strengthening and enhancing internal controls and processes for identifying, reporting and managing risk. The board, through its newly created Risk Committee, oversaw the process. The purpose of the corporate governance report which follows is to give an understanding of the corporate governance framework and arrangements we have in place. It is also to explain how the group as a whole and the board in particular have complied with the principles of the UK Corporate Governance Codes, published in May 2010 and September 2012 (the “Code”). John Connolly Chairman 31 March 2014 52 G4S plc Annual Report and Accounts 2013 OUR GOVERNANCE FRAMEWORK The board sits at the top of the company’s governance framework, setting broad strategic targets, monitoring progress, approving proposed actions and ensuring appropriate controls are in place and operating effectively. Management decisions, development of strategies and policies and implementation of board decisions fall to the executive committee. Regional management teams have responsibility for businesses within their regions and are tasked with implementing policies and controls at business levels, as well as ensuring they meet agreed fi nancial goals. The presence of a majority of independent non-executive directors on the board ensures objectivity, challenge and debate. It is the primary responsibility of the board to provide effective leadership for the group and this is done by, amongst other things, ensuring that decision making is conducted throughout the group within a strong internal control framework – and by setting values and standards. There is a detailed schedule of matters reserved to the board under 12 separate categories: strategy and management; structure and capital; fi nancial reporting and controls; risk and internal controls; contracts; communication; board membership and other appointments; remuneration; delegation of authority; corporate governance matters; policies; and other matters such as settling material litigation and approving levels of insurance. By way of example, board approval is required for: unbudgeted capital projects of more than £10m; entering into a sales contract where annual revenue is to be more than £50m; any changes to the group’s long-term objectives and commercial strategy; and the annual operating and capital expenditure budgets. The schedule of matters reserved to the board was reviewed and updated during the course of the year. The board fulfi ls a number of its most important functions through its committees. The work of these committees is described below in this report. The terms of reference of the committees are available on the company’s website. www.g4s.com BOARD BALANCE Board composition As at the date of this report, the board comprises 11 members: the non-executive chairman (John Connolly), seven other non-executive directors and three executive directors. The board considers all the non-executive directors to be independent. The names of the directors serving as at 31 December 2013 and their biographical details are set out on pages 48 and 49. All directors served throughout the year under review, except as noted below: – Tim Weller – appointed as non-executive director on 1 April 2013 – Ashley Almanza – appointed as director and chief fi nancial offi cer on 1 May 2013 and then as chief executive offi cer on 1 June 2013 – Nick Buckles stepped down from the board on 31 May 2013 – Lord Condon, Trevor Dighton and Bo Lerenius retired from the board at the conclusion of the company’s AGM on 6 June 2013 – Himanshu Raja – appointed as director and chief fi nancial offi cer on 7 October 2013 Mark Seligman will have served on the board for nine years by the end of this year and will stand down from the board after the company’s AGM in 2015. Mark has served as Audit Committee chairman since May 2009 and has been a member of that committee since January 2006. As part of the board’s succession plan therefore, Mark will stand Governance COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE The board’s statement on the company’s corporate governance performance is based on the Code, which is available on the Financial Reporting Council’s website (https:// www.frc.org.uk/Our-Work/Codes-Standards/Corporate- governance/UK-Corporate-Governance-Code-Code.aspx). The Listing Rules require companies to disclose how they apply the Code’s main principles and report how they have done so. The Code recognises that alternatives to following its provisions may be justifi ed in particular circumstances if good governance can be achieved by other means, provided the reasons are explained clearly and carefully. In such cases, companies must also illustrate how their actual practices are consistent with the principle in question and contribute to good governance. The company complied throughout the year under review with the provisions of the Code. The Corporate governance report, together with the Audit committee report and the Directors’ remuneration report, describe how the board has applied these provisions. down as a member of the committee at the end of this year and as chairman of the Audit Committee after the 2014 AGM, when the role will be taken on by Tim Weller. Both Mark and Tim are the members of the Audit Committee with recent and relevant fi nancial experience, and Tim is a serving FTSE 100 CFO. Tim will therefore lead the external audit tender process which will be undertaken by the Audit Committee later this year (see page 63). Induction and professional development A tailored induction is provided to new non-executive directors joining the board. This includes spending time with the executive directors and other senior executives to understand the business, its structure and people as well as the company’s strategy and fi nancial performance. In March 2013, Messrs Crozier, Spence and Weller met the group’s regional CEOs who each presented an overview of their region. This was followed by a question and answer session also attended by the chief executive offi cer and the chief fi nancial offi cer. Visits to key locations within the group are also arranged. New directors are given the opportunity to visit businesses so they can learn about the group’s operations. In February 2013, John Connolly, Mark Elliott and Paul Spence attended the North American regional management conference in Miami. Prior to the conference, as part of his induction, Mr Spence attended a session with the Americas regional management team, who provided an overview of the businesses in the region, as well as the opportunities and challenges there. The induction also provides details of the group’s governance policies and structure and includes a summary of the risks facing the group. Meeting regional and country staff continues throughout a director’s time on the board, as does continuing professional development, usually in areas where the director has specifi c committee responsibility. GOVERNANCE STRUCTURE BOARD RISK COMMITTEE AUDIT COMMITTEE CSR COMMITTEE REMUNERATION COMMITTEE NOMINATION COMMITTEE RISK MANAGEMENT FUNCTION GROUP INTERNAL AUDIT COMPANY SECRETARIAT GROUP EXECUTIVE COMMITTEE GROUP INVESTMENT COMMITTEE EXECUTIVE RISK COMMITTEE REGIONAL RISK & AUDIT COMMITTEES Annual Report and Accounts 2013 G4S plc 53 Corporate governance report continued Board performance review In 2013, the performance of the board and its committees was evaluated using a questionnaire-based self-assessment process which was then interpreted and reported on by the external consultancy (Lintstock Limited) which conducted an externally facilitated evaluation of the board and its committees’ performance in 2011. Reports generated by this process related to the board, the chairman and each of the Audit, Remuneration, Nomination and CSR committees. Lintstock has no connection with the company other than evaluating the board and its committees’ performance. Following consideration of the report on the board’s performance, the board has agreed a set of primary objectives for its work in 2014, which will include: – regular reviews of businesses within each region including the group’s risk services business – scrutinising the group’s technology strategy – focusing on succession planning – increased understanding of the group’s competitors – increased focus on effectiveness of internal controls environment – analysis of employee and customer satisfaction. In addition, the reports considered the performance of the chairman and each board member and were used to inform the discussion about the chairman’s performance, which was conducted by the senior independent director without the chairman being present. The chairman has also conducted discussions with individual directors which, amongst other things, allowed the chairman to review directors’ training and development needs. The chairman also held regular meetings with the non-executive directors without the executives being present. Succession The Nomination Committee, led by the chairman, is responsible for the recruitment of all new members of the board and the board as a whole discusses succession planning for the board and senior executives. Director re-election The company’s articles of association require that all continuing directors are subject to election by shareholders at the next annual general meeting following their appointment and that they submit themselves for re-election at least every three years and that at least one-third of the directors not standing for election for the fi rst time stand for re-election at each annual general meeting. However, in accordance with the Code provision on re-election of directors, all the continuing directors will stand for re-election every year. Confl icts authorisation Each of the directors has disclosed to the board any situations which apply to them as a result of which they have or may have an interest which confl icts or may confl ict with the interests of the company. In accordance with the company’s articles of association, the board has authorised such matters. The affected directors did not vote when their own positions were considered. Where the board deemed it appropriate, such authorisation was given subject to certain conditions. The board reviews such matters on a regular basis. RELATIONS WITH SHAREHOLDERS The company actively seeks to engage with shareholders and, during 2013, senior management had extensive contact via one on one meetings, group meetings and telephone conference calls with shareholders representing more than 80% of the share register across over 200 institutions. In November, the chief executive and chief fi nancial offi cer presented to institutional investors at the group’s annual capital markets update which is video webcast and available on the group’s website. Additional results meetings are held for the preliminary and half-yearly results announcements and conference calls are arranged for the interim management statements. The chairman has engaged with major shareholders over senior management changes and other broader governance issues. The previous and current chairs of the CSR Committee, Mark Elliott and Clare Spottiswoode, and relevant senior executives met with a group of socially responsible investors in September 2013, updating them on the group’s corporate responsibility programme. Mark Elliott, in his capacity as chair of the Remuneration Committee, along with senior human resources executives, held a detailed consultation process with the company’s largest shareholders on proposals for a new long-term incentive plan. It is intended that all the directors will attend, and be available to answer questions at, the company’s annual general meeting which is an important opportunity for communication between the board and shareholders, particularly private shareholders. At the annual general meeting, the meeting is informed of the numbers of proxy votes cast and the same information is published subsequently on the company’s website. BOARD MEETINGS AND INFORMATION FLOW Seven scheduled board meetings were held during the year ended 31 December 2013 and there were a further seven additional unscheduled board meetings. These additional meetings were mostly called at short notice and it was not always possible for all directors to attend. Three of the Remuneration Committee meetings were unscheduled. One of the scheduled board meetings was an extended two-day board and strategy session covering presentations on development and implementation of the company’s strategy. The board debated the company’s strategy and business plans and the company’s strategy was reviewed again by the board at a subsequent meeting. Prior to each meeting, comprehensive board papers are circulated to the directors addressing not only the regular agenda items on which the executives will report, but also details of any areas requiring approval or decisions such as signifi cant transactions or events or important market issues. At each meeting, the board then receives reports from the chairman, the chief executive, the chief fi nancial offi cer and the company secretary, an HR report which includes summaries of developments on HR and health and safety matters and an investor relations report which includes analysts’ reviews and any comments received from major shareholders since the previous board meeting. After meetings of the board committees, the respective committee chairmen report to the board on the matters considered by each committee. In addition, in months where there is no board meeting scheduled, the board receives trading and fi nancial updates, investor relations and HR reports. There are seven board meetings scheduled for the current year, including a two-day board and strategy meeting. 54 G4S plc Annual Report and Accounts 2013 Governance Meeting attendance in 2013 Executive directors Ashley Almanza (CEO)(1) Himanshu Raja (CFO)(2) Nick Buckles (CEO)(3) Trevor Dighton (CFO)(4) Grahame Gibson (Regional CEO – Americas) Non-executive directors John Connolly (chairman) Mark Seligman (deputy chairman) Lord Condon (senior independent director)(4) Mark Elliott (senior independent director) (5) Adam Crozier Winnie Fok Bo Lerenius(4) Paul Spence Clare Spottiswoode Tim Weller(6) Board scheduled Board unscheduled Nomination Committee CSR Committee Risk Committee Audit Committee Remuneration Committee 4 of 4 2 of 2 3 of 3 4 of 4 7 of 7 2 of 2 2 of 3 2 of 3 7 of 7 5 of 7 7 of 7 7 of 7 7 of 7 6 of 7 4 of 4 3 of 3 7 of 7 6 of 7 7 of 7 4 of 4 7 of 7 7 of 7 5 of 5 6 of 7 6 of 7 6 of 7 3 of 3 6 of 7 6 of 7 7 of 7 1 of 1 1 of 1 2 of 2 1 of 1 4 of 4 6 of 6 2 of 2 2 of 2 2 of 2 4 of 4 2 of 2 2 of 2 4 of 4 3 of 4 2 of 2 4 of 4 3 of 3 0 of 1 1 of 1 3 of 3 6 of 6 6 of 6 5 of 6 1 Ashley Almanza was appointed to the board on 1 May 2013. 2 Himanshu Raja was appointed to the board on 7 October 2013. 3 Nick Buckles stepped down from the board on 31 May 2013. 4 Trevor Dighton, Lord Condon and Bo Lerenius stepped down from the board on 6 June 2013. 5 Mark Elliott took over from Lord Condon as senior independent director on 7 June 2013. 6 Tim Weller was appointed to the board on 1 April 2013. FAIR, BALANCED AND UNDERSTANDABLE ASSESSMENT In relation to compliance with the Code, the board has given consideration to whether the annual report and accounts, taken as a whole, is fair, balanced and understandable. The preparation of the annual report and accounts is coordinated by the fi nance, investor relations and company secretariat teams with group-wide support and input from other areas of the business. Comprehensive reviews were undertaken at regular intervals throughout the process by senior management and other contributing personnel within the group. The statement required to be given by the directors by Code provision C.1.1 can be found on page 83. RISK MANAGEMENT AND INTERNAL CONTROL The directors acknowledge their responsibility for the group’s system of risk management and internal control and for reviewing its effectiveness each year. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Enterprise-wide policies and procedures, which are reviewed and monitored by the group director of risk and programme assurance, are in place to identify the key risks faced by each business unit and to put in place appropriate remediation strategies for any risks determined to exceed the group’s risk appetite. The most material risks are elevated to the board which evaluates their impact on the group’s activities and reviews any matters which may be considered by the board to present signifi cant exposure. The group’s key risks are summarised in the Strategy section – Managing risk effectively and Our principal risks in detail on pages 34 to 41. The key features of the group’s risk management process, which was in place throughout the year under review, are: – Senior executives in each business unit and region use a common risk management framework* to provide a profi le of those risks which may have an impact on the achievement of their business objectives – Each signifi cant risk is documented in the group’s risk management system, showing an overview of the risk, its owner, how the risk is managed, and any improvement actions. Risk appetite/tolerance is considered in the context of the residual (after controls and mitigation) risk with a particular focus on “High” net risks. To be categorised as “High”, a risk must meet at least one of the following criteria: Annual Report and Accounts 2013 G4S plc 55 Corporate governance report continued – major impact on the achievement of the business strategy – Defi ning a more precise group risk appetite. – serious damage to business reputation – severe business disruption – impact of > 5% on operating profi t or assets – Implementing a new risk management software tool with improved mitigation action tracking capabilities and improved management information and reporting. – Rolling-out new approaches to and policies on risk across the – The risk profi les ensure that internal audit reviews of the adequacy, group. application and effectiveness of risk management and internal controls are targeted on the key risks. – Risk management committees have been established at regional and group level. – Risk and control self-evaluation exercises are undertaken for each operating company, for most companies at least twice a year, and updated risk profi les are prepared. Similar exercises are undertaken as part of the integration process for all major acquisitions. The results of the company risk evaluations are assessed by the regional risk management committees*. – Both the regional committees and the group executive risk committee receive internal audit reports and regular reports on risks. They monitor the actions taken to manage risks. The process is carried out under the overall supervision of the group executive risk committee, which comprises the group chief fi nancial offi cer, the group general counsel, the group communications director and the group human resources director. The group executive risk committee reports to the group executive and to the Risk Committee of the board. The process outlined above is reviewed regularly by the board through its Risk Committee to ensure its robustness and suitability to meet the group’s needs. In 2013, a new board Risk Committee was constituted. This committee approved a plan for the improvement of the group’s risk management policies and procedures to be led by the group director of risk and programme assurance. Under this plan the following progress has been made: – Revised terms of reference have been agreed for regional risk and audit committees and the executive risk committee. The reporting arrangements and inter-relationships between these governance bodies and the Audit Committee have been clarifi ed. – Regional risk managers with revised, standardised, role descriptions have been appointed in each region as well as in the global risk services and consulting business. – A new group risk universe providing greater structure to the classifi cation of the group’s risk was developed. – A new methodology for identifying and assessing risks has been created. – An interim risk management tool, incorporating the risk universe and new methodology was put into place to capture risk at regional and group level. – In January 2014, the regional risk and audit committees all held risk workshops to identify and assess the principal regional residual risks afresh. These risks were recorded in the interim risk management tool and provided the basis for identifying and assessing the group’s principal residual risks presented in this annual report. Mitigation action plans are being refreshed for all regional and group residual risks. – During 2014, the risk management improvement programme will focus on: – Defi ning a new overall risk management approach and revised risk policy. – Implementation of enhanced contract approval and contract management processes. Further information about the Risk Committee, its remit, work during 2013 and its plans for 2014 can be found on pages 34 to 41. The internal control system includes clearly defi ned reporting lines and authorisation procedures, a comprehensive budgeting and monthly reporting system, and written policies and procedures. In addition to a wide range of internal audit reports, senior management also receives assurance from other sources including security inspections, third-party reviews, company fi nancial control reviews, external audit reports, summaries of whistle-blowing activity, fraud reports and risk and control self-evaluations. The group has in place robust internal control and risk management systems for fi nancial reporting. The group has a single global consolidation system which is used for internal management reporting, budgeting and planning as well as external reporting. The group has a comprehensive budgeting process with the budget being approved by the board. Forecasts for the year are reported at least quarterly. Actual results at business unit, region and group level are reported monthly and variances are reviewed. A programme of business internal fi nancial reviews is performed by a fi nance team from either region or group to check the accuracy of fi nancial reporting and compliance with the group fi nance manual. The Audit Committee undertakes a high level review of risk management and internal control each year. As well as the above processes and sources of assurance, the Audit Committee also considers the following year end reporting in conducting this review: – Summary of 2013 internal audit work, including an update on all open audits with a defi cient rating, analysis of results by region, common audit fi ndings and areas identifi ed for improvement in internal controls – Summary of 2013 internal fi nancial reviews, including signifi cant accounting or fi nancial control issues and common concerns identifi ed – Overview of year-end fi nancial control status reports completed by all businesses confi rming adherence to group standards, with any exceptions reported – A broad overview of the general risk management and internal control systems in place during the year – Year-end group risk profi le – Review of risk management processes and of the group’s principal residual risks by the board Risk Committee – External audit year-end reporting on fi nancial controls and accounting. The Audit Committee has confi rmed that it is satisfi ed that the group’s risk management and internal control processes and procedures are appropriate. The board has reviewed the group’s risk management and internal control system for the year ended 31 December 2013 by considering reports from the Audit Committee and the Risk Committee and has taken account of events since 31 December 2013. * Because G4S Government Solutions, Inc. (“GSI”) is governed through a proxy agreement under which the group is excluded from access to operational information, it is not subject to the same risk management process as is applied to other group companies. The board has however satisfi ed itself as to the adequacy of the internal control processes adopted by GSI, which include a risk review by an external adviser. 56 G4S plc Annual Report and Accounts 2013 THE NOMINATION COMMITTEE John Connolly Nomination Committee Chairman “ There have been signifi cant changes to the board during the year. The Nomination Committee was engaged in selecting and appointing two new executive directors. In any appointment recommended to the board, the Nomination Committee continues to ensure that board membership represents the wide range of skills and experience required.” John Connolly MEMBERSHIP IN 2013 The members of the Nomination Committee are John Connolly (chairman), Adam Crozier and Mark Elliott. On 24 January Lord Condon left the committee and Adam Crozier joined. ROLE The Nomination Committee is responsible for making recommendations on board appointments and on maintaining a balance of skills and experience on the board and its committees. Succession planning for the board is a matter which is devolved primarily to the Nomination Committee, although the committee’s deliberations are reported to and debated by the full board. The board itself also regularly reviews more general succession planning for the senior management of the group. KEY ACTIVITIES DURING 2013 Following an evaluation of the board committee memberships of the non-executive directors, proposals for changes were implemented in January 2013. Further details of these changes can be found in the relevant section relating to each committee. Governance NEW APPOINTMENTS In 2013, three new non-executive directors were appointed to the board during the year, having been selected and announced in 2012 through a process led by the Nomination Committee which was assisted by the external executive search consultant, Zygos Partnership. Through a process led by the Nomination Committee which was assisted by the external executive search consultant, Inzito, Ashley Almanza was appointed as CFO on 1 May 2013. At the end of 2012, the board initiated a succession planning process to search for a new CFO. The chairman of the Nomination Committee led the process. Inzito, which was provided with a detailed brief for the role, undertook a thorough search. The list of potential candidates selected by Inzito was considered by the Nomination Committee, which carried out the review having regard to the balance of skills, experience and diversity on the board. Candidates who were shortlisted were all interviewed by the CEO and a smaller number also met with the chairman of the Nomination Committee and other non-executive directors. This process led to the Nomination Committee recommending to the board the appointment of Mr Almanza as the new CFO. The board accepted the recommendation, which resulted in the appointment of Mr Almanza on 1 May 2013. At the time of looking for a replacement for Mr Buckles, with Inzito’s assistance, the board considered the skills and experience of a range of potential external candidates as well as those of Mr Almanza. After careful review, the board concluded that Mr Almanza’s wealth of experience gained from working across international borders in complex businesses as well as his experience of strategic and operational management would enable him to provide strong strategic and operational leadership to the group. The board therefore approved Mr Almanza’s appointment as CEO. The Nomination Committee then instigated the selection process for a new CFO to replace Mr Almanza. Mr Almanza and the group human resources director interviewed a number of candidates, some of whom had been seen before, including Himanshu Raja. With Inzito’s assistance, a list of candidates was produced, a number of whom were interviewed by the CEO and by the chairmen of the Nomination Committee and the Audit Committee. The Nomination Committee recommended to the board the appointment of Mr Raja, and he was appointed as CFO on 7 October 2013. Inzito and Zygos Partnership each provided recruitment consultancy services to the Nomination Committee and neither has any other connection with the company. DIVERSITY With operations in 120 countries, G4S operates in very diverse communities and businesses. Diversity covers many aspects such as gender, race, religion and language as well as background and experience. Our workforce refl ects this diversity. The board recognises that the group needs to continue to promote diversity in order to create an organisation that attracts, supports and promotes the broadest range of talent. This allows individuals to reach their full potential but also to provide the best service to our customers. Diversity is a consideration that forms part of any new recruitment for and appointment to the board. Although appointments will continue to be made on merit, the Nomination Committee and the board recognise that the board performs better when it includes members from varying backgrounds, experiences and perspectives. Diversity will therefore continue to be a key consideration when contemplating the composition and refreshing of the board and senior management, although the board has no specifi c targets in relation to diversity including gender. Annual Report and Accounts 2013 G4S plc 57 Corporate governance report continued THE CSR COMMITTEE Clare Spottiswoode CSR Committee Chair “ Corporate social responsibility remains at the heart of G4S’ business strategy and operations. I was delighted to become chair of the CSR Committee in June 2013, taking over from my predecessor Mark Elliott. Although CSR matters considered by the committee are wide ranging, a signifi cant area of focus for the group and the CSR Committee is to ensure the health and safety of our colleagues around the world. Sadly, 55 of them lost their lives in 2013. This has been and remains a key concern for the committee. Whilst any employee fatality is unacceptable, we are making good progress in implementing our health and safety campaigns and strategies, which include signifi cant work around road safety, to reduce the number of injuries and fatalities across our global workforce. In addition, Safety First has been introduced as a new value for the group and performance-related objectives, which focus on health and safety awareness and role modelling, have also been implemented. This work continues in 2014.” Clare Spottiswoode MEMBERSHIP IN 2013 The members of the CSR Committee are Clare Spottiswoode (chair), Winnie Fok and Paul Spence. Bo Lerenius retired from the board and left the committee following the company’s annual general meeting on 6 June 2013. On the same date, Mark Elliott left the committee and Ms Spottiswoode became the committee’s chair. CSR Committee meetings are attended by the group communications director and the group human resources director and, from February 2014 onwards, also by Grahame Gibson, one of the executive directors of the board. ROLE The CSR Committee is responsible for reviewing and monitoring the group’s CSR strategy. This includes developing policies on various CSR-related matters for consideration by the board, reviewing the activities of the executives who are responsible for CSR matters and monitoring performance of the group against its policies and any associated targets. It also takes responsibility for the company’s CSR report. The company’s separate CSR report for 2013 provides more detail on the group’s CSR strategy and the progress it has made during the year. A brief summary of some of the issues which that report addresses is set out on pages 42 to 47. KEY ACTIVITIES DURING 2013 During the year, the committee reviewed the content of the company’s 2013 CSR report and the results of the CSR materiality exercise undertaken during the year. The committee also oversaw the group’s implementation of a number of initiatives to improve health and safety for the group’s employees. With regard to road safety specifi cally, which remains a strong area of focus, initiatives included the “Driving Force Rules” campaign, which was piloted in seven countries. In addition, the committee oversaw the introduction of enhanced incident reporting and investigation processes and the collection of “lost time incident” data. Early in the year, the committee oversaw the launch of human rights and policy guidelines throughout the group and will monitor their effectiveness. The committee reviewed the effectiveness of communication of the group’s whistle-blowing hotlines, following which the promotion of these hotlines was improved. Mark Elliott, the previous chair of the CSR Committee, and Clare Spottiswoode, the current chair, led a meeting with a group of socially responsible investors in September 2013 to provide an update on the group’s corporate responsibility programme. 58 G4S plc Annual Report and Accounts 2013 THE RISK COMMITTEE John Connolly Risk Committee Chairman “ Over the past year we have begun an in-depth review of our risk management processes. A new Risk Committee, chaired by me, was created in 2013. The Risk Committee is tasked with overseeing this review and the implementation of agreed changes. A specifi c group risk management function, separate from internal audit, has also been created. In September 2013, Alastair James was appointed as group director of risk and programme assurance to lead the new function. I am confi dent that these actions will signifi cantly improve management of the group’s risks.” John Connolly Governance MEMBERSHIP IN 2013 The members of the Risk Committee are John Connolly (chairman), Ashley Almanza, Himanshu Raja, Paul Spence and Tim Weller. Other regular attendees include the group general counsel, the head of internal audit and the group director of risk and programme assurance. ROLE The Risk Committee advises the board on the group’s overall risk appetite, develops the group’s risk management strategy, advises the board on risk exposures, reviews the level of risk within the group and assesses the effectiveness of the group’s risk management systems. The committee’s composition ensures that a broad-ranging set of skills and experience come together to take a fresh look at how the group manages risk in the business. KEY ACTIVITIES DURING 2013 The board decided last year that it would establish a distinct Risk Committee to oversee a comprehensive review of the group’s enterprise risk management processes. It also decided that the company would implement more fully the best practice “three lines of defence” model for risk management, by separating responsibility for risk management from the group internal audit function. A thorough review of the effectiveness of the group’s risk management processes was commissioned and carried out by Deloitte. The review took place in July and August 2013. The Risk Committee met in September 2013 to receive Deloitte’s report, discuss the results and agree a plan of action designed to reinforce the group’s risk management approach. The conclusion of the Deloitte report was that, while the group has in place a basically sound risk management process, there were a number of areas where improvements could be made. A plan was therefore developed to take forward Deloitte’s recommendations through 2014. The terms of reference of the Risk Committee were fi nalised and agreed by the board. During the year, a sub-committee of the Risk Committee met on fi ve occasions to review major contract bids, the risk associated with them and mitigation plans. IN 2014 In March, the Risk Committee reviewed the residual risks identifi ed by each of the regional risk and audit committees. The residual risks were identifi ed as a result of the consolidation of the risks identifi ed by these regional committees following a revised methodology rolled out towards the end of 2013. Further details of the principal risks and uncertainties facing the business are set out on pages 34 to 41. The Risk Committee plans to meet at least twice more in 2014 to carry out the following activities: – review progress on the improvement of the risk management approach – review the group’s residual risk exposure and the progress of mitigation action plans – review new and emerging risks. The Risk Committee will consider all signifi cant risks to the group, not only fi nancial risks. The Risk Committee’s role is to support the Audit Committee and the board in discharging their responsibilities in respect of the monitoring, reviewing and reporting of internal control and risk management. Annual Report and Accounts 2013 G4S plc 59 Corporate governance report continued THE AUDIT COMMITTEE Membership in 2013 The members of the Audit Committee are Mark Seligman (chairman), Adam Crozier, Paul Spence and Tim Weller. On 24 January 2013, Adam Crozier and Paul Spence became members of the committee and Lord Condon and Ms Fok left. Tim Weller joined the committee upon his appointment to the board on 1 April and Mr Lerenius left upon his retirement following the company’s annual general meeting on 6 June 2013. The committee members were selected for their breadth of commercial and fi nancial expertise, necessary to fulfi l the Committee’s responsibilities. Each member of the Audit Committee brings signifi cant and relevant fi nancial experience gained at senior management level. Their skills and experience are set out on pages 48 and 49. The Audit Committee’s chairman, Mr Seligman, and Mr Weller, are considered by the board to be the members of the Audit Committee with recent and relevant fi nancial experience. Mark Seligman has served as Audit Committee chairman since May 2009 and has been a member of the committee since January 2006. As part of the board’s succession plan, Mark will stand down as chairman of the Audit Committee after the 2014 AGM, when the role will be taken on by Tim Weller. Mark will remain a member of the committee until the end of this year. Audit Committee meetings are attended by the chief fi nancial offi cer, the group fi nancial controller, the head of group internal audit, the company secretary and representatives of the group auditor. The chairman of the board and the chief executive also attend meetings from time to time with the agreement of the chairman of the committee. The role and work of the Audit Committee is described more fully in the Audit Committee report set out on pages 61 to 63. THE REMUNERATION COMMITTEE Membership in 2013 The members of the Remuneration Committee are Mark Elliott (chairman), Winnie Fok, Mark Seligman and Clare Spottiswoode. Remuneration Committee meetings are attended by the group HR director, the director of compensation and benefi ts, representatives of the committee’s adviser and the company secretary. The chief executive offi cer also attends from time to time to provide information and guidance to the committee on remuneration packages for senior executives within the group. The work of the Remuneration Committee is more fully described in the Directors’ remuneration report, which appears on pages 64 to 79 of the annual report. Role The Remuneration Committee is responsible for all elements of the remuneration of the executive directors and the chairman of the board and monitors the levels and structure of remuneration for the senior management team. The chairman of the Remuneration Committee attends the company’s annual general meeting to respond to any questions from shareholders relating to the Remuneration Committee’s activities. 60 G4S plc Annual Report and Accounts 2013 AUDIT COMMITTEE REPORT Mark Seligman Chairman of the Audit Committee DEAR SHAREHOLDER, 2013 saw the appointment of fi rst Ashley Almanza, then Stuart Curl (on an acting basis) and subsequently Himanshu Raja as chief fi nancial offi cer after Trevor Dighton stepped down from that position at the end of April. Starting in May, a thorough review of the group’s balance sheet was undertaken and work began on a process of change to strengthen signifi cantly the group’s fi nancial capabilities. This process was fully supported by the committee, which reviewed and discussed the outcomes with executive management and the rest of the board. During the course of the year, the Audit Committee devoted signifi cant time to reviewing the integrity and quality of the group’s fi nancial reporting. The Audit Committee reviewed and assessed the half-year and full-year exercises relating to the carrying value of the group’s assets and liabilities, the effectiveness of the internal control environment and the effectiveness of both the internal audit function and the external auditor. Together, these actions increased our understanding of the overall control environment, and resulted in a number of decisions intended to further strengthen controls. The Audit Committee concluded that the annual report and accounts was fair, balanced and understandable, and reported this to the board. At the end of 2014 I will have served on the board for nine years and I will retire from the board at the 2015 AGM. Tim Weller will become chairman of the committee in my place after this year’s AGM, thereby allowing Tim to assume leadership of the external audit tender process described below. Mark Seligman Chairman of the Audit Committee 31 March 2014 ROLE The committee’s tasks include: – reviewing the group’s fi nancial results announcements and fi nancial statements and monitoring compliance with relevant statutory and listing requirements – overseeing the relationship with the external auditor, including discussing with them the nature, scope and fees for their work and making recommendations to the board in relation to the appointment, reappointment and removal of the external auditor – monitoring and reviewing the effectiveness and resourcing of the group internal auditing function – reviewing the group’s whistle-blowing arrangements Governance – testing the effectiveness of the risk management procedures (through reviewing and considering reports from the Risk Committee) – reviewing the effectiveness of internal controls – advising the board on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy – reporting to the board on how it has discharged its responsibilities MAIN ACTIVITIES OF THE AUDIT COMMITTEE DURING THE YEAR The committee: – reviewed the company’s annual report, half-yearly results and preliminary announcement – reviewed and approved the 2013 external audit plan and received regular reports from the external auditor – reviewed and approved the external auditor’s fees, including fees for non-audit services – recommended to the board the re-tendering of the annual external audit process as set out on page 63 – considered the effectiveness of the group’s internal controls over fi nancial reporting – reviewed and approved the internal audit resources and annual audit plan and received regular reports from internal audit on the results of their work – reviewed provisioning for potential tax liabilities – reviewed the committee’s terms of reference – reviewed whistle-blowing reports and actions taken – carried out an externally facilitated self-assessment of its performance – considered the signifi cant issues below. SIGNIFICANT ISSUES CONSIDERED BY THE AUDIT COMMITTEE The primary areas of judgement considered by the committee in relation to the 2013 fi nancial statements, and how these were addressed, were: Presentation of the income statement In order to provide a better understanding of the underlying performance of the business, for the half-yearly and full-year results, management presented a view of the underlying results of the group, with separate disclosure of restructuring charges and other specifi c items. The committee discussed the rationale with management and with the external auditor and concluded that separate presentation of restructuring charges and other specifi c items provides users of the group’s fi nancial statements with added clarity and transparency, and therefore facilitates a clearer assessment of the group’s performance over time. The committee confi rmed that appropriate accounting policies, controls and guidance on the constituents for specifi c items were in place and would be applied robustly in future years. Annual Report and Accounts 2013 G4S plc 61 Audit Committee report continued Risk of management override of internal controls The group operates in a large number of diverse locations and has a decentralised management structure, with a signifi cant number of local fi nancial systems and processes which could potentially lead to management override of internal controls in the absence of group oversight. The committee assessed the overall control environment of the group, reviewed and approved the group internal audit plan for the year as well as internal audit reports provided, interviewed senior management, and reviewed other controls including whistle-blowing arrangements. The committee also examined signifi cant accounting estimates and judgements and the supporting documentation for evidence of fraud or bias that may represent a risk of material misstatement, and satisfi ed itself that the risk of management override of internal controls is not material. Review of the carrying value of assets and liabilities Following the appointment of Ashley Almanza as chief fi nancial offi cer in May 2013 and subsequently as chief executive offi cer in June 2013, a balance sheet review was undertaken of the carrying value of the group’s assets and liabilities in advance of the half-year results. Following the appointment of Himanshu Raja as chief fi nancial offi cer in October 2013, a further and more detailed exercise was carried out. The committee had extensive discussions with both management and with the external auditor, which was asked to include the balance sheet review as part of the audit’s scope and report to the committee. Note 8 to the fi nancial statements provides the details of the assets that have been written down as a result of this exercise. In fi nalising the year-end results, the committee scrutinised the proposed adjustments and received assurance from management and the external auditor that the review was comprehensive and complete and that the revised estimates took account of current circumstances. The committee was satisfi ed that the adjustments made were balanced and reasonable. Review of contracts The group delivers outsourcing services that can be complex in nature and may be governed by unique contractual arrangements. There is a risk that revenue from these contracts is not recognised in accordance with contractual entitlements and therefore provisions may be required for refunds due to inaccurate billing and revenue recognition. During the year, the group was subject to a number of inquiries in relation to the accuracy of billing and services provided on some specifi c UK Government contracts, most notably the investigation into the electronic monitoring contracts where the Ministry of Justice alleged the group had overcharged for certain aspects of the services. Subsequent to year-end, a settlement was reached with the UK Government which is in line with the provision made at the year-end. During the second half of the year, management undertook a review of 163 contracts across the group. The committee tested management on the underlying principles and application of provisions relating to the contract portfolio review and was satisfi ed that the judgements made were balanced and reasonable. Compliance with foreign ownership rules and consolidation of subsidiaries The group has a diverse set of complex ownership structures, which are sometimes based upon local laws and regulations relating to foreign ownership. In some instances the group operates through local structures with limited direct share ownership of the business but exercises control through shareholder agreements. Forthcoming changes to the rules on consolidation require different judgements in deciding whether or not to consolidate the underlying business or to treat the operation as a joint venture, an associate or an investment, as appropriate. During the year, management carried out an extensive exercise to review whether the group is in compliance with local foreign ownership rules and whether or not the group holds suffi cient control and infl uence to support consolidation in the group results. This was a major area of focus in the external audit plan and the work was reviewed by the external auditor and by the committee. As a result of this review, the committee was satisfi ed that the basis of consolidation and joint venture accounting was appropriate for the year. The committee also considered a report on the impact of adopting IFRS 10, 11 and 12 which came into force on 1 January 2014 and approved the enhanced disclosures relating to IFRS 10, 11 and 12 as set out in note 3(v) on page 103. Carrying value of goodwill The total value of the group’s goodwill as at 31 December 2013 is £2bn and it relates to a signifi cant number of acquisitions made. The estimation of the recoverable amount of goodwill supported by the group’s cash generating units requires signifi cant judgement primarily in relation to the achievability of long-term business plans and macroeconomic assumptions underlying the valuation process. The committee addressed these matters through receiving reports from management outlining the basis for the assumptions used, and was satisfi ed with the carrying value of goodwill. In addition, this matter is a prime area of external audit focus. Going concern The committee considered the group’s strategy and the principal risks and uncertainties, reviewed the liquidity position of the group taking into account the signifi cant undrawn but committed facilities available, and reviewed compliance with and availability of headroom in relation to covenants. In addition, the committee considered the group’s cash fl ow forecast for the next 12 months, considered a number of stress test scenarios to assess the robustness of this forecast. The committee was satisfi ed that the cash fl ow forecast, taking into account reasonably possible risk sensitivities and the group’s current funding and facilities, alongside the group’s funding strategy; show that the group will continue to operate for the forseeable future. In addition, the committee has reviewed the relevant disclosures made in the statement of directors’ responsibilities on page 83. The committee has recommended to the board the adoption of the going concern statement for inclusion in the annual report and accounts. Discontinued operations The group often has business disposals underway at any reporting date. There is a risk that any such businesses may not meet the group’s accounting policy for presentation as discontinued at the balance sheet date, either because they are not a separate major line of business or because there is uncertainty as to the likelihood of achieving the sale or the realisable value on disposal. The latter requires a level of judgement due to the range of potential sale prices. The committee reviewed the classifi cation of all discontinued businesses and, following discussions with management and with the external auditor, was satisfi ed that the likelihood of sale was highly probable and that the carrying value was reasonable based on market multiples and on expectations arising from negotiations with potential buyers. Taxation The group operates in many tax jurisdictions, including countries where tax legislation is not always applied consistently and under some complex contractual circumstances where the responsibility for tax arising is not always clear. The committee received reports from management and the external auditor on such issues, challenging them with assistance from external legal and other advisers, and is satisfi ed as to the judgements made. The committee also evaluated the adequacy of the group’s disclosures about the tax provisions and contingencies at notes 14 and 35 and the level of estimation due to uncertainty in the tax provisions at note 4. 62 G4S plc Annual Report and Accounts 2013 INTERNAL AUDIT REVIEW The Institute of Internal Auditors suggests that internal audit functions are subject to an external assessment at least every fi ve years. The last review of the group’s internal audit function was carried out in 2009, and updated in 2011. In May 2013, the committee commissioned an independent review of the group’s internal audit function. After a selection process which involved proposals from fi ve fi rms, Deloitte scored highest and was selected to carry out the review. Deloitte’s report was considered by the committee in December 2013. The report found that the existing internal audit function was well organised and diligent, but that there were areas for improvement. Deloitte recommended the strengthening of the internal audit function and more emphasis on auditing the “third line of defence” activities. Deloitte also concluded that, although the group’s internal fi nancial review process was well designed, it could benefi t from being carried out by fi nance staff, with internal audit reviewing the outcome. The committee accepted Deloitte’s fi ndings, and adopted a number of changes including signifi cantly increasing the resources available to the internal audit function over the course of 2014. This will enable an increase in the amount of time available for on-site audits and the insourcing of testing of internal controls in the UK and of IT auditing. Internal audit’s effectiveness will be further enhanced by the strengthening of regional and country fi nance functions. EXTERNAL AUDITOR The committee considers the reappointment of the external auditor, including the rotation of the audit partner, each year and also assesses their independence on an on-going basis. The external auditor is required to rotate the audit partner responsible for the group audit every fi ve years. The current lead audit partner has been in place for two years. The external auditor KPMG Audit Plc was fi rst appointed in 2005. So as to ensure that the independence of the audit is not compromised, during the year the committee reviewed its policy on the provision of non-audit services. Besides its formal audit function, the external auditor is permitted to provide consultation and due diligence services related to mergers and acquisitions, audits of employee benefi t plans, reviews of internal accounting and control policies and general advice on fi nancial reporting standards. Where the fees for such services are signifi cant, prior approval of the committee is required. The external auditor is also prohibited from providing other services without specifi c permission from the committee. The provision of any non-audit services by the external auditor must in any event comply with the requirements in that regard of the Auditing Practices Board. The committee has reviewed this policy and agreed that it will be amended to allow the external auditor to undertake certain controls testing activities and any other services with the committee’s approval which would not diminish the auditor’s independence. The external auditor has written to the committee confi rming that, in its opinion, it is independent. The committee discussed the levels of materiality used by the external auditor as set out in the report on page 92 and satisfi ed itself these were appropriate. The committee approved the fees paid to the external auditor, noting that the external audit is a complex exercise involving over 1,000 KPMG personnel. Details of the fees paid for audit services and non-audit services can be found in note 10 to the fi nancial statements. Effectiveness of the external auditor A combination of formal and informal processes is used in the assessment of the effectiveness of the external audit process. Regular feedback is sought and received by management from the businesses within the scope of the external audit. At the conclusion of the year-end audit, this is fed back to the committee by the group Governance fi nancial controller where appropriate. In addition, the committee has considered the results of an internal questionnaire about the external auditor completed by management and members of the committee. The questionnaire included questions relating to the quality, planning, execution and communication of the external audit programme. The committee also reviewed the fi ndings of the Financial Reporting Council’s report on its audit quality inspection of KPMG published in May 2013. Since the assessment of the external audit concluded that the external audit remains effective and the external auditor remains independent, the committee recommended to the board that KPMG should be re-appointed as the group’s auditor for 2014. The board accepted this recommendation and has proposed a resolution (set out on page 151) to shareholders for the re-appointment of KPMG. The committee also considered whether to tender the external audit. EXTERNAL AUDIT TENDER KPMG has been the group’s external auditor since 2005. As part of the committee’s review of the objectivity and effectiveness of the audit process, a detailed assessment was undertaken in 2013 as to whether the group should consider putting the external audit engagement out to tender. The committee concluded it was appropriate to undertake a full tender process for external audit services. The committee has therefore approved a tender process (outlined below) which will be carried out during 2014. In the event that KPMG is unsuccessful, the board will appoint a successor with effect from the conclusion of the 2014 audit, and shareholders will be invited to confi rm this appointment at the AGM in 2015. If KPMG is successful, shareholders will have the opportunity to re-appoint the fi rm as the group’s external auditor at the AGM in 2015. EXTERNAL AUDIT TENDER Tender process – A request for a proposal will be sent to each of the global audit fi rms in the second quarter of 2014. – A tender evaluation team will be appointed comprising senior representatives from fi nance, group internal audit, group treasury, group legal and group tax. – Following a review and evaluation of submissions and interviews by the tender team, a shortlist of prospective fi rms will be agreed by the committee and those selected will be invited to present to the committee. – Members of the board and management will attend to assist the committee in developing a recommendation for the board. The committee will make the recommendation to the board. Criteria Detailed criteria for evaluation will be developed so as to incorporate key aspects of the Financial Reporting Council’s Audit Quality Framework. Appropriate weighting will be given to: – organisation, capability and service delivery – including fully integrated global coverage, industry experience, in-depth appreciation of the group’s risk environment and technical expertise – audit quality – including quality assurance and compliance procedures, commitment to innovation and value-add, audit methodology, partner rotation and succession planning – audit approach – including audit planning and scope, materiality and risk focus, and – team capability and fi t – including experience, continuity, culture, team structure and supervision. Annual Report and Accounts 2013 G4S plc 63 Directors’ remuneration report THE REMUNERATION COMMITTEE Mark Elliott Chairman of the Remuneration Committee DEAR SHAREHOLDER, In what has been a year of great change for the group, the Remuneration Committee has dealt with both the activities that occur in the normal course of events and those driven by changes in leadership and regulation. COMMITTEE OPERATIONS As announced in last year’s report, Lord Condon retired from the board at the AGM held on 6 June 2013 and thus I assumed the role of chairman of the committee. In addition, Winnie Fok joined the committee in January 2013. As is best practice, the committee performed a formal review of its performance by collecting feedback from committee members and those associated with committee proceedings. In summary, the review found that the committee performed well but that we have the opportunity to improve in a few key areas such as greater involvement in the operation of incentives schemes across the group and in engagement with all of our stakeholders. We developed plans to enhance our performance and will monitor our improvement in those areas as part of this review. In addition, we regularly review our terms of reference to determine if they continue to refl ect best practice. We have recommended to the board minor updates to refl ect our intent to more closely monitor variable pay plans across the organisation’s top 220 senior managers. Our terms of reference continue to be available on our website. The committee executed a formal review of its advisers in September and saw presentations and terms from three fi rms. We selected Deloitte to become our new advisers effective from October 2013. 2014 REMUNERATION The committee had two strategic issues to manage during the year. The development of a remuneration policy for approval by our shareholders and the creation of a new long-term incentive plan given the impending expiry of the plan approved in 2004. The policy is presented on pages 65 to 72 of this report. The proposed Long Term Incentive Plan (LTIP) is presented on pages 66 and 67 as well as page 78 of this report and a summary of its rules is contained in the Appendix to the Explanatory Notes to the AGM notice on pages 156 and 157. While the policy will not formally take effect until approved by the shareholders at the AGM on 5 June 2014, we intend to operate within that policy beginning immediately. The committee consulted with 15 of the company’s largest shareholders and a number of key shareholder representative bodies in the development of both the policy and the LTIP. In particular the new LTIP was altered to refl ect: – a desire for greater transparency in the way EPS is calculated – a change in our TSR comparator group – a desire to alter the metrics so that EPS is balanced with TSR and a third metric aligned with our strategy. We selected a cash fl ow metric which aligns with our strategic intent to reduce debt and to invest in organic growth – an increase in the shareholding requirement for executive directors. We believe the result is a plan which is better aligned with our strategy and with shareholder interests. The committee believes the proposed policy and plan outlined in this report will allow us to attract and retain top talent for executive roles and will incentivise behaviour and performance aligned with our strategy and shareholder interest. As part of the annual salary review process, the committee determined that the CEO’s salary would be increased to £890,000 with effect from 1 January 2014. Salaries for other executive directors were unchanged. An illustration of the effect of our remuneration policy during 2014 can be found on page 71 of the following report. PAY DURING 2013 The committee was involved in approving the terms agreed with Messrs Buckles and Dighton upon their departure during the year and the employment terms for their replacements. The terms agreed with Messrs Buckles and Dighton simply refl ected their contractual entitlements. There were no additional payments nor was there any accelerated vesting of outstanding awards. Further details are set out on page 76 of the report. In recruiting new executives the committee considered a number of factors (including external market practice, internal relativities, individual experience, expertise and the requirements of the role). In the case of Ashley Almanza he was fi rst recruited as the chief fi nancial offi cer from 1 May 2013 and was awarded a salary commensurate with the position and variable compensation and benefi ts as refl ected in our policy. When he was promoted to chief executive in June 2013, his base salary, benefi ts and variable compensation were increased to refl ect his additional responsibility. No further payments were committed or made. 64 G4S plc Annual Report and Accounts 2013 Governance OUR REMUNERATION POLICY The committee reviews the company’s remuneration policy for directors regularly to ensure that it remains aligned with the company’s strategic objectives, in line with best practice and suitable to attract and retain high calibre individuals whilst rewarding performance fairly. When reviewing and setting the policy, the committee takes account of the overall approach and structure of employee reward across the group, pay decisions for the wider workforce as well as the results of relevant benchmarking data. It is the committee’s intention that pay should also refl ect responsibility attached to the role fulfi lled, individual performance and other relevant market information. Shareholders are consulted from time to time on the remuneration policy, for example where a signifi cant change to the policy is proposed. When setting the policy, the committee is mindful of the need to have a remuneration framework which not only provides the ability to attract and retain high calibre executives but also motivates executives and rewards the delivery of superior performance. The strong link between executive reward and the group’s performance; alignment of the interests of the executives and the shareholders; and provision of incentive arrangements which focus appropriately on both annual and longer-term performance are at the heart of the policy. Overall, the committee remains intent on achieving remuneration levels which provide a market competitive base salary with the opportunity through the company’s incentive schemes to achieve earnings commensurate with the delivery of superior performance. The policy on remuneration of directors is set out on pages 66 to 72 and a separate resolution to approve this will be put to the shareholders at the company’s annual general meeting on 5 June 2014. Following Ashley’s promotion to chief executive offi cer, Himanshu Raja was recruited as chief fi nancial offi cer. His base pay is equal to that paid to Ashley Almanza whilst he was chief fi nancial offi cer. The directors’ service contracts are available for inspection by shareholders. No bonuses were paid to executive directors in March 2013 for the year 2012. Having reviewed performance for 2013, Grahame Gibson, Regional CEO – Americas was awarded a bonus of £103,000 and the committee used some discretion to determine that bonuses of £648,000 and £234,375 will be paid to Ashley Almanza and Himanshu Raja respectively, in recognition of their signifi cant business achievements since joining the group. In Ashley Almanza’s case, he assumed the role of CEO in a time of great uncertainty. The board asked him to focus on identifying root causes of issues that had led to our profi t warning in May and to prioritise the correction of those issues in a sustainable manner. We asked him to stay equally balanced on delivering quality underlying operating results that would set the foundation for sustainable growth going forward. Given his assumption of the CFO role in May and then the CEO role in June, the committee concluded that the underlying PBITA of £442 million, as presented in the results, was “at target” for the fi nancial portion of his bonus. For the portion of his bonus based on non-fi nancial objectives, the committee, and indeed the whole board, was highly satisfi ed with the rate and pace of progress and the committee therefore awarded him the maximum quantum. The bonus was prorated to refl ect his nine months of employment by the group which resulted in the £648,000 payment. In Himanshu Raja’s case, given he did not join until October, the committee concluded that his prorated bonus would be awarded based on a set of non-fi nancial objectives that again addressed the immediate need to deal with underlying fi nancial and risk management processes in a manner that would correct root cause issues uncovered during 2013. Again the board and the committee were highly satisfi ed with the signifi cant progress he made in three months. Therefore we judged his performance to deserve a maximum prorated bonus of £234,375. In accordance with the plan rules a portion of these bonus payments will be deferred for three years and paid in shares. In Grahame Gibson’s case, there was no payment for the fi nancial portion of his bonus, since his fi nancial targets were not achieved. However, he met a number of his non-fi nancial objectives in relation to talent management, succession planning, portfolio management and in preparing our US businesses for the introduction of the Affordable Care Act. Therefore, Grahame was awarded a bonus of £103,000 payable in cash. More information can be found on the committee’s deliberations of these bonuses on page 73 of the report. Executive directors are also eligible for long-term incentive awards although there was no vesting in relation to the awards made in 2010 and 2011 which would have vested in March 2013 and March 2014 respectively. We hope that you fi nd this year’s remuneration report informative and that we will enjoy your support on all of the remuneration-related votes at the 2014 AGM. Mark Elliott Chairman of the Remuneration Committee 31 March 2014 Annual Report and Accounts 2013 G4S plc 65 Directors’ remuneration report continued FUTURE POLICY TABLE This remuneration policy will be effective from the day after the 2014 AGM. Remuneration policy for executive directors Purpose and link to strategy BASE PAY Base pay is set at competitive levels in order to recruit and retain high calibre executives with the skills required in order to manage a company of the size and global footprint of G4S. The level of pay will refl ect a number of factors including individual experience, expertise and role. BENEFITS As with base salary, a suitable range of benefi ts is made available in order to recruit and retain high calibre executives. ANNUAL BONUS Rewards the achievement of annual fi nancial and strategic business targets and delivery of personal objectives. Deferred element encourages long-term shareholding and discourages excessive risk taking. Operation Reviewed annually and fi xed for 12 months commencing 1 January. Interim salary reviews may be carried out following signifi cant changes in role, scope or responsibility or at any other time at the committee’s discretion. The fi nal salary decision may also be infl uenced by role, experience, individual and company performance, internal relativities and increases for group employees. Executives are entitled to a number of benefi ts comprising paid holiday, healthcare for themselves and their family and life insurance of up to four times base salary, car allowance, business-related transport, limited fi nancial advice from time to time, expatriate benefi ts where relevant. A relocation allowance refl ecting reasonable costs actually incurred will be paid. Other benefi ts may be granted at the discretion of the Remuneration Committee. Reasonable business expenses in line with G4S expenses policy (e.g. travel accommodation and subsistence) will be reimbursed and in some instances the associated tax will be borne by the company. Awarded annually based on performance in the year. Targets are set annually and relate to the group and/or the business managed by the executive. Bonus outcome is determined by the committee after the year end, based on annual performance against targets. Bonuses are paid in cash, but executives are required to defer any bonus payable in excess of 50% of their maximum bonus entitlement into shares. Deferral is for a minimum period of three years. Dividends or equivalents accrue during the deferral period on deferred shares. Bonuses are not pensionable. LONG TERM INCENTIVE PLAN (NEW) Incentivises executives to achieve the company’s long-term fi nancial goals as well as focus on value creation, whilst aligning the interests of executives with those of shareholders. Executive directors are granted awards on an annual basis, which vest over a period of at least three years subject to continued service and the achievement of a number of (currently three) key performance measures. The Remuneration Committee reviews the quantum of awards to be made to each executive each year to ensure that they remain appropriate. Dividends or equivalents accrue during the vesting period on awards that vest. The award is settled by the transfer of market-purchased shares to the executive directors. All the released shares (after tax) must be retained until the minimum shareholder requirement is met. Currently, the minimum shareholding requirement is 200% of base salary for the CEO and 150% for the other executive directors. RETIREMENT BENEFITS As with base salary and other benefi ts, making available a suitable retirement benefi ts package aids the recruitment and retention of high calibre executives, allowing such executives to provide for their retirement. G4S operates a defi ned contribution group-wide personal pension plan in the UK in which executives may participate. Alternatively, G4S may provide a cash allowance in lieu of a contribution into such plan. The current executive directors receive cash allowances. The CEO receives 25% of base pay as a cash allowance; the CFO receives 20% of base pay and the other executive director receives 40% of base pay, refl ecting his historic participation in a defi ned benefi ts plan which has been closed. The level of award is kept under review by the committee and is intended to be broadly market comparable for the roles. 66 G4S plc Annual Report and Accounts 2013 Governance Maximum opportunity Performance measures and clawback None, although individual performance may have a bearing on salary increases. Actual base pay for each executive director is disclosed each year in the Directors’ remuneration report. In determining salary increases, the committee considers market salary levels including those of appropriate comparator companies. Ordinarily, annual salary increases would be no more than the average annual increases across the group. However, in exceptional circumstances a higher level of increases may be awarded, for example: • following a signifi cant change to the nature or scale of the business; or • following a signifi cant change to the nature or scope of the role; or • for a new appointment, where the base pay may initially be set below the market level and increased over time, as experience develops and with reference to the individual’s performance in the fi rst few years in the role. Where exceptional increases are made we will fully disclose and explain the rationale for such increases. Maximum benefi ts per director per annum: None. • holidays – 30 days • car allowance – £20,000 • business-related local transport – £40,000 • for fi nancial advice, expatriate benefi ts and relocation expenses, the expense will refl ect the cost of the provision of benefi ts from time to time but will be kept under review by the committee • other benefi ts granted at the discretion of the committee up to 3% of base pay per annum per director • reasonable business expenses which are reimbursed are not subject to a maximum, since these are not a benefi t to the director. Any allowance in relation to relocation will provide for the reimbursement of reasonable costs incurred. Maximum opportunity of 150% of base pay per annum for the CEO and the CFO. 125% of base pay per annum for any other executive director. Maximum opportunity of 250% of base pay per annum for the CEO. Maximum opportunity of 200% of base pay per annum for the other executive directors. Typically, executive directors’ bonus measures are weighted so that: • between 70% and 85% of the bonus is based on achievement of challenging fi nancial performance measures (e.g. profi t before tax and amortisation, organic growth, cash fl ow measures, etc.), with each measure operating independently of the others; and • the remainder is linked to personal and/or non-fi nancial measures, which are strategic or operational in nature. Each year, the committee may use its discretion to vary the exact number of measures as well as their relative weightings, and this will be disclosed in the annual remuneration report. As a result of the number of factors taken into account in determining bonus, there is no minimum pay-out level. For illustrative purposes, in the event that only threshold has been achieved, pay-out would be 35% of maximum, rising to full pay-out should achievement of a stretch performance level be achieved for all measures assuming the non-fi nancial performance measures were satisfi ed. The deferred element of the bonus is not subject to any further performance measures but is subject to claw-back in certain circumstances. The non-deferred part of the bonus, which is settled in cash, is also subject to claw-back (see separate section below on page 68). Awards vest based on performance over a period of at least three fi nancial years commencing with the fi nancial year in which the award is made. Performance will be measured based on a combination of earnings per share growth, total shareholder return against a comparator group and average operating cash fl ow. For awards made in 2014, these will be in the proportion of 40%, 30% and 30% respectively. However, the committee retains the fl exibility to amend these proportions, provided that no single measure will be a signifi cantly greater proportion than the others. At threshold, 25% of the relevant portion vests. This increases on a straight-line basis up to 100% for performance in line with maximum. Targets are set out on page 78. Awards are subject to claw-back in certain circumstances (see separate section below on page 68). Maximum opportunity of up to 25% of base pay for the CEO and 20% for the other executive directors save that 40% of base pay per annum is payable to Grahame Gibson. None Annual Report and Accounts 2013 G4S plc 67 Directors’ remuneration report continued Remuneration policy for non-executive directors Purpose CHAIRMAN’S FEE To attract and retain a high calibre chairman by offering a market competitive fee, which also refl ects the responsibilities and time commitment. There are no performance-related elements. Operation Maximum opportunity The chairman’s fee is disclosed each year in the Director’s remuneration report. The fees are reviewed annually by the committee. The annual fee is an all- inclusive consolidated amount. The committee retains the discretion to review the chairman’s fee at any other time if appropriate. The chairman’s fee are reviewed against those of other companies of a similar size. Ordinarily, any increase of the chairman’s fee would be in line with increases for similar roles in other companies Fees payable to the chairman and other non-executive directors in aggregate per annum shall not exceed the maximum specifi ed in the company’s articles of association for the relevant year. Ordinarily, any increase of the non-executive directors’ fees would be in line with other increases for similar roles in other companies. Fees payable to non-executive directors (including the chairman) in aggregate per annum shall not exceed the maximum specifi ed in the company’s articles of association for the relevant year. NON-EXECUTIVE DIRECTORS’ FEES (EXCLUDING THE CHAIRMAN) To attract and retain high calibre non-executive directors (NEDs) by offering market competitive fees which should refl ect the responsibilities and time commitment. There are no performance related elements. NED fees including any additional fee for any additional role listed below are disclosed each year in the remuneration report. With the exception of the chairman, the fees for NEDs are structured by composition build-up consisting of: • a base fee • an additional fee for chairing a committee • an additional fee for the role of deputy chairman • an additional fee for the role of senior independent director The non-executive director component fees are reviewed annually by the executive directors. The board retains the discretion to review the NED fees at other times, as appropriate, to refl ect any changes in responsibilities or commitment. The basic fee covers committee membership and each NED is expected to participate in one or more board committees. All the fees are reviewed against those of other companies of a similar size. Reasonable business expenses in line with G4S expenses policy (e.g. travel accommodation and subsistence) will be reimbursed and in some instances the associated tax will be borne by the company. Reasonable business expenses which are reimbursed are not subject to a maximum, since these are not a benefi t to the director. Benefi ts and expenses will refl ect the actual cost of the provision. BENEFITS Benefi ts may be provided from time to time in connection with the chairman and other NEDs performing their roles, such as business travel, subsistence and entertainment, accommodation and professional fees for tax and social security compliance, and other ancillary benefi ts. Notes to the future policy table 1. Performance measures Annual Bonus Plan – The actual performance measures and targets are set by the Remuneration Committee at the beginning of each year. The performance measures used for our annual bonus plan have been selected to refl ect the group’s key performance indicators. The committee aims to ensure that the measures appropriately encourage the executive directors to focus on the company’s strategic annual priorities, whilst the targets are set to be stretching but achievable. The aim is to strike an appropriate balance between incentivising annual fi nancial and strategic business targets, and each executive director’s key role specifi c objectives for the year. Long Term Incentive Plan – In choosing the performance measures for the proposed new Long Term Incentive Plan, the committee aims to fi nd a balance of measures which refl ect the company’s long-term fi nancial goals as well as incentivise executives to create sustainable, long-term value for shareholders. Legacy plans – The committee reserves the right to make any remuneration payments including payments for loss of offi ce notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was not a director of the company and, in the opinion of the committee, the payment was not in consideration for the individual becoming a director of the company. For these purposes, payments may include the committee satisfying awards of variable remuneration. In cases where all or a part of the variable remuneration award was in the form of shares, the payment terms are those agreed at the time the award was granted. 68 G4S plc Annual Report and Accounts 2013 In particular, awards made under the previous Performance Share Plan will continue to vest in accordance with the rules of that plan and to the extent that the relevant performance tests are met. Details of the vesting of the awards will be published in the annual remuneration report each year. The non-executive directors do not participate in any incentive schemes nor do they receive any benefi ts other than those referred to in the above table. 2. Changes in period During 2013, a new CEO and CFO were appointed. No changes were made to the remuneration policy in effect during the previous year and the new CEO and CFO were recruited in line with the existing remuneration framework. Without the infl uence of the historic participation in a defi ned benefi t scheme, the new hires were recruited on a lower pension cash allowance than the previous CEO and CFO. 3. Malus and claw-back mechanisms Since 2010, any cash and/or shares awarded under the annual bonus plans and the current Performance Share Plan may be subject to claw-back. The proposed new Long Term Incentive Plan and the current annual bonus plan may be subject to malus or claw-back from the executive director concerned if the Remuneration Committee so determines and, in the case of misstatement of accounts, where the Audit Committee concurs. The time period in which the claw-back can be operated depends on the reason for the overpayment. Please see the explanatory table on page 69. Governance Material misstatement of group fi nancial accounts Misconduct Fraud Annual Bonus Plan (including deferred elements) 2013 Plan up to 2 years after the payment of the cash element (regardless of the reason) 2014 Plan up to 2 years after the payment of the cash element LTIP Proposed new LTIP up to 2 years after vesting Current PSP rules up to 2 years after vesting (except where due to fraud or reckless behaviour when it shall be 6 years after vesting) up to 6 years after the payment of the cash element unlimited up to 6 years after vesting unlimited The amount to be clawed back directly from the executive director will be the overpaid amount, but the Remuneration Committee retains the discretion to claw-back the “net” (i.e. post-tax) amount of the award received by the executive director. PRINCIPLES AND APPROACH TO RECRUITMENT AND INTERNAL PROMOTION OF DIRECTORS When hiring a new executive director, or promoting to the board from within the group, the committee will offer a package that is suffi cient to retain and motivate and, if relevant, attract the right talent whilst at all times aiming to pay no more than is necessary. Ordinarily, remuneration for a new executive director will be in line with the policy set out in the table above. However, discretion may be required for exceptional circumstances such as dealing with remuneration relinquished in a previous job. The maximum level of on-going variable pay that may be awarded to new executive directors on recruitment or on promotion to the board shall be limited to 400% of base salary as set out in the policy table above (calculated at the date of grant, excluding any buy-out awards – see below). Remuneration and any buy-out arrangements will be announced as far as possible at the time a new executive director or chairman is appointed, or in the following Directors’ remuneration report. When determining the remuneration of a newly-appointed executive director, the Remuneration Committee will apply the following principles: – The on-going remuneration package to be designed in accordance with the policy table above – New executive directors will participate in the Annual Bonus Scheme and Long Term Incentive Plan on a similar basis to existing executive directors – The Remuneration Committee shall have discretion to grant one-off cash or share-based awards to executive directors where it determines that such an award is necessary to secure the recruitment of that executive director and where it is in the best interests of the company to do so. Such awards would only be made as compensation for remuneration relinquished under a previous employment (i.e. buy-out arrangements) and would be intended to mirror forfeited awards as far as possible by refl ecting the value, nature, time horizons and performance measures attached. In such circumstances, the company will disclose a full explanation of the detail and rationale for such one-off award – In certain circumstances, it may be necessary to buy out long notice periods of previous employment – With regard to internal promotions, any commitments made before promotion and unconnected with the individual’s promotion may continue to be honoured even if they would not otherwise be consistent with the policy prevailing when the commitment is fulfi lled – For external and internal appointments, the Remuneration Committee may agree that the company will meet certain relocation expenses (including legal fees), as set out in the policy table – In determining the approach for all relevant elements, the Remuneration Committee will consider a number of factors, including (but not limited to) external market practice, current arrangements for existing executive directors and other internal relativities. SERVICE CONTRACTS Shareholders are entitled to inspect copies of executive directors’ service contracts at the company’s head offi ce and annually at the AGM. Executive directors’ service contracts all have the following features: – Contracts are drafted in line with best practice at the time the executive directors were appointed – Terminable on 12 months’ notice by either party. Specifi c provisions for Ashley Almanza and Himanshu Raja’s contracts (dated 2013) that are not in Grahame Gibson’s contract (dated 2006) include: – Following board approval, Ashley Almanza is allowed to hold two external non-executive appointments (he is currently a non- executive director of Noble Corporation and of Schroders plc) and retain the fees paid directly to him for the appointments. Himanshu Raja is allowed to hold one external non-executive appointment and retain any fees paid directly to him for the appointment. Grahame Gibson’s contract does not specifi cally deal with NED positions, which will therefore be subject solely to board discretion. – Mitigation obligations on termination payments are explicitly included in the 2013 contracts. Notice payments for Ashley Almanza are payable monthly and those for Himanshu Raja are payable in two six monthly instalments payable in advance. There are no express mitigation provisions in Grahame Gibson’s contract. Non-executive directors’ letters of appointment: – Appointment is subject to the provisions of the articles of association of the company, as amended from time to time regarding appointment, retirement, fees, expenses, disqualifi cation and removal of directors – All continuing non-executive directors’ are required to stand for re-election by the shareholders at least once every three years, although they have agreed to submit themselves for re-election annually in accordance with the 2012 UK Corporate Governance Code – Initial period of appointment is two years – All reasonably incurred expenses will be met – Fees are normally reviewed annually. LOSS OF OFFICE PAYMENT The duration of the notice period in each of the executive directors’ contracts is 12 months. The Remuneration Committee would consider the application of mitigation obligations in relation to any termination payments where such provisions exist in the executive director’s contract. The contracts do not provide for the payment of a guaranteed bonus in the event of termination. Directors (other than Himanshu Raja) will not be eligible for bonus accrual during any period of garden leave. In the case of Himanshu Raja, his contract provides for such accrual although any level of payment would depend on the discretion of the Remuneration Committee. Annual Report and Accounts 2013 G4S plc 69 Directors’ remuneration report continued The value of the termination payment would cover the balance of any salary and associated benefi ts payments due to be paid for the remaining notice period, the value of which will be determined by the Remuneration Committee. The Remuneration Committee would also retain the discretion to make appropriate payments necessary to fi nalise any settlement agreement, but in exercising such discretion the Remuneration Committee will remain mindful to ensure that there is no reward for failure. The fees for outplacement services and reasonable legal fees in connection with advice on a settlement agreement may be met by the company. The table below illustrates how each component of pay would be calculated under different circumstances: Plan Annual bonus (cash element) Automatic “good leaver” categories All leavers other than voluntary resignation and summary dismissal Annual bonus (deferred share element) • Injury, disability or ill health Performance Share Plan (current) Long Term Incentive Plan (new) • Redundancy • Retirement • Death • Termination without cause • Change of control or sale of employing company or business • Any other circumstances at the discretion of the Remuneration Committee • Injury, disability or ill health • Redundancy • Retirement • Death • Change of control or sale of employing company or business • Any other circumstances, provided that the Remuneration Committee considers there are exceptional circumstances • Injury, disability or ill health • Retirement • Redundancy • Death • Change of control or sale of employing company or business • Any other circumstances at the discretion of the Remuneration Committee Treatment for other leavers Bonus opportunity will lapse. Deferred share awards shall lapse. Treatment for good leavers Executive directors may receive a bonus to be paid on the normal payment date and in accordance with the agreed performance measures but reduced pro-rata to refl ect the time employed. Deferred shares may be released if the executive director ceases employment prior to the third anniversary as a result of one of the good leaver reasons. Awards will lapse. Awards will vest on the relevant vesting date on a time- apportioned basis, unless the Remuneration Committee determines otherwise, and subject to the achievement of the performance measures. Awards will lapse. Awards will vest on the relevant vesting date on a time- apportioned basis, unless the Remuneration Committee determines otherwise, and subject to the achievement of performance measures at the relevant vesting date. The vesting date for such awards will normally be the original vesting date, unless otherwise determined by the Remuneration Committee. As directors may leave employment for a wide range of reasons, the Remuneration Committee retains discretion to approve payments where the reason for leaving does not fall precisely within the prescribed “good leaver” category. The committee will take account of the director’s performance in offi ce and the circumstances of their exit. The committee will seek to balance the interests of shareholders, the departing director and the remaining directors. Any awards subject to performance conditions would be assessed at the end of the relevant period and be subject to time apportionment. CORPORATE ACTION If the company is subject to a change in control, the current Performance Share Plan and the proposed new Long Term Incentive Plan provide that awards will vest subject to the performance targets having been satisfi ed up to the date of the change of control and, unless the committee determines otherwise, time pro-rating. On a variation of share capital, other reorganisation of the company, or a demerger of a substantial part of the group’s business, the committee may make such adjustment to awards as it may determine to be appropriate. 70 G4S plc Annual Report and Accounts 2013 Governance Illustrations of application of remuneration policy ASHLEY ALMANZA HIMANSHU RAJA GRAHAME GIBSON £’000 5,000 4,000 3,000 2,000 1,000 0 £4,754 47% 28% £2,551 22% 31% 47% 25% £1,194 100% Minimum On-target performance Maximum performance £’000 5,000 4,000 3,000 2,000 1,000 0 £3,036 41% 31% 28% £1,724 18% 33% 49% On-target performance Maximum performance £849 100% Minimum £’000 5,000 4,000 3,000 2,000 1,000 0 £3,084 41% 26% 33% £1,805 18% 27% 56% On-target performance Maximum performance £1,005 100% Minimum Fixed pay Annual bonus Long-term incentive Fixed pay Annual bonus Long-term incentive Fixed pay Annual bonus Long-term incentive Base pay as at 1 January 2014 Benefi ts Pension Total fi xed pay CEO £890,000 £81,408 £222,500 £1,193,908 Regional CEO – Americas CFO £625,000 £98,716 £125,000 £848,716 £639,483* £110,152 £255,793 £1,005,428 * The base pay for the Regional CEO – Americas is calculated using average exchange rates over 2013. The benefi ts fi gures include taxable business expenses and the associated tax and NIC payable by the company. The bar charts above set out the effect of the executive directors’ remuneration policy as it will apply in 2014 and based on the assumptions set out below: Fixed pay Minimum On-target Consists of total fi xed pay including base salary, benefi ts and retirement benefi ts Maximum • Base salary – salary effective as at 1 January 2014 • Benefi ts – amount received by each executive director in 2013 including business expenses classifi ed by HMRC as benefi ts but which the company does not consider to be benefi ts in the ordinary sense • Retirement benefi ts – 25% of salary for Ashley Almanza, 20% of salary for Himanshu Raja and 40% for Grahame Gibson Annual bonus No payout Long-term incentives No vesting 60% of the maximum payout (i.e. 90% of salary for Ashley Almanza and Himanshu Raja and 75% of salary for Grahame Gibson) 25% vesting under the LTIP (i.e. 62.5% of salary for Ashley Almanza and 50% of salary for Himanshu Raja and Grahame Gibson) 100% of the maximum payout (i.e. 150% of salary for Ashley Almanza and Himanshu Raja and 125% of salary for Grahame Gibson) 100% of the maximum payout (i.e. 250% of salary for Ashley Almanza and 200% of salary for Himanshu Raja and Grahame Gibson) Annual Report and Accounts 2013 G4S plc 71 Directors’ remuneration report continued STATEMENTS OF CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN THE GROUP The structure of the executive directors’ pay policy is generally in line with the policy for remuneration of the senior management within the group, though the levels of award will be different. The performance measures that apply in the variable element of the remuneration will refl ect the relevant areas of responsibilities. There may be one-off awards for retaining scarce and critical individuals below board level. Remuneration of employees globally will depend on local regulation and practice, taking any collective bargaining agreements into account, where they exist. Elements of remuneration Fixed Variable Benefi ts Availability Base salaries Pensions Annual bonus Long-term incentive plan Car or car allowance Protection insurance Private Healthcare Available to all employees worldwide Available to most employees in developed markets Available to all senior managers worldwide Available to some senior managers worldwide Available to all senior managers worldwide Available to most employees in developed markets Available to all senior managers and above worldwide Across the group the company seeks to pay competitively, taking into account external benchmarking and internal moderation at each level to ensure that remuneration is in line with market practice. When determining base salary increases for executive directors, the Remuneration Committee pays particular attention to the data at senior manager level. At G4S, the Remuneration Committee does not normally consult directly with employees as part of the usual process of determining the remuneration policy and pay decisions for executive directors and has not therefore done so in setting this remuneration policy. However, employee surveys are carried out biennially to determine employees’ views of their own pay and benefi ts, as well as those of colleagues in general. STATEMENT OF CONSIDERATION OF SHAREHOLDER VIEWS We are committed to consulting with our top shareholders on key remuneration issues and we would usually seek to consult prior to any major change in policy or practice. This helps us to understand any potential concerns our shareholders may have, and take any views on board. In 2013 and early 2014, we consulted with some of our largest shareholders and certain shareholders’ representative bodies in respect of the proposed new LTIP and the directors’ remuneration policy. Details of the consultation are provided in the Chairman’s statement section of this report. Furthermore, our Remuneration Committee chairman will be available to answer any questions and listen to the views of our shareholders at the forthcoming annual general meeting. ANNUAL REPORT ON REMUNERATION SINGLE TOTAL FIGURE OF REMUNERATION (AUDITED INFORMATION) Executive directors The following table shows a single total fi gure of remuneration in respect of qualifying services for the 2013 fi nancial year for each executive director, together with the comparative fi gures for 2012. Aggregate executive directors’ emoluments are shown in the fi nal column of the table. Base pay £ Benefi ts £ Annual Bonus £ PSP £ Pension related benefi ts £ Total £ 2013 600,000 345,833 221,000 639,483 156,250 2012 n/a 830,000 510,000 630,286 n/a 2013 61,056 30,095 55,471 110,152 24,679 2012 n/a 23,551 31,749 37,223 n/a 2013 648,000 0 0 103,000 234,375 2012 n/a 0 0 0 n/a 2013 n/a 0 0 0 n/a 2012 n/a 0 0 0 n/a 2013 150,000 138,333 88,400 255,793 31,250 2012 n/a 332,000 204,000 252,114 n/a 2013 1,459,056 514,261 364,871 1,108,428 446,554 2012 n/a 1,185,551 745,749 919,623 n/a Ashley Almanza Nick Buckles Trevor Dighton Grahame Gibson Himanshu Raja Notes: 1 The information relates to the part years during which they have served as executive directors: a. For Ashley Almanza, this includes the period from 1 April 2013 when he commenced employment and when he was Group CFO from 1 May 2013 (during which time his base pay was £625,000 per annum) prior to his appointment as Group CEO from 1 June 2013 (when his base pay increased to £850,000 per annum). b. For Trevor Dighton, this includes the period when he was an executive director, to the AGM held on 6 June 2013. Payments made after that date are shown on page 76. c. For Nick Buckles, this is up to 31 May 2013. Payments made after that date are shown on page 76. d. For Himanshu Raja, this was from his appointment date on 7 October 2013 and this includes the period from 1 October 2013. 2 Benefi ts include car allowance, business-related travel, healthcare, disability and life assurance. In 2013 for Grahame Gibson, the benefi ts value includes a total value of £42,290 relating to fl ights for him and his family between the UK and US. Benefi t values include the costs of overnight accommodation and meals which HMRC treats as a taxable benefi t and on which the company will pay tax in due course, although it does not consider such expenses to be benefi ts in the ordinary sense. The grossed-up amounts are £18,914 for Ashley Almanza, £8,471 for Himanshu Raja, £18,479 for Nick Buckles, £28,695 for Grahame Gibson and £35,218 for Trevor Dighton. Benefi t values also include business-related local travel costs of £22,528 and £10,224 for Mr Almanza and Mr Raja respectively who bear the tax themselves. 3 The benefi t values for 2012 are those from the 2012 annual report. They do not include estimates of the value of staff entertainment, taxable travel costs and the associated taxes met by the company but these are not expected to be signifi cant. 4 In relation to the PSP, where the performance measures are substantially complete by the end of a particular year, the value of any award will be reported in the column for that year. 5 Any bonus due above 50% of the individual’s maximum bonus entitlement is awarded as deferred shares which vest after a period of three years. 72 G4S plc Annual Report and Accounts 2013 Governance The following table shows a single total fi gure of remuneration in respect of qualifying services for the 2013 fi nancial year for each non-executive director, together with the comparative fi gures for 2012. Aggregate non-executive directors’ emoluments are shown in the last row of the table. John Connolly Lord Condon Adam Crozier Mark Elliott Winnie Fok Bo Lerenius Mark Seligman Paul Spence Clare Spottiswoode Tim Weller TOTAL Base fee SID Chair of Committee 2013 348,000 24,540 56,800 56,800 56,800 24,540 56,800 56,800 56,800 42,600 2012 195,412 56,800 n/a 56,800 56,800 56,800 56,800 n/a 56,800 n/a 2013 n/a 4,537 n/a 5,896 n/a n/a n/a n/a n/a n/a 2012 n/a 10,500 n/a n/a n/a n/a n/a n/a n/a n/a 2013 n/a 7,582 n/a 17,550 n/a n/a 17,550 n/a 9,855 n/a 2012 n/a 17,550 n/a 17,550 n/a n/a 17,550 n/a n/a n/a Deputy Chair 2013 n/a n/a n/a 2012 n/a n/a n/a n/a n/a n/a 46,800 n/a n/a n/a n/a n/a n/a 46,800 n/a n/a n/a Benefi ts 2013 564 4,026 528 12,445 36,307 14,050 2,556 45,530 872 417 2012 300 9,700 n/a 12,400 36,300 33,700 2,600 n/a 900 n/a Total 2013 348,564 40,685 57,328 92,691 93,107 38,590 123,706 102,330 67,527 43,017 1,007,545 Total 2012 195,741 94,512 n/a 86,795 93,107 90,520 123,706 n/a 57,672 n/a 742,053 Notes: The above fees were pro-rated where the appointments or retirements were part way through the year. 1 John Connolly was appointed in June 2012. 2 Lord Condon and Bo Lerenius retired on 6 June 2013. 3 Mark Elliott was appointed as chair of the Remuneration Committee and senior independent director on 6 June 2013. 4 Clare Spottiswoode was appointed as Chair of the Corporate Social Responsibility Committee on 6 June 2013. 5 Adam Crozier and Paul Spence were appointed on 1 January 2013. 6 Tim Weller was appointed on 1 April 2013. 7 Benefi t values include the costs of travel, overnight accommodation and meals which HMRC treats as a taxable benefi t, and on which the company will pay tax in due course, although it does not consider such expenses to be benefi ts in the ordinary sense. 8 The only benefi ts paid for non-executive directors in 2012 were business expenses which HMRC treats as a taxable benefi t. Such expenses were not required to be disclosed in 2012 and so they were not recorded separately for each director. Therefore the benefi ts fi gures listed for 2012 are estimated and based upon 2013 data. Ashley Almanza received £113,000 from Schroders plc and a fee of $33,000 as well as shares valued at $285,000 from Noble Corporation for his non-executive directorships referred to on page 48 and retained such remuneration. Mr Almanza uses his annual leave entitlement for Noble Corporation board meetings. FURTHER NOTES TO THE SINGLE TOTAL FIGURE OF REMUNERATION TABLES Executive directors’ base pay Ashley Almanza’s base pay in 2013 as group CEO was £850,000 per annum. Himanshu Raja’s base pay as group CFO was £625,000 per annum. Grahame Gibson’s base pay was last increased in January 2011. He receives part of his salary in sterling and part in US$. The US$ element has been converted into sterling for the purposes of reporting, at the exchange rates prevailing in each month in which Grahame Gibson was paid. 2013 Annual bonus In previous years, the annual performance-related bonus scheme was dependent on profi t. However, during the fi nancial year ending 31 December 2013, the annual bonus scheme rules were amended to include two other fi nancial measures, organic growth and cash generation. The organic growth target which is measured against the budgeted percentage increase constituted 20% of maximum bonus. Cash generation measured against a cash conversion target was 15% with profi t measured by achievement against budget being 35%. Non-fi nancial strategic objectives linked to the delivery of the business plan were also introduced. These measures were personal objectives with 15% of maximum bonus attributable to strategic objectives taken from the business plan and a further 15% linked to objectives relating to the organisation such as people, CSR, risk, values etc. Each of the measures operated independently of the others. The maximum bonus entitlement for the chief fi nancial offi cer increased from 125% to 150% of base pay, while the maximum bonus entitlement for the chief executive (150% of base pay) and other executive directors (125% of base pay) remained unchanged; however, the maximum pay-out is only reached when the relevant stretch targets are achieved. Bonuses are paid in cash up to 50% of their maximum entitlement. Where the bonus amount is in excess of 50% of the maximum bonus entitlement, the amount which exceeds 50% will be delivered in the form of a deferred share award which vests after a period of three years. Payments approved by the committee under the 2013 bonus scheme were as follows: For Ashley Almanza, given that he assumed the CEO role in a time of great uncertainty in June, the board asked him to focus on the achievement of high quality underlying profi t for the portion of his bonus relating to the fi nancial measures. In view of the part-year for which Ashley was CEO, we judged his delivery of £442 million of underlying operating profi t against a budget of £439 million to be “on target”. For the portion of his bonus relating to non-fi nancial measures, the board asked Ashley to complete a thorough assessment of the root causes for our performance issues and to develop and implement the changes required for long-term success. The committee and the board noted in particular the following performance in concluding that Ashley has earned a maximum entitlement on the non-fi nancial element of his bonus: – Balance sheet – an equity placement in nine days and the aggressive management of cash-fl ow allowed us to reduce debt by £269 million and to improve our net debt to EBITDA ratio to 2.6x. The identifi cation of underperforming assets with plans to fi x or dispose delivered £124 million of proceeds with more to follow. – Risk management – developed a new risk and assurance organisation and recruited professional staff to develop and implement new contract management processes. – Customer engagement – personally led the work to understand delivery and billing issues with our UK MoJ contract. Ashley personally interacted with the UK Government to understand concerns and to develop a corporate renewal programme which when fully implemented will regain the trust of this important customer. This renewal programme sets the highest ethical standards and commitment to customer service as the standard behaviour expected throughout the organisation. – Leadership – recruited new leaders for regional roles and a high calibre CFO to lead the transformation of the fi nance organisation and its process and procedures. Annual Report and Accounts 2013 G4S plc 73 Directors’ remuneration report continued These scores lead to the following calculated bonus: Based on his average base pay, Ashley’s maximum potential bonus for a full year’s service would have been £1,200,000 in the event of achievement of a stretch target, 30% of which would be attributable to non-fi nancial objectives and the remainder to fi nancial objectives. The payment was prorated to take account of the different levels in base pay and the period for which he was employed, namely nine months. £270,000 was therefore paid in respect of non-fi nancial objectives and £378,000 for the “on target” fi nancial achievement. In accordance with the bonus plan rules, 30.55% of the bonus paid will be awarded as shares, deferred for three years. The board is satisfi ed that Ashley has made very signifi cant progress in establishing a foundation for long-term sustainable growth of quality earnings. Himanshu Raja did not join the group until October. Himanshu’s objectives included strengthening the group’s audit and risk management functions, reviewing and applying balanced accounting judgements to the group’s assets and liabilities and assessing prior year underlying performance, undertaking a fi nancial review of the group’s large contracts portfolio, developing and implementing a successful 2014 budget process and supporting the CEO with the group’s transformation programme. The committee noted that excellent progress was made against each of these objectives and therefore awarded Himanshu a maximum prorated bonus of £234,375. Based on his base pay for a full year’s service, Himanshu’s maximum potential bonus would have been £937,500. The payment was prorated to take account of the period for which he was employed, namely three months. In accordance with the bonus plan rules, half of the bonus will be paid in shares, deferred for three years. For Grahame Gibson, the payment of a bonus under the fi nancial portion of the annual bonus scheme was dependant on the attainment of three fi nancial objectives relating to the Americas region (PBITA, cash conversion and working capital reduction). Since the threshold targets for these objectives were not met, no bonus is payable under the fi nancial portion. For the portion of his bonus relating to non- fi nancial measures, Grahame was set a number of strategic objectives linked to the delivery of the Americas region’s business plan such as portfolio management and progress on operational and fi nancial effi ciencies, as well as a number relating to the organisation such as succession planning and progress on health and safety. Having met a number of his non-fi nancial objectives, Grahame was awarded a bonus of £103,000 (paid as $147,717 and £8,608.10), which represents 16.11% of his maximum bonus entitlement. PERFORMANCE SHARE PLAN (PSP) The PSP values shown in the 2013 and 2012 columns of the single fi gure table relate to the PSP awards made in March 2011 and March 2010, for the three-year EPS performance periods ended on 31 December 2013 and 31 December 2012 respectively. The performance measures and targets for these PSP awards are set out below: Two-thirds of each award (2010 and 2011) One-third of each award (2010 and 2011) Average annual growth in EPS – Period ending on 31 December in the third year Less than global CPI + 4% pa Global CPI + 4% pa (12% over 3 years) Global CPI + 4 to 12% pa Proportion of allocation vesting Nil 25% Ranking against the bespoke comparator group by reference to TSR Below median Median Proportion of allocation vesting Nil 25% Pro-rata between 25% and 100% Between median and upper quartile Pro-rata between 25% and 100% Greater than global CPI + 12% pa (33% over 3 years) 100% Upper quartile 100% The table below illustrates the company’s performance against the 2010 PSP award targets and the resulting payout, shown in the 2012 column of the single fi gure table: The table below illustrates the company’s performance against the 2011 PSP award targets and the resulting payout, shown in the 2013 column of the single fi gure table: Average annual growth in EPS Relative TSR Total vesting Performance Increase of 2.65% pa Ranked between 9th and 10th in peer group Vesting (% of element) 0% Average annual growth in EPS 0% 0% of maximum Relative TSR Total vesting Performance Fall of 10.8% pa Ranked between 15th and 16th in peer group Vesting (% of element) 0% 0% 0% of maximum 74 G4S plc Annual Report and Accounts 2013 Governance TOTAL PENSION ENTITLEMENTS (AUDITED INFORMATION) Neither Ashley Almanza nor Himanshu Raja is a member of the company’s pension plan, which is a defi ned contribution group personal pension plan available to all UK employees. Instead they receive cash allowances of 25% and 20% of their base pay, respectively. Nick Buckles, Trevor Dighton and Grahame Gibson have ceased accruing pensions under the company’s defi ned benefi t scheme. A salary supplement in lieu of pension of 40% of basic salary was paid. Their pension transfer values in the defi ned benefi ts scheme (all fi gures are in £’000s) are shown in the table below. Nick Buckles Trevor Dighton Grahame Gibson Notes: Pension input amount 2013 0 0 0 Pension input amount 2012 0 0 0 Total accrued annual pension at 31/12/13 0 161.7 21.7 Total accrued annual pension at 31/12/12 411.6 148.0 20.0 Date accrual ceased 5/7/2011 6/4/2011 6/4/2006 Normal retirement date 1/2/2021 30/7/2009 17/1/2013 1 Nick Buckles transferred out the value of his G4S pension benefi ts on 15 December 2013. The transfer value was calculated using the same actuarial basis as that used by the Trustees of the Pension Scheme for all members. 2 In 2011, Grahame Gibson transferred the majority of his pension benefi ts to a private pension arrangement leaving a residual pension of £20K pa payable from age 60. Grahame Gibson has passed normal retirement date and the accrued pension shown includes the application of a late retirement factor. 3 Trevor Dighton has passed normal retirement date and the accrued pension shown for both 2012 and 2013 include the application of a late retirement factor. 4 The earliest date when entitlement to a pension arises without consent and without actuarial reduction is age 60 (the normal retirement date). There are no additional benefi ts available on early retirement before the normal retirement date. SCHEME INTERESTS AWARDED DURING THE FINANCIAL YEAR (AUDITED INFORMATION) Awards have been granted each year under the company’s Performance Share Plan (PSP), generally in March, after the announcement of the company’s results. PSP awards were made or deemed to be made to the executive directors in March 2013, save for the additional award for Ashley Almanza on his appointment as CEO, in accordance with the company’s normal grant policy, as shown in the table below: Number of shares (see notes below for details) 777,367 Face value (£) 2,151,426 692,2823 2,074,998 340,3024 1,019,997 357,611 1,071,878 347,531 1,041,654 Award type Conditional shares Conditional shares Conditional shares Conditional shares Conditional shares Performance condition 50% TSR / 50% EPS 50% TSR / 50% EPS 50% TSR / 50% EPS 50% TSR / 50% EPS 50% TSR / 50% EPS EPS Performance period 01/01/2013 – 31/12/2015 01/01/2013 – 31/12/2015 01/01/2013 – 31/12/2015 01/01/2013 – 31/12/2015 01/01/2013 – 31/12/2015 TSR Performance period As per note 1 below 19/03/2013 – 19/03/2016 19/03/2013 – 19/03/2016 19/03/2013 – 19/03/2016 19/03/2013 – 19/03/2016 % vesting at threshold 25% 25% 25% 25% 25% Director Ashley Almanza Nick Buckles Trevor Dighton Grahame Gibson Himanshu Raja Notes: 1 Ashley Almanza was granted an award over 417,037 shares on his appointment as CFO. This award had a face value of £1,250,000 based on a share price of 299.733p. On 21 May 2013, a further conditional share award over 360,330 shares was made when his appointment as CEO was announced. This award had a face value of £901,426 based on a share price of 250.167p. The total number of shares awarded was calculated on a pro-rated basis. The EPS performance criteria are the same for both awards but the TSR reference periods are different as they relate to the dates of grant. 2 Himanshu Raja was granted an award over 347,531 shares on his appointment as CFO. This award had a face value of £1,041,654 based on a share price of 299.733p. The award is calculated on a pro-rated basis based on 30 complete months (between the appointment date and vesting date) relative to three years. 3 Nick Buckles’ award has been reduced on a time pro-rated basis to 57,690 shares to refl ect the period from the date of grant to 31 May 2013, when he ceased to be an executive director. 4 Trevor Dighton’s award will be reduced on a time pro-rated basis to 160,698 shares to refl ect the period from date of grant to 30 July 2014, when he will cease to be an employee. PSP awards granted in 2013 have the following performance measures and targets: Half of each 2013 PSP award Proportion of allocation vesting Average annual growth in EPS period ending on 31 December in the third year Less than global CPI + 4% pa Global CPI + 4% pa (11% over 3 years) Global CPI + 4 to 11% pa Nil 25% Half of each 2013 PSP award Ranking against the bespoke comparator group by reference to TSR Below median Median Proportion of allocation vesting Nil 25% Pro-rata between 25% and 100% Between median and upper quartile Pro-rata between 25% and 100% Greater than global CPI + 11% pa (33% over 3 years) 100% Upper quartile 100% Annual Report and Accounts 2013 G4S plc 75 Directors’ remuneration report continued STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTEREST (AUDITED INFORMATION) The executive directors are required to build up a minimum shareholding in G4S, as explained in the remuneration policy. Shares are valued for these purposes at the year-end price, which was 262.5p per share at 31 December 2013. Number of shares owned outright Share ownership requirements (% of salary) 200% 150% 100% 150% 150% 2013 100,000 1,832,0503 825,0903 0 651,682 Ashley Almanza Nick Buckles Trevor Dighton Himanshu Raja Grahame Gibson Notes: Share ownership requirements met? 2012 Number of deferred shares held as at 31/12/2013 Total shares under PSP awards subject to performance4 Shares vested (but unexercised) PSP awards n/a 1,832,050 1,225,090 n/a 704,685 No Yes Yes No Yes 0 0 145,161 0 7,526 777,367 795,633 683,143 347,531 963,036 0 0 55,291 0 0 1 Deferred share awards and PSP awards do not include the further shares with a value equivalent to the dividends which would have been paid in respect of shares received. The number of shares is gross and will be subject to tax when they are released. 2 In addition to the above, each of the directors has a deemed interest in the total number of shares held by the company’s employee benefi t trust. As at 31 December 2013, the trustee of the employee benefi t trust held 6,934,564 shares (7,589,853 in 2012). 3 Number of shares owned outright shown as at 31 December 2013, except for Messrs Buckles and Dighton for whom they are shown as at 31 May 2013 and 6 June 2013 respectively. At 31 May 2013, Nick Buckles held 370, 568 deferred shares. 4 Shares under PSP awards include awards on a time pro-rated basis for Messrs Buckles and Dighton. 5 Includes any shares owned by connected persons. 6 On 12 March 2014, Himanshu Raja purchased 50,000 shares in the company. There have been no changes in the interest of each of the other directors between 31 December 2013 and the date of this report. 7 The table does not include the deferred shares which will be awarded to Ashley Almanza and Himanshu Raja in respect of the portion of their bonus which exceeds 50% of their respective maximum bonus entitlement. There are no requirements for the non-executive directors or former directors to hold shares once they have left the company. The shareholdings for non-executive directors are shown below. John Connolly Lord Condon1 Adam Crozier Mark Elliott Winnie Fok Bo Lerenius2 Mark Seligman Paul Spence Clare Spottiswoode Tim Weller As at 31.12.2012 100,000 2,029 n/a 25,000 20,000 16,000 75,496 n/a 0 n/a As at 31.12.2013 100,000 n/a 0 25,000 20,000 n/a 75,496 10,000 4,681 37,570 1 Interests for Lord Condon shown as at 6 June 2013. 2 Interests for Bo Lerenius shown as at 6 June 2013. PAYMENTS TO PAST DIRECTORS (AUDITED INFORMATION) No payments have been made to former directors of the company during the fi nancial year ended 31 December 2013 other than those payments set out in the payments for loss of offi ce section. PAYMENTS FOR LOSS OF OFFICE (AUDITED INFORMATION) Nick Buckles Nick Buckles was entitled under the terms of his contract to payment for a 12 month notice period, comprising the following elements: – Base pay of £69,167 per month – Car allowance of £1,667 per month – Cash allowance in lieu of pension of £27,666 per month The total payment made for his 12 month notice period was £1,182,000 and was paid subject to the normal withholding of payroll taxes. The monthly payments were made up to and including August. In September, the balance of the payments relating to the 12 months’ notice was paid. Nick Buckles did not receive any bonus payment, nor did he receive any award under the PSP, for the duration of his 12-month notice period. His unvested awards under the PSP were reduced on a time pro-rated based on the period from the dates of grant to 31 May 2013. The company paid for the cost of outplacement advice and services, which was £48,000. Non-cash benefi ts, including medical insurance of £1,892 and a gift (valued at £12,890 exclusive of associated taxes) in recognition of his long service were also provided to Mr Buckles. Trevor Dighton Trevor Dighton remained an employee after he stepped down from the board at the conclusion of the 2013 AGM. The terms of his employment between 7 June 2013 and 30 July 2013 were in respect of contractual service performed and equalled his normal monthly salary. Trevor Dighton was served notice on 24 July 2013 in accordance with his contract of employment pursuant to which he will cease to be an employee on 30 July 2014. Trevor Dighton is entitled under the terms of his contract to payment comprising the following until his departure on 30 July 2014: – Base pay of £42,500 per month – Car allowance of £1,333.33 per month from 1 September 2013 following the return of his company car – Cash allowance in lieu of pension of £17,000 per month. The total payment made for the period from 1 August 2013 to 31 December 2013 was £302,833. The total payment due to be made for the period 1 January to 30 July 2014 is anticipated to be £425,833. Mr Dighton has not received any bonus in respect of the year under review. His unvested awards under the PSP will be pro-rated to 30 July 2014. 76 G4S plc Annual Report and Accounts 2013 Governance PERFORMANCE GRAPH AND TABLE The line graph below shows the eight-year annual Total Shareholder Return (TSR) performance against the FTSE 100 index. The directors believe this to be an appropriate form of broad equity market index against which to base a comparison given the size and geographic coverage of the company and the fact that the company is itself a member of the FTSE 100. 2006 – 2013 TOTAL SHAREHOLDER RETURN 300 250 200 150 100 50 0 06 07 08 09 10 11 12 13 G4S FTSE 100 index CEO’S PAY IN LAST EIGHT FINANCIAL YEARS Year Incumbent CEO’s total fi gure of annual remuneration(£’000)1 Bonus % of maximum awarded PSP % of maximum vesting Notes: 2006 Nick Buckles 2007 Nick Buckles 2008 Nick Buckles 2009 Nick Buckles 2010 Nick Buckles 2011 Nick Buckles 2012 Nick Buckles 2013 Nick Buckles 2013 Ashley Almanza 1,908 76% 63% 2,269 95% 75% 2,376 83% 100% 3,248 74% 100% 2,823 53% 58% 1,542 0% 14% 1,186 0% 0% 514 0% 0% 1,459 72% n/a 1 Nick Buckles stepped down as CEO on 31 May 2013 and Ashley Almanza took over as CEO from 1 June. 2 After July 2011, the CEO’s total single fi gure of annual remuneration included payment in lieu of pension. This was 40% of base pay for Nick Buckles and is 25% of base pay for Ashley Almanza. Prior to July 2011, a notional sum equal to 40% of relevant base pay has been included. The value of shares that vested in the relevant year under the PSP (or a notional value in the case of shares vested but unexercised) have been included in the prior year’s CEO’s total fi gures since that is the most relevant year for measurement of performance. 3 Prior to 2013, the CEO’s total single fi gures did not include taxable expenses. PERCENTAGE CHANGE IN CEO’S REMUNERATION The table below shows how the percentage change in the CEO’s salary, benefi ts and bonus between 2012 and 2013 compares with the percentage change in the average of each of those components of pay for a selected group of G4S employees. The Remuneration Committee has chosen all employees in the UK as the group which should provide the most appropriate comparator. Percentage change in remuneration between 2012 and 2013 Benefi ts Annual bonus See note 2 Salary 1.4% 0.1% 8.2% 9.7% See note 3 CEO Average increase for all other UK employees RELATIVE IMPORTANCE OF SPEND ON PAY The table below illustrates the relative importance of spend on pay compared with other disbursements from profi t. Disbursements Dividends paid Total employee costs 2013 £130m 2012 £120m Change 8.3% £5,441m £5,452m -0.2% 1 There were no share buy-backs effected in either year. 1 The CEO’s benefi ts for 2013 were calculated on a like for like basis and therefore do not include taxable business expenses and grossed up tax and NIC payable thereon. In future years, the comparison will include such taxable business expenses and the baseline cost for 2013 will be £84,820. 2 There was no bonus paid to the CEO in 2012. 3 Information on bonuses is not available for all other UK employees. G4S employs more than 618,000 employees globally. Infl ation is a key driver of general increases in salary and the structure of the benefi ts provided is often driven by the local market practice. Hence, as the CEO is based in the UK, employees in the same country rather than all employees within the group have been chosen as the comparator. Annual Report and Accounts 2013 G4S plc 77 Directors’ remuneration report continued STATEMENT OF IMPLEMENTATION OF REMUNERATION POLICY IN 2014 Our Remuneration Policy for directors as set out on pages 66 to 72 will, if approved, take effect following the 2014 AGM and will then be implemented on the basis set out in this report. Some elements of pay for executive directors, forming a signifi cant proportion of the total reward available, are subject to the achievement of performance conditions. Base pay The committee agreed to freeze base pay for executive directors in 2009 and 2010 and again in 2012 and 2013, in view of the economic circumstances and the pay and employment conditions across the group. For 2014 at the annual pay review, it was decided to increase Mr Almanza’s base pay by just under 5% whilst no change was made to the base pay of the other two executive directors. Annual Bonus Scheme The annual bonus for the fi nancial year ending 31 December 2014 will be consistent with the policy detailed in the remuneration policy section of this report in terms of the maximum bonus opportunity, deferral and claw-back provisions. The committee selects for each executive director, from a range of fi nancial and non-fi nancial measures which support the group’s key strategic objectives. The range of fi nancial measures includes group profi t, organic growth and operating cash fl ow. The non-fi nancial measures are based on the core values and include the following key areas: – Health & safety – Customer service and retention – People and organisation – Operational excellence – Business development – Values Between 70% and 85% of the bonus will be based on fi nancial measures and the balance will be based on non-fi nancial measures. Details of the performance measures and targets are commercially sensitive. They will be disclosed in the 2014 report when they are no longer commercially sensitive. Performance Share Plan Awards will be granted under a new LTIP, subject to shareholder approval at the 2014 AGM. Details of the new LTIP are as set out in the summary of the scheme on pages 156 and 157. The Remuneration Committee considers that a combination of earnings per share growth, total shareholder return and cumulative cash fl ow targets are the most appropriate performance measures for 2014 awards, as they provide a transparent method of assessing the company’s performance, both in terms of underlying fi nancial performance and returns to shareholders. PERFORMANCE MEASURES FOR LONG TERM INCENTIVES TO BE AWARDED IN 2014 40% of each award granted 30% of each award granted 30% of each award granted Average annual growth in EPS – Period ending on 31 December in the third year Less than 5% pa 5% pa (15% over 3 years) +5 to 12% pa Greater than +12% pa (36% over 3 years) Proportion of allocation vesting Nil 25% Pro-rata between 25% and 100% Ranking against the bespoke comparator group by reference to TSR Below median Proportion of allocation vesting Nil Average operating cash fl ow <105% Proportion of allocation vesting Nil Median Between median and upper quartile 25% Pro-rata between 25% and 100% 105% Between 105% and 125% 25% Pro-rata between 25% and 100% 100% Upper quartile 100% 125% 100% The company’s current policy is to use market purchased shares to satisfy performance share plan awards. The new plan will continue to do the same. Participants in the LTIP will receive a further share award with a value equivalent to the dividends which would have been paid in respect of future LTIP award vesting at the end of the performance period. The company calculates whether the EPS performance targets have been achieved by reference to the company’s audited accounts which provide an accessible and objective measure of the company’s earnings per share. Adjustments to the EPS will be made in respect of: – Constant exchange rates – which will be normalised to the rates in the base year – Acquisition – earnings will be added to the EPS base at the level used in the acquisition business case – Disposal – earnings will be removed from the EPS base at the business plan rate – Share buy back – the company will only execute buy-backs if the investment is economically accretive and it is in the interest of the company. The adjusted EPS for the purposes of calculating performance against the LTIP target shall be further adjusted by (a) Increasing the average number of shares in issue during the performance year by the number of shares bought back during the past three years (b) Decreasing the net interest cost in the performance year in respect of the interest charge on the cash cost of any share buy backs during the past three years. Interest will be calculated at the group’s average costs of funds for the year. The Remuneration Committee will apply discretion in the event of impairment, if the impairment is not a result of management failure, then it does not impact the payout. The Remuneration Committee may alter the terms of the EPS measure if it feels that it is no longer a fair measure and is no longer incentivising. Operating cash fl ow is a measure taken before capital expenditure and investments to ensure that management is not incentivised to under-invest in growth opportunities. Operating cash fl ow is expressed as EBITDA +/- working capital and provisions movement as a percentage of EBITA. Average operating cash fl ow is the average over three years. TSR ranking will be verifi ed externally. Non-executive directors’ remuneration The fees payable to the non-executive directors are set by the executive directors and the chairman. The fees payable to the non-executive chairman are set by the Remuneration Committee. In both cases, fees are reviewed mid-year. 78 G4S plc Annual Report and Accounts 2013 Governance ADVISERS TO THE REMUNERATION COMMITTEE For the period to October 2013, the Remuneration Committee received advice from Towers Watson Limited as the committee’s appointed adviser on executive and senior management remuneration matters. After a tendering process, the Remuneration Committee appointed Deloitte as its independent adviser on 17 October 2013. Towers Watson has also provided and will continue to provide management remuneration information in respect of senior management below the level of the group executive committee. The Remuneration Committee has satisfi ed itself as to the independence of Deloitte. Deloitte is a member of the Remuneration Consultants Group and as such, voluntarily operates under the code of conduct in the UK. Adviser Towers Watson Services provided to Rem Co Advice on executive remuneration and pay benchmarking Deloitte Advice on executive remuneration Alithos TSR – vesting indications for in-fl ight plans and verifying the TSR vesting percentage and advice on potential peer group constituents Herbert Smith Freehills LLP (HSF) provided legal advice to the company throughout the year, including in relation to the operation of the company’s incentive arrangements and on executive directors’ service agreements. This advice was available to be considered by the Remuneration Committee. HSF has also advised the Remuneration Committee on compliance with the new regulations relating to directors’ remuneration. The CEO (Nick Buckles to 31 May 2013 and from 1 June 2013, Ashley Almanza) provided guidance to the Remuneration Committee on remuneration packages for senior executives within the group. Further guidance was received from the group’s HR director, Irene Cowden, and the director of compensation and benefi ts Sok Wah Lee. Neither the CEO nor the HR director participated in discussions regarding their own remuneration. The Remuneration Committee is satisfi ed that the advice it received during the year was objective and independent based on the experience of its members generally. The table below sets out the members of the Remuneration Committee who were present during any consideration of directors’ remuneration, and shows the number of meetings attended by each director: Name Lord Condon Mark Elliott Winnie Fok Mark Seligman Clare Spottiswoode Number of meetings attended 3/3 6/6 6/6 6/6 5/6 Other services provided to company Provision of market remuneration data for senior management and collation of pension data for accounting purposes Employment tax advice on expatriate and share plans along with corporate tax advice and other consulting services provided by different parts of Deloitte. None Fees £51,000 £23,250 £10,500 STATEMENT OF VOTING AT GENERAL MEETING An ordinary resolution to receive and approve the Directors’ Remuneration report contained in the annual report for the year ended 31 December 2012 was passed at the company’s annual general meeting which took place on 6 June 2013, with 78.4% of the votes in favour and 21.58% against. 28,733,156 votes were withheld. It is believed that many of the votes against and abstentions were prompted by a recommendation from one of the proxy adviser fi rms which expressed concern about an increase in the PSP allocations in 2013. The then chairman of the Remuneration Committee and his successor have consulted widely with key shareholders and shareholder representatives to explain the rationale for the policy adopted in 2013 and that proposed for the future. Following his appointment as chairman of the Remuneration Committee, Mark Elliott has also undertaken an extensive process of consultation with major shareholders on the proposed new LTIP. Mark Elliott Chairman of the Remuneration Committee 31 March 2014 Annual Report and Accounts 2013 G4S plc 79 Directors’ report For the year ended 31 December 2013 – In January 2014, G4S Cash Solutions (Canada) Limited was This is the report of the directors of the board of G4S plc for the year ended 31 December 2013. 1. THE COMPANY G4S plc is a parent company with subsidiaries, associated undertakings and joint ventures in numerous jurisdictions. G4S plc has its primary listing on the London Stock Exchange and a secondary listing on the NASDAQ OMX exchange in Copenhagen. 2. REPORTING OBLIGATIONS In compliance with relevant listing rules and in particular DTR4.1.5.R and DTR4.1.8R, the annual report contains the consolidated result for the year, shown in the consolidated income statement on page 94, a management statement contained in the Strategic Report and in the Directors’ report and responsibility statements on pages 80 to 83. Details of the development and performance of the group’s business during the year, its position at the year end, future developments, principal risks and uncertainties and prospects of the group and other information which fulfi ls the requirements of a management report are contained on pages 4 to 7 of the Strategic Report and are incorporated by reference in this Report of the Directors. The Corporate Governance report, the Audit Committee report, the Directors’ Remuneration report set out on pages 64 to 79 and the Chief Financial Offi cer’s review on pages 84 to 89 are also incorporated in this report by reference. The group’s fi nancial risk management objectives and policies in relation to its use of fi nancial instruments, and its exposure to price, credit, liquidity and cash fl ow risk, to the extent material, are set out in note 32 to the consolidated fi nancial statements on pages 124 to 127 which is also incorporated by reference in the Report of the Directors. 3. DIVIDENDS The directors propose the following net dividend for the year: – Interim dividend of 3.42p (DKK 0.2972) per share paid on 18 October 2013 – Final dividend of 5.54p (0.4954DKK ) per share payable on 13 June 2014 Shareholders on the Danish VP register will receive their dividends in Danish kroner. Shareholders who hold their shares through CREST or in certifi cated form will receive their dividends in sterling unless they prefer to receive Danish kroner, in which case they should apply in writing to the Registrars by no later than 2 May 2014. 4. SIGNIFICANT BUSINESS ACQUISITIONS, DISPOSALS AND DEVELOPMENTS – In January 2013, Deposita Systems (Pty) was acquired in South Africa – In February 2013, a settlement agreement was entered into with LOCOG in the UK in relation to the Olympics contract – In August 2013, G4S plc completed a placing of shares which resulted in the issue of 140,925,797 new ordinary shares of 25 pence each at a price of 247 pence per placing share raising gross proceeds of approximately £348.1 million – In September 2013, G4S Secure Data Solutions Colombia S.A.S and G4S Document Delivery S.A.S were disposed of in Colombia disposed of in Canada – In January 2014, G4S Holdings (Norway) AS was disposed of in Norway – In March 2014, a settlement agreement was entered into with the Ministry of Justice in the UK in relation to contracts for electronic monitoring services provided between 2005 and 2013 and two facilities management contracts. 5. CAPITAL Following the issue on 28 August 2013 of 140,925,797 new ordinary shares in the company’s capital (the “Placing”), representing approximately 9.99 per cent of the company’s issued share capital prior to the Placing, the issued share capital of G4S plc at 31 December 2013 consisted of 1,551,594,436 ordinary shares of 25 pence each. The number of shares in issue as at 31 March 2014 remains unchanged. Resolutions granting the directors power, subject to certain conditions, to allot and make market purchases of the company’s shares will be proposed at the company’s annual general meeting. The resolutions are set out in the Notice of Meeting on pages 151 and 152 and further explanation is provided on pages 154 to 157. At 31 December 2013 the directors had authority in accordance with a resolution passed at the company’s annual general meeting held on 6 June 2013 to make market purchases of up to 141,066,000 of the company’s shares. The company does not hold any treasury shares as such. However, the 6,934,564 shares held within the G4S Employee Benefi t Trust (“the Trust”) and referred to on page 137 (note 37 to the consolidated fi nancial statements) are accounted for as treasury shares. The Trust has waived its right to receive dividends in respect of the company’s shares which it held during the period under review. 6. SIGNIFICANT AGREEMENTS The company is party to a GBP1,100,000,000 multi-currency revolving credit facility agreement which requires prompt notifi cation of a change of control event following which funds committed but unutilised could be cancelled and repayment of outstanding commitments would need to be made within 45 days. The company entered into two US Private Placement Note Purchase Agreements (the “USPP Agreements”), on 1 March 2007 and 15 July 2008 respectively. The fi rst USPP Agreement is for USD 550,000,000 and series A-D senior notes mature between 1 March 2014 and 1 March 2022. The second USPP Agreement is for USD 513,500,000 and GBP 69,000,000 and series B-F senior notes representing USD 448,500,000 and GBP 69,000,000 remain outstanding and will mature between 15 July 2015 and 15 July 2020. Under the terms of both USPP Agreements, the company is required to offer the note holders to purchase the notes at par value together with interest thereon upon a change of control. Under the terms of the GBP 2,000,000,000 Euro Medium Term Note Programme under which the company issued three tranches of Medium Term Notes (MTNs) to various institutions on 13 May 2009 (GBP 350,000,000), 2 May 2012 (Euro 600,000,000) and 6 December 2012 (Euro 500,000,000), In the event of a change of control, a put option comes into force, according to which holders of any MTN may require the company to redeem the MTNs at par if the MTNs carry a sub-investment grade in the period immediately prior to the change of control, or in certain circumstances where the MTNs are downgraded to sub-investment as a result of the change of control. 80 G4S plc Annual Report and Accounts 2013 Governance 10. POLITICAL DONATIONS Each year shareholders of the company have passed a resolution, on a precautionary basis, to allow the company and its subsidiaries to make political donations to political organisations or incur political expenditure not exceeding £50,000. However, the board confi rms that the group’s policy is not to make any fi nancial contribution to political parties and that the company and its subsidiaries have made no contributions during the year to political parties carrying on activities, or to candidates seeking election within the EU, or anywhere else in the world. 11. GREENHOUSE GAS EMISSIONS Our customers and employees demonstrate increasing concern for environmental issues. Whilst our environmental impact is not signifi cant relative to other businesses of comparable size, it remains important to us to be effi cient in the use of resources and, in doing so, to curtail, where possible, our greenhouse gas emissions. We are required to state the annual quantity of emissions in tonnes of carbon dioxide equivalent from activities for which the group is responsible, including the combustion of fuel and the operation of any facility. Details of our emissions for 2013 and information about the group’s actions to reduce them are set out on page 46 and form part of the Directors’ report. For further details of our Climate Action Programme and the methodology used, please refer to our 2013 CSR report or visit www.g4s.com/cap 12. SUBSTANTIAL HOLDINGS The company had been notifi ed under DTR 5 of the following interests in the ordinary capital of G4S plc: As at 31.12.2013 Invesco Cevian Capital II G.P Limited Tweedy, Brown Company LLC William H Gates III 250,071,735(16.11%) 72,142,365 (5.11%)* 71,420,862 (5.06%)* 45,224,081 (3.2%)* These fi gures represent the number of shares and percentage held as at the date of notifi cation to the company. * Notifi cations received prior to the increase in the company’s share capital on 28 August 2013. These percentages were therefore based on the lower number of shares in issue at that time. Between 1.1.2014 and 31.3.2014 Prudential plc group of companies 82,292,546 (5.30%) 13. AUDITOR A resolution to re-appoint KPMG Audit Plc, chartered accountants, as auditor to the company and for their remuneration to be fi xed by the directors will be submitted to the annual general meeting. 7. RESEARCH AND DEVELOPMENT EXPENDITURE Research in connection with the development of new services and products and the improvement of those currently provided by the group is carried out continuously. Research and development written- off to profi t and loss during the year amounted to £5 million (2012: £5 million). 8. EMPLOYEES High levels of employee engagement are crucial to the success of our business. Making our people feel valued and able to contribute fully in their roles helps ensure they can deliver excellent customer service and in turn improves business performance. To measure levels of engagement the company conducts regular employee surveys across the organisation. The latest survey, conducted in 2013, was the most comprehensive to date, with over 62% (380,000) of employees responding. To encourage employees to participate, the survey was offered both online and in a paper version in 31 languages. The questions in the survey were based around the employment engagement model, or PRIDE, and asked employees to rate the extent to which the company takes steps to protect, respect, involve, develop and engage them. The responses to these questions showed positive improvements, with 82% of employees responding favourably compared to 80% when the last employee survey was conducted in 2011. Having shared the survey results, businesses in each country are now implementing the action plans they have developed to address areas identifi ed for improvement. We value the constructive relationships we have with unions globally, regionally and locally. With over a third of our employees covered by collective agreements, unions provide additional opportunities for sharing information with employees on the company’s performance and consulting them on decisions likely to affect their interests. Protecting our people is a key challenge especially where they work in roles and environments where the risk of harm is high. As the reduction in work-related fatalities indicates, we have made some progress in 2013, but there is much more to be done. In 2014 the increased resources, improved processes and leadership commitment to health and safety will ensure more progress is made. With employees in six continents and 120 countries, the diversity of ideas and thinking available to the business is a competitive advantage and one we seek to safeguard by having employment policies and procedures that do not discriminate. Creating an inclusive workplace where everyone can fl ourish regardless of their background is often an important factor that infl uences people’s decision to join, to stay and to recommend the company to others. Offering the same opportunities for training, development and promotion and making reasonable adjustments to support new employees or people who have become disabled during the course of their employment with G4S is just one example of how we strive to create an inclusive environment. 9. FINANCIAL INSTRUMENTS Details of the fi nancial risk management objectives and policies of the group and exposure to interest risk, credit risk, liquidity risk and foreign exchange risk are given in note 32 to the consolidated fi nancial statements. Annual Report and Accounts 2013 G4S plc 81 Directors’ report continued 14. DIRECTORS The directors, biographical details of whom are contained on pages 48 and 49, held offi ce throughout the year with the exception of Tim Weller who was appointed to the board on 1 April 2013, Ashley Almanza, who was appointed to the board on 1 May 2013, and Himanshu Raja who was appointed to the board on 7 October 2013. Nick Buckles stepped down from the board on 31 May 2013 and Trevor Dighton, Bo Lerenius and Lord Condon retired on 6 June 2013. In accordance with the code provisions on re-election of directors in the UK Corporate Governance Code 2012, each of the directors continuing in offi ce will offer themselves for re-election (or, in the case of Himanshu Raja, election). The board believes that the directors standing for re-election possess experience and expertise relevant to the company’s operations; that they continue to be effective; that they are committed to the success of the company; and that they should be re-elected at the annual general meeting. Mr Raja has been appointed to the board since the last annual general meeting and so he would, in any event, be required to retire in accordance with the company’s articles of association. Being eligible, he offers himself for election. The board believes that Mr Raja’s extensive experience of leading fi nancial discipline in large and complex global organisations, strong track record of streamlining fi nancial reporting systems and processes to improve controls and visibility of business performance and building strong relationships with the investor community, adds signifi cant value to the board and therefore recommends that he is elected at the annual general meeting. The contracts of service of the executive directors have no unexpired term since they are not for a fi xed term. They are terminable at 12 months’ notice. None of the non-executive directors has a contract of service. The company has executed deeds of indemnity for the benefi t of each of the directors in respect of liabilities which may attach to them in their capacity as directors of the company. These deeds are qualifying third party indemnity provisions as defi ned by section 234 of the Companies Act 2006 and have been in effect since 3 November 2006 for Mark Elliott, Mark Seligman and Grahame Gibson, 14 June 2010 for Ms Spottiswoode, 1 October 2010 for Ms Fok, 8 June 2012 for Mr Connolly, 1 January 2013 for Messrs Spence and Crozier, 1 April 2013 for Mr Weller, 1 May 2013 for Mr Almanza and 7 October 2013 for Mr Raja. Copies of the forms of indemnity are available on the company’s website. In addition, indemnities have been granted by the company in favour of certain of the directors of certain of the group’s subsidiaries in the UK, Germany and the Netherlands. The company has maintained a directors’ and offi cers’ liability insurance policy throughout the year under review. Details of directors’ interests (including the interests of their connected persons) in the share capital of G4S plc and of the directors’ remuneration are set out on pages 64 to 79. The directors who held offi ce at the date of approval of this Directors’ report confi rm that, so far as they are each aware, there is no relevant audit information of which the company’s auditor is unaware and each director has taken all the steps that he or she ought to have taken as a director to make him or herself aware of any relevant audit information and to establish that the company’s auditor is aware of that information. None of the directors had a material interest in any contract signifi cant to the business of the group during the fi nancial year. By order of the board Peter David Company Secretary 31 March 2014 82 G4S plc Annual Report and Accounts 2013 Directors’ responsibilities Governance STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS The directors are responsible for preparing the Annual Report and the group and parent company fi nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company fi nancial statements for each fi nancial year. Under that law they are required to prepare the group fi nancial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company fi nancial statements in accordance with UK Accounting Standards. Under company law the directors must not approve the fi nancial statements unless they are satisfi ed that they give a true and fair view of the state of affairs of the group and parent company and of their profi t or loss for that period. In preparing each of the group and parent company fi nancial statements, the directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and estimates that are reasonable and prudent; – for the group fi nancial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; – for the parent company fi nancial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company fi nancial statements; and – prepare the fi nancial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are suffi cient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the fi nancial position of the parent company and enable them to ensure that its fi nancial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and fi nancial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of fi nancial statements may differ from legislation in other jurisdictions. DIRECTORS’ RESPONSIBILITY STATEMENT Each of the directors, the names of whom are set out on pages 48 and 49 of this annual report, confi rms that, to the best of his or her knowledge: – the fi nancial statements in this annual report have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, fi nancial position and profi t of the company and the group taken as a whole; and – the management report required by DTR4.1.8R (contained in the Strategic Report and the Directors’ report) includes a fair review of the development and performance of the business and the position of the company and the group taken as a whole, together with a description of the principal risks and uncertainties they face The Strategic Report from the inside front cover to page 47 and pages 84 to 89 includes information on the group structure, the performance of the business and the principal risks and uncertainties it faces. The fi nancial statements on pages 94 to 150 include information on the group and the company’s fi nancial results, fi nancial outlook, cash fl ow and net debt and balance sheet positions. Notes 23, 27, 28, 31 and 32 to the consolidated fi nancial statements include information on the group’s investments, cash and cash equivalents, borrowings, derivatives, fi nancial risk management objectives, hedging policies and exposure to interest, foreign exchange, credit, liquidity and market risks. In addition to the above, the directors have considered the group’s cash fl ow forecasts for the next 12 months. The directors are satisfi ed that these cash fl ow forecasts, taking into account reasonably possible risk sensitivities associated with them and the group’s current funding and facilities and its funding strategy, show that the group will continue to operate for the foreseeable future. Accordingly, the directors have a reasonable expectation that the group and company will continue to operate within the level of available funding for the foreseeable future and it is therefore appropriate to adopt the going concern basis in preparing the fi nancial statements. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy. The statement of directors’ responsibilities and the Strategic Report was approved by a duly authorised committee of the board of directors on 31 March 2014 and signed on its behalf by Himanshu Raja, chief fi nancial offi cer. 31 March 2014 Annual Report and Accounts 2013 G4S plc 83 Chief Financial Offi cer’s review A solid underlying performance This section presents a summary of our fi nancial performance, providing commentary on the group’s underlying and reported results. During the year, the group took the opportunity to enhance its results presentation by separately disclosing the underlying business performance from restructuring and other specifi c items. Himanshu Raja Chief Financial Offi cer We also carried out a global fi nancial review of 163 contracts with annualised revenues of around £2bn which together with the settlement for the UK Electronic Monitoring contracts and two smaller contracts resulted in a £136m charge. The balance sheet and contract reviews, together with the settlement with the MoJ and our restructuring programmes, resulted in a £386m charge to profi ts in 2013 and contributed to a decrease in net assets, which fell to £919m (2012: £1,231m). The resulting total PBITA for the year was £56m (2012: £364m). Cash fl ow from continuing operations improved by 36% to £460m. The group has previously highlighted its focus on cash and free cash fl ow, and this remains a key target in 2014. During the year, we also strengthened the fi nancial position of the group. The group raised £343m from a 9.99% share placing in August and has taken a disciplined approach to managing the portfolio of G4S businesses. We disposed of our Colombia secure archiving business. Together, these steps helped to reduce net debt to £1,533m as at 31 December 2013. This has also improved the group’s net debt to EBITDA ratio to 2.6x. Since the end of the year, we have also completed the divestment of businesses in Norway and Canada, raising net proceeds of £89m. Underlying EPS was 14.7p against 15.8p in 2012 and total loss per share was 24.9p, compared with earnings per share of 2.9p in 2012. The group has declared a fi nal dividend of 5.54p (2012: 5.54p), making the total dividend for the year 8.96p (2012: 8.96p). “ Our strong market positions and focus on operational excellence, operating cost reduction and cash fl ow generation, provide a platform for sustainable growth in profi t and cash fl ow in the medium term.” INTRODUCTION The continued opportunities we see in our emerging and developed markets are mirrored in the fi nancial results. The group’s underlying revenue increased by 5.8%. Emerging markets grew by 16% and now represent 37% of the group’s total revenue and 44% of the group’s underlying PBITA. In our developed markets, revenue overall was fl at on 2012, with growth of 2% in the UK & Ireland, no change in North America and Europe down 2%. Underlying PBITA was £442m1, an increase on £430m2 in 2012, refl ecting solid progress during the year. In the fourth quarter, we accelerated the restructuring of some of our businesses which, together with the actions taken in the fi rst-half, resulted in a restructuring charge of £68m for the full year. This will help to improve the market competitiveness of those businesses and improve profi tability, with paybacks generally in the range of 12-36 months. In terms of specifi c items, we undertook an extensive review of the balance sheet to assess the carrying value of the group’s assets and liabilities. This resulted in a total specifi c items charge of £182m to PBITA and a £46m charge to goodwill impairment. The balance sheet at 31 December 2013 is therefore on a more balanced footing. 84 G4S plc Annual Report and Accounts 2013 Financial statements Strengthening our capability The group has grown rapidly, both organically and through acquisition, resulting in considerable variation in fi nancial capability, operational systems and processes across the world, including manual processes. include programmes on direct labour effi ciency, organisational effi ciency, vehicle route planning, telematics, IT standardisation and procurement. Over time this will drive operational improvement and reduce costs at the same time. We are committed to maintaining disciplined fi nancial management. We have begun a process of change to signifi cantly strengthen our fi nance capability by bringing in people with experience of operating in a global fi nance organisation. We are also moving to regional shared service centres which will further strengthen the control environment and bring greater consistency to our fi nance operations, whilst at the same time reducing costs. The shared service centres will act as a platform to bring further activities into shared service environments to get the benefi ts of scale in being part of a large global organisation. On the operational front, we are committed to standardising certain operational processes and procedures across the business. These Outlook Demand for the group’s services and products remains robust, as refl ected in 5.8% revenue growth and the potential in the global sales pipeline of £5 billion. (see page 19). Our focus in 2014 is to continue to invest in organic growth and operational capacity and for the on-going and accelerated restructuring of a number of our businesses to begin to deliver benefi ts in 2014. In the medium term we expect the group to deliver attractive revenue growth and we expect that operational actions across a wide range of areas will underpin our plans to deliver sustainable growth in profi t and cash fl ow in the medium term. BASIS OF PREPARATION The following discussion and analysis is based on, and should be read in conjunction with, the consolidated fi nancial statements, including the related notes, that form part of this annual report. The consolidated fi nancial statements have been prepared in accordance with IFRS as issued by the IASB and as adopted by the EU. A reconciliation of non-EU IFRS prior period results is set out on page 86. GROUP FINANCIAL PERFORMANCE Summary Income Statement Revenue PBITA (pre-restructuring) Restructuring PBITA Amortisation of intangible assets Goodwill impairment Acquisition related expenses Profi t on disposal of assets and subsidiaries PBIT Net fi nance expenses PBT Tax PAT Loss from discontinued operations Profi t/(loss) for the year Attributable to: Equity holders of the parent Non-controlling interests Profi t/(loss) for the year Earnings per share: Basic and diluted Underlying results 2013 £m 7,428 442 – 442 – – – – 442 (128) 314 (75) 239 – 239 214 25 239 14.7p Specifi c items 2013 £m (318) (68) (386) (72) (46) (4) 24 (484) – (484) 19 (465) (116) (581) (576) (5) (581) Total 2013 £m 7,428 124 (68) 56 (72) (46) (4) 24 (42) (128) (170) (56) (226) (116) (342) (362) 20 (342) (24.9p) Underlying results 20122 £m 7,024 430 – 430 – – – – 430 (117) 313 (69) 244 – 244 222 22 244 15.8p Refer to footnotes on page 89 Annual Report and Accounts 2013 G4S plc 85 Chief Financial Offi cer’s review continued Prior year reconciliation from total to underlying results Prior year results have been re-presented to clearly show the impact of net charges arising from the balance sheet review of assets and liabilities performed in 2013 (more details are given in note 3), restructuring costs and the Olympics contract. The group considers that this presentation provides readers with a clearer understanding of comparative underlying performance and trends. A reconciliation of reported statutory results to underlying results is set out below. The £40m prior year impact of the review of assets and liabilities in 2013 relates mainly to a write-down of receivables and obsolescent inventory. December 2012 Revenue £m PBITA £m Total results as reported in the income statement Foreign exchange Total results as reported at current exchange rates Exclude impact of Olympics contract Add back: restructuring costs Less: One-off credits 2012 results at current rates Impairment of fi xed assets Current asset write-downs Impairment of receivables Creditors, claims and provisions Total prior year impact of review of assets and liabilities in 2013 Underlying 2012 results at current rates 7,228 8 7,236 (204) – – 7,032 – – (8) – (8) 7,024 364 – 364 88 42 (24) 470 (3) (4) (28) (5) (40) 430 Revenue Organic growth was 4.7%. Contributions from acquisitions in South Africa and Indonesia in 2013 and a current year benefi t from acquisitions in Brazil in 2012 helped the group’s underlying revenue increase by 5.8%. Emerging markets grew by 16% and now represent 37% of the group’s total revenue (2012: 34%). In our developed markets, revenue overall was fl at on 2012, with 2% growth in the UK, no change in North America and Europe down 2%. Gross margin Revenue Cost of sales Gross profi t Gross margin (%) 2013 £m 7,428 (5,941) 1,487 20.0% 2012 £m 7,024 (5,563) 1,461 20.8% Underlying gross margin declined by 80 basis points to 20.0% (2012: 20.8%) for the year ended 31 December 2013. Developed markets declined 120 basis points to 18.8% (2012: 20.0%) mainly as a result of challenging economic conditions in the UK and Europe and the impact of Federal spending cuts affecting both our secure solutions and technologies businesses in the US. Emerging markets gross margins were broadly in line at 22.1% (2012: 22.4%), the decline was in Africa with margins effectively maintained in Latin America and Asia Middle East. Underlying revenue in the prior year excludes specifi c items. Underlying cost of sales in both years excludes specifi c items as described in note 8 on page 108. PBITA Group underlying PBITA was £442m1, an increase of 2.8% on the prior year (2012: £430m)2. Emerging markets generated 44% of PBITA (2012: 36%). See the Business review on pages 28 to 33. The underlying PBITA margin was 6.0% (2012: 6.1%). Specifi c items Specifi c items have been excluded from the underlying results to provide a clear comparison of the underlying trading performance of the group. Those items are set out below: Contracts review Review of assets and liabilities Impairment of fi xed assets Current asset write-downs Impairment of receivables Creditors, claims and provisions Total review of assets and liabilities Subtotal Restructuring Total specifi c items As at 30 June 2013 £m – Since 30 June 2013 £m 136 As at 31 December 2013 £m 136 23 17 52 40 132 132 4 136 3 17 7 23 50 186 64 250 26 34 59 63 182 318 68 386 Contracts review A global fi nancial review of 163 contracts with annualised revenues of around £2bn, which together with the settlement for the UK Electronic Monitoring contracts and two smaller contracts resulted in a £136m charge. Review of assets and liabilities A review of the group’s assets and liabilities was initiated in the fi rst half of 2013, resulting in a PBITA charge of £132m. This was extended to cover all legal entities during the second half of the year. Completion of this review resulted in a further charge of £50m, bringing the full-year charge to PBITA of £182m. The total charge related principally to impairment of fi xed assets, inventory obsolescence, write down of receivables and the recognition of employer related liabilities. The group’s balance sheet is therefore on a more balanced footing as at 31 December 2013. Restructuring Following the strategic review over the summer, we identifi ed opportunities to signifi cantly enhance the competitiveness of some of our businesses and to reduce overheads, specifi cally in the UK & Ireland and in certain European operations, resulting in £35m of restructuring programmes announced in August 2013. Acceleration of the restructuring programme in the fourth quarter, primarily in the Netherlands, Belgium and Finland, resulted in additional charges of £33m. Amortisation and impairment Acquisition-related intangible assets included in the balance sheet at 31 December 2013 consisted of £1,966m goodwill, £137m customer- related intangible assets and £4m other intangible assets. The charge for the year for the amortisation of acquisition-related intangible assets other than goodwill amounted to £72m (2012: £84m). Goodwill is not amortised, but it is tested for impairment annually. As a result of the group’s impairment test for the year ended 31 December 2013, the group incurred an impairment charge of £46m to continuing operations (mainly relating to the technology business in Brazil; see note 19 on page 117 for details) and a further £80m to discontinued operations (relating to the US Government Solutions business; see note 7 on page 108 for details). 86 G4S plc Annual Report and Accounts 2013 Financial statements Non-controlling interests Profi t attributable to non-controlling interests was £20m in 2013, a slight decrease on £22m for 2012, mainly due to the partners’ share of specifi c charges in the year. Loss for the year The group made a loss of £342m (2012: profi t of £62m) for the year after specifi c items, interest, tax, amortisation and the results of discontinued operations. Earnings per share (EPS) Underlying1 earnings per share 20122 at constant exchange rates £m 244 (22) 20122 at actual exchange rates £m 244 (22) 222 1,403 15.8p 222 1,403 15.8p 2013 £m 239 (25) 214 1,452 14.7p Total3 (loss)/earnings per share 2012 at constant exchange rates £m 62 (22) 2012 at actual exchange rates £m 62 (22) 40 1,403 2.9p 40 1,403 2.9p 2013 £m (342) (20) (362) 1,452 (24.9)p Profi t for the year Non-controlling interests Adjusted profi t attributable to shareholders Average number of shares (m) EPS (p) Los/(profi t) for the year Non-controlling interests Adjusted (loss)/profi t attributable to shareholders Average number of shares (m) EPS (p) Underlying earnings per share was 14.7p compared to 15.8p in the prior year. Total loss per share was 24.9p (2012: earnings per share 2.9p). These are based on a weighted average number of shares in issue of 1,452 million (2012: 1,403 million). A reconciliation of the total and underlying EPS is provided in note 16. Underlying earnings, as analysed in note 16 on page 112, excludes the result from discontinued operations, amortisation and impairment of acquisition-related intangible assets, acquisition-related costs and non-underlying items, all net of tax. This better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. Net fi nance expense Net interest payable on net debt was £108m. This is a net increase of 2.9% over the prior year cost of £105m, principally due to the increase in the group’s average gross debt in the fi rst-half of the year. The pension interest charge was £20m (2012: £15m), resulting in total net fi nance costs of £128m (2012: £120m). The group’s average cost of gross borrowings in 2013, net of interest rate hedging, was 4.1%, compared to 4.3% in 2012. The cost based on prevailing interest rates at 31 December 2013 was 3.7%, compared to 3.9% at 31 December 2012. Taxation The underlying taxation charge of £75m represents an effective tax rate of 24%, an increase from 22% in 2012. The cash tax rate is 18% compared to 23% in 2012. The group’s target is to maintain the effective tax rate in the short term. 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 £21m (2012: £25m). Disposals and discontinued operations In August 2013, the group sold its Colombian secure archiving business for £34m and its cash business in Slovakia for £1m. In January 2014 the group completed the sale of its cash solutions business in Canada and its remaining business in Norway for total proceeds of £89m. The cash solutions business in Canada, the business in Norway and the US Government Solutions business were classifi ed as held for sale as at 31 December 2013 and therefore their results have been included within discontinued operations in the income statement. The classifi ed US Government Solutions business continues to be classifi ed within discontinued operations as at 31 December 2013 as it was held for sale at that date. Due to the restrictions on US Government spend during the year, the sale process has been extended but the group is confi dent a sale will be fi nalised in 2014. During the prior year the group disposed of its cash solutions business in Sweden in February 2012, its businesses in Poland in September 2012, its justice services businesses in the United States and Canada in April 2012 and its security solutions business in Pakistan in October 2012. The total loss from discontinued operations of £116m (2012: £56m) includes a post-tax trading loss of £11m, restructuring costs of £2m and an impairment charge of £103m, of which £80m relates to goodwill impairment in the US Government Solutions business. The contribution to the turnover and operating profi t of the group from discontinued operations is shown in note 6 on page 106 and their contribution to net profi t and cash fl ows is detailed in note 7 on page 108. Consolidation of subsidiaries The group has a diverse set of complex ownership structures, often driven by local laws and regulations relating to foreign ownership. As set out in note 3 and on pages 103 to 104, the group has not adopted early the new consolidation standards, IFRS 10 ‘Consolidated Financial Statements’ and IFRS 11 ‘Joint Arrangements’. Had the group applied IFRS 10 and IFRS 11, revenue would have been £317m lower (2012: £277m lower) and PBITA would have been £32m lower at £410 (2012: £27m lower at £443m). As shown on page 104, profi t to equity holders would have been unchanged. Refer to footnotes on page 89 Annual Report and Accounts 2013 G4S plc 87 Chief Financial Offi cer’s review continued Cash fl ow A reconciliation of net cash generated by continuing operations to movement in net debt is presented below: Net debt maturity The group’s funding position is strong, with committed but undrawn facilities of £965m and with no signifi cant debt maturing before 2016. PBITA Non-cash movements Depreciation Amortisation of other intangible assets Write down of fi xed assets Increase/(decrease) in provisions Working capital and pensions Working capital Pensions Cash fl ow from continuing operations Cash from discontinued operations Net cash generated by operations: Investment in the business Investment in capital expenditure and non-current assets New fi nance leases Disposal proceeds Acquisitions Net investment in the business Net cash fl ow after investing in the business Other (uses)/sources of funds Net fi nancing Tax Dividends Share capital Other Net sources/(uses) of funds Net cash fl ow after investment, fi nancing and tax Net debt at beginning of period Foreign exchange Net debt at end of period 2013 £m 56 118 24 24 189 87 (38) 460 28 488 (199) (12) 35 (35) (211) 277 (110) (88) (154) 343 16 7 2012 £m 364 117 22 – (5) (124) (37) 337 35 372 (137) (21) 19 (87) (226) 146 (111) (85) (139) – 3 (332) 284 (1,802) (15) (1,533) (186) (1,616) – (1,802) Cash generated from continuing operations was £460m (2012: £337m) resulting from improved working capital management and the receipt of £76m relating to the Olympics contract, offset by approximately £60m of payments which were deferred from December 2012 to January 2013 and from £27m of receivables withheld as at the year-end in relation to the UK electronic monitoring contracts. Net investment in the business was £211m (2012: £226m). The main areas of investment have been in vehicles and plant and equipment, together with investment in new contracts and also includes £35m on acquisitions, mainly in the fi rst-half of 2013, with a number of smaller cash solutions acquisitions in South Africa and Indonesia. Tax paid was £88m (2012: £85m), interest paid was £110m (2012: £111m) and group shareholder dividend payments were £130m (2012: £120m). Net cash fl ow was £284m (2012: outfl ow of £186m) resulting in an improved net debt of £1,533m. Net debt The net debt position as at 31 December 2013 was £1,533m (2012: £1,802m) resulting in a net debt to EBITDA ratio of 2.6x. The decrease of £269m is principally attributable to the improvement in net cash fl ow after investing in the business and the proceeds of the share placing, offset by interest, tax and dividend payments. COMMITTED FUNDING – MATURITY PROFILE (£m) at 31 December 2013* 1200 1000 800 600 400 200 0 135 965 495 409 121 174 350 88 45 63 2017 2018 2019 2020 2021 2022 60 76 2014 2015 25 2016 USPP Bond RCF RCF drawn * Exchange rates at 31 December 2013 or hedged rates where applicable. The group’s primary sources of bank fi nance are a £1.1bn multi- currency revolving credit facility provided by a consortium of lending banks at a margin of 1.30% over LIBOR and maturing 10 March 2016. The group also has US $550m in fi nancing 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 fi xed interest rates payable have been swapped into fl oating 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 US $514m and £69m private placement of unsecured senior loan notes. $449m and £69m remain outstanding, maturing at various dates between 2015 and 2020 and bearing interest at rates between 6.43% and 7.56%. US $200m of the loan note proceeds have been swapped into £101m fi xed rate sterling for the term of the notes. On 13 May 2009, the group issued a £350m note bearing an interest rate of 7.75% and maturing in 2019. On 2 May 2012, the group issued a Euro 600m note bearing an interest rate of 2.875% and maturing in 2017. €325m was swapped into £266m fi xed rate sterling and the interest rate on €90m was swapped to a fl oating rate linked to six month EURIBOR. On 6 December 2012, the group issued a €500m note bearing an interest rate of 2.625% and maturing in 2018. €350m was swapped into £284m fi xed rate sterling and the interest rate on €120m was swapped to a fl oating rate linked to six month EURIBOR. The group’s net debt at 31 December 2013 was £1,533m. The group’s committed but unutilised facilities at 31 December 2013 were £965m. The group has suffi cient capacity to fi nance its normal funding and current investment plans. Credit rating The group’s credit rating was revised by Standard & Poor’s from BBB- (Negative) to BBB- (Stable) on 4 September 2013. Dividend The directors recommend a fi nal dividend of 5.54p (DKK 0.4954) per share, unchanged from 2012. The interim dividend was 3.42p (DKK 0.2972) per share and the total dividend, if approved, will be 8.96p (DKK 0.7926)per share, unchanged from 2012. The proposed dividend cover is 1.6 times (2012: 2.4 times) on adjusted earnings. The board’s intention is that dividends will increase broadly in line with underlying earnings over the medium term. 88 G4S plc Annual Report and Accounts 2013 OTHER INFORMATION Pensions As at 31 December 2013 the defi ned benefi t pension obligation on the balance sheet was £504m (2012: £471m), or £405m net of tax (2012: £367m) of which £472m (2012: £436m) related to material funded defi ned benefi t schemes. The most signifi cant pension scheme is in the UK and accounts for 95% (2012: 95%) of the total material scheme obligation. The scheme has approximately 30,000 members and further details of the make up of the scheme are given in note 33 on page 129. Defi ned benefi t obligation – UK scheme Scheme assets Obligation Total UK obligation 2013 £m 1,564 (2,013) (449) 2012 £m 1,474 (1,886) (412) Movement £m 90 (127) 37 The movement in the UK scheme was as a result of scheme obligations increasing by £127m partly offset by an increase of £90m in the value of scheme assets arising from contributions paid to the scheme during the year and an increase in underlying asset values. The increase in the obligation is mainly due to actuarial losses incurred in the year resulting from discount rates decreasing to 4.4% (2012: 4.5%), infl ation rates increasing to 3.4% (2012: 3.0%) and a change in demographic assumptions during the year. The group made payments of £38m (2012: £37m) into the scheme during the year. Following the recent triennial valuation, the group agreed with the Trustees to increase next year’s annual defi cit recovery payment to £42m and extended the term of these payments from 2022 to 2024. The next triennial valuation is in 2015. Due to the nature and materiality of the group’s pension schemes certain risks exist as detailed further in note 33 on page 130. Financing and treasury activities The group’s treasury function is responsible for ensuring the availability of cost-effective fi nance and for managing the group’s fi nancial risk arising from currency and interest rate volatility and counterparty credit. Treasury is not a profi t centre and it is not permitted to speculate in fi nancial 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 32 on pages 124 to 127. To assist the effi cient management of the group’s interest costs, the group operates a multi-currency notional pooling cash management system with a wholly owned subsidiary of an A+ rated bank. At year-end, credit balances of £425m were pooled with debit balances of £422m, resulting in a net pool credit balance of £3m. There is legal right of set off under the pooling agreement and an overdraft facility of £3m. Interest rate risks and interest rate swaps The group’s investments and borrowings at 31 December 2013 were at a mix of fi xed rates of interest and fl oating rates of interest linked to LIBOR and EURIBOR. The private placement notes in March 2007 and July 2008 and the public notes in May 2009, May 2012 and December 2012 were all issued at fi xed rates, whilst the group’s investments and bank borrowings were all at variable rates of interest linked to LIBOR and EURIBOR. Financial statements The group’s interest risk policy requires treasury to fi x a proportion of its interest exposure on a sliding scale in US dollars, sterling and euro, using the natural mix of fi xed and fl oating interest rates emanating from the bond and bank markets and by utilising interest rate and cross currency swaps. The proceeds of the private placement notes issued in March 2007 and part of the public notes issued in May 2012 and December 2012 were swapped to fl oating interest rates and accounted for as fair value hedges, with a net gain at 31 December 2013 of £45m. The market value of the pay-fi xed receive-variable swaps and the pay-fi xed receive-fi xed cross currency swaps outstanding at 31 December 2013, accounted for as cash fl ow hedges, was a net gain of £40m. Foreign currency The group has many overseas subsidiaries and associates denominated in various different currencies. Treasury policy is to manage signifi cant translation risks in respect of net operating assets and its consolidated net debt/EBITDA ratio by holding 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 fl ow should not be put at risk by these instruments in order to preserve the carrying value of net assets. At 31 December 2013, the group’s US dollar and euro net assets were approximately 59% and 82% respectively, hedged by foreign currency loans. As at 31 December 2013, net debt held in US dollar and euro and in those currencies offi cially pegged to these two currencies equated broadly to a ratio of 2 times the EBITDA generated from these currencies. If year-end 31 December 2013 exchange rates were used for 2013, underlying PBITA would have been £422m, a reduction from £442m due to a strengthening of the relative value of sterling. Exchange differences on the translation of foreign operations included in the consolidated statement of comprehensive income amount to a loss of £109m (2012: £95m). Corporate governance The group’s policies regarding risk management and corporate governance are set out in the Corporate governance report on pages 52 to 60. Going concern The directors are confi dent that, after making enquiries and on the basis of current fi nancial 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 fi nancial statements. Himanshu Raja Chief Financial Offi cer 1 To clearly present underlying performance, specifi c items have been excluded and disclosed separately – see page 86. 2 2012 underlying results are presented at constant exchange rates and have been restated for the adoption of IAS19 (2011). 2012 PBITA has been re-presented to exclude PBITA from businesses subsequently classifi ed as discontinued, one off credits, profi ts on disposal and the prior year effect of the review of assets and liabilities in 2013 – see page 86. 3 Including specifi c items. See page 86 for details. Annual Report and Accounts 2013 G4S plc 89 Independent auditor’s report to the members of G4S plc only OPINIONS AND CONCLUSIONS ARISING FROM OUR AUDIT 1. OUR OPINION ON THE FINANCIAL STATEMENTS IS UNMODIFIED We have audited the fi nancial statements of G4S plc for the year ended 31 December 2013 set out on pages 94 to 150. In our opinion: – the fi nancial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2013 and of the group’s loss for the year then ended; – the group fi nancial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; – the parent company fi nancial statements have been properly prepared in accordance with UK Accounting Standards; and – the fi nancial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the group fi nancial statements, Article 4 of the IAS Regulation. 2. OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT In arriving at our audit opinion above on the fi nancial statements the risks of material misstatement that had the greatest effect on our audit were as follows: Presentation of the income statement Refer to page 61 (Audit Committee Report), page 98 (accounting policy) and page 108 (fi nancial disclosures). The risk – In order to give better understanding of the underlying performance of the business, management have presented a view of the underlying results of the group, with separate disclosure of specifi c items. There is a risk that items included within ‘restructuring’ and ‘specifi c items’ are not in accordance with clearly disclosed group accounting policies and therefore the ‘underlying’ result is misstated. There is a related presentation risk concerning discontinued operations and held for sale assets and liabilities which are further considered below. Our response – In this area our audit procedures included, inter alia, providing detailed instructions to all in-scope audit teams on the defi nitions of items that can be included within these income statement categories to assist them in their assessment of specifi c items identifi ed in their components. We considered and challenged the work of the group fi nance team in reviewing with the regional and local fi nance teams the basis of any specifi c items. In doing so we critically assessed their accuracy and presentation of specifi c items taking into account their policy, considered the appropriateness, by reference to accounting standards, of the individual items presented within these categories and therefore excluded from ‘underlying results’ at both the local and group levels. We have also considered the adequacy of the group’s disclosures about the items included within ‘restructuring’ and ‘specifi c items’ in notes 8 (specifi c items) and 34 (restructuring) and the related accounting policies for these categories on page 98 and on page 101. Risk of management override of internal controls Refer to page 62 (Audit Committee Report). The risk – The de-centralised structure of the group and the manual nature of many accounting entries means there is a higher risk of management override of fi nancial controls. There is also a risk of management bias within judgements and estimates including those related to the other risks discussed in this report. The application of management override or biased judgements could be infl uenced by targets on which bonuses are paid which could be signifi cant to the relevant individuals. This risk affects all areas of the fi nancial statements. Our response – In this area our audit procedures included, among others, extending the scope of our audit to include businesses where we see a risk of management bias or override of controls (see below). We also mandated certain key audit procedures be performed by all in-scope audit teams to assist in the identifi cation of management override of fi nancial controls within the local books and records. We tested the reconciliations from the group consolidation package to the local books and records for 84% of the group including for those businesses out of scope for the group audit, performed testing on manual journals within all in-scope businesses, performed testing on the group consolidation system, identifying and testing signifi cant unusual transactions and assessing indications of management bias in judgements and estimates. This work was performed with assistance from our Forensic Accounting specialists. 90 G4S plc Annual Report and Accounts 2013 Financial statements Revenue recognition particularly on UK Government contracts and related provisions Refer to page 62 (Audit Committee Report), page 102 (accounting policy) and page 134 (fi nancial disclosures). The risk – The group delivers outsourcing services that can be complex in nature and may be governed by unique and complex contractual arrangements. In these circumstances there is a heightened risk of inaccurate billing and revenue recognition. In particular the group was subject to a number of inquiries in relation to the accuracy of billing and services provided on certain of its UK Government contracts. There was an investigation into an electronic monitoring contract where the Ministry of Justice alleged the group has overcharged for certain aspects of the services. There was a risk that revenue recognition on these contracts is not in accordance with contractual entitlements and therefore provisions may be required for refunds due (e.g. to the UK Government) or costs of termination. There was further a risk that the provisions for refunds are not appropriately disclosed and presented. Our response – In this area our audit procedures included, among others, reviewing the sales process on complex and signifi cant contracts in order to critically assess controls over process risks which might lead to revenue recognition issues, and comparing the contractual terms of the relevant agreements to the accounting treatment adopted. We made inquiries with contract managers and reviewed customer correspondence to identify, investigate and evaluate any areas of dispute or subjectivity within contracts and related billing, meeting with the company’s legal advisors to discuss their advice on any areas of interpretation within the contract. We also considered the recovery of signifi cant overdue receivables including seeking external evidence of likely recovery, taking into account the ageing of receivables and comparing any provision to recovery levels post year end. We inspected correspondence with the Government and its appointed advisers. Based on those inquiries we recalculated the quantum of potential exposures and critically assessed the judgements made by management as to the provision made for the settlement of any and all claims arising from these contracts. Full and fi nal settlement in respect of the Ministry of Justice claims was reached in March 2014. We have evaluated the adequacy of the group’s disclosures about the UK Government settlement and amounts recognised within the fi nancial statements as revenue and provisions. Compliance with foreign ownership rules and consolidation of subsidiaries Refer to page 62 (Audit Committee Report), page 98 and 105 (accounting policy) and pages 140 and 141 (fi nancial disclosures). The risk – The group is required to comply with sometimes complex or imprecise foreign ownership rules in the countries in which it operates. There is a risk that the rules may be interpreted in different ways. In some instances the group operates through local structures with limited direct share ownership of the business but exercising control through shareholder agreements. These structures can mean there is a higher level of judgement required in deciding whether or not to consolidate the underlying business or treat the operation as a joint venture/ associate/investment. Our response – In this area our audit procedures included, inter alia, understanding the structure of local businesses and evaluating whether they are in compliance with local foreign ownership rules involving local lawyers where applicable. We also challenge the Directors’ conclusions on whether or not consolidation was appropriate by comparing the rights bestowed by share ownership and all related ownership and management agreements to the requirements set out in the relevant accounting standards. We have also evaluated the adequacy of the group’s disclosures about the degree of judgement as to which businesses can be consolidated in note 4 and the reasons for consolidating those businesses with less than 50% ownership in note 3 and note 43. Recoverable value of goodwill and other intangible assets Refer to page 62 (Audit Committee Report), page 100 (accounting policy) and page 115 (fi nancial disclosures). The risk – The group has £2.2 billion of goodwill and other intangible assets. Although the majority of this relates to business units where the carrying value is exceeded by the calculated Value In Use by a signifi cant margin, in the current economic environment there is a risk of impairment related to particular business units within the group. The estimation of the recoverable amount of cash generating units requires signifi cant judgement in relation to the appropriate discount rates, growth rates, terminal values, forecast cashfl ows and, where the fair value less costs to sell approach is used, the appropriate fair value multiple. Our response – In this area our audit procedures included, among others, challenging the forecast earnings and cash fl ows over the fi ve year forecast period, for example by comparison to historic results and budgets and by seeking explanations for any assumed trends and growth rates. We also challenged the discount rates and terminal values and, where a fair value less costs to sell approach is used, challenged the multiples employed. Where possible we compared the group’s assumptions to externally derived data. Our valuations specialists assisted in the evaluation of the more subjective and material cash generating units. We challenged the group’s sensitivities to help us assess whether the key assumptions and drivers considered are correctly identifi ed. We compared the group’s aggregate recoverable amount to its market capitalisation. We have also assessed the adequacy of the group’s disclosures on goodwill impairments (see note 19) and considered whether the sensitivity analysis provided properly refl ects the risks inherent within the estimate of the recoverable amount of goodwill. Annual Report and Accounts 2013 G4S plc 91 Independent auditor’s report to the members of G4S plc only continued Discontinued operations and held for sale assets and liabilities Refer to page 62 (Audit Committee Report), page 103 (accounting policy) and pages 108 and 121 (fi nancial disclosures). The risk – The group often has business disposals underway at any reporting date. Given the judgement involved, there is a risk that any such businesses may not meet the accounting standard’s criteria for presentation as discontinued at the balance sheet date as either they are not a separate major line of business, the Directors are not committed to the sale and that sale is not highly probable, or the business has not been exited. The results of discontinued businesses are presented below profi t before tax on the face of the income statement and therefore any profi ts/losses from discontinued businesses are not included within underlying PBITA being the group’s own key fi nancial KPI. Were the group to incorrectly classify a loss making business as discontinued a higher underlying PBITA would result. For the US Government Solutions business, which is presented as held for sale, the calculation of the fair value less costs to sell is subject to judgement due to a range of potential sales prices and assumptions around the method and quantum of recovery of working capital balances. This subjectivity creates a risk around the determination of an appropriate fair value for the business and therefore the appropriate impairment recognised. Our response – In this area our audit procedures included, amongst others, using our knowledge of the business to perform an assessment of whether the businesses constitute separate major lines of business or geographical areas of operations. We also obtained and evaluated evidence to critically challenge the level of the Directors’ commitment to sell the businesses classifi ed as held for sale and to critically challenge the probability of those sales at the balance sheet date. We sought external evidence of likely sales prices and compared these to the net book value of the held for sale assets and liabilities to assess whether any further impairment was required. For those businesses being wound down and therefore being classifi ed as discontinued on the basis that the business has been exited, we sought external evidence that the group is no longer operating that business. We have also considered the adequacy of the group’s disclosures about discontinued operations and held for sale assets in notes 7 and 26. Taxation exposures and provisions Refer to page 63 (Audit Committee Report), page 102 (accounting policy) and page 111 (fi nancial disclosures). The risk – The group is required to make estimates of tax provisions in jurisdictions and/or circumstances where the application of the tax rules is complex, uncertain and in some cases inconsistent. Our response – Our audit procedures included, consideration of each signifi cant exposure on a case by case basis taking into account our understanding of the facts, any specifi c advice the group has received, past experience and any relevant observations of our tax specialists. Using this information we conducted a critical review of the group’s judgement as to the provision required. We have also evaluated the adequacy of the group’s disclosures about the tax provisions and contingencies in note 14 and the level of estimation uncertainty in the tax provisions in note 3(r). 3. OUR APPLICATION OF MATERIALITY AND AN OVERVIEW OF THE SCOPE OF OUR AUDIT The materiality for the group fi nancial statements as a whole was set at £10m. This has been determined with reference to a benchmark of group loss before tax, adjusted for non-recurring items including ‘restructuring costs’, ‘specifi c items’ and ‘goodwill impairment’, which we consider to be one of the principal considerations for members of the company in assessing the fi nancial performance of the group. Materiality represents 4.9% of group profi t before tax adjusted for these items and 4.4% of group profi t before tax from continuing operations as disclosed on the face of the income statement. We agreed with the audit committee to report to it all corrected and uncorrected misstatements we identifi ed through our audit with a value in excess of £0.5m for errors impacting profi t and in excess of £4m for balance sheet only misclassifi cations, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds. Audits for group reporting purposes were performed by component auditors at the key reporting components in 42 countries. In addition, specifi ed audit procedures were performed by component auditors in a further 42 countries. These group procedures covered: Audit for group reporting purposes Specifi c audit procedures Not covered Group revenue 81% 13% 6% The audits undertaken for group reporting purposes at the key reporting components of the group were all performed to materiality levels set by, or agreed with, the group audit team. These materiality levels were set individually for each component and ranged from £0.02m to £5m. Detailed audit instructions were sent to all the auditors in these locations. These instructions covered the signifi cant audit areas that should be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported back to the group audit team. The group audit team visited the following locations: the Philippines, Ireland, South Africa, Botswana, Peru, Brazil, Saudi Arabia, India, Belgium, Finland, Denmark and the United Kingdom. Telephone meetings were also held with the auditors of 25 signifi cant countries as part of the planning process and a further 22 high risk countries as part of the audit close out process. The remaining 6% of revenue includes no components which individually represent more than 0.4% of revenue. 92 G4S plc Annual Report and Accounts 2013 Financial statements 4. OUR OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 IS UNMODIFIED In our opinion: – the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and – the information given in the Strategic Report and the Directors’ Report for the fi nancial year for which the fi nancial statements are prepared is consistent with the fi nancial statements. 5. WE HAVE NOTHING TO REPORT IN RESPECT OF THE MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identifi ed other information in the annual report that contains a material inconsistency with either that knowledge or the fi nancial statements, a material misstatement of fact, or that is otherwise misleading. In particular, we are required to report to you if: – we have identifi ed material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and fi nancial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy; or – the Audit Committee Report does not appropriately address matters communicated by us to the audit committee. Under the Companies Act 2006 we are required to report to you if, in our opinion: – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent company fi nancial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of directors’ remuneration specifi ed by law are not made; or – we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: – the directors’ statement, set out on page 83, in relation to going concern; and – the part of the Corporate Governance Statement on page 53 in the Chairman’s letter relating to the company’s compliance with the nine provisions of the 2010 UK Corporate Governance Code specifi ed for our review. We have nothing to report in respect of the above responsibilities. SCOPE OF REPORT AND RESPONSIBILITIES As explained more fully in the Directors’ Responsibilities Statement set out on page 83, the directors are responsible for the preparation of the fi nancial statements and for being satisfi ed that they give a true and fair view. A description of the scope of an audit of fi nancial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. John Luke (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 31 March 2014 Annual Report and Accounts 2013 G4S plc 93 Consolidated income statement For the year ended 31 December 2013 Continuing operations Revenue Operating profi t before interest, tax, amortisation, specifi c items and restructuring Specifi c items Restructuring costs Operating profi t before interest, tax and amortisation (PBITA) Amortisation of acquisition-related intangible assets Goodwill impairment Acquisition-related expenses Profi t on disposal of assets and subsidiaries Operating (loss)/profi t before interest and taxation (PBIT) Finance income Finance costs Operating (loss)/profi t before taxation (PBT) Taxation (Loss)/profi t after taxation Loss from discontinued operations (Loss)/profi t for the year Attributable to: Equity holders of the parent Non-controlling interests (Loss)/profi t for the year Earnings per share attributable to equity shareholders of the parent From (loss)/profi t from continuing operations: Basic and diluted From (loss)/profi t from continuing and discontinued operations: Basic and diluted * Restated – see notes 3(a) and 3(v). Notes 5, 6 6 8 8 6, 8 12 13 14 7 16 Total 2013 £m 7,428 442 (318) (68) 56 (72) (46) (4) 24 (42) 15 (143) (170) (56) (226) (116) (342) (362) 20 (342) (16.9)p (24.9)p Total 2012* £m 7,228 470 (64) (42) 364 (84) – (7) 5 278 12 (132) 158 (40) 118 (56) 62 40 22 62 6.8p 2.9p 94 G4S plc Annual Report and Accounts 2013 Consolidated statement of comprehensive income For the year ended 31 December 2013 (Loss)/profi t for the year Other comprehensive income Items that will never be reclassifi ed to profi t or loss: Actuarial losses on defi ned retirement benefi t schemes Tax on items that will never be reclassifi ed to profi t or loss Items that are or may be reclassifi ed to profi t or loss: Exchange differences on translation of foreign operations Change in fair value of net investment hedging fi nancial instruments Change in fair value of cash fl ow hedging fi nancial instruments Tax on items taken directly to equity Other comprehensive income, net of tax Total comprehensive income for the year Attributable to: Equity holders of the parent Non-controlling interests Total comprehensive income for the year * Restated – see note 3 (v). Consolidated statement of changes in equity For the year ended 31 December 2013 At 1 January 2013 Total comprehensive income attributable to equity shareholders of the parent Shares issued Dividends declared Own shares awarded Transactions with non-controlling interests At 31 December 2013 At 1 January 2012 Total comprehensive income attributable to equity shareholders of the parent Dividends declared Own shares purchased Own shares awarded Transactions with non-controlling interests At 31 December 2012 * See note 37. Share capital £m 353 – 35 – – – 388 353 – – – – – 353 Attributable to equity holders of the parent Other reserves* £m 422 Share premium £m 258 Retained earnings £m 143 – – – – – 258 258 – – – – – 258 (422) – (130) (2) (4) (415) 389 (126) (120) – (2) 2 143 (96) 308 – 2 – 636 494 (68) – (6) 2 – 422 Notes 14 14 Financial statements 2013 £m (342) (60) (1) (61) (109) 25 (8) (4) (96) (157) (499) (518) 19 (499) 2012* £m 62 (167) 30 (137) (95) (4) (6) 5 (100) (237) (175) (194) 19 (175) Total £m 1,176 (518) 343 (130) – (4) 867 1,494 (194) (120) (6) – 2 1,176 NCI reserve £m 55 Total equity £m 1,231 19 – (24) – 2 52 50 19 (18) – – 4 55 (499) 343 (154) – (2) 919 1,544 (175) (138) (6) – 6 1,231 Annual Report and Accounts 2013 G4S plc 95 Consolidated statement of fi nancial position At 31 December 2013 ASSETS Non-current assets Goodwill Other acquisition-related intangible assets Other intangible assets Property, plant and equipment Trade and other receivables Deferred tax assets Current assets Inventories Investments Trade and other receivables Cash and cash equivalents Assets classifi ed as held for sale Total assets LIABILITIES Current liabilities Bank overdrafts Bank loans Loan notes Obligations under fi nance leases Trade and other payables Current tax liabilities Provisions Liabilities associated with assets classifi ed as held for sale Non-current liabilities Bank loans Loan notes Obligations under fi nance leases Trade and other payables Retirement benefi t obligations Provisions Deferred tax liabilities Total liabilities Net assets EQUITY Share capital Share premium and reserves Equity attributable to equity holders of the parent Non-controlling interests Total equity Notes 19 19 19 20 24 35 22 23 24 27 26 6 27, 28 28 28 29 30 34 26 28 28 29 30 33 34 35 6 36 2013 £m 1,966 141 77 490 130 184 2,988 117 39 1,394 594 220 2,364 5,352 (22) (27) (61) (21) (1,172) (48) (200) (133) (1,684) (169) (1,921) (31) (13) (504) (64) (47) (2,749) 2012 £m 2,108 204 87 512 132 179 3,222 128 56 1,506 469 229 2,388 5,610 (17) (18) (40) (18) (1,193) (41) (29) (52) (1,408) (327) (1,999) (43) (18) (471) (45) (68) (2,971) (4,433) (4,379) 919 1,231 388 479 867 52 919 353 823 1,176 55 1,231 The consolidated fi nancial statements were approved by the board of directors and authorised for issue on 31 March 2014. They were signed on its behalf by: Ashley Almanza Director Himanshu Raja Director 96 G4S plc Annual Report and Accounts 2013 Notes Consolidated statement of cash fl ow For the year ended 31 December 2013 (Loss)/profi t before taxation Adjustments for: Finance income Finance costs Depreciation of property, plant and equipment Amortisation of acquisition-related intangible assets Amortisation of other intangible assets Goodwill impairment Acquisition-related costs Impairment of other assets Increase/(decrease) in provisions Additional pension contributions Profi t on disposal of fi xed assets and subsidiaries Operating cash fl ow before movements in working capital Decrease/(increase) in inventories Decrease/(increase) in receivables Increase in payables Net cash fl ow from operating activities of continuing operations Net cash fl ow from operating activities of discontinued operations Cash generated by operations Tax paid Net cash fl ow from operating activities Investing activities Interest received Cash fl ow from associates Purchases of non-current assets Proceeds on disposal of property, plant and equipment and intangible assets other than acquisition-related Acquisition of subsidiaries Net cash and overdraft balances acquired Disposal of subsidiaries Sale of investments Net cash used in investing activities Financing activities Share issues Dividends paid to minority interests Own shares purchased Dividends paid to equity shareholders of the parent Other net movement in borrowings Movement in customer cash balances Transactions with non-controlling interests Interest paid Repayment of obligations under fi nance leases Net cash fl ow from fi nancing activities Net increase in cash, cash equivalents and bank overdrafts Cash, cash equivalents and bank overdrafts at the beginning of the year Effect of foreign exchange rate fl uctuations on cash held Cash, cash equivalents and bank overdrafts at the end of the year 38 27 Financial statements 2013 £m (170) (15) 143 118 72 24 46 4 24 189 (38) (24) 373 5 40 42 460 28 488 (88) 400 22 (6) (210) 11 (23) (8) 35 16 (163) 343 (24) – (130) (165) 24 (2) (132) (9) (95) 142 472 (27) 587 2012 £m 158 (12) 132 117 84 22 – 7 – (5) (37) (5) 461 (14) (116) 6 337 35 372 (85) 287 6 3 (160) 23 (101) 15 19 – (195) – (19) (6) (120) 324 – 6 (117) (22) 46 138 370 (36) 472 Annual Report and Accounts 2013 G4S plc 97 Notes to the consolidated fi nancial statements 1. GENERAL INFORMATION G4S plc is a company incorporated in the United Kingdom under the Companies Act 1985. The consolidated fi nancial statements incorporate the fi nancial statements of the company and entities (its subsidiaries) controlled by the company (collectively comprising the group) and the group’s interest in associates and jointly controlled entities made up to 31 December each year. The group operates throughout the world and in a wide range of functional currencies, the most signifi cant being the euro, the US dollar and sterling. The group’s fi nancial statements are presented in sterling, as the group’s primary listing is in the UK. The address of the registered offi ce is given on page 160. 2. STATEMENT OF COMPLIANCE The consolidated fi nancial statements of the group have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (adopted IFRSs). The company has elected to prepare its parent company fi nancial statements in accordance with UK Generally Accepted Accounting Practice (UK GAAP). These are presented on pages 142 to 150. 3. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation The consolidated fi nancial statements of the group have been prepared under the going concern basis and using the historical cost basis, except for the revaluation of certain non-current assets and fi nancial instruments. The principal accounting policies adopted are set out below. Judgements made by the directors in the application of these accounting policies which have a signifi cant effect on the fi nancial statements, and estimates with a signifi cant risk of material adjustment, are discussed in note 4. The directors are confi dent that, after making enquiries and on the basis of current fi nancial projections and available facilities, they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Further information on the going concern assessment is given in note 32 on pages 124 to 127. In preparing the fi nancial statements the notes to the accounts have been presented with regard to the principles set out in the Financial Reporting Council’s publication ‘Cutting Clutter’ to make the fi nancial statements easier to follow and more intuitive to provide readers with a clearer understanding of the fi nancial performance of the group. The comparative income statement for the year ended 31 December 2012 has been re-presented for operations qualifying as discontinued during the current year. Revenue from continuing operations has been reduced by £273m and PBT has decreased by £7m compared to the fi gures published previously. Further details of discontinued operations are presented within note 7. In addition, the comparative consolidated statement of fi nancial position as at 31 December 2012 has been restated to refl ect the completion during 2013 of the initial accounting in respect of acquisitions made during 2012. Adjustments made to the provisional calculation of the fair values of assets and liabilities acquired amount to £15m, with an equivalent decrease in the reported value of goodwill. The impact of these adjustments on the net assets acquired is presented in note 17. (b) Changes in presentation of the income statement During the year the group has enhanced its presentation of business performance by separately disclosing ‘underlying results’. Underlying results exclude specifi c items and for the prior year re-present the effect of one-off credits relating to fair value and other provision releases. The group’s income statement and segmental analysis note separately identify results before specifi c items. Specifi c items are those that in management’s judgement need to be disclosed separately by virtue of their size, nature or incidence. In determining whether an event or transaction is specifi c, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Specifi c items include items relating to acquisitions and disposals including amortisation and impairment of acquisition-related intangible assets, discontinued operations, restructuring costs and impairments and other one-off items such as the review of the carrying value of assets and liabilities performed in 2013 or the impact of the Olympics contract in the prior year. This is consistent with the way that fi nancial performance is measured by management and reported to the Board and assists in providing a meaningful analysis of the underlying results of the group. The directors believe that presentation of the group’s results in this way is relevant to an understanding of the group’s fi nancial performance, as specifi c items are identifi ed by virtue of their size, nature or incidence. Any reversal arising from a recovery of previously impaired assets will also fl ow through specifi c items such that the underlying results refl ect the ongoing recurring results of the business. Specifi c items may not be comparable to similarly titled measures used by other companies. Specifi c items for the current and prior years are disclosed in note 8. (c) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the group. Control is achieved where the group has the power to govern the fi nancial and operating policies of an investee entity so as to obtain benefi ts from its activities, determined either by the group’s ownership percentage, or by the terms of any shareholder agreement. In the case of certain investments detailed analysis of the different contracts in place is required, together with a level of judgement, to ascertain whether there is control under the defi nition of IAS 27 ‘Separate Financial Statements’ (see note 4). On acquisition, the assets and liabilities and contingent liabilities of the acquired business are measured at their fair values at the date of acquisition. The cost of acquisition is measured as the acquisition date fair value of the assets transferred as consideration to the vendor and does not include transaction costs. Any excess of the cost of acquisition over the fair values of the identifi able net assets acquired is recognised as goodwill. Any defi ciency in the cost of acquisition below the fair values of the identifi able net assets acquired (i.e. discount on acquisition) is credited to the income statement in the year of acquisition. 98 G4S plc Annual Report and Accounts 2013 Financial statements The cost of acquisition includes the present value of deferred and contingent consideration payable, including that in respect of put options held by non-controlling shareholders, as estimated at the date of acquisition. For acquisitions prior to 1 January 2010 subsequent changes to the present value of the estimate of contingent consideration and any difference upon fi nal settlement of such a liability are recognised as adjustments to the cost of acquisition. For acquisitions after 1 January 2010 such changes are recognised in the income statement with respect to contingent consideration and in other comprehensive income with respect to put options. Non-controlling interests are stated at their proportion of the fair values of the assets and liabilities recognised. Profi ts and losses are applied in the proportion of their respective ownership to the interest of the parent and to the non-controlling interest. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of control or up to the effective date of disposal, as appropriate. Joint ventures A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control, in that strategic, fi nancial and operating decisions require the unanimous consent of the parties. The group’s interest in joint ventures is accounted for using the proportionate consolidation method, whereby the group’s share of the results and assets and liabilities of a jointly-controlled entity is combined line by line with similar items in the group’s consolidated fi nancial statements. Associates An associate is an entity over which the group is in a position to exercise signifi cant infl uence, but not control or joint control, through participation in the fi nancial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in the group’s consolidated fi nancial statements using the equity method of accounting. Investments in associates are carried in the consolidated statement of fi nancial position at cost as adjusted by post-acquisition changes in the group’s share of the net assets of the associates, less any impairment in the value of individual investments. Losses of the associates in excess of the group’s interest in those associates are not recognised. Transactions eliminated on consolidation All intra-group transactions, balances, income and expenses are eliminated on consolidation. Where a group company transacts with a joint venture or associate of the group, profi ts and losses are eliminated to the extent of the group’s interest in the relevant joint venture or associate. (d) Foreign currencies The fi nancial statements of each of the group’s businesses are prepared in the functional currency applicable to that business. Transactions in currencies other than the functional currency are translated at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities which are denominated in other currencies are retranslated at the rates prevailing on that date. Non-monetary assets and liabilities carried at fair value which are denominated in other currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items measured at historical cost denominated in other currencies are not retranslated. Gains and losses arising on retranslation are included in the income statement for the period. On consolidation, the assets and liabilities of the group’s overseas operations, including goodwill and fair value adjustments arising on their acquisition, are translated into sterling at exchange rates prevailing on the balance sheet date. Income and expenses are translated into sterling at the average exchange rates for the period (unless this is not a reasonable approximation of the cumulative effect of the rate prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions). Exchange differences arising are recognised in other comprehensive income, together with exchange differences arising on monetary items that are in substance a part of the group’s net investment in foreign operations and on borrowings and other currency instruments designated as hedges of such investments where and to the extent that the hedges are deemed to be effective. On disposal, translation differences are recognised in the income statement in the period in which the operation is disposed of. (e) Derivative fi nancial instruments and hedge accounting In accordance with its treasury policy, the group only holds or issues derivative fi nancial instruments to manage the group’s exposure to fi nancial risk, not for trading purposes. Such fi nancial risk includes the interest risk on the group’s variable-rate borrowings, the fair value risk on the group’s fi xed-rate borrowings, commodity risk in relation to its diesel consumption and foreign exchange risk on transactions, on the translation of the group’s results and on the translation of the group’s net assets measured in foreign currencies. The group manages these risks through a range of derivative fi nancial instruments, including interest rate swaps, fi xed rate agreements, commodity swaps, commodity options, forward foreign exchange contracts and currency swaps. Derivative fi nancial instruments are recognised in the consolidated statement of fi nancial position as fi nancial assets or liabilities at fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement, unless the derivatives qualify for hedge accounting. Where derivatives do qualify for hedge accounting, the treatment of any resultant gain or loss depends on the nature of the item being hedged as described below. Fair value hedge The change in the fair value of both the hedging instrument and the related portion of the hedged item is recognised immediately in the income statement. Cash fl ow and net investment hedges The change in the fair value of the portion of the hedging instrument that is determined to be an effective hedge is recognised in equity and subsequently recycled to the income statement when the hedged cash fl ow or hedged net investment impacts the income statement. The ineffective portion of the fair value of the hedging instrument is recognised immediately in the income statement. Annual Report and Accounts 2013 G4S plc 99 Notes to the consolidated fi nancial statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Intangible assets Goodwill All business combinations are accounted for by the application of the acquisition method. Goodwill arising on consolidation represents the excess of the cost of acquisition over the group’s interest in the fair value of the identifi able assets and liabilities and contingent liabilities of a subsidiary, associate or jointly-controlled entity at the date of acquisition. No goodwill arises on the acquisition of an additional interest from a non-controlling interest in a subsidiary as this is accounted for as an equity transaction. Goodwill is stated at cost, less any accumulated impairment losses, and is tested annually for impairment or more frequently if there are indications that amounts may be impaired. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profi t or loss on disposal. Acquisition-related intangible assets Intangible assets on acquisitions that are either separable or arising from contractual rights are recognised at fair value at the date of acquisition. Such acquisition-related intangible assets include trademarks, technology, customer contracts and customer relationships. The fair value of acquisition-related intangible assets is determined by reference to market prices of similar assets, where such information is available, or by the use of appropriate valuation techniques, including the royalty relief method and the excess earnings method. Acquisition-related intangible assets are amortised by equal annual instalments over their expected economic life. The directors review acquisition-related intangible assets on an ongoing basis and, where appropriate, provide for any impairment in value. The estimated useful lives are as follows: Trademarks and technology Customer contracts and customer relationships up to a maximum of fi ve years up to a maximum of ten years Other intangible assets Development expenditure represents expenditure incurred in establishing new services and products of the group. Such expenditure is recognised as an intangible asset only if the following can be demonstrated: the expenditure creates an identifi able asset, its cost can be measured reliably, it is probable that it will generate future economic benefi ts, it is technically and commercially feasible and the group has suffi cient resources to complete development. In all other instances, the cost of such expenditure is taken directly to the income statement. Capitalised development expenditure is amortised over the period during which the expenditure is expected to be revenue-producing, up to a maximum of ten years. The directors review the capitalised development expenditure on an ongoing basis and, where appropriate, provide for any impairment in value. Research expenditure is written off in the year in which it is incurred. Capitalised computer software is stated at cost, net of amortisation and any provision for impairment. Amortisation is charged on software so as to write off the cost of the assets to their estimated residual values by equal annual instalments over their expected useful economic lives up to a maximum of eight years. (g) Property, plant and equipment Property, plant and equipment is stated at cost, net of accumulated depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment other than freehold land. Depreciation is calculated so as to write off the cost of the assets to their estimated residual values by equal annual instalments over their expected useful economic lives as follows: Freehold and long leasehold buildings Short leasehold buildings (under 50 years) Equipment and motor vehicles up to 50 years over the life of the lease 2 to 10 years Assets held under fi nance leases are depreciated over the shorter of the expected useful economic life and the term of the relevant lease. Where signifi cant, the residual values and the useful economic lives of property, plant and equipment are re-assessed annually. (h) Financial instruments Financial assets and fi nancial liabilities are recognised when the group becomes a party to the contractual provisions of the instruments. Trade receivables Trade receivables do not carry interest and are stated initially at their fair value. The carrying amount of trade receivables is reduced through the use of a bad debt allowance account. The group provides for bad debts based upon an analysis of those that are past due, in accordance with local conditions and past default experience. Service concession assets Under the terms of a Private Finance Initiative (PFI) or similar project, the risks and rewards of ownership of an asset remain largely with the purchaser of the associated services. In such cases, the group’s interest in the asset is classifi ed as a fi nancial asset and included at its discounted value within trade and other receivables, to the extent to which the group has an unconditional right to receive cash from the grantor of the concession for the construction of the asset. To the extent that the group has the right to charge for the use of such an asset, conditional upon the extent of the use, the group recognises an intangible asset. Current asset investments Current asset investments comprise investments in securities which are classifi ed as held-for-trading. They are initially recognised at cost, including transaction costs, and subsequently measured at fair value. Gains and losses arising from changes in fair value are recognised in the income statement. 100 G4S plc Annual Report and Accounts 2013 Financial statements Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and that form an integral part of the group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash fl ow. Interest-bearing borrowings Interest-bearing bank overdrafts, loans and loan notes are recognised at the value of proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are recognised in the income statement on an accrual basis using the effective interest method. Trade payables Trade payables are not interest-bearing and are stated initially at fair value. Equity instruments Equity instruments issued by the group are recorded at the value of proceeds received, net of direct issue costs. (i) Inventories Inventories are valued at the lower of cost and net realisable value. Cost represents expenditure incurred in the ordinary course of business in bringing inventories to their present condition and location and includes appropriate overheads. Cost is calculated using either the weighted average or the fi rst-in-fi rst-out method. Net realisable value is based on estimated selling price, less further costs expected to be incurred to completion and disposal. (j) Impairment The carrying value of the group’s assets, with the exception of inventories and deferred tax assets, is reviewed on an ongoing basis for any indication of impairment and, if any such indication exists, the assets’ recoverable amount is estimated. An impairment loss is recognised in the income statement whenever the carrying value of an asset or its cash-generating unit exceeds its recoverable amount. An impairment loss in respect of goodwill is not reversed. In respect of any other asset, an impairment loss is reversed if there has been a change in the estimates used to determine its recoverable amount. The amount of the reversal is limited such that the asset’s carrying amount does not exceed that which would have been determined (after depreciation and amortisation) if no impairment loss had been recognised. (k) Employee benefi ts Retirement benefi t costs Payments to defi ned contribution schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefi t schemes are dealt with as payments to defi ned contribution schemes where the group’s obligations under the schemes are equivalent to those arising in a defi ned contribution retirement benefi ts scheme. The retirement benefi t obligation recognised in the consolidated statement of fi nancial position represents the present value of the defi ned benefi t obligation as adjusted for unrecognised past service cost, reduced by the fair value of scheme assets. Any asset resulting from the calculation is limited to unrecognised past service cost plus the present value of available refunds and reductions in future contributions to the scheme. For defi ned benefi t plans, the cost charged to the income statement consists of current service cost, net interest cost, and past service cost. The fi nance element of the pension charge is shown in fi nance expense and the remaining service cost element is charged as a component of employee costs in the income statement. Actuarial gains and losses and other remeasurement gains and losses are recognised immediately in full through the statement of comprehensive income. Share-based payments The group issues equity-settled share-based payments to certain employees. The fair value of share-based payments is determined at the date of grant and expensed, with a corresponding increase in equity, on a straight-line basis over the vesting period, based on the group’s estimate of the shares that will eventually vest. The amount expensed is adjusted over the vesting period for changes in the estimate of the number of shares that will eventually vest, save for changes resulting from any market-related performance conditions. (l) Provisions and contingent liabilities Provisions are recognised when a present legal or constructive obligation exists for a future liability in respect of a past event and where the amount of the obligation can be estimated reliably. The amount recognised as a provision is the group’s best estimate of the cost of settlement at the end of the reporting period. In respect of claims and litigation, the group provides for anticipated costs where an outfl ow of resources is considered probable and a reasonable estimate can be made of the likely outcome. For all risks, the ultimate liability may vary from the amounts provided and will be dependent upon the eventual outcome of any settlement. Management exercise judgement in measuring the exposures to contingent liabilities (see note 34) through assessing the likelihood that a potential claim or liability will arise and in quantifying the possible range of fi nancial outcomes. Where the time value of money is material, provisions are stated at the present value of the expected expenditure using an appropriate discount rate. (m) Restructuring provision A restructuring provision is recognised when the group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. Annual Report and Accounts 2013 G4S plc 101 Notes to the consolidated fi nancial statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) Revenue recognition Revenue Revenue represents amounts receivable for goods and services provided in the normal course of business and is measured at the fair value of the consideration received or receivable, net of discounts, VAT and other sales-related taxes. Revenue for manned security and cash solutions products and for recurring services in security systems products is recognised to refl ect the period in which the service is provided. Revenue on security systems installations is recognised either on completion in respect of product sales, or in accordance with the stage of completion method in respect of construction contracts. Construction contracts Where signifi cant, security system installations with a contract duration in excess of one month are accounted for as construction contracts. Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is measured either by the proportion that contract costs incurred for work to date bear to the estimated total contract costs or by the proportion that the sales value of work completed to date bears to the total sales value. Variations in contract work, claims and incentive payments are included to the extent that it is likely that they will be agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that are deemed likely to be recoverable. Contract costs are recognised as expenses as they are incurred. Where it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense in the income statement. Construction contracts are recognised in the consolidated statement of fi nancial position at cost plus profi t recognised to date, less provision for foreseeable losses and less progress billings. Balances are not offset. (o) Pre-contract costs Pre-contract costs in respect of major outsourcing contracts incurred after the point at which the group achieves preferred bidder status (at which point it is considered probable that the contract will be obtained) are capitalised and expensed over the life of the contract subject to recoverability criteria. Costs incurred prior to this point are expensed as incurred. Capitalised costs are expensed immediately in the event that preferred bidder status is not followed by the award of the contract. (p) Onerous contracts Onerous contract provisions are recognised for losses on contracts where the forecast costs of fulfi lling the contract throughout the contract period exceed the forecast income receivable. Management plans to recover the position on loss-making contracts require a level of judgement and are only taken into account in the calculation of the onerous contract provision when implementation has commenced and tangible evidence exists of benefi ts being delivered. The provision is calculated based on discounted cash fl ows to the end of the contract. In-year losses from onerous contracts will continue to be reported in underlying earnings as they are incurred, whilst provisions for future losses on onerous contract provisions will be charged and unwound through specifi c items. Vacant property provisions are recognised when the group has committed to a course of action that will result in the property becoming vacant. The provision is calculated based on discounted cash fl ows to the end of the lease taking into account expected future sub-lease income. (q) Interest Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable. This is the rate that exactly discounts estimated future cash receipts through the expected life of the fi nancial asset’s net carrying amount. Borrowing costs are recognised as an expense in the income statement. (r) Income taxes Tax is recognised in the income statement except to the extent that it relates to items recognised in equity, in which case it is recognised in equity or other comprehensive income. The tax expense represents the sum of current tax and deferred tax. Current tax is based on taxable profi t for the year. Taxable profi t differs from net profi t as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated fi nancial statements and the corresponding tax bases used in the computation of taxable profi t, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profi ts will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and interests in joint ventures, except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of each deferred tax asset is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that suffi cient taxable profi ts will be available to allow all or part of the asset to be recovered. Deferred tax is measured based on the tax rates that have been enacted or substantively enacted by the end of the reporting period. Tax liabilities or refunds may differ from those anticipated due to changes in tax legislation, differing interpretation of tax legislation and uncertainties surrounding the application of tax legislation. In situations where uncertainty exists, provision is made for contingent tax liabilities and assets on the basis of management judgement following consideration of the available relevant information. 102 G4S plc Annual Report and Accounts 2013 Financial statements (s) Leasing Leases are classifi ed as fi nance leases when the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. On occasion this classifi cation requires a level of judgement. All other leases are classifi ed as operating leases. Assets held under fi nance leases are recognised at the inception of the lease at their fair value or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of fi nancial position as a fi nance lease obligation. Lease payments made or received are apportioned between fi nance charges or income and the reduction of the lease liability or asset so as to produce a constant rate of interest on the outstanding balance of the liability or asset. Rentals payable or receivable under operating leases are charged or credited to income on a straight-line basis over the lease term, as are incentives to enter into operating leases. (t) Non-current assets held for sale and discontinued operations Non-current assets (and disposal groups) classifi ed as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classifi ed as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. The group must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classifi cation. A discontinued operation is a component of the group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale that has been disposed of, has been abandoned or meets the criteria to be classifi ed as held for sale. (u) Dividend distribution Dividends are recognised as distributions to equity holders in the period in which they are paid or approved by the shareholders in general meeting. (v) Adoption of new and revised accounting standards and interpretations In the year ended 31 December 2013, the group adopted the following new standards and amendments: – As a result of the amendment to IAS 19 (2011), the group has changed its accounting policy with respect to the basis for determining the income or expense related to its post-employment defi ned benefi t plans. The amendment makes changes to the recognition, measurement and disclosure of the defi ned benefi t expense, in particular requiring that the return on investment assets recognised in the income statement be calculated at the same interest rate as that used for calculating the fi nance cost on the obligations, and to the disclosures of employee benefi ts. Pensions interest has therefore been restated for the change in calculation of the net pension interest charge, resulting in an additional £14m interest cost for the year ended 31 December 2013 and £7m additional interest cost for the year ended 31 December 2012. The amendments also require that the group re-allocates pension administration costs from its previous classifi cation within fi nance income through other comprehensive income (OCI) to disclosing it within PBITA. Current year and prior year PBITA has reduced by £3m as a result of this restatement. – As a result of the amendments to IAS 1 ‘Presentation of Financial Statements’, the group has modifi ed the presentation of items of comprehensive income in its condensed consolidated statement of comprehensive income, to present separately items that would be reclassifi ed to profi t or loss in the future from those that would never be reclassifi ed. Comparative income has also been re-presented accordingly. The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities and comprehensive income of the group. – The group also adopted IFRS 13 ‘Fair Value Measurement’ during the year. This has not resulted in any signifi cant impact on the group’s results for the year ended 31 December 2013 or the year ended 31 December 2012. The group has not adopted early any standard, amendment or interpretation. A number of new standards, amendments to standards and interpretations have been announced but are not yet effective for the year ended 31 December 2013. Those that are expected to have an impact on the group accounts are detailed below: – IFRS 10 (2011) ‘Consolidated Financial Statements’, which replaces parts of IAS 27 ‘Consolidated and Separate Financial Statements’ and all of SIC-12 ‘Consolidation – Special Purpose Entities’, introduces a new control model that focuses on whether the group has power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns. This differs from the previous approach where one of the main criteria used to consolidate was to have the power to govern the fi nancial and operating policies of the entity. Apart from certain exceptions within the Asia Middle East region (including certain business in Kuwait, Saudi Arabia and Qatar) it is expected that under the terms of the existing shareholder agreements the remainder of the group’s principal subsidiaries (see note 43) will continue to be consolidated upon adoption of IFRS 10 (2011). Those entities which do not meet the IFRS 10 (2011) criteria to be consolidated will be accounted for generally as joint ventures under the new IFRS 11 ‘Joint Arrangements’. – IFRS 11 ‘Joint Arrangements’ replaces IAS 31 ‘Interests in Joint Ventures’ and SIC-13 ‘Jointly Controlled Entities – Non-monetary Contributions by Vendors’ and removes the option to account for jointly controlled entities using the proportionate consolidation method. Instead all jointly controlled entities will be accounted for using the equity method of accounting, similar to that used to account for associates under the current standards. As the group currently applies the proportionate method of accounting to its jointly controlled entities this will impact the group’s consolidated income statement and consolidated statement of fi nancial position. Annual Report and Accounts 2013 G4S plc 103 Notes to the consolidated fi nancial statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Had the group applied IFRS 10 (2011) and IFRS 11 to its accounts for the year ended 31 December 2013 and 31 December 2012 it would have had the following estimated impact on the group’s consolidated income statement, statement of fi nancial position and statement of cash fl ow. Year ended 31 December 2013 Adjustments £m As reported £m New basis £m Year ended 31 December 2012 As reported £m Adjustments £m New basis £m Income statement Revenue PBITA before specifi c items PBT* Tax* PAT* Non-controlling interests* Profi t to equity holders* Statement of fi nancial position Non-current assets Current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Non-controlling interests Statement of cash fl ow Net cash fl ow from operating activities Net cash fl ow from investing activities Net cash fl ow from fi nancing activities Net increase/(decrease) in cash 7,428 442 314 (75) 239 (25) 214 2,988 2,364 5,352 (1,684) (2,749) (4,433) 919 52 400 (163) (95) 142 (317) (32) (27) 2 (25) 25 – 18 (167) (149) 74 48 122 (27) (27) (42) 30 3 (9) 7,111 410 287 (73) 214 – 214 3,006 2,197 5,203 (1,610) (2,701) (4,311) 892 25 358 (133) (92) 133 7,024 470 353 (83) 270 (22) 248 3,222 2,388 5,610 (1,408) (2,971) (4,379) 1,231 55 287 (195) 46 138 (277) (27) (15) – (15) 15 – 18 (147) (129) 80 18 98 (31) (31) (41) 14 25 (2) 6,747 443 338 (83) 255 (7) 248 3,240 2,241 5,481 (1,328) (2,953) (4,281) 1,200 24 246 (181) 71 136 * Excluding specifi c items, amortisation of acquisition-related intangible assets, goodwill impairment, acquisition-related expenses and profi t on disposal of assets and subsidiaries. 2012 results also exclude the impact of the Olympics contract. – IFRS 12 ‘Disclosure of Interest in Other Entities’ is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The standard includes disclosure requirements for entities within the scope of IFRS 10 (2011) and IFRS 11. – IFRS 10 (2011), IFRS 11 and IFRS 12 together form a suite of standards that are effective from 1 January 2013. However they have been endorsed by the EU to be applied from 1 January 2014. The group will therefore adopt all three standards for its fi nancial statements for the year ended 31 December 2014. 4. ACCOUNTING ESTIMATES, JUDGEMENTS AND ASSUMPTIONS The preparation of fi nancial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of the group’s accounting policies, which are described in note 3, with respect to the carrying amounts of assets and liabilities at the date of the fi nancial statements, the disclosure of contingent assets and liabilities at the date of the fi nancial statements and the reported amounts of income and expenses during the reporting period. These judgements, estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, including current and expected economic conditions, and in some cases, actuarial techniques. Although these judgements, estimates and associated assumptions are based on management’s best knowledge of current events and circumstances, the actual results may differ. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The judgements, estimates and assumptions which are of most signifi cance in preparing the group’s 2013 accounts are detailed below: Review of the carrying value of assets and liabilities In 2013 the group carried out a review of the carrying value of its assets and liabilities as at 31 December 2012, taking into account any changes in facts or circumstances since that date. The purpose of this review was to ensure that the fi nancial statements were presented in a more balanced way. This exercise required a level of judgement and in many cases taking a more balanced judgement based on the group’s current understanding of circumstances surrounding each issue. The results of the review are presented within ‘specifi c items’ given the one-off nature of the review performed and are disclosed in note 8. 104 G4S plc Annual Report and Accounts 2013 Financial statements Contract portfolio review The group delivers outsourcing services that in some circumstances can be complex in nature and may be governed by unique contractual arrangements. There is a risk that revenue recognition on these contracts is not in accordance with contractual entitlements and therefore provisions may be required to be recognised within ‘contract provisions’ (see note 34). Estimates and judgements are therefore required to determine the appropriate level of provisioning applied to these contracts. Compliance with foreign ownership rules and consolidation of subsidiaries The group has a diverse set of complex ownership structures, which are sometimes driven by local laws and regulations relating to foreign ownership. In some instances the group operates through local structures with limited direct share ownership of the business but exercises control through shareholder agreements. In determining whether some group entities qualify for consolidation under IAS 27 ‘Separate Financial Statements’, professional and legal advice is sought and a level of judgement is required. Consolidation of any of these entities would be at risk if the group’s ability to enforce its rights of control were successfully challenged. Furthermore, as set out in note 3(v), following the adoption of IFRS 10 ‘Consolidated Financial Statements’ in 2014, the group expects to cease to consolidate some of these entities and will equity account for them. Carrying value of goodwill The group tests tangible and intangible assets, including goodwill, for impairment on an annual basis or more frequently if there are indications that amounts may be impaired. The impairment analysis for such assets is based principally upon discounted estimated future cash fl ows from the use and eventual disposal of the assets. Such an analysis includes the estimation of future results, cash fl ows, annual growth rates and discount rates. Judgement is required in relation to the achievability of the long-term business plan and macroeconomic assumptions underlying the valuation process. In certain circumstances, where market prices can be ascertained (for example through recent transactions), fair value less costs to sell is used as a basis for the recoverable amount. This involves judgements and estimates to apply reasonable valuations techniques and to estimate future selling costs. The full methodology and results of the group’s impairment testing is presented in note 19. Discontinued operations The group normally has business disposals underway at any reporting date. There is a risk that any such businesses may not meet the accounting standard’s criteria for presentation as discontinued at the balance sheet date either because they are not a separate major line of business or there is uncertainty as to the likelihood of achieving the sale or the realisable value on disposal (see note 7). The latter requires a level of judgement due to the range of potential sale prices. Taxation The group operates in many tax jurisdictions including countries where the tax legislation is not consistently applied and under some complex contractual circumstances where the responsibility for tax arising is not always clear. Management are required to apply judgements and estimates to determine the appropriate amount of tax to provide for and any required disclosure around contingent tax liabilities at each period end. Valuation of retirement benefi t obligations The valuation of defi ned retirement benefi t schemes is arrived at using the advice of qualifi ed independent actuaries who use the projected unit credit method for determining the group’s obligations. This methodology requires the use of a variety of assumptions and estimates, including the appropriate discount rate, the expected return on scheme assets, mortality assumptions, future service and earnings increases of employees and infl ation. Full details of the group’s retirement benefi t obligations, including an analysis of the sensitivity of the calculations to the key assumptions are presented in note 33. 5. REVENUE An analysis of the group’s revenue, as defi ned by IAS 18 ‘Revenue’, is as follows: Continuing operations Sale of goods Rendering of services Revenue from construction contracts Revenue from continuing operations as presented in the consolidated income statement Discontinued operations Sale of goods Rendering of services Revenue from construction contracts Revenue from discontinued operations Other operating income Interest income Total other operating income Total revenue as defi ned by IAS 18 Notes 6 6,7 2013 £m 165 7,064 199 7,428 1 609 12 622 15 15 2012 £m 154 6,853 221 7,228 1 808 2 811 12 12 8,065 8,051 Annual Report and Accounts 2013 G4S plc 105 Notes to the consolidated fi nancial statements continued 6. OPERATING SEGMENTS The group operates on a worldwide basis and derives a substantial proportion of its revenue, PBITA and PBIT from each of the following six geographic regions: Africa, Asia Middle East, Latin America, Europe, North America and UK & Ireland. For each of the reportable segments, the group executive committee (the chief operating decision maker) reviews internal management reports on a regular basis. This presentation has been re-aligned during the year to more closely refl ect internal management reporting which is based on geographical regions. Segment information is presented below: Revenue by reportable segment and geographical area Africa Asia Middle East Latin America Europe North America UK & Ireland Total revenue before Olympics Olympics revenue Total revenue Revenue from internal and external customers by product Secure solutions Cash solutions Total revenue Continuing operations 2013 £m 486 1,567 717 1,648 1,358 1,652 7,428 – 7,428 Total gross segment revenue 2013 £m 6,735 1,325 8,060 Discontinued operations 2013 £m 8 5 – 164 445 – 622 – 622 Total 2013 £m 494 1,572 717 1,812 1,803 1,652 8,050 – 8,050 Inter-segment revenue 2013 £m (8) (2) (10) External revenue 2013 £m 6,727 1,323 8,050 Continuing operations 2012 £m 465 1,353 644 1,604 1,338 1,620 7,024 204 7,228 Total gross segment revenue 2012 £m 6,737 1,307 8,044 Inter-segment sales are charged at prevailing market prices. Refer to note 7 for details on discontinued operations. PBITA by reportable segment and geographical area Africa Asia Middle East Latin America Europe North America UK & Ireland PBITA before head offi ce costs Head offi ce costs PBITA before specifi c items Specifi c items: Contracts review Review of assets and liabilities Sub total One-off credits Olympics Restructuring costs Total specifi c items Total PBITA Goodwill impairment Amortisation of acquisition-related intangible assets Acquisition-related expenses Profi t on disposal of assets and subsidiaries Total PBIT Continuing operations 2013 £m 39 129 48 92 56 122 486 (44) 442 Discontinued operations 2013 £m (5) 3 – (8) 15 – 5 – 5 (136) (182) (318) – – (68) (386) 56 (46) (72) (4) 24 (42) – (23) (23) – – (2) (25) (20) (80) (4) – – (104) Total 2013 £m 34 132 48 84 71 122 491 (44) 447 (136) (205) (341) – – (70) (411) 36 (126) (76) (4) 24 (146) Continuing operations 2012 £m 35 108 48 108 73 145 517 (47) 470 – – – 24 (88) (42) (106) 364 – (84) (7) 5 278 Discontinued operations 2012 £m 15 73 1 184 538 – 811 – 811 Inter-segment revenue 2012 £m (5) – (5) Discontinued operations 2012 £m 2 1 – (2) 11 – 12 – 12 – – – – – (8) (8) 4 (35) (5) – – (36) Total 2012 £m 480 1,426 645 1,788 1,876 1,620 7,835 204 8,039 External revenue 2012 £m 6,732 1,307 8,039 Total 2012 £m 37 109 48 106 84 145 529 (47) 482 – – – 24 (88) (50) (114) 368 (35) (89) (7) 5 242 Continuing PBIT as stated above is equal to PBIT as disclosed in the income statement. Discontinued PBIT as stated above is analysed in note 7. 106 G4S plc Annual Report and Accounts 2013 Financial statements Segment assets and liabilities The following information is analysed by reportable segment and by the geographical area in which the assets are located: Total assets and liabilities By reportable segment and geographical area Africa Asia Middle East Latin America Europe North America UK & Ireland Inter-segment trading balances Total segment assets and liabilities Head offi ce Total operating assets and liabilities Non-operating assets and liabilities Total assets and liabilities Total assets 2013 £m 240 736 345 880 818 1,397 (192) 4,224 115 4,339 1,013 5,352 Total assets 2012 £m 250 762 425 888 964 1,480 (218) 4,551 140 4,691 919 5,610 Total liabilities 2013 £m Total liabilities 2012 £m (76) (247) (104) (360) (184) (493) 192 (1,272) (86) (1,358) (3,075) (4,433) (73) (215) (105) (348) (205) (357) 218 (1,085) (65) (1,150) (3,229) (4,379) Included within operating and non-operating assets are £179m (2012: £183m) and £41m (2012: £46m) respectively relating to disposal groups classifi ed as held for sale. Included within operating and non-operating liabilities are £93m (2012: £36m) and £40m (2012: £16m) respectively relating to liabilities associated with disposal groups classifi ed as held for sale. Disposal groups are analysed in note 26. Non-current operating assets By reportable segment and geographical area Africa North America Latin America Asia Middle East Europe UK & Ireland Total segment assets Head offi ce Total non-current operating assets Non-operating assets Less: Non-current assets held for sale Total non-current assets 2013 £m 136 409 223 530 505 1,027 2,830 46 2,876 214 (102) 2,988 2012 £m 152 431 297 521 598 1,059 3,058 56 3,114 202 (94) 3,222 Non-operating assets and liabilities comprise fi nancial assets and liabilities, taxation assets and liabilities and retirement benefi t obligations. Other information By reportable segment Africa Asia Middle East Latin America Europe North America UK & Ireland Head offi ce Total Impairment losses recognised in income 2013 £m 12 5 – 14 105 7 7 150 Depreciation and amortisation 2013 £m 14 34 21 41 29 86 2 227 Impairment losses recognised in income 2012 £m – – – – 35 – – 35 Depreciation and amortisation 2012 £m 15 34 19 48 35 87 2 240 Capital additions 2013 £m 27 40 14 47 11 65 3 207 Capital additions 2012 £m 16 32 98 50 11 56 5 268 Annual Report and Accounts 2013 G4S plc 107 Notes to the consolidated fi nancial statements continued 7. DISCONTINUED OPERATIONS Operations qualifying as discontinued in 2012 mainly comprised the cash and secure solutions businesses in Pakistan, which were disposed of in October 2012, the justice business in the United States of America, which was disposed of in April 2012, and the group’s classifi ed US Government Solutions business. The classifi ed US Government Solutions business is still included within discontinued operations as at 31 December 2013 as it was held for sale at that date. Due to circumstances beyond the group’s control, mainly relating to the impact on market sentiment arising out of political uncertainty culminating with the US Government shutdown in early October 2013, the sale process has been extended and has now taken over 12 months since the previous year end. The sale process has progressed to a stage of negotiation with potential buyers and the group is confi dent a sale will be agreed in 2014. Operations qualifying as discontinued in 2013 also included the group’s cash business in Canada and the group’s remaining business in Norway, both of which were sold in January 2014. The results of the discontinued operations are presented below: Revenue Expenses Underlying PBITA Review of assets and liabilities Restructuring costs Total PBITA Impairment of goodwill and other assets to net recoverable amount Amortisation of acquisition-related intangible assets Operating loss before interest and taxation (PBIT) Net fi nance costs Attributable tax (charge)/credit Total operating loss for the year Loss on disposal of discontinued operations Net loss attributable to discontinued operations 2013 £m 622 (617) 5 (23) (2) (20) (80) (4) (104) (1) (8) (113) (3) (116) 2012 £m 811 (799) 12 – (8) 4 (35) (5) (36) (6) 6 (36) (20) (56) The effect of discontinued operations on segment results is disclosed in note 6. The impairment of goodwill and other assets in 2013 and 2012 relates to the US Government Solutions business and reduces the carrying value of its net assets down to their recoverable amount. Cash fl ows from discontinued operations included in the consolidated cash fl ow statement are as follows: Net cash fl ows from operating activities (after tax) Net cash fl ows from investing activities Net cash fl ows from fi nancing activities 8. PROFIT FROM OPERATIONS BEFORE INTEREST AND TAXATION (PBIT) The income statement can be analysed as follows: Continuing operations Revenue Cost of sales Gross profi t Administration expenses PBIT 2013 £m 30 (18) 19 31 2013 £m 7,428 (6,066) 1,362 (1,404) (42) 2012 £m 35 (1) (6) 28 2012 £m 7,228 (5,812) 1,416 (1,138) 278 Cost of sales includes a charge resulting from the group’s review of assets and liabilities of £98m (2012: £nil) and a provision for the review of contracts of £27m (2012: £nil). Cost of sales in 2012 included a £70m net loss relating to the Olympics contract. Administration expenses include £72m of amortisation of acquisition-related intangible assets (2012: £84m), £4m of acquisition-related expenses (2012: £7m) and are net of a £24m profi t recognised on the disposal of the group’s secure archiving business in Colombia (2012: £5m profi t on disposal of assets and subsidiaries). Administration expenses also include a £46m charge relating to goodwill impairment made at the half year (2012: £nil), a charge resulting from the group’s review of assets and liabilities of £84m (2012: £nil), a provision for the settlement on the UK Electronic Monitoring contract and two smaller contracts of £109m (2012: £nil) and restructuring costs of £68m (2012: £42m). Further details of specifi c items are given below. Administration expenses in 2012 included £24m of one-off credits relating to fair value and other provision releases and a charge of £18m for sponsorship and other costs relating to the Olympics contract. 108 G4S plc Annual Report and Accounts 2013 Financial statements Specifi c items Specifi c items have been excluded from underlying results to provide a clear comparison of the underlying trading performance of the group. These items are set out below: Contracts review Review of assets and liabilities Impairment of fi xed assets Current asset write-downs Impairment of receivables Creditors, claims and provisions Total review of assets and liabilities Subtotal Restructuring Total specifi c items As at 30 June 2013 £m – Since 30 June 2013 £m 136 As at 31 December 2013 £m 136 23 17 52 40 132 132 4 136 3 17 7 23 50 186 64 250 26 34 59 63 182 318 68 386 Contracts review A global fi nancial review of 163 contracts, including UK Electronic Monitoring and other contracts, with annualised revenues of around £2bn resulted in a £136m charge. For more details of the UK Electronic Monitoring settlement please see note 34 on page 135. Review of assets and liabilities A review of the group’s assets and liabilities applying more balanced judgements was initiated in the fi rst half of 2013, resulting in a PBITA charge of £132m. This was extended to cover all legal entities during the second half of the year. Completion of this review resulted in a further charge of £50m, bringing the full-year charge to PBITA of £182m. The total charge related principally to impairment of fi xed assets, inventory obsolescence, write down of receivables and the recognition of employee related liabilities. Restructuring costs Restructuring charges of £68m (2012: £42m) were incurred during the year. These include £35m in respect of restructuring programmes in the UK & Ireland, Finland and other European businesses. Acceleration of the restructuring programme in the fourth quarter, primarily in the Netherlands, Belgium and in North America, resulted in additional charges of £33m. 9. PROFIT FROM OPERATIONS Profi t from continuing and discontinued operations has been arrived at after charging/(crediting): Continuing 2013 £m Discontinued 2013 £m Notes Total 2013 £m Continuing 2012 £m Discontinued 2012 £m Total 2012 £m Cost of sales Cost of inventories recognised as an expense Net loss on Olympics contract Contracts review Review of assets and liabilities Administration expenses Acquisition-related expenses Sponsorship and other costs on Olympics contract Restructuring costs Amortisation of acquisition-related intangible assets Goodwill impairment Contracts review Review of assets and liabilities One-off credits Amortisation of other intangible assets Depreciation of property, plant and equipment Profi t on disposal of property, plant and equipment (Profi t)/loss on disposal of subsidiaries Impairment of trade receivables Litigation settlements Research and development expenditure Operating lease rentals payable Operating sub-lease rentals receivable 8 8 8 8 8 19 8 8 18 108 – 27 98 4 – 68 72 46 109 84 – 24 118 – (24) 20 1 5 135 (16) 5 – – – – – 2 4 80 – 23 – 2 7 – 3 – – – 5 – 113 – 27 98 4 – 70 76 126 109 107 – 26 125 – (21) 20 1 5 140 (16) 84 70 – – 7 18 42 84 – – – (24) 22 117 (3) (2) 28 1 5 126 (14) 6 – – – – – 8 5 35 – – – 2 10 – 20 – – – 5 – 90 70 – – 7 18 50 89 35 – – (24) 24 127 (3) 18 28 1 5 131 (14) Annual Report and Accounts 2013 G4S plc 109 Notes to the consolidated fi nancial statements continued 10. AUDITORS’ REMUNERATION Fees payable to the company’s auditor for the audit of the company’s annual report and accounts Fees payable to the company’s auditor and its associates for other services: The audit of the company’s subsidiaries pursuant to legislation All other services* * Other services includes the provision of tax and non-audit advisory services. 2013 £m 1 6 1 2012 £m 1 5 1 The Corporate Governance Report on pages 52 to 60 outlines the company’s established policy for ensuring that audit independence is not compromised through the provision by the company’s auditor of other services. 11. STAFF COSTS AND EMPLOYEES The average monthly number of employees, in continuing and discontinued operations, including executive directors was: By reportable segment and geographical area Africa Asia Middle East Latin America Europe North America UK & Ireland Head offi ce Total average number of employees Their aggregate remuneration, in continuing and discontinued operations, comprised: Wages and salaries Social security costs Employee benefi ts Total staff costs 2013 Number 2012 Number 113,964 262,818 75,118 72,152 60,238 44,672 173 629,135 2013 £m 4,665 561 215 5,441 112,347 277,028 67,190 82,333 59,062 50,168 126 648,254 2012 £m 4,689 552 211 5,452 Information on directors’ remuneration, long-term incentive plans, pension contributions and entitlements is set out in the Directors’ Remuneration Report on pages 64 to 79. 12. FINANCE INCOME Interest income on cash, cash equivalents and investments Other interest income Loss arising from change in fair value of derivative fi nancial instruments hedging loan notes Gain arising from fair value adjustment to the hedged loan note items Total fi nance income 13. FINANCE COSTS Interest on bank overdrafts and loans Interest on loan notes Net interest receivable on loan note related derivatives Interest on obligations under fi nance leases Other interest charges Total group borrowing costs Net fi nance costs on defi ned retirement benefi t obligations Total fi nance costs 2013 £m 14 1 (28) 28 15 2013 £m 26 100 (12) 4 5 123 20 143 2012 £m 11 1 (6) 6 12 2012 £m 35 83 (10) 3 6 117 15 132 Included within interest on bank overdrafts and loans is a charge of £6m (2012: £6m) relating to cash fl ow hedges that were transferred from equity during the year. 110 G4S plc Annual Report and Accounts 2013 Financial statements 14. TAXATION Current taxation expense/(credit) UK corporation tax Overseas tax Adjustments in respect of prior years: UK corporation tax Overseas tax Total current taxation expense/(credit) Deferred taxation (credit)/expense (see note 35) Current year Adjustments in respect of prior years Total deferred taxation (credit)/expense Total income tax expense/(credit) for the year Continuing operations 2013 £m Discontinued operations 2013 £m Total 2013 £m Continuing operations 2012 £m Discontinued operations 2012 £m 12 58 1 21 92 (23) (13) (36) 56 – (4) – 9 5 (2) 5 3 8 12 54 1 30 97 (25) (8) (33) 64 4 72 (3) (1) 72 (26) (6) (32) 40 – (2) – – (2) – (4) (4) (6) UK corporation tax is calculated at 23.3% (2012: 24.5%) of the estimated assessable profi ts for the period. Overseas tax is calculated at the corporation tax rates prevailing in the relevant jurisdictions. The tax charge for the year can be reconciled to the profi t per the income statement as follows: (Loss)/profi t before taxation Continuing operations Discontinued operations Total (loss)/profi t before taxation Tax at UK corporation tax rate of 23.3% (2012: 24.5%) Expenses that are not deductible in determining taxable profi t Tax losses not recognised in the current year Different tax rates of subsidiaries operating in non-UK jurisdictions Movement in deferred tax balance due to reduction in UK rate to 20% from 1 April 2015 Adjustments for previous years Total income tax charge 2013 £m (170) (108) (278) (65) 46 44 13 3 23 64 Total 2012 £m 4 70 (3) (1) 70 (26) (10) (36) 34 2012 £m 158 (62) 96 24 9 8 8 (1) (14) 34 Effective tax rate (23)% 35% The following taxation charge/(credit) has been recognised directly in equity within the statement of comprehensive income: Tax relating to components of other comprehensive income Actuarial losses on defi ned retirement benefi t schemes Change in fair value of cash fl ow and net investment hedging fi nancial instruments Other Total tax debited/(credited) to other comprehensive income 2013 £m 1 3 1 5 2012 £m (30) (3) (2) (35) Annual Report and Accounts 2013 G4S plc 111 Notes to the consolidated fi nancial statements continued 15. DIVIDENDS Amounts recognised as distributions to equity holders of the parent in the year Final dividend for the year ended 31 December 2011 Interim dividend for the six months ended 30 June 2012 Final dividend for the year ended 31 December 2012 Interim dividend for the six months ended 30 June 2013 Pence per share DKK per share 2013 £m 2012 £m 5.11 3.42 5.54 3.42 0.4544 0.3220 0.4730 0.2972 72 48 – – 120 – – 78 52 130 86 Proposed fi nal dividend for the year ended 31 December 2013 5.54 0.4954 The proposed fi nal dividend is subject to approval by shareholders at the Annual General Meeting. If so approved, it will be paid on 13 June 2014 to shareholders who are on the UK register on 2 May 2014. The exchange rate used to translate it into Danish krone is that at 11 March 2014. 16. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO EQUITY SHAREHOLDER OF THE PARENT From continuing and discontinued operations (Loss)/profi t for the year attributable to equity holders of the parent Weighted average number of ordinary shares (m) (see note below) (Loss)/earnings per share from continuing and discontinued operations (pence) Basic and diluted From continuing operations (Loss)/earnings (Loss)/profi t for the year attributable to equity holders of the parent Adjustment to exclude loss for the year from discontinued operations (net of tax) (Loss)/profi t from continuing operations (Loss)/earnings per share from continuing operations (pence) Basic and diluted From discontinued operations Loss per share from discontinued operations (pence) Basic and diluted From adjusted earnings Earnings (Loss)/profi t from continuing operations Adjustments for: Amortisation of acquisition-related intangible assets Goodwill impairment Acquisition-related expenses Profi t on disposal of assets and subsidiaries Contracts review Other specifi c items Restructuring Tax on specifi c items Non-controlling interests’ share of specifi c items Adjusted profi t for the year attributable to equity holders of the parent Weighted average number of ordinary shares (m) Adjusted earnings per share (pence) 112 G4S plc Annual Report and Accounts 2013 Note 2013 £m 2012 £m (362) 40 1,452 1,403 (24.9)p 2.9p 7 (362) 116 (246) 40 56 96 (16.9)p 6.8p (8.0)p (4.0)p (246) 72 46 4 (24) 136 182 68 (19) (5) 214 1,452 14.7p 96 84 – 7 (5) – 67 42 (43) – 248 1,403 17.7p Financial statements Adjusted earnings per share In the opinion of the directors the earnings per share fi gure of most use to shareholders is the adjusted earnings per share. This fi gure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future earnings. Share placing In August 2013 the group completed a 9.99% share placing which resulted in the weighted average number of shares for the year increasing to 1,452 million. 17. ACQUISITIONS Current year acquisitions The group undertook a number of business combinations in the current year including the acquisition of Deposita, a cash solutions business in South Africa. A summary of the provisional fair value of net assets acquired by geographical location is presented below: Provisional fair value of net assets acquired of subsidiary undertakings Goodwill Total purchase consideration Europe £m 5 1 6 Emerging Markets £m 9 3 12 The following table sets out the provisional fair value to the group in respect of all acquisitions made in the year: Intangible assets Property, plant and equipment Deferred tax assets Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Borrowings Deferred tax liabilities Net assets acquired of subsidiary undertakings Goodwill Total purchase consideration (paid in cash) Total group £m 14 4 18 Fair value £m 15 2 2 4 3 1 (6) (4) (3) 14 4 18 Adjustments made to identifi able assets and liabilities on acquisition are to refl ect their fair value. These include the recognition of customer-related intangible assets amounting to £12m. The fair values of net assets acquired are provisional and represent estimates following a preliminary valuation exercise. These estimates may be adjusted to refl ect any development in the issues to which they relate. The goodwill arising on acquisitions can be ascribed to the existence of a skilled, active workforce, developed expertise and processes and the opportunities to obtain new contracts and develop the business. None of these meet the criteria for recognition as intangible assets separable from goodwill. No goodwill acquired in the year is expected to be deductible for tax purposes. From their respective dates of acquisition, the acquired businesses contributed £28m to revenues, £4m to PBITA and £3m to profi t for the part year they were under the group’s ownership. If all acquisitions had occurred on 1 January 2013, group revenue would have been £7,434m, underlying PBITA would have been £443m and total loss for the year would have been £341m. Annual Report and Accounts 2013 G4S plc 113 Notes to the consolidated fi nancial statements continued 17. ACQUISITIONS (CONTINUED) Prior year acquisitions Principal acquisitions in subsidiary undertakings in the prior year included the purchase of a 100% interest in Vanguarda Segurança e Vigilância Ltda ‘Vanguarda’, a security personnel, security systems and monitoring services provider in Brazil. At 31 December 2012, the fair value adjustments made against net assets acquired were provisional. The initial accounting in respect of acquisitions made during 2012 has since been fi nalised. This resulted in fair value adjustments to acquired trade debtors (increase of £9m), trade creditors (decrease of £3m) and provisions (decrease of £3m) with a resulting £15m decrease in the value of goodwill. The net assets acquired and goodwill arising in respect of all acquisitions made in 2012 are as follows: Intangible assets Property, plant and equipment Trade and other receivables Cash and cash equivalents Trade and other payables Provisions Borrowings Deferred tax liabilities Net assets acquired of subsidiary undertakings Goodwill Total purchase consideration Fair value £m 31 1 16 17 (19) (4) (1) (9) 32 61 93 Adjustments made to identifi able assets and liabilities on acquisition are to refl ect their fair value. These include the recognition of customer-related intangible assets amounting to £31m. In the year of acquisition, in aggregate, the acquired businesses contributed £39m to revenues, £4m to PBITA and £1m to profi t for the part year they were under the group’s ownership. If all acquisitions had occurred on 1 January 2012, group revenue would have been £7,264m, underlying PBITA would have been £472m and total profi t for the year would have been £64m. Post balance sheet acquisitions No signifi cant acquisitions have been effected between the balance sheet date and the date that the fi nancial statements were authorised for issue. 18. DISPOSAL OF SUBSIDIARIES During the current year the group disposed of its data solutions business in Colombia and its cash business in Slovakia. Since the year end the group has disposed of its business in Norway (for proceeds of £29m) and its cash solutions business in Canada (for proceeds of £60m). In the prior year the group disposed of its cash solutions business in Sweden, a justice services business in the United States of America, its security systems business in the Netherlands and its businesses in Poland and Pakistan. The net assets and profi t on disposal of operations disposed of were as follows: Goodwill Property, plant and equipment and intangible assets other than acquisition-related Current assets Liabilities Net assets of operations disposed Profi t/(loss) on disposal Total consideration Satisfi ed by: Cash received Disposal costs Total consideration 2013 £m – 8 11 (5) 14 21 35 35 – 35 2012 £m 10 18 26 (17) 37 (18) 19 25 (6) 19 114 G4S plc Annual Report and Accounts 2013 Financial statements Acquisition-related intangible assets Goodwill £m Trademarks £m Customer related £m Technology £m Other intangibles £m 2,170 4 – – (45) (66) 2,063 (62) – (46) – – 11 (97) 2,108 1,966 2,275 61 – (5) (88) (73) 2,170 (70) – (35) 1 35 7 (62) 2,205 2,108 33 – – – (1) – 32 (30) (2) – – 1 – (31) 3 1 34 – – (1) – – 33 (28) (3) – 1 – – (30) 6 3 675 12 – – (18) (12) 657 (475) (73) – – 17 11 (520) 200 137 673 31 – (2) (14) (13) 675 (412) (85) – 2 11 9 (475) 261 200 6 3 – – – – 9 (5) (1) – – – – (6) 1 3 19 – – (12) – (1) 6 (17) (1) – 12 – 1 (5) 2 1 199 – 27 (5) (14) (7) 200 (112) (26) – 4 8 3 (123) 87 77 185 – 25 (10) – (1) 199 (98) (24) – 6 – 4 (112) 87 87 Total £m 3,083 19 27 (5) (78) (85) 2,961 (684) (102) (46) 4 26 25 (777) 2,399 2,184 3,186 92 25 (30) (102) (88) 3,083 (625) (113) (35) 22 46 21 (684) 2,561 2,399 19. INTANGIBLE ASSETS 2013 Cost At 1 January 2013 Acquisition of businesses Additions Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2013 Amortisation and accumulated impairment losses At 1 January 2013 Amortisation charge Impairment charge Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2013 Carrying amount At 1 January 2013 At 31 December 2013 2012 Cost At 1 January 2012 Acquisition of businesses Additions Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2012 Amortisation and accumulated impairment losses At 1 January 2012 Amortisation charge Impairment charge Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2012 Carrying amount At 1 January 2012 At 31 December 2012 Annual Report and Accounts 2013 G4S plc 115 Notes to the consolidated fi nancial statements continued 19. INTANGIBLE ASSETS (CONTINUED) Goodwill allocation Goodwill acquired in a business combination is allocated to the cash-generating units (CGUs) which are expected to benefi t from that business combination. The majority of the group’s goodwill was generated by the merger of the security services businesses of Group 4 Falck and Securicor in 2004 which was accounted for as an acquisition of Securicor by Group 4 Falck. Goodwill impairment testing The group tests tangible and intangible assets, including goodwill, for impairment on an annual basis or more frequently if there are indications that any of these assets may be impaired. The annual impairment test is performed prior to the year end when the budgeting process is fi nalised and reviewed post year end. The group’s impairment test compares the carrying value of each CGU with its recoverable amount. CGUs are identifi ed on a country level basis including signifi cant business units, as per the group’s detailed management accounts. Under IAS 36 ‘Impairment of Assets’, an impairment is deemed to have occurred where the recoverable amount of a CGU is less than its carrying value. The recoverable amount of a CGU is generally determined by its value in use which is derived from discounted cash fl ow calculations. The key inputs to the calculations are described below. In certain circumstances, where market prices can be ascertained (for example through recent transactions), fair value less costs to sell is used as a basis for the recoverable amount. Forecast cash fl ows All operating countries in the group are required to submit a budget for the next fi nancial year (for the current year test this is for the year ended 31 December 2014) and their strategic plan forecasts for the following two years (in this case the years ended 31 December 2015 and 31 December 2016). The revenue fi gures submitted as part of this exercise are used to derive a growth rate for the discounted cash fl ow calculation (see the growth rate table below). The group applies a 10% forecast risk to reduce revenue forecasts in each year to refl ect the uncertainties inherent in estimating future revenue streams. Forecast cash fl ows are adjusted from year 4 onwards by applying a growth rate as detailed in the growth rate section, and discounted using specifi c risk-adjusted discount rates as described in the discount rate section. Growth Rate Growth rates are determined from the budgeted and forecast revenue in years 1-3 and then projected using the lower of the forecast growth rate and the country’s nominal growth rate (per the IMF) to a terminal growth rate in year 15 of 1% for developed markets or 3% for emerging markets. This is detailed in the table below: Growth assumptions Input Year 1 Budget* Year 2 Forecast* Year 3 Forecast* Example 8% 7% 6% * Budgets and forecasts are reviewed by the group Board. Year 4 Projected – to year 5 at lower of forecast or country growth 5% Year 5 Projected –to year 5 at lower of forecast or country growth 4% Year 6 to 15 Projected to year 15 ‘terminal growth’ Terminal value Estimate of residual growth: developed 1%; emerging 3% 4% to 1% over 10 years 1% In the above example, budgeted year 1 growth rate is 8%, forecast growth in year 2 is 7% and in year 3 is 6%. The country growth rate is 4% so the growth rate is reduced each year to reach 4% at year 5. From year 6 the growth rate is then reduced over the next ten years to provide a terminal value growth of 1% (the example is based on a developed market CGU). Discount rate Discount rates are calculated for each CGU based on the relevant local risk-free rate adjusted for that CGU’s specifi c risk-adjusted equity risk premium. For the impairment test performed for the year ended 31 December 2013 the group has revised the calculation of the discount rates applied to certain CGU’s. This revision adjusts for the current low-interest rate environment by increasing abnormally low discount rates. Details of how the other key discount rate inputs are derived are given below: Input Risk free rate UK equity risk premium Operating country equity risk premium Leveraged beta Tax rate Debt margin Weighted average cost of capital How determined The risk free rate is generally obtained from the applicable government’s 10 year gilt/bond rates. Where these are unavailable the group uses the closest available information (eg shorter term gilt rates). The equity risk premium is determined for the UK by analysing a variety of sources including economic studies carried out by Barclays Capital and others. Specifi c local equity risk premiums are based on the UK risk premium adjusted for specifi c economic and fi nancial risks. The sources for these adjustments are the Institutional Investor Magazine and the IMF website as well as other studies by independent economists. Beta is a risk adjustment applied to the discount rate to refl ect the risk of the group’s operating companies relative to the market as a whole. The group’s beta is obtained from independent market studies and is adjusted for the appropriate leverage of the group. Local tax rates are applied to each CGU to calculate pre-tax cost of equity. The group applies a margin to the cost of debt for each CGU, with a higher margin applied to those CGUs operating in higher risk environments. These margins range from 1.5% in less risky CGUs (for example in the UK) to 5-6% in more risky CGUs (eg 5.5% in Yemen). The weighted average cost of capital is calculated by weighting the cost of equity and the cost of debt by the applicable debt:equity ratio at the year end. 31 Dec 2013 2.83% in UK 5.0% in UK 0.8 for the group 23% in UK 1.5% in UK 8.6% in UK 116 G4S plc Annual Report and Accounts 2013 The table below sets out the discount rates and growth rates used for the group’s signifi cant countries: South Africa Brazil Canada** United States of America Hong Kong Malaysia Estonia Israel Netherlands United Kingdom Other (all allocated) Total goodwill Discount rate 2013 16.0% 18.4% 8.2% 9.0% 9.2% 10.4% 9.2% 10.4% 8.9% 8.6% Discount rate 2012 14.0% 14.8% 6.9% 7.4% 5.4% 8.6% 7.4% 9.4% 7.0% 7.1% Growth rate* 2013 8.5% 8.0% 4.0% 5.3% 7.5% 7.4% 6.2% 1.0% 3.1% 4.3% Growth rate* 2012 9.0% 8.7% 2.8% 5.2% 7.3% 7.5% 3.6% 2.0% 3.6% 2.8% Financial statements Goodwill 2013 £m 30 98 8 384 38 40 63 36 150 710 409 1,966 Goodwill 2012 £m 36 142 51 395 39 43 61 34 146 706 455 2,108 * Lower of country growth rate per IMF and implied year 3 business forecast growth rate. ** £45m of goodwill in respect of the cash solutions business in Canada was reclassifi ed as held for sale in 2013. Within the UK, the most signifi cant CGUs and their goodwill carrying values are UK Care and Justice (£247m), UK Cash Solutions (£205m) and UK Secure Solutions (£102m). Within the USA, the most signifi cant CGU is US Commercial Security Solutions with goodwill of £302m. Impairment During the year ended 31 December 2013 impairment charges totalling £46m were recorded in respect of the group’s goodwill, in the following countries: Democratic Republic of Congo Malawi Nigeria Brazil Ireland Other impaired Non-impaired Total Goodwill pre- impairment 8 3 9 122 17 7 1,846 2,012 Impairment (4) (2) (4) (24) (5) (7) – (46) Goodwill post- impairment Growth rate* Discount rate 42.7% 50.0% 25.6% 18.4% 10.1% 11.4% 10.6% 13.6% 8.0% 4.2% 4 1 5 98 12 – 1,846 1,966 * Lower of country growth rate per IMF and implied year 3 business forecast growth rate. The impairment charge in Brazil was driven by losses incurred in the fi rst half of the year in the technology business and a general downturn in trading. The impairment in Ireland was as a result of the economic challenges in the country and the specifi c situation of the group’s cash business. Certain CGUs in Africa were impaired as a result of worsening economic and political circumstances in those countries. Sensitivity to key assumptions The key assumptions used in the discounted cash fl ow calculations relate to the discount rates and growth rates used. The table below shows the additional impairment that would arise from an increase in discount rates by 1% and 3% (with all other variables being equal, for example taking the UK base rate from 8.6% to 9.6% and 11.6%) or a decrease in growth rates by 1% and 3% (with all other variables being equal, for example taking the UK growth rate from 4.3% to 3.3% and 1.3%) for the group in total and for each of its signifi cant countries. South Africa Brazil Canada United States of America Hong Kong Malaysia Estonia Israel Netherlands United Kingdom Other (all allocated) Total Goodwill 2013 £m 30 98 8 396 38 40 63 36 150 710 397 1,966 Base discount rate 2013 16.0% 18.4% 8.2% 9.0% 9.2% 10.4% 9.2% 10.4% 8.9% 8.6% Additional impairment 1% increase 2013 £m – 6 – – – – 7 – 11 – 2 26 3% increase 2013 £m – 16 – – – – 22 – 28 47 9 122 Base growth rate* 2013 8.5% 8.0% 4.0% 5.3% 7.5% 7.4% 6.2% 1.0% 3.1% 4.3% Additional impairment 1% decrease 2013 £m – 4 – – – – 6 – 6 – 1 17 3% decrease 2013 £m – 12 – – – – 18 – 15 22 6 73 * Lower of country growth rate per IMF and implied year 3 business forecast growth rate. Annual Report and Accounts 2013 G4S plc 117 Notes to the consolidated fi nancial statements continued 20. PROPERTY PLANT AND EQUIPMENT 2013 Cost At 1 January 2013 Acquisition of businesses Additions Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2013 Depreciation and accumulated impairment losses At 1 January 2013 Depreciation charge Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2013 Carrying amount At 1 January 2013 At 31 December 2013 2012 Cost At 1 January 2012 Acquisition of businesses Additions Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2012 Depreciation and accumulated impairment losses At 1 January 2012 Depreciation charge Disposals Reclassifi ed as held for sale Translation adjustments At 31 December 2012 Carrying amount At 1 January 2012 At 31 December 2012 Land and buildings £m Equipment and vehicles £m 240 – 21 (10) (5) (2) 244 (77) (15) 8 4 1 (79) 163 165 222 – 24 (3) (2) (1) 240 (67) (15) 4 1 – (77) 155 163 983 2 138 (63) (35) (29) 996 (634) (110) 47 22 4 (671) 349 325 1,012 1 126 (89) (15) (52) 983 (636) (112) 65 10 39 (634) 376 349 Total £m 1,223 2 159 (73) (40) (31) 1,240 (711) (125) 55 26 5 (750) 512 490 1,234 1 150 (92) (17) (53) 1,223 (703) (127) 69 11 39 (711) 531 512 The net book value of equipment and vehicles held under fi nance leases was £52m (2012: £57m). Accumulated depreciation on these assets was £124m (2012: £116m) and the depreciation charge for the year was £17m (2012: £19m). The rights over fi nance leased assets are effectively security for lease liabilities. These rights revert to the lessor in the event of default. The net book value of equipment and vehicles includes £26m (2012: £34m) of assets leased by the group to third parties under operating leases. Accumulated depreciation on these assets was £97m (2012: £91m) and the depreciation charge for the year was £7m (2012: £9m). The net book value of land and buildings comprises freeholds of £73m (2012: £71m), long leaseholds of £20m (2012: £20m) and short leaseholds of £72m (2012: £72m). 118 G4S plc Annual Report and Accounts 2013 Financial statements 21. INVESTMENT IN JOINT VENTURES At the year end the group owned 59% of the equity of Bridgend Custodial Services Ltd. The group jointly shares operational and fi nancial control over the operations and is therefore entitled to a proportionate share of its results, which are consolidated on the basis of the equity shares held. The group’s correctional facilities in South Africa are under a similar arrangement other than that the group’s holding is 20%. During the year the group acquired a 50% share of the equity of Policity Limited, to construct and run a police training academy facility in Israel, which also operates under a similar arrangement. The results of each of the jointly controlled operations are prepared in accordance with group accounting policies. The way the group accounts for joint ventures will change in 2014 with the adoption of IFRS 11 ‘Joint Arrangements’, as explained in note 3(v). In particular, the group will no longer account for joint ventures using the proportionate method and will instead apply the equity method. Amounts proportionately consolidated into the group’s fi nancial statements are as follows: Results Revenue Expenses Profi t after tax Balance sheet Assets Non-current assets Current assets Liabilities Current liabilities Non-current liabilities Net assets 22. INVENTORIES Raw materials Work in progress Finished goods including consumables Total inventories 2013 £m 43 (39) 4 2013 £m 22 24 (9) (32) 5 2013 £m 14 14 89 117 2012 £m 36 (32) 4 2012 £m 16 6 (10) (7) 5 2012 £m 16 16 96 128 23. INVESTMENTS Investments comprise primarily listed securities of £29m (2012: £40m) held by the group’s wholly-owned captive insurance subsidiaries. These are stated at their fair values based on quoted market prices consistent with level 1 of the valuation hierarchy. Use of these investments is restricted to the settlement of claims against the group’s captive insurance subsidiaries. 24. TRADE AND OTHER RECEIVABLES Within current assets Trade debtors Allowance for doubtful debts Other debtors (including tax receivable) Prepayments and accrued income Amounts due from construction contract customers Derivative fi nancial instruments at fair value Total trade and other receivables included within current assets Within non-current assets Derivative fi nancial instruments at fair value Other debtors* Total trade and other receivables included within non-current assets Notes 25 31 31 2013 £m 1,159 (39) 154 82 23 15 1,394 74 56 130 2012 £m 1,243 (46) 173 88 22 26 1,506 81 51 132 * Other debtors include amounts receivable under service concession arrangements of £22m (2012: £13m) which are pledged as security against borrowings of the group. Annual Report and Accounts 2013 G4S plc 119 Notes to the consolidated fi nancial statements continued 24. TRADE AND OTHER RECEIVABLES (CONTINUED) Credit risk on trade receivables There is limited concentration of credit risk with respect to trade receivables, as the group’s customers are both large in number and dispersed geographically in 120 countries. The group’s largest customer is the UK Government which comprises approximately 13% (2012:10%) of the total trade debtor balance as at 31 December 2013. Group companies are required to follow the Group Finance Manual guidelines with respect to assessing the credit worthiness of potential customers. These guidelines include processes such as obtaining approval for credit limits over a set amount, performing credit checks and assessments and obtaining additional security where required. Credit terms vary across the group and can range from 0 to 90 days to refl ect the different risks within each country in which the group operates. There is no group-wide rate of provision, and provision is made for debts that are past due according to local conditions and past default experience. The movement in the allowance for doubtful debts is as follows: At 1 January Amounts written off during the year Increase in allowance At 31 December The ageing of trade debtors, net of allowance for doubtful debts, is as follows: Not yet due 1-30 days overdue 31-60 days overdue 61-90 days overdue 91-180 days overdue 181-365 days overdue Over 365 days overdue Net trade debtors 2013 £m (46) 20 (13) (39) 2013 £m 887 132 27 28 38 6 2 1,120 2012 £m (67) 28 (7) (46) 2012 £m 890 161 70 29 26 7 14 1,197 Included within ‘not yet due’ in the prior year is £75m relating to the Olympics contract settlement. No additional provision has been made on the above amounts as there has not been a signifi cant change in credit quality and the group believes that the amounts are still recoverable. The group does not hold any collateral over these balances. The proportion of trade debtors at 31 December 2013 that were overdue for payment was 21% (2012: 26%). The group-wide average age of all trade debtors at year end was 54 days (2012: 60 days). The directors believe the fair value of trade and other receivables, being the present value of future cash fl ows, approximates to their book value. 25. CONSTRUCTION CONTRACTS Amounts due from contract customers included in trade and other receivables Amounts due to contract customers included in trade and other payables Net balances relating to construction contracts Contract costs incurred plus recognised profi ts less recognised losses to date Less: progress billings Net balances relating to construction contracts Notes 24 30 2013 £m 23 (2) 21 287 (266) 21 2012 £m 22 (2) 20 311 (291) 20 At 31 December 2013, advances received from customers for contract work amounted to £4m (2012: £4m). There were no retentions held by customers for contract work at either balance sheet date. All trade and other receivables arising from construction contracts are due for settlement within one year. 120 G4S plc Annual Report and Accounts 2013 Financial statements 26. DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE At 31 December 2013, disposal groups classifi ed as held for sale primarily comprised the assets and liabilities associated with the classifi ed Government Solutions business in the United States of America (see note 7), the group’s business in Norway which was sold in January 2014 and the cash solutions business in Canada which was also sold in January 2014. A further impairment charge of £80m has been applied to goodwill and other assets in the US Government Solutions business during the year. At 31 December 2012, disposal groups classifi ed as held for sale primarily comprised the assets and liabilities associated with the classifi ed Government Solutions business in the United States of America, which were subject to a £35m impairment charge to goodwill in the prior year to write down their assets to their estimated recoverable value. The major classes of assets and liabilities comprising the operations classifi ed as held for sale are as follows: ASSETS Goodwill Acquisition-related intangible assets Property, plant and equipment and intangible assets other than acquisition-related Interest in associates Trade and other receivables (non-current) Deferred tax asset Trading investments Inventories Trade and other receivables (current) Cash and cash equivalents Total assets classifi ed as held for sale LIABILITIES Bank loans Trade and other payables Retirement benefi t obligations Deferred tax liability Total liabilities associated with assets classifi ed as held for sale Net assets of disposal group 2013 £m 2012 £m 45 1 20 12 10 14 12 2 89 15 220 (19) (93) (17) (4) (133) 87 53 3 6 5 12 15 11 – 104 20 229 (1) (36) (13) (2) (52) 177 27. CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS A reconciliation of cash and cash equivalents reported within the consolidated cash fl ow statement to amounts reported within the consolidated statement of fi nancial position is presented below: Cash and cash equivalents Bank overdrafts Cash, cash equivalents and bank overdrafts included within disposal groups classifi ed as held for sale Total cash, cash equivalents and bank overdrafts 2013 £m 594 (22) 15 587 2012 £m 469 (17) 20 472 Cash and cash equivalents comprise principally short-term money market deposits, current account balances and group-owned cash held in ATM machines and at 31 December 2013 bore interest at a weighted average rate of 0.7% (2012: 0.5%). The credit risk on cash and cash equivalents is limited because wherever possible and in accordance with Group Treasury policy, the cash is placed with bank counterparties that hold investment grade credit ratings assigned by international credit-rating agencies. The group operates a multi-currency notional pooling cash management system which included over 140 group companies at 31 December 2013. It is expected that the number of participants in the group will continue to grow. The group met the conditions of IAS 32 ‘Financial Instruments: Presentation’ allowing balances within this cash pool to be offset for reporting purposes. At 31 December 2013 £422m (2012: £360m) of the cash balances and the equivalent amount of the overdraft balances were offset. Cash and cash equivalents of £39m (2012: £27m) are held by the group’s wholly-owned captive insurance subsidiaries. Their use is restricted to the settlement of claims against the group’s captive insurance subsidiaries. Annual Report and Accounts 2013 G4S plc 121 Notes to the consolidated fi nancial statements continued 28. BANK OVERDRAFTS, BANK LOANS AND LOAN NOTES Bank overdrafts Bank loans Loan notes* Total bank overdrafts, bank loans and loan notes The borrowings are repayable as follows: On demand or within one year In the second year In the third to fi fth years inclusive After fi ve years Total bank overdrafts, bank loans and loan notes Less: Amount due for settlement within 12 months (shown under current liabilities): – Bank overdrafts – Bank loans – Loan notes Amount due for settlement after 12 months * Loan notes includes £716m (2012: £794m) of private loan notes and £1,266m (2012: £1,245m) of public loan notes. Analysis of bank overdrafts, bank loans and loan notes by currency: Bank overdrafts Bank loans Loan notes At 31 December 2013 Bank overdrafts Bank loans Loan notes At 31 December 2012 Sterling £m 1 – 419 420 6 137 419 562 Euro £m 8 37 915 960 1 73 895 969 US Dollar £m 6 80 648 734 7 99 725 831 2013 £m 22 196 1,982 2,200 110 96 1,392 602 2,200 (22) (27) (61) (110) 2,090 Other £m 7 79 – 86 3 36 – 39 2012 £m 17 345 2,039 2,401 75 86 1,059 1,181 2,401 (17) (18) (40) (75) 2,326 Total £m 22 196 1,982 2,200 17 345 2,039 2,401 Of the borrowings in currencies other than sterling, £1,014m (2012: £1,078m) is designated as a net investment hedge. The weighted average interest rates on bank overdrafts, bank loans and loan notes at 31 December 2013 adjusted for hedging were as follows: Bank overdrafts Bank loans Private loan notes Public loan notes 2013 % 1.1 3.5 4.2 4.3 2012 % 1.5 3.5 4.5 4.2 The group’s committed bank borrowings comprise a £1,100m multi-currency revolving credit facility with a maturity date of March 2016. At 31 December 2013, undrawn committed available facilities amounted to £965m (2012: £856m). Interest on all committed bank borrowing facilities is at prevailing Libor or Euribor rates, dependent upon the period of drawdown, plus an agreed margin, and re-priced within one year or less. Borrowing at fl oating rates exposes the group to cash fl ow interest rate risk. The management of this risk is discussed in note 32. The group issued fi xed rate loan notes in the US Private Placement market totalling US$550m (£332m) on 1 March 2007. The notes mature in March 2014 ($100m), March 2017 ($200m), March 2019 ($145m) and March 2022 ($105m). The group issued further fi xed rate loan notes in the US Private Placement market totalling US$514m (£310m) and £69m on 15 July 2008. $65m notes matured and were repaid on 15 July 2013, with the remaining notes maturing in July 2015 ($150m), July 2016 (£25m), July 2018 ($224m) and (£44m), and July 2020 ($75m). The group issued its inaugural public note of £350m using its European Medium Term Note Programme on 13 May 2009. The note matures in May 2019. During 2012 the group issued two further public notes, a €600m note issued in May 2012 maturing May 2017 and a €500m note issued in December 2012 maturing December 2018. 122 G4S plc Annual Report and Accounts 2013 Financial statements The committed bank facilities and the private loan notes are subject to one fi nancial covenant (net debt to EBITDA ratio where EBITDA is calculated as underlying group PBITA plus depreciation and amortisation) and non-compliance with the covenant may lead to an acceleration of maturity. The group complied with the fi nancial covenant throughout the year to 31 December 2013 and the year to 31 December 2012. The group has not defaulted on, or breached the terms of, any material loans during the year. Bank overdrafts, bank loans, the loan notes issued in July 2008, the loan notes issued in May 2009, €510m of the loan notes issued in May 2012 and €380m of the loan notes issued in December 2012 are stated at amortised cost. The loan notes issued in March 2007, €90m of the loan notes issued in May 2012 and €120m of the loan notes issued in December 2012 are stated at amortised cost recalculated at an effective interest rate current at the balance sheet date as they are part of a fair value hedge relationship. US$200m (£121m) of the loan notes issued in July 2008 have a fair value market gain of £21m (2012: £31m) resulting from the cross currency swaps fi xing the sterling value of this portion of the loan notes at an exchange rate of 1.975. €325m (£270m) of the loan notes issued in May 2012 have a fair value market gain of £5m (2012: loss £5m) partly resulting from the cross currency swaps fi xing the sterling value of this portion of the loan notes at an exchange rate of 1.222 and partly resulting from the cross currency swaps fi xing the sterling and euro interest rates. €350m (£291m) of the loan notes issued in December 2012 have a fair value market gain of £16m (2012: £2m) partly resulting from the cross currency swaps fi xing the sterling value of this portion of the loan notes at an exchange rate of 1.233 and partly resulting from the cross currency swaps fi xing the sterling and euro interest rates. 29. OBLIGATIONS UNDER FINANCE LEASES Amounts payable under fi nance leases: Within one year In the second to fi fth years inclusive After fi ve years Less: future fi nance charges on fi nance leases Present value of lease obligations Less: amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Minimum lease payments 2013 £m Minimum lease payments 2012 £m 23 31 3 57 (5) 52 20 42 4 66 (5) 61 Present Value of minimum lease payments 2013 £m 21 28 3 52 Present value of minimum lease payments 2012 £m 18 40 3 61 (21) 31 (18) 43 It is the group’s policy to lease certain of its fi xtures and equipment under fi nance leases. The weighted average lease term is eight years. For the year ended 31 December 2013, the weighted average effective borrowing rate was 4.8% (2012: 4.9%). Interest rates are fi xed at the contract date. All leases are on a fi xed repayment basis and no arrangements have been entered into for contingent rental payments. The group’s obligations under fi nance leases are secured by the lessors’ charges over the leased assets. 30. TRADE AND OTHER PAYABLES Within current liabilities: Trade creditors Amounts due to construction contract customers Amounts owed to associated undertakings Other taxation and social security costs Holiday pay accruals Other creditors Accruals and deferred income Derivative fi nancial instruments at fair value Total trade and other payables included within current liabilities Within non-current liabilities: Derivative fi nancial instruments at fair value Other creditors Total trade and other payables included within non-current liabilities Notes 25 31 31 2013 £m 223 2 2 200 336 95 312 2 1,172 2 11 13 2012 £m 232 2 2 228 356 74 294 5 1,193 6 12 18 Trade and other payables comprise principally amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 43 days (2012: 42 days). Annual Report and Accounts 2013 G4S plc 123 Notes to the consolidated fi nancial statements continued 31. DERIVATIVE FINANCIAL INSTRUMENTS The carrying values of derivative fi nancial instruments at the balance sheet date are presented below: Cross currency swaps designated as cash fl ow hedges Interest rate swaps designated as cash fl ow hedges Interest rate swaps designated as fair value hedges Commodity swaps Less: non-current portion Current portion Assets 2013 £m 42 – 46 1 89 (74) 15 Assets 2012 £m 32 – 73 2 107 (81) 26 Liabilities 2013 £m – 2 1 1 4 (2) 2 Liabilities 2012 £m 5 6 – – 11 (6) 5 Derivative fi nancial instruments are stated at fair value, measured using techniques consistent with Level 2 of the valuation hierarchy (inputs other than quoted prices in active markets that are observable for the asset and liability, either directly or indirectly). The source of the market prices is Bloomberg and in addition the third party relationship counterparty banks. The relevant currency yield curve is used to forecast the fl oating rate cash fl ows anticipated under the instrument which are discounted back to the balance sheet date. This value is compared to the original transaction value giving a fair value of the instrument at the balance sheet date. The mark to market valuation of the derivatives has fallen by £11m during the year. The interest rate, cross currency and commodity swaps treated as cash fl ow hedges have the following maturities: Within one year In the second year In the third year In the fourth year In the fi fth year or greater Total carrying value Assets 2013 £m 1 16 – 5 21 43 Assets 2012 £m 9 – 17 – 8 34 Liabilities 2013 £m 1 – 2 – – 3 The projected settlement of cash fl ows (including accrued interest) associated with derivatives treated as cash fl ow hedges: Within one year In the second year In the third year In the fourth year In the fi fth year or greater Total cash fl ows Assets 2013 £m 1 16 – 11 26 54 Assets 2012 £m 7 3 – 17 17 44 Liabilities 2013 £m 6 4 4 – – 14 Liabilities 2012 £m 1 2 – 3 5 11 Liabilities 2012 £m 7 6 5 4 – 22 32. FINANCIAL RISK Capital management On 28 August 2013 the group raised equity capital amounting to £348m before costs. The net proceeds of £343m were used to reduce debt that was drawn on the group’s £1.1bn bank facility. In May 2013, Standard & Poor’s downgraded the group’s long term credit rating to BBB- Negative. However, following the equity capital raising the group’s rating was revised to BBB- Stable in September 2013. The group intends to continue to manage its capital structure so that it retains an investment grade rating. The group’s policy is to maintain a net debt to EBITDA ratio to below 2.5 times. At the end of 2013 the ratio was 2.6 times, before £89m of divestment proceeds received in January 2014. It is expected the ratio will be within the target range in 2014. The group is currently well fi nanced with £965m available and undrawn facilities from its committed £1.1bn bank facility. It has no signifi cant maturity until March 2016 and has a medium to long term debt maturity profi le. The group can access fi nance from the debt capital markets and the bank market. Borrowings are principally in sterling, US dollars and euros refl ecting the geographies of signifi cant operational assets and profi ts. 124 G4S plc Annual Report and Accounts 2013 Financial statements Liquidity risk The group mitigates liquidity risk by ensuring there are suffi cient undrawn committed facilities available to it. For more details of the group’s bank overdrafts, bank loans and loan notes see note 28. The percentage of available, but undrawn committed facilities during the course of the year was as follows: 31 December 2012 31 March 2013 30 June 2013 30 September 2013 31 December 2013 28% 25% 25% 32% 32% To reduce re-fi nancing risk, group treasury obtains fi nance with a range of maturities and hence minimises the impact of a single material source of fi nance terminating on a single date. Re-fi nancing risk is further reduced by group treasury opening negotiations to either replace or extend any major medium term facility at least 12 months before its termination date. Maturity profi le of loans and borrowings The contractual maturities of fi nancial assets and liabilities, together with the carrying amounts in the statement of fi nancial position, including interest payments, estimated based on expectations at the reporting date, are shown below: 31 December 2013 Investments Derivative fi nancial instruments (interest rate swaps) Financial assets designated at fair value through profi t or loss Derivative fi nancial instruments (commodity swaps) Derivative fi nancial instruments (cross currency swaps) Financial assets designated as cash fl ow hedges Net trade receivables Cash and cash equivalents Other fi nancial assets Loans and receivables Loan notes (issued March 2007, 5.77%-6.06%, maturing 2014-22) Derivative fi nancial instruments (interest rate swaps) Financial liabilities designated as fair value hedges Derivative fi nancial instruments (interest rate swaps) Derivative fi nancial instruments (commodity swaps) Financial liabilities designated as cash fl ow hedges Loan notes (issued July 2008, 6.09%-7.56%, maturing 2015-20) Loan notes (issued May 2009, 7.75%, maturing 2019) Loan notes (issued May 2012, 2.875%, maturing 2017)* Loan notes (issued December 2012, 2.625%, maturing 2018)* Bank loans Overdrafts Finance lease liabilities Trade payables Other liabilities Financial liabilities measured at amortised cost Notes 23 31 31 31 24 27 24 28 31 31 31 28 28 28 28 28 28 29 30 30 Carrying Amount 39 46 Fair Value 39 46 Total contractual cash fl ows 39 53 Within 1 year 39 16 2-5 years – 35 Over 5 years – 2 85 1 42 43 1,120 594 22 1,736 (377) (1) (378) (2) (1) (3) (340) (350) (500) (415) (196) (22) (52) (223) (11) (2,109) 85 1 42 43 1,120 594 22 1,736 (377) (1) (378) (2) (1) (3) (381) (376) (508) (410) (196) (22) (52) (223) (11) (2,179) 92 1 42 43 1,120 594 22 1,736 (420) (1) (421) (3) (1) (4) (418) (513) (556) (471) (196) (22) (52) (223) (11) (2,462) 55 1 (3) (2) 1,120 594 – 1,714 (78) 1 (77) (2) – (2) (23) (27) (14) (11) (27) (22) (21) (223) – (368) 35 – 45 45 – – 22 22 (175) (2) (177) (1) (1) (2) (344) (109) (542) (460) (169) – (28) – (11) (1,663) 2 – – – – – – – (167) – (167) – – – (51) (377) – – – – (3) – – (431) * €90m (£75m) of May 2012 loan notes and €120m (£100m) of December 2012 loan notes are recorded at fair value through profi t or loss. Annual Report and Accounts 2013 G4S plc 125 Notes to the consolidated fi nancial statements continued 32. FINANCIAL RISK 31 December 2012 Investments Derivative fi nancial instruments (interest rate swaps) Financial assets designated at fair value through profi t or loss Derivative fi nancial instruments (commodity swaps) Derivative fi nancial instruments (cross currency swaps) Financial assets designated as cash fl ow hedges Net trade receivables Cash and cash equivalents Other fi nancial assets Loans and receivables Loan notes (issued March 2007, 5.77%-6.06%, maturing 2014-22) Financial liabilities designated as fair value hedge Derivative fi nancial instruments (interest rate swaps) Derivative fi nancial instruments (cross-currency swaps) Financial liabilities designated as cash fl ow hedges Loan notes (issued July 2008, 6.09%-7.56%, maturing 2013-20) Loan notes (issued May 2009, 7.75%, maturing 2019) Loan notes (issued May 2012, 2.875%, maturing 2017)* Loan notes (issued December 2012, 2.625%, maturing 2018)* Bank loans Overdrafts Finance lease liabilities Trade payables Other liabilities Financial liabilities measured at amortised cost Notes 23 31 31 31 24 27 24 28 31 31 28 28 28 28 28 28 29 30 30 Carrying Amount 56 73 Fair Value 56 73 Total contractual cash fl ows 56 81 129 129 137 2 32 34 1,197 469 13 1,679 (409) (409) (6) (5) (11) (385) (350) (489) (406) (345) (17) (61) (232) (12) (2,297) 2 32 34 1,192 469 13 1,674 (409) (409) (6) (5) (11) (354) (350) (507) (409) (345) (17) (61) (232) (12) (2,287) 2 32 34 1,192 469 13 1,674 (448) (448) (6) (5) (11) (514) (540) (557) (469) (345) (17) (61) (232) (12) (2,747) Within 1 year 56 18 2-5 years – 52 Over 5 years – 11 74 2 6 8 1,192 469 – 1,661 (20) (20) (3) (2) (5) (66) (27) (14) (11) (18) (17) (18) (232) – (403) 52 – 12 12 – – 13 13 11 – 14 14 – – – – (249) (249) (179) (179) (3) (3) (6) (198) (109) (543) (42) (327) – (40) – (12) (1,271) – – – (250) (404) – (416) – – (3) – – (1,073) The gross cash fl ows disclosed in the tables above represent the contractual undiscounted cash fl ows relating to derivative fi nancial liabilities held for risk management purposes and which are usually not closed out before contractual maturity. The disclosure shows net cash fl ow amount for derivatives that are net cash-settled and gross cash infl ow and outfl ow amounts for derivatives that have simultaneous gross cash settlement – e.g. forward exchange contracts. * €90m (£73m) of May 2012 loan notes and €120m (£97m) of December 2012 loan notes are recorded at fair value through profi t or loss. 126 G4S plc Annual Report and Accounts 2013 Financial statements Market risk Currency risk and forward foreign exchange contracts The group conducts business in many currencies. Transaction risk is limited since, wherever possible, each business operates and conducts its fi nancing activities in local currency. However, the group presents its consolidated fi nancial statements in sterling and it is in consequence subject to foreign exchange risk due to the translation of the results and net assets of its foreign subsidiaries. The group hedges a substantial proportion of its exposure to fl uctuations in the translation into sterling of its overseas net assets by holding loans in foreign currencies. Translation adjustments arising on the translation of foreign currency loans are recognised in equity to match translation adjustments on foreign currency equity investments as they qualify as net investment hedges. At 31 December 2013, the group’s US dollar and euro net assets were approximately 82% and 59% respectively hedged by foreign currency loans (2012: US dollar 85%, euro 60%). Cross currency swaps with a nominal value of £101m are in place hedging the foreign currency risk on US$200m of the second US Private Placement notes issued in July 2008, effectively fi xing the sterling value of this portion of debt at an exchange rate of 1.9750. Cross currency swaps with a nominal value of £266m were arranged to hedge the foreign currency risk on €325m of the euro public notes issued in May 2012, effectively fi xing the sterling value of this portion of debt at an exchange rate of 1.2217. Cross currency swaps with a nominal value of £284m were arranged to hedge the foreign currency risk on €350m of the euro public notes issued in December 2012, effectively fi xing the sterling value of this portion of debt at an exchange rate of 1.2332. Assuming a 1% appreciation of sterling against the US dollar and the euro, the fair value net gain on the cross currency swaps which hedge part of the currency loan notes would be expected to fall by £7m. Interest rate risk and interest rate swaps Borrowing at fl oating rates as described in note 28 exposes the group to cash fl ow interest rate risk, which the group manages within policy limits approved by the directors. Interest rate swaps and, to a limited extent, forward rate agreements are utilised to fi x the interest rate on a proportion of borrowings on a reducing scale over forward periods up to a maximum of fi ve years. At 31 December 2013 the nominal value of such contracts was £97m (in respect of US dollar) (2012: £98m) and £37m (in respect of euro) (2012: £73m); their weighted average interest rate was 1.3% (US dollar) (2012: 1.3%) and 2.8% (euro) (2012: 3.2 %), and their weighted average period to maturity was two and a half years. All the interest rate hedging instruments are designated and fully effective as cash fl ow hedges and movements in their fair value have been deferred in equity. The US Private Placement market is predominantly a fi xed rate market, with investors wanting a fi xed rate return over the life of the loan notes. At the time of the fi rst issue in March 2007, the group was comfortable with the proportion of fl oating rate exposure not hedged by interest rate swaps and therefore rather than take on a higher proportion of fi xed rate debt arranged fi xed to fl oating swaps effectively converting the fi xed coupon on the Private Placement to a fl oating rate. Following the swaps the resulting average coupon on the US Private Placement is Libor + 60bps. These swaps have been documented as fair value hedges of the US Private Placement fi xed interest loan notes, with the movements in their fair value posted to profi t and loss at the same time as the movement in the fair value of the hedged item. The interest on the US Private Placement notes issued in July 2008, the sterling public notes issued in May 2009, 510m of the euro public notes issued in May 2012 and 380m of the euro public notes issued in December 2012 was kept at fi xed rate. All three public notes have a coupon step up of 1.25% which is triggered should the credit rating of G4S plc fall below investment grade. The core group borrowings are held in US dollar, euro and sterling. Although the impact of rising interest rates is largely shielded by fi xed rate loans and interest rate swaps which provide certainty on the vast majority of the exposure, some interest rate risk remains. A 1% increase in interest rates across the yield curve in each of these currencies with the 31 December 2013 debt position constant throughout 2014, would lead to an expectation of an additional interest charge of £8m in the 2014 fi nancial year. Commodity risk and commodity swaps The group’s principal commodity risk relates to the fl uctuating level of diesel prices, particularly affecting its cash solutions businesses. Commodity swaps and commodity options are used to fi x synthetically part of the exposure and reduce the associated cost volatility. Commodity swaps hedging 41 million litres of projected 2014 diesel consumption, 27 million litres of projected 2015 diesel consumption and 9 million litres of projected 2016 diesel consumption were in place at 31 December 2013. Counterparty credit risk The group’s strategy for credit risk management is to set minimum credit ratings for counterparties and monitor these on a regular basis. For treasury-related transactions, the policy limits the aggregate credit risk assigned to a counterparty. The utilisation of a credit limit is calculated by applying a weighting to the notional value of each transaction outstanding with each counterparty based on the type and duration of the transaction. The total mark to market value outstanding with each counterparty is also closely monitored against policy limits assigned to each counterparty. For short-term transactions (under one year), at inception of the transaction, the fi nancial counterparty must be investment grade rated by either the Standard & Poor’s or Moody’s rating agencies. For long-term transactions, at inception of the transaction, the fi nancial counterparty must have a minimum rating of BBB+/Baa1 from Standard & Poor’s or Moody’s. Treasury transactions are dealt with the group’s relationship banks, all of which have a strong investment grade rating. At 31 December 2013 the largest two counterparty exposures related to treasury transactions were £29m and £28m and both were held with institutions with a long term Standard & Poor’s credit rating of A and A- respectively. These exposures represent 13% and 12% of the carrying values of the treasury transactions, with a fair value gain at the balance sheet date. Both of these banks had signifi cant loan commitments outstanding to G4S plc at 31 December 2013. The group operates a multi-currency notional pooling cash management system with a wholly owned subsidiary of an A+ rated bank. At year end credit balances of £425m were pooled with debit balances of £422m, resulting in a net pool credit balance of £3m. There is legal right of set off under the pooling agreement and an overdraft facility of £3m. At an operating level the minimum investment grade rating criteria applies. Exceptionally, where required by local country circumstances, counterparties with no, or a non-investment grade, rating can be approved as counterparties for a period of up to 12 months. Due to the group’s global geographical footprint and exposure to multiple industries, there is minimal concentration risk. Annual Report and Accounts 2013 G4S plc 127 Notes to the consolidated fi nancial statements continued 33. RETIREMENT BENEFIT OBLIGATIONS The group operates a wide range of retirement benefi t arrangements which are established in accordance with local conditions and practices within the countries concerned. These include funded defi ned contribution, multi-employer and funded and unfunded defi ned benefi t schemes. Defi ned contribution arrangements The majority of the retirement benefi t arrangements operated by the group are of a defi ned contribution structure, where the employer contribution and resulting income statement charge is fi xed at a set level or is a set percentage of employees’ pay. Contributions made to defi ned contribution schemes and charged to the income statement totalled £99m (2012: £107m). In the UK, following the closure of the defi ned benefi t schemes to new entrants in 2004, the main scheme for new employees is a contracted-in defi ned contribution scheme. G4S Government Solutions, Inc. is the administrator of several defi ned benefi t schemes. G4S Government Solutions, Inc. is responsible for making periodic cost-reimbursable deposits to the various defi ned benefi t schemes as determined by independent actuaries. In each instance, the US Department of Energy (‘DOE’) acknowledged within the contract entered between the DOE and G4S Government Solutions, Inc. its responsibility for all unfunded pension and benefi t liabilities. Therefore, these schemes are accounted for as defi ned contribution schemes. Multi-employer arrangement In the Netherlands, most of the employees are members of the Security Industry Wide Pension Fund (IWPF). This is a career-average defi ned benefi t plan. Pensionable salary is subject to a cap, and minus an offset that refl ects social security levels. Withdrawal from the scheme is only possible under certain strict conditions determined by Dutch law and by the pension fund board of the IWPF. The plan is funded by a premium that is set by the IWPF board in line with the fi nancing rules that state that the premium should cover the cost of the annual accrual of pension benefi ts. Historically, the premium has been 30% of pensionable salaries and the employer pays 60% of this premium and the employees the remaining 40%. The fi nancing rules specify that an employer is not obliged to pay any further premiums in respect of previously accrued benefi ts. This means that in case of insuffi cient funding, the benefi ts of participants could, in theory, be reduced. The current solvency ratio is 116.6% (October 2013). The required solvency ratio according to Dutch law is 122% (as at 31 December 2012). Should a surplus appear within the scheme the board will decide if a reduction in premium is possible although this would only be possible at much higher solvency levels. Premiums paid to the scheme by the group and charged to the income statement in 2013 totalled £8m (2012: £8m). The estimated amounts of contributions expected to be paid to the schemes during the fi nancial year commencing 1 January 2014 in respect of the on-going accrual of benefi ts is approximately £8m. The premium that the IWPF received in 2013 is not yet available; in 2012 this amounted to €60m of which approximately €8m was paid by the group. The total number of employees in the scheme is approximately 22,000 at the end of 2012. The number of employees working for the group is approximately 5,600 as at 31 October 2013. The scheme is not accounted for as a defi ned benefi t scheme under IAS 19 ‘Employee Benefi ts’ as it is not possible to identify the group’s share of the scheme’s assets and liabilities. As a result, and in line with general practice for such schemes, the scheme is accounted for as if it were a defi ned contribution scheme under IAS 19. Defi ned benefi t arrangements The group operates several funded defi ned retirement benefi t schemes where the benefi ts are based on employees’ length of service. Whilst the group’s primary scheme is in the UK, it also operates other material schemes in the Netherlands and Canada and other less material plans elsewhere. Under funded arrangements, the assets of defi ned benefi t schemes are held in separate trustee-administered funds or similar structures in the countries concerned. There are also various less material unfunded arrangements; for these the group does not hold related assets separate from the group. The amounts recognised in income are included within the following categories in the income statement: Amounts recognised in income Cost of sales Administration expenses Net fi nance costs Total for all defi ned benefi t schemes 2013 £m (5) (2) (20) (27) 2012 £m (5) (3) (15) (23) 128 G4S plc Annual Report and Accounts 2013 The Defi ned Benefi t Obligation (DBO), Assets and balance sheet provisions for defi ned benefi t schemes are as follows: 2013 UK Netherlands Other Total for material funded defi ned benefi t schemes Total provision for unfunded and other funded defi ned benefi t schemes Total provision for all defi ned benefi t schemes 2012 UK Canada* Netherlands Other Total for material funded defi ned benefi t schemes Total provision for unfunded and other funded defi ned benefi t schemes Total provision for all defi ned benefi t schemes DBO £m (2,011) (111) (10) (2,132) DBO £m (1,886) (34) (96) (9) (2,025) Financial statements Assets £m 1,562 88 10 1,660 Assets £m 1,474 28 79 8 1,589 Provision £m (449) (23) – (472) (32) (504) Provision £m (412) (6) (17) (1) (436) (35) (471) * Liabilities and assets for the Canadian scheme were transferred to ‘held for sale’ as at 30 June 2013 and the sale of the sponsoring business was completed on 17 January 2014. UK Defi ned Benefi t Scheme The defi ned benefi t scheme in the UK accounts for 95% of the net balance sheet liability for material funded defi ned retirement benefi t schemes. It comprises three sections: the Group 4 section which is the pension scheme demerged from the former Group 4 Falck A/S; the Securicor section, responsibility for which the group assumed on 20 July 2004 with the acquisition of Securicor plc, and the GSL section, responsibility for which the group assumed on 12 May 2008 with the acquisition of GSL. The UK scheme is closed to future accrual apart from some sub-sections of the GSL section, and for most members defi nes the pension based on fi nal salary. The GSL section has historically remained open to provide a facility to accept former public-sector employees who join G4S through outsourcings. In the Group 4 and Securicor sections, members retain their link to fi nal salary where appropriate on their benefi ts accrued up to closure in 2011. As at the latest actuarial funding valuation, the participants of the UK pension scheme sections can be analysed as follows: At 5 April 2012 Active participants – Number – Average age Deferred participants – Number – Average age Pensioner participants – Number – Average age Group 4 section GSL section Securicor section – N/A 4,390 51.5 3,024 69.9 808 47.1 1,318 50.0 581 63.6 – N/A 9,973 51.3 8,891 71.2 Total 808 47.1 15,681 51.2 12,496 70.5 There is a mix of fi xed and infl ation-dependent pension increases (in payment and deferment) which vary from member to member according to their membership history and the section of the scheme. The discounted weighted average duration of the accrued liabilities of the sections are respectively 17 years (Group 4 section), 18 years (GSL section) and 18 years (Securicor section). The scheme is set up under UK law and governed by a Trustee company which is responsible for the scheme’s investments, administration and management. The Board of the Trustee Company is comprised of an independent chairman and further independent, group and scheme membership representatives. The current schedule of defi cit recovery contributions provides for a contribution of approximately £42m during 2014. In addition, the company has pledged a share of any material disposal proceeds to the pension scheme (to be shared in the same proportion as the pension scheme defi cit bears to overall group indebtedness) and has agreed that additional contributions would be made in the event that the average annual dividend payment to ordinary shareholders over the three fi nancial years 2013, 2014, 2015 exceeds a certain threshold or in the event that the company makes a signifi cant special dividend payment, (or equivalent capital return), to its ordinary shareholders over the same period. A funding valuation is carried out for the scheme’s Trustee every three years by an independent fi rm of actuaries. Depending on the outcome of that valuation a schedule of future contributions is negotiated; the group has guaranteed any contributions due from its subsidiaries. The most recent valuation had an effective date of 5 April 2012. Annual Report and Accounts 2013 G4S plc 129 Notes to the consolidated fi nancial statements continued 33. RETIREMENT BENEFIT OBLIGATIONS (CONTINUED) Other material Defi ned Benefi t Schemes Apart from the multi-employer scheme referred to above, the group operates two material pension schemes in the Netherlands which apply to different employee populations; they are known as the Securicor Staff and Cash Solutions schemes. Both schemes defi ne pensions in terms of average career pay, are open to new entrants and are funded in accordance with Dutch requirements. Pension increases in the Securicor Staff scheme are conditional on the funding level and so are only required if there is a funding surplus. The Securicor scheme has a risk sharing arrangement whereby members pay 50% of the cost of the scheme but the group has opted to record 100% of the defi cit as a company liability due to uncertainties as to the practicalities of applying the scheme’s provisions in this respect; for example in 2012 benefi ts were reduced rather than increasing members’ contributions. The Cash Solutions scheme is required to provide benefi ts at least equivalent to the industry-wide multi-employer scheme, and in particular pension increases in payment and deferment, as well as revaluation of active members’ rights in the Cash Solutions scheme have to follow the multi-employer scheme (which also applies a conditional approach). The Cash Solutions scheme is insured, so longevity risk on the base level of insured pension (that is before increases) is carried by the insurer, and any bonuses from the insurer’s returns may defray the cost of pension increases. Accordingly, there is a counterparty risk against the insurer. The other material scheme is in Canada; it is a fi nal salary scheme that is closed to new entrants, other than to hourly-paid members in a few specifi c locations. Most of the benefi ts are not subject to indexation in payment. The scheme is funded in accordance with Canadian requirements. The sponsoring business is held for sale as at 31 December 2013. It was sold on 17 January 2014 and the entire liabilities and assets of the scheme are now the responsibility of the purchaser. The discounted weighted average duration of the accrued liabilities of the schemes are respectively 28 years (Netherlands Securicor Staff), 28 years (Netherlands Cash Solutions) and 18 years (Canada). Expected Contributions The estimated amounts of contributions expected to be paid to the material schemes during the fi nancial year commencing 1 January 2014 in respect of the ongoing accrual of benefi ts are approximately £9m (split £6m UK, £3m Netherlands) and it is anticipated that these will remain at a similar level in the medium term subject to changes in fi nancial conditions. Additional contributions of approximately £42m will also be made in 2014 in respect of the defi cit in the UK schemes. Principal Risks The group’s pension schemes create a number of risk exposures. Annual increases on benefi ts are, to a varying extent from scheme to scheme, dependent on infl ation so the main uncertainties affecting the level of benefi ts payable are future infl ation levels (including the impact of infl ation on future salary increases) and the actual longevity of the membership. Benefi ts payable will also be infl uenced by a range of other factors including member decisions on matters such as when to retire and the possibility to draw benefi ts in different forms. A key risk is that additional contributions are required if the investment returns fall short of those anticipated when setting the contributions to the pension plans. For the UK funding valuation those assumed investment returns (for funding valuations) are set based on fi xed margins over the LIBOR swap curve. The management of the pension fund assets has been delegated to an asset manager which manages the assets against a liability benchmark. The key parameters of this mandate can be summarised as follows: – An asset mix which is managed dynamically over time rather than a set strategic allocation – Interest rate and infl ation risk is managed with the benchmark of hedging 100% of these risks as a percentage of the asset value through the use of debt instruments (government bonds) and derivatives – Currency risk is managed with the objective of hedging at least 70% of the overseas currency exposure in the portfolio through the use of forward foreign currency contracts All pension schemes are regulated by the relevant jurisdictions. These include extensive legislation and regulatory mechanisms that are subject to change and may impact G4S’ pension schemes. Regarding fi nancial reporting measures, the IAS 19 liability measurement (DBO) and the service cost are sensitive to the actuarial assumptions made on a range of demographic and fi nancial matters that are used to project the expected benefi t payments, the most important of these assumptions being about future infl ation and salary growth levels and the assumptions made about life expectation. The DBO and service cost are also very sensitive to the IAS 19 discount rate, which determines the discounted value of the projected benefi t payments. The discount rate depends on market yields on high-quality corporate bonds. Investment strategies are set with funding rather than IAS 19 considerations in mind and do not seek to provide a specifi c hedge against the IAS 19 measurement of liabilities. As a result the difference between the market value of the assets and the IAS 19 liabilities may be volatile. 130 G4S plc Annual Report and Accounts 2013 Financial statements Assumptions and sensitivities The weighted average principal assumptions used for the purposes of the actuarial valuations were as follows: Key assumptions used at 31 December 2013 Discount rate Expected rate of salary increases Pension increases in payment (for the UK, at RPI* with a limit of 5% p.a.) Infl ation Key assumptions used at 31 December 2012 Discount rate Expected rate of salary increases Pension increases in payment (for the UK, at RPI with a limit of 5% p.a.) Infl ation * The CPI assumption used for the UK valuation in 2013 was 2.4%. UK Canada Netherlands 4.4% 3.5% 3.2% 3.4% 4.5% 3.1% 2.9% 3.0% 5.0% 3.0% 1.4% 2.3% 4.5% 3.0% 1.4% 2.3% 3.7% 2.0% 1.4% 2.0% 3.7% 2.0% 1.0% 2.0% IAS 19 specifi es that pension liabilities should be discounted at appropriate high-quality corporate bond rates. The group considers that it is appropriate to consider AA-rated corporate bonds as high quality and therefore have used discount rates based on yields on such bonds corresponding to the liability profi le of the schemes. The effect of a movement in the discount rate applicable in the UK alters reported liabilities (before associated deferred tax adjustments) by approximately the amounts shown in the table below: Sensitivity analysis Discount rate assumption being 0.5% higher Discount rate assumption being 0.5% lower Increase/(decrease) in the DBO of the UK Scheme 2013 £m (163) 181 The effect of a movement in RPI infl ation applicable in the UK alters reported liabilities (before associated deferred tax adjustments) by approximately the amounts shown in the table below: Sensitivity analysis Infl ation assumption being 0.5% higher Infl ation assumption being 0.5% lower Increase/(decrease) in the DBO of the UK Scheme 2013 £m 79 (70) The above sensitivities allow for infl ation-dependent assumptions such as salary growth and relevant pension increases to vary corresponding to the infl ation assumption variation. Due to the caps and fl oors on pension increases a certain movement in the infl ation assumption will not generally result in the same movement in the pension increase assumption. In addition to the above, the group uses appropriate mortality assumptions when calculating the schemes’ obligations. The mortality tables used for the scheme in the UK are: Birth year table S1P[M/F]A Base with future improvements in line with CMI_2013 Core projections, based on a long term improvement rate of 1.25% p.a. and allowing for individual scaling factors based on the majority analysis carried out as part of the last funding valuation. The resulting assumed life expectancy of a male member of the UK schemes currently aged 65 is between 21 and 22 years, depending on the section of the plan. The assumed life expectancy at 65 of a male currently aged 52 is between 22 and 23 years. At those ages, the assumed life expectancy for a female member is between 2 and 3 years higher than for a male member. The effect of a one year change in this UK life expectancy assumption is to alter reported liabilities (before associated deferred tax adjustments) by approximately £88m. The selection of these movements to illustrate the sensitivity of the DBO to key assumptions should not be interpreted as the group expressing any specifi c view of the probability of such movements happening. Annual Report and Accounts 2013 G4S plc 131 Notes to the consolidated fi nancial statements continued 33. RETIREMENT BENEFIT OBLIGATIONS (CONTINUED) The amounts recognised on the balance sheet in respect of these defi ned benefi t schemes and the various components of income, OCI and cashfl ow are as follows: 2013 Amounts recognised on the balance sheet at beginning of the period DBO £m (2,025) Assets £m 1,589 Total £m (436) Amounts recognised in income Current service cost Settlements and past service costs Interest on obligations and assets Administration costs paid from plan assets Transfers in Total amounts recognised in income Remeasurements Actuarial loss – change in fi nancial assumptions Actuarial loss – change in demographic assumptions Actuarial loss – experience Return on assets in excess of interest Remeasurement effects recognised in OCI Cash Employer contributions Employee contributions Benefi ts paid from plan assets Net cash Other Exchange rates Transfer of Canada scheme to held for sale (9) 1 (90) – (11) (109) (80) (22) (4) – (106) – (4) 79 75 2 31 – – 70 (2) 14 82 – – – 46 46 49 4 (79) (26) 1 (32) (9) 1 (20) (2) 3 (27) (80) (22) (4) 46 (60) 49 – – 49 3 (1) Amounts recognised on the balance sheet at end of the period (2,132) 1,660 (472) In 2011 G4S won the managed prisons bid in respect of HMP Birmingham and relevant employees have accrued benefi ts in the GSL section since 1 October 2011. New employees had the option to transfer accrued pension rights. This occurred as at 1 March 2013 and the effect of this transfer has been presented in the ‘Transfers in’ line of the above breakdown. 132 G4S plc Annual Report and Accounts 2013 Financial statements 2012 Amounts recognised on the balance sheet at beginning of the period DBO £m (1,825) Assets £m 1,539 Asset Ceiling £m (9) Amounts recognised in income Current service cost Settlements and past service costs Interest on obligations and assets Administration costs paid from plan assets Total amounts recognised in income Remeasurements Actuarial loss – change in fi nancial assumptions Actuarial gain – experience Return on assets in excess of interest Change in effect of asset ceiling in excess of interest Remeasurement effects recognised in OCI Cash Employer contributions Employee contributions Benefi ts paid from plan assets Net cash Other Exchange rates (7) 2 (89) – (94) (179) 1 – – (178) – (4) 73 69 3 – – 75 (3) 72 – – 1 – 1 47 4 (73) (22) (1) Amounts recognised on the balance sheet at end of the period (2,025) 1,589 – – (1) – (1) – – – 10 10 – – – – – – Total £m (295) (7) 2 (15) (3) (23) (179) 1 1 10 (167) 47 – – 47 2 (436) The asset ceiling restriction at the beginning of 2012 refl ects an inability to derive economic value from an IAS 19 surplus in a scheme in the Netherlands; by 31 December 2012 the scheme was in defi cit and no restriction was necessary, and this was still the case at 31 December 2013. The contribution from sponsoring companies in 2013 included £38m (2012: £37m) of additional contributions in respect of the defi cit in the UK schemes. Annual Report and Accounts 2013 G4S plc 133 Notes to the consolidated fi nancial statements continued 33. RETIREMENT BENEFIT OBLIGATIONS (CONTINUED) The composition of the scheme assets at the reporting date is as follows: 2013 Equity Bonds Other Total 2012 Equity Bonds Other Total Total £m 438 107 1,105 1,650 Netherlands £m 25 44 19 88 Total £m 252 373 956 1,581 Canada £m 16 10 2 28 Netherlands £m 22 38 19 79 A more detailed split of assets of the UK scheme at 31 December 2013 is presented in the table below: Equity Private equity Government bonds Credit Property Macro-oriented Multi-strategy Derivatives Cash and cash equivalents UK £m 413 63 1,086 1,562 UK £m 214 325 935 1,474 2013 £m 367 46 63 274 42 296 48 15 411 1,562 Within the UK pension fund, the Equity, Credit, Macro-orientated and Multi-strategy sub-categories consist of pooled vehicles investing predominantly in assets with quoted prices in active markets. All government bonds are issued by the UK government and have quoted prices in active markets. Other UK investments are predominantly not quoted. Derivatives include a range of interest rate and infl ation linked swaps, forward currency contracts, equity index total return swaps, equity options, and futures. Investing in interest rate and infl ation linked swaps is designed to mitigate the impact of future changes in interest rates and infl ation. None of the pension scheme assets are held in the group’s own fi nancial instruments or in any assets held or used by the group. 134 G4S plc Annual Report and Accounts 2013 Financial statements 34. PROVISIONS AND CONTINGENT LIABILITIES At 1 January 2013 Additional provision in the year Utilisation of provision Transfers and reclassifi cations Translation adjustments At 31 December 2013 Included in current liabilities Included in non-current liabilities Employee benefi ts £m 14 21 (6) – 2 31 Restructuring £m 3 68 (35) – (3) 33 Claims reserves £m 46 27 (17) – 1 57 Contract provisions £m 11 136 (2) (2) – 143 Total £m 74 252 (60) (2) – 264 200 64 264 Employee benefi ts The provision for employee benefi ts is in respect of any employee benefi ts which accrue over the working lives of the employees, typically including items such as long service awards and termination indemnity schemes. The group’s net obligation in respect of long-term service benefi ts other than retirement benefi ts represents the present value of the future benefi t that employees have earned at the balance sheet date, less the fair value of scheme assets out of which the obligations are to be settled directly. Restructuring Restructuring provisions include amounts for redundancy payments, and the costs of closure of activities in acquired businesses and discontinued operations. Settlement of restructuring provisions is highly probable. The timing is uncertain but is generally likely to be short term. Claims reserves The claims reserves are held by the wholly-owned captive insurance subsidiaries in Guernsey and the US which underwrite part of the group’s cash solutions, general liability, workers’ compensation and auto liability policies. The provisions are subject to regular actuarial review and are adjusted as appropriate. Settlement of these provisions is highly probable but both the value of the fi nal settlements and their timing is uncertain, dependent upon the outcome of ongoing processes to determine both liability and quantum in respect of a wide range of claims or possible claims. Contract provisions Contract provisions include provisions for onerous contracts including future liabilities for loss-making contracts, for all properties sub-let at a shortfall, for the cost of replacing assets where there is a present contractual requirement and for long-term idle, leased properties. Provisions relating to revenue recognition are also included in this category. The provision is based on the value of future net cash outfl ows. Whilst the likelihood of settlement of these obligations is considered probable, there is uncertainty over their value and duration. On 12 March 2014 the group announced that it had reached agreement with the UK Ministry of Justice (MoJ) on a settlement in respect of claims arising in relation to Electronic Monitoring services provided between 2005 and 2013. The agreement also concluded outstanding matters relating to two UK facilities management contracts. The total settlement amount was £109m and the group has provided for this amount within contract provisions as at 31 December 2013. Contingent liabilities Contingent liabilities exist in respect of agreements entered into in the normal course of business, none of which are individually or collectively signifi cant. Details of unprovided contingent tax liabilities are presented in note 35. Annual Report and Accounts 2013 G4S plc 135 Notes to the consolidated fi nancial statements continued 35. DEFERRED TAX The following are the major deferred tax liabilities and assets recognised by the group and movements thereon during the current and prior reporting periods: At 1 January 2013 (Charge)/credit to the income statement Acquisition of subsidiaries Charge to equity Translation adjustments Transfers/other At 31 December 2013 At 1 January 2012 Credit to the income statement Acquisition of subsidiaries Credit to equity Transfers/other At 31 December 2012 Retirement benefi t obligations £m 104 (5) – – – – 99 76 3 – 25 – 104 Intangible assets £m (61) 20 (3) – 2 – (42) (79) 27 (9) – – (61) Tax losses £m 28 2 – – – – 30 23 5 – – – 28 Other temporary differences £m 53 16 2 (4) (4) (3) 60 45 1 – 3 4 53 Total £m 124 33 (1) (4) (2) (3) 147 65 36 (9) 28 4 124 Certain deferred tax assets and liabilities have been offset where permitted. The following is the analysis of the deferred tax balances (after offset): Deferred tax liabilities Deferred tax assets Net deferred tax asset included in held for sale Total deferred tax position 2013 £m (47) 184 10 147 2012 £m (68) 179 13 124 At 31 December 2013, the group had unutilised tax losses of approximately £705m (2012: £485m) potentially available for offset against future profi ts. A deferred tax asset of £30m (2012: £28m) has been recognised in respect of approximately £120m (2012: £106m) of gross losses. No deferred tax asset has been recognised in respect of the remaining £585m (2012: £379m) of gross losses due to the unpredictability of future profi t streams in the relevant jurisdictions and the fact that a signifi cant proportion of such losses remains unaudited by the relevant tax authorities. Included in unrecognised tax losses are gross losses of £15m which will expire between 2014 and 2023. Other losses may be carried forward indefi nitely. At 31 December 2013, the aggregate amount of temporary differences associated with undistributed earnings of non-UK subsidiaries for which deferred tax liabilities have not been recognised is £1,220m (2012: £1,378m). No liability has been recognised in respect of these gross differences on the basis that the group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. At 31 December 2013, the group had total unprovided contingent tax liabilities of approximately £58m (2012: £5m) relating to unresolved tax issues in various jurisdictions. 136 G4S plc Annual Report and Accounts 2013 36. SHARE CAPITAL G4S plc Issued and fully paid ordinary shares of 25p each Ordinary shares in issue At 1 January 2013 New shares issued for cash At 31 December 2013 Financial statements 2013 £ 387,898,609 2012 £ 352,667,160 2013 Number 1,410,668,639 140,925,797 1,551,594,436 2012 Number 1,410,668,639 – 1,410,668,639 In August 2013 the group issued140,925,797 ordinary shares as a result of the 9.99% placing. The group received gross proceeds of £348m and paid related costs of £5m. 37. OTHER RESERVES At 1 January 2013 Total comprehensive income attributable to equity shareholders of parent Shares issued Own shares awarded At 31 December 2013 At 1 January 2012 Total comprehensive income attributable to equity shareholders of parent Own shares purchased Own shares awarded At 31 December 2012 Other reserves include: Hedging reserve £m (34) Translation reserve £m 50 Merger reserve £m 426 Reserve for own shares £m (20) Total other reserves £m 422 13 – – (21) (26) (8) – – (34) (109) – – (59) 110 (60) – – 50 – 308 – 734 426 – – – 426 – – 2 (18) (16) – (6) 2 (20) (96) 308 2 636 494 (68) (6) 2 422 Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash fl ow instruments related to the hedged transactions that have not yet occurred (net of tax). Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the fi nancial statements of foreign operations, as well as from the translation of liabilities that hedge the company’s net investment in foreign operations (net of tax). Merger reserve The merger reserve comprises reserves arising upon the merger between the former Group 4 Falck A/S and the former Group 4 Securitas BV in 2000 and the acquisition of Securicor plc by the group in 2004. In 2013 the £308m addition to the merger reserve resulted from the group’s 9.99% share placing in August 2013. Reserve for own shares An employee benefi t trust established by the group held 6,934,564 shares at 31 December 2013 (2012: 7,589,853 shares) to satisfy the vesting of awards under the performance share plan and performance-related schemes. During the year no shares were purchased by the trust, whilst 655,289 shares were used to satisfy the vesting of awards under the schemes. At 31 December 2013, the cost of shares held by the trust was £18,460,753 (2012: £20,207,798), whilst the market value of these shares was £18,203,231 (2012: £19,470,928). Shares held by the trust are treated as treasury shares, are deducted from equity, do not receive dividends and are excluded from the calculations of earnings per share. Annual Report and Accounts 2013 G4S plc 137 Notes to the consolidated fi nancial statements continued 38. ANALYSIS OF NET DEBT A reconciliation of net debt to amounts in the consolidated statement of fi nancial position is presented below: Cash and cash equivalents Investments Net cash and overdrafts included within disposal groups classifi ed as held for sale Net debt (excluding cash and overdrafts) included within disposal groups classifi ed as held for sale Bank overdrafts Bank loans Loan notes Fair value of loan note derivative fi nancial instruments Obligations under fi nance leases Total net debt An analysis of movements in net debt in the year is presented below: Increase in cash, cash equivalents and bank overdrafts per consolidated cash fl ow statement Sale of investments Movement in debt and lease fi nancing Change in net debt resulting from cash fl ows Borrowings acquired with subsidiaries Net additions to fi nance leases Movement in net debt in the year Translation adjustments Net debt at the beginning of the year Net debt at the end of the year 2013 £m 594 39 15 (17) (22) (196) (1,982) 88 (52) (1,533) 2013 £m 142 (16) 174 300 (4) (12) 284 (15) (1,802) (1,533) 39. OPERATING LEASE ARRANGEMENTS The group as lessee As at 31 December 2013, the group had outstanding commitments under non-cancellable operating leases, which fall due as follows: Within one year In the second to fi fth years inclusive After fi ve years Total operating lease commitments 2013 £m 134 290 214 638 2012 £m 469 56 20 10 (17) (345) (2,039) 105 (61) (1,802) 2012 £m 138 – (302) (164) (1) (21) (186) – (1,616) (1,802) 2012 £m 133 315 181 629 The group leases a number of its offi ce properties, vehicles and other operating equipment under operating leases. Property leases are negotiated over an average term of eight years, at rates refl ective of market rentals. Periodic rent reviews take place to bring lease rentals in line with prevailing market conditions. Some but not all lease agreements have an option to renew the lease at the end of the lease term. Leased vehicles and other operating equipment are negotiated over an average lease term of four years. Certain leased properties have been sub-let by the group. Sub-leases are negotiated on terms consistent with those of the associated property. The total future minimum sub-lease payments expected to be received by the group from sub-let properties amount to £12m (2012: £10m). 138 G4S plc Annual Report and Accounts 2013 Financial statements 40. SHARE BASED PAYMENTS Shares allocated conditionally fall under either the group’s performance-related bonus scheme or the group’s Performance Share Plan (PSP). Shares allocated conditionally under the performance-related bonus scheme vest three years following the date of grant provided certain non-market performance conditions are met. Those allocated under the PSP vest after three years, to the extent that (a) certain non-market performance conditions are met and (b) certain market performance conditions are met. The proportion of the allocation of awards to these criteria is described in the remuneration report. Vesting occurs after the third anniversary of the date the shares were allocated conditionally. To the extent that the performance criteria have been met and the shares are not forfeited, these shares can only be released upon request after the third anniversary but before the tenth anniversary. The number of shares allocated conditionally is as follows: Outstanding at 1 January Allocated during the year Transferred during the year Forfeited during the year Expired during the year Outstanding at 31 December Performance- related bonus scheme 2013 Number 812,200 58,026 (494,492) – – 375,734 PSP 2013 Number 15,589,225 7,385,392 (161,948) (2,546,129) (4,232,718) 16,033,822 Total 2013 Number 16,401,425 7,443,418 (656,440) (2,546,129) (4,232,718) 16,409,556 Performance- related bonus scheme 2012 Number 1,068,455 40,652 (296,907) – – 812,200 PSP 2012 Number 16,102,450 5,859,439 (613,518) (727,959) (5,031,187) 15,589,225 Total 2012 Number 17,170,905 5,900,091 (910,425) (727,959) (5,031,187) 16,401,425 The weighted average remaining contractual life of conditional share allocations outstanding at 31 December 2013 was 16 months (2012: 16 months). The weighted average share price at the date of allocation of shares allocated conditionally during the year was 291.7p (2012: 277.1p) and the contractual life of all conditional allocations was three years. Under the PSP, the vesting of half (2012: half) of the shares allocated conditionally depends upon Total Shareholder Return (a market performance condition) over the performance period measured against a comparator group. 25% of the allocation vests upon the group’s Total Shareholder Return equalling median performance amongst the comparator group. The fair value of the shares allocated subject to this market performance condition has therefore been reduced by 75%. The income statement is charged with an estimate for the vesting of shares conditionally awarded subject to non-market performance conditions. The charge for 2013 was £nil (2012: £nil). Annual Report and Accounts 2013 G4S plc 139 Notes to the consolidated fi nancial statements continued 41. RELATED PARTY TRANSACTIONS Transactions and balances with joint ventures and associated undertakings Transactions between the company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the group and other related parties are disclosed below. All transactions with related parties are entered into in the normal course of business. Transactions with joint ventures included revenue recorded of £28m (2012: £30m). Amounts due to related parties include £2m (2012: £1m) to joint ventures and £2m (2012: £2m) to associates. Amounts due from related parties include £4m (2012: £4m) from joint ventures and £1m (2012: £2m) from associates. No expense has been recognised in the year for bad and doubtful debts in respect of amounts owed by related parties. Details of principal joint ventures are shown in note 21. The group has a legal interest in a number of joint ventures and joint arrangements, where the economic interest was divested by the Global Solutions Group prior to its acquisition by G4S plc in 2008. Transactions with these entities during the year comprised: White Horse Education Partnership Limited Integrated Accommodation Services plc Fazakerley Prison Services Limited Onley Prison Services Limited ECD Cookham Wood Limited ECD Onley Limited Stratus Integrated Services Limited UK Court Services (Manchester) Limited East London Lift Company Limited Total Services/ sales to 2013 £m 2 39 33 14 12 13 8 2 1 124 Services/ sales to 2012 £m 2 44 34 14 13 13 7 2 1 130 Transactions with post-employment benefi t schemes Details of transactions with the group’s post-employment benefi t schemes are provided in note 33. Unpaid contributions owed to schemes amounted to £0.5m at 31 December 2013 (2012: £0.5m). Transactions with other related parties In the normal course of the group’s business the group provides services to and receives services from certain non-controlling interests on an arm’s length basis. Remuneration of key management personnel The group’s key management personnel are deemed to be the non-executive directors and those individuals, including the executive directors, whose remuneration is determined by the Remuneration Committee. Their remuneration is set out below. Further information about the remuneration of individual directors included within key management personnel is provided in the audited part of the Directors’ Remuneration Report on pages 64 to 79. Short-term employee benefi ts Post-employment benefi ts Other long-term benefi ts Share-based payment Total 2013 £ 10,887,469 217,937 56,682 931,197 12,093,285 2012 £ 7,253,734 104,212 41,819 132,289 7,532,054 42. EVENTS AFTER THE BALANCE SHEET DATE In January 2014, the group sold its cash solutions business in Canada and its remaining business in Norway for total proceeds of £89m. No other signifi cant post-balance sheet events have affected the group since 31 December 2013. 43. SIGNIFICANT INVESTMENTS The companies listed below are those which were part of the group at 31 December 2013 and which, in the opinion of the directors, signifi cantly affected the group’s results and net assets during the year. The directors consider that those companies not listed are not signifi cant in relation to the group as a whole. A comprehensive list of all subsidiaries will be disclosed as an appendix to the group’s annual return. The principal activities of the companies listed below are indicated according to the following key: Secure solutions Cash solutions S C These businesses operate principally in the country in which they are incorporated. 140 G4S plc Annual Report and Accounts 2013 Financial statements Product segment Country of incorporation Ultimate ownership S S S S S C S S C S S S+C S S S C C S S S S S S+C S C S S S S S+C S+C S+C S+C C S S S+C S+C S S+C C S S S S+C S S S S S S S S S Argentina Australia Australia Austria Belgium Belgium Brazil Brazil Canada Canada Chile Colombia Denmark England England England England England England England England England Estonia Finland Hungary India Ireland Israel Israel Kenya Kuwait Luxembourg Malaysia Netherlands Netherlands Norway Peru Qatar Saudi Arabia Saudi Arabia South Africa South Africa Sweden Thailand UAE USA USA USA USA USA England South Africa Israel USA 75% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 49% 100% 92% 92% 100% 49% 100% 49% 100% 100% 100% 100% 0% 49% 0% 75% 74% 100% 100% 49% 100% 100% 100% 100% 100% 59% 20% 46% 46% Subsidiary undertakings G4S Soluciones de Seguridad S.A. G4S Australia Pty Limited G4S Custodial Services Pty Limited G4S Secure Solutions AG (Austria) G4S Secure Solutions SA/NV G4S Cash Solutions (Belgium) NV G4S Interativa Service Ltda Vanguarda Segurança e Vigilância Ltda G4S Cash Solutions (Canada) Limited G4S Secure Solutions (Canada) Limited G4S Security Services Regiones S.A. G4S Secure Solutions Colombia S.A. G4S Security Services A/S G4S Aviation Services (UK) Limited G4S Care and Justice Services (UK) Limited G4S Cash Centres (UK) Limited G4S Cash Solutions (UK) Limited G4S Integrated Services (UK) Limited G4S Risk Management Limited G4S Secure Solutions (UK) Limited G4S Security Services (UK) Limited G4S Utility and Outsourcing Service (UK) Limited AS G4S Baltics G4S Security Services Oy G4S Keszpenzlogisztikai Kft G4S Secure Solutions (India) Pvt. Limited1, 5 G4S Secure Solutions (Ire) Limited G4S Secure Solutions (Israel) Limited G4S Security Technologies (Israel) Limited G4S Kenya Limited Al Mulla Security Services Co. WLL5 G4S Security Solutions S.A.R.L Safeguards G4S Sdn Bhd2, 5 G4S Cash Solutions BV G4S Beheer BV G4S Secure Solutions AS G4S Peru S.A.C. G4S Qatar SPC5 al Majal Service Master Co. Limited5 Mohammed Bin Abdoud Al Amoudi Co. for Civilian Security Services Partnership (Almajal)5 G4S Cash Solutions (SA) (Pty) Limited G4S Secure Solutions (SA) (Pty) Limited G4S Secure Solutions AB G4S Secure Solutions (Thailand) Limited Group 4 Securicor Security Services UAE (LLC) G4S5 G4S Government Solutions, Inc. G4S Integrated Services, Inc. G4S Secure Solutions (USA) Inc. G4S Technology LLC G4S Youth Services LLC Joint ventures (see note 21) Bridgend Custodial Services Limited3 Bloemfontein Correctional Contracts (Pty) Limited4 Policity Limited Associated undertakings Space Gateway Support LLC 1 G4S Secure Solutions (India) Pvt. Limited has a year end of 31 March. 2 Safeguards G4S Sdn Bhd has a year end of 30 June. 3 Bridgend Custodial Services Limited has a year end of 30 September. 4 Bloemfontein Correctional Contracts (Pty) Limited has a year end of 30 September. 5 By virtue of shareholder agreements, options, pre-emption rights and other contractual arrangements, the group has the power to govern the fi nancial and operating policies, so as to obtain the benefi ts from the activities of these companies. These are therefore consolidated as full subsidiaries. Annual Report and Accounts 2013 G4S plc 141 Parent company balance sheet At 31 December 2013 Fixed assets Intangible assets Investments Current assets Debtors Cash at bank and in hand Creditors – amounts falling due within one year Bank overdraft(unsecured) Borrowings(unsecured) Other creditors Net current assets Total assets less current liabilities Creditors – amounts falling due after more than one year Borrowings(unsecured) Other creditors Net assets Capital and reserves Called up share capital Share premium and reserves Equity shareholders’ funds Notes (b) (c) (d) (e) (f) (e) (f) 36 (i) 2013 £m 11 3,055 3,066 2,992 56 3,048 (5) (61) (2,856) (2,922) 126 3,192 (1,040) – (1,040) 2,152 388 1,764 2,152 2012 £m 16 3,051 3,067 2,930 9 2,939 (9) (40) (2,851) (2,900) 39 3,106 (1,174) (2) (1,176) 1,930 353 1,577 1,930 The parent company fi nancial statements were approved by the board of directors and authorised for issue on 31 March 2014. They were signed on its behalf by: Ashley Almanza Director Himanshu Raja Director 142 G4S plc Annual Report and Accounts 2013 Parent company reconciliation of movements in equity shareholders’ funds For the year ended 31 December 2013 Retained profi t for the year Changes in fair value of hedging derivatives Shares issued Dividends declared Own shares purchased Tax on equity movements Net increase/(decrease) in shareholders’ funds Opening equity shareholders’ funds Closing equity shareholders’ funds Financial statements 2013 £m 15 (8) 343 (130) – 2 222 1,930 2,152 2012 £m 24 (6) – (120) (6) 2 (106) 2,036 1,930 Annual Report and Accounts 2013 G4S plc 143 Notes to the parent company fi nancial statements (A) SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The separate fi nancial statements of the company are presented as required by the Companies Act 2006. They have been prepared under the historical cost convention except for the revaluation of certain fi nancial instruments and in accordance with applicable United Kingdom Accounting Standards (UK GAAP). The fi nancial statements have been prepared under the going concern basis. Exemptions Under section 408 of the Companies Act 2006 the company is exempt from the requirement to present its own profi t and loss account. The company has taken advantage of the exemption from preparing a cash fl ow statement under the terms of FRS 1 ‘Cash Flow Statements’. The cash fl ows of the company are included within its consolidated fi nancial statements. The company is also exempt under the terms of the revised FRS 8 ‘Related Party Disclosures’ from disclosing related party transactions with wholly owned subsidiaries within the group. Intangible fi xed assets Intangible fi xed assets are stated at cost net of accumulated amortisation and any provision for impairment. Intangible fi xed assets are amortised on a straight-line basis over their expected economic life. Software is amortised over periods up to a maximum of eight years. Fixed asset investments Fixed asset investments, which comprise investments in subsidiary undertakings, are stated at cost less amounts written off. Financial instruments Financial assets and fi nancial liabilities are recognised when the group becomes a party to the contractual provisions of the instruments. External debtors Debtors do not carry interest and are stated initially at their fair value. The company provides for bad debts based upon an analysis of those that are past due in accordance with local conditions and past default experience. Cash at bank and in hand and bank overdrafts Cash at bank and in hand and bank overdrafts comprise cash balances and call deposits. Interest-bearing borrowings Interest-bearing bank overdrafts, loans and loan notes are recognised at the value of proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are recognised in the profi t and loss account on an accrual basis using the effective interest method. External creditors Creditors are not interest-bearing and are stated initially at their fair value. Amounts owed to/from subsidiary undertakings Amounts owed to/from subsidiary undertakings bear interest at prevailing market rates. Equity instruments Equity instruments issued by the company are recorded at the value of proceeds received, net of direct issue costs. Derivative fi nancial instruments and hedge accounting In accordance with its treasury policy, the company only holds or issues derivative fi nancial instruments to manage the group’s exposure to fi nancial risk, not for trading purposes. Such fi nancial risk includes the interest risk on the group’s variable-rate borrowings, the fair value risk on the group’s fi xed-rate borrowings, commodity risk in relation to its diesel consumption and foreign exchange risk on transactions, on the translation of the group’s results and on the translation of the group’s net assets measured in foreign currencies. The company manages these risks through a range of derivative fi nancial instruments, including interest rate swaps, commodity swaps, commodity options, forward foreign exchange contracts and currency swaps. Derivative fi nancial instruments are recognised in the balance sheet as fi nancial assets or liabilities at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the profi t and loss account, unless they qualify for hedge accounting. Where derivatives do qualify for hedge accounting, the treatment of any resultant gain or loss depends on the nature of the item being hedged as described below: Fair value hedge The change in the fair value of both the hedging instrument and the related portion of the hedged item is recognised immediately in the profi t and loss account. Cash fl ow hedge The change in the fair value of the portion of the hedging instrument that is determined to be an effective hedge is recognised in equity and subsequently recycled to the profi t and loss account when the hedged cash fl ow impacts the profi t and loss account. The ineffective portion of the fair value of the hedging instrument is recognised immediately in the profi t and loss account. 144 G4S plc Annual Report and Accounts 2013 Financial statements Foreign currencies The fi nancial statements of the company are presented in sterling, its functional currency. Transactions in currencies other than sterling are translated at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities which are denominated in other currencies are retranslated at the rates prevailing on that date. Non-monetary assets and liabilities carried at fair value which are denominated in other currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items measured at historical cost denominated in other currencies are not retranslated. Gains and losses arising on retranslation are included in the profi t and loss account. Taxation Current tax is provided at amounts expected to be paid (or recovered) using tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all material timing differences that have originated, but not reversed, by the balance sheet date. Deferred tax is measured on a non-discounted basis at tax rates that are expected to apply in the periods in which the timing differences reverse based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised where their recovery is considered more likely than not in that there will be suitable taxable profi ts from which the future reversal of underlying timing differences can be deducted. Pensions The company participates in multi-employer pension schemes in the UK, which provide benefi ts based on fi nal pensionable pay. The company is unable to identify its share of the schemes’ assets and liabilities on a consistent and reasonable basis. In accordance with FRS 17 ‘Retirement Benefi ts’, the company treats the schemes as if they were defi ned contribution schemes and recognises charges as and when contributions are due to the scheme. Details of the schemes are included in note 33 to the consolidated fi nancial statements. Share-based payments The company grants equity-settled share-based payments to certain employees. The fair value of share-based payments is determined at the date of grant and expensed, with a corresponding increase in equity on a straight-line basis over the vesting period, based on the company’s estimate of the shares that will eventually vest. The amount expensed is adjusted over the vesting period for changes in the estimate of the number of shares that will eventually vest, save for changes resulting from any market-related performance conditions. Developments expected in future accounting periods The new UK fi nancial reporting framework which comes into effect for accounting periods beginning on or after 1 January 2015 consists of three new standards; FRS 100 ‘Application of Financial Reporting Standards’ sets out the application of fi nancial reporting requirements in the UK and Republic of Ireland, FRS 101 ‘Reduced Disclosure Framework’ outlines the reduced disclosure framework available for use by qualifying entities choosing to report under IFRS and FRS 102 ‘The Financial Reporting Standard Applicable in the UK and Republic of Ireland’ is the new ‘UK GAAP’ which replaces all previous SSAPs and FRSs in one standard. A full analysis is currently being undertaken to identify the most appropriate option. Dividends Dividends are recognised as distributions to equity holders in the period in which they are paid. Dividends proposed but not declared are not recognised but are disclosed in the notes to the consolidated fi nancial statements. Financial guarantees The company enters into fi nancial guarantee contracts to guarantee the indebtedness of other companies within the group. The company considers these to be insurance arrangements and accounts for them as such. The company therefore treats such contracts as a contingent liability unless and until such time as it becomes probable that the company will be required to make a payment under the guarantee. Own shares held by employee benefi t trust Transactions of the company-sponsored employee benefi t trust are included in the parent company fi nancial statements. In particular, the trust’s purchases of shares in the company are debited directly to equity. Annual Report and Accounts 2013 G4S plc 145 Notes to the parent company fi nancial statements continued (B) INTANGIBLE FIXED ASSETS Cost At 1 January 2013 Additions Disposals At 31 December 2013 Amortisation At 1 January 2013 Amortisation charge Disposals At 31 December 2013 Net book value At 1 January 2013 At 31 December 2013 (C) FIXED ASSET INVESTMENTS The following are included in the net book value of fi xed asset investments: Subsidiary undertakings Shares at cost: At 1 January 2013 Additions Impairments At 31 December 2013 Software £m 17 3 (7) 13 (1) (2) 1 (2) 16 11 Total £m 3,051 13 (9) 3,055 The impairment within the carrying value of investments in the year is primarily due to a reduction in the net asset value of certain subsidiary undertakings. Full details of signifi cant investments held by the parent company and the group are detailed in note 43 to the consolidated fi nancial statements. (D) DEBTORS Amounts owed by group undertakings Other debtors Derivative fi nancial instruments at fair value Total debtors 2013 £m 2,918 8 66 2,992 2012 £m 2,828 – 102 2,930 Included within derivative fi nancial instruments at fair value is £52m due after more than one year (2012: £77m). See note (g) for further details. Included in other debtors is £1m (2012: £nil) with regard to deferred tax comprised as follows: Changes in fair value of hedging derivatives Total deferred tax The reconciliation of deferred tax balances is as follows: At 1 January 2013 Charged to equity in relation to changes in fair value of hedging derivatives At 31 December 2013 2013 £m 1 1 2012 £m – – Total £m – 1 1 146 G4S plc Annual Report and Accounts 2013 (E) BORROWINGS (UNSECURED) The unsecured borrowings are in the following currencies: Sterling Euro US dollar Total unsecured borrowings The payment profi le of the unsecured borrowings is as follows: Repayable within one year Repayable within two to fi ve years Repayable after fi ve years Total unsecured borrowings Undrawn committed facilities mature as follows: Within two to fi ve years Total undrawn committed facilities Financial statements 2013 £m 419 37 645 1,101 2013 £m 61 469 571 1,101 2013 £m 965 965 2012 £m 419 73 722 1,214 2012 £m 40 402 772 1,214 2012 £m 856 856 Borrowings consist of £37m of fl oating rate bank loans (2012: £73m) and £1,064m of fi xed rate loan notes (2012: £1,144m). Bank overdrafts, bank loans, loan notes issued in July 2008 and May 2009 are stated at amortised cost. The loan notes issued in March 2007 are stated at amortised cost recalculated at an effective interest rate current at the balance sheet date as they are part of a fair value hedge relationship. The directors believe the fair value of the company’s bank overdrafts, bank loans and the loan notes issued in March 2007, calculated from market prices, approximates to their book value. US$200m (£121m) of the loan notes issued in July 2008 have a fair value market gain of £21m (2012: £31m). The fair value of the remaining notes approximates to their book value. Borrowing at fl oating rates exposes the company to cash fl ow interest rate risk. The management of this risk is detailed in note (h). There were no fi nancial liabilities upon which no interest is paid. (F) OTHER CREDITORS Amounts falling due within one year: Amounts owed to group undertakings Other taxation and social security costs Other creditors Accruals and deferred income Derivative fi nancial instruments at fair value Total creditors - amounts falling due within one year Amounts falling due after more than one year: Derivative fi nancial instruments at fair value 2013 £m 2,821 4 1 29 1 2,856 2012 £m 2,817 1 – 31 2 2,851 – 2 Annual Report and Accounts 2013 G4S plc 147 Notes to the parent company fi nancial statements continued (G) DERIVATIVE FINANCIAL INSTRUMENTS The carrying values of derivative fi nancial instruments at the balance sheet date are presented below: Cross currency swaps designated as cash fl ow hedges Interest rate swaps designated as cash fl ow hedges Interest rate swaps designated as fair value hedges Commodity swaps Less: Amounts falling due after more than one year Amounts falling due within one year Assets 2013 £m 21 – 45 – 66 (52) 14 Assets 2012 £m 31 – 70 1 102 (77) 25 Liabilities 2013 £m – 1 – – 1 – 1 Liabilities 2012 £m – 3 – 1 4 (2) 2 Derivative fi nancial instruments are stated at fair value, based upon market prices where available or otherwise on discounted cash fl ow valuations. The mark to market valuation of the derivatives has decreased by £33m (2012: decrease £12m) during the year. The interest rate, cross currency and commodity swaps treated as cash fl ow hedges have the following maturities: Within one year In the second year In the third year In the fourth year In the fi fth year or greater Total carrying value Assets 2013 £m – 15 – – 6 21 Projected settlement of cash fl ows (including accrued interest) associated with derivatives: Within one year In the second year In the third year In the fourth year In the fi fth year or greater Total cash fl ows Assets 2013 £m – 16 – – 5 21 Assets 2012 £m 9 – – 17 6 32 Assets 2012 £m 7 2 – 17 6 32 Liabilities 2013 £m 1 – – – – 1 Liabilities 2013 £m 1 – – – – 1 Liabilities 2012 £m 2 2 – – – 4 Liabilities 2012 £m 2 2 – – – 4 148 G4S plc Annual Report and Accounts 2013 Financial statements (H) FINANCIAL RISK Currency risk and forward foreign exchange contracts The group conducts business in many currencies. The group presents its consolidated fi nancial statements in sterling and as a consequence is subject to foreign exchange risk due to the translation of the results and net assets of its foreign subsidiaries. The company together with G4S International Finance plc hedges a substantial portion of the group’s exposure to fl uctuations in the translation into sterling of its overseas net assets by holding loans in foreign currencies. Translation adjustments arising on the translation of foreign currency loans are recognised in the profi t and loss account. Cross currency swaps with a nominal value of £101m were arranged to hedge the foreign currency risk on US$200m of the second US Private Placement notes issued in July 2008, effectively fi xing the sterling value on this portion of debt at an exchange rate of 1.9750. Assuming a 1% appreciation of sterling against the US dollar, the fair value net gain on the cross currency swaps which hedge part of the currency loan notes would be expected to fall by £1m. Interest rate risk and interest rate swaps Borrowing at fl oating rates as described in note 28 to the consolidated fi nancial statements exposes the group to cash fl ow interest rate risk, which the company manages within policy limits approved by the directors. Interest rate swaps and, to a limited extent, forward rate agreements are utilised to fi x the interest rate on a proportion of borrowings on a reducing scale over forward periods up to a maximum of fi ve years. At 31 December 2013 the nominal value of such contracts was £nil (in respect of US dollar) (2012: £nil) and £37m (in respect of euro) (2012: £73m), their weighted average interest rate was nil% (US dollar) (2012: nil%) and 2.8% (euro) (2012: 3.2%), and their weighted average period to maturity was twelve months. All the interest rate hedging instruments are designated and fully effective as cash fl ow hedges and movements in their fair value have been deferred in equity. The quantity of interest rate swaps outstanding in the company is expected to continue to decline as Treasury activity is increasingly conducted by G4S International Finance plc. The US Private Placement market is predominantly a fi xed rate market, with investors looking for a fi xed rate return over the life of the loan notes. At the time of the fi rst issue in March 2007, the company was comfortable with the proportion of fl oating rate exposure not hedged by interest rate swaps and therefore rather than take on a higher proportion of fi xed rate debt arranged fi xed to fl oating swaps effectively converting the fi xed coupon on the Private Placement to a fl oating rate. Following the swaps the resulting average coupon on the US Private Placement is Libor + 60bps. These swaps have been documented as fair value hedges of the US Private Placement fi xed interest loan notes, with the movements in their fair value posted to profi t and loss at the same time as the movement in the fair value of the hedged item. The interest on the US Private Placement notes issued in July 2008 and on the sterling Public Bond issued in May 2009 was kept at fi xed rate. The core company borrowings are held in US dollar, euro and sterling. Although the impact of rising interest rates is largely shielded by fi xed rate loans and interest rate swaps which fi x a portion of the exposure, some interest rate risk remains. A 1% increase in interest rates across the yield curve in each of these currencies with the 31 December 2013 debt position constant throughout 2014, would lead to an expectation of an additional interest charge of £3m in the 2014 fi nancial year. Commodity risk and commodity swaps The group’s principal commodity risk relates to the fl uctuating level of diesel prices, particularly affecting its cash solutions businesses. The company acts as a market intermediary, arranging commodity swaps and commodity options with its relationship banks with back to back deals on identical terms with its subsidiaries to fi x synthetically part of the exposure and reduce the associated cost volatility. Counterparty credit risk The company’s strategy for credit risk management is to set minimum credit ratings for counterparties and monitor these on a regular basis. For treasury-related transactions, the policy limits the aggregate credit risk assigned to a counterparty. The utilisation of a credit limit is calculated by applying a weighting to the notional value of each transaction outstanding with each counterparty based on the type and duration of the transaction. The total mark to market value outstanding with each counterparty is closely monitored against policy limits assigned to each counterparty. For short-term transactions (under one year), at inception of the transaction, the fi nancial counterparty must be investment grade rated by either the Standard & Poor’s or Moody’s rating agencies. For long-term transactions, at inception of the transaction, the fi nancial counterparty must have a minimum rating of BBB+/Baa1 from Standard & Poor’s or Moody’s. Treasury transactions are dealt with the company’s relationship banks, all of which have a strong investment grade rating. At 31 December 2013 the largest two counterparty exposures relating to treasury transactions were £28m and £20m and both were held with institutions with long-term Standard & Poor’s credit ratings of A- and A respectively. These exposures represent 42% (2012: 37%) and 30% (2012: 29%) of the carrying values of derivative fi nancial instruments, with a fair value gain at the balance sheet date. Both of these banks had signifi cant loan commitments outstanding to G4S plc at 31 December 2013. The company participates in the group’s multi-currency notional pooling cash management system with a wholly owned subsidiary of an Aa3 rated bank. There is legal right of set off under the pooling agreement. Annual Report and Accounts 2013 G4S plc 149 Notes to the parent company fi nancial statements continued (I) SHARE PREMIUM AND RESERVES At 1 January 2013 Retained profi t Changes in fair value of hedging derivatives Shares issued Dividends declared Own shares awarded Tax on equity movements At 31 December 2013 Share premium £m 258 – – – – – – 258 Merger reserve £m – – – 308 – – – 308 Profi t and loss account £m 1,339 15 (8) – (130) (2) 2 1,216 Own shares £m (20) – – – – 2 – (18) Total £m 1,577 15 (8) 308 (130) – 2 1,764 In 2013 the £308m addition to the merger reserve resulted from the group’s 9.99% share placement in August 2013. (J) AUDITOR’S REMUNERATION Fees paid to KPMG Audit Plc and its associates for non-audit services to the company itself are not disclosed in its individual accounts because the company’s consolidated fi nancial statements are required to disclose such fees on a consolidated basis. (K) SHARE-BASED PAYMENTS The group has one type of equity-settled, share-based payment scheme in place being the conditional allocations of G4S plc shares. An employee benefi t trust established by the group holds shares to satisfy the vesting of conditional allocation awards. Reserve for own share disclosures relevant to the company are presented within note 37 to the consolidated fi nancial statements. Share-based payments disclosures relevant to the company are presented within note 40 to the consolidated fi nancial statements. (L) RELATED PARTY TRANSACTIONS Certain disclosures relevant to the company are presented within note 41 to the consolidated fi nancial statements. Company transactions with group undertakings primarily consist of royalty charges, central service charges, group insurance recharges and loan transactions. There were no material transactions with non-wholly owned group undertakings in 2013 (2012: none). (M) CONTINGENT LIABILITIES To help secure cost effective fi nance facilities for its subsidiaries, the company issues guarantees to some of its fi nance providers. At 31 December 2013 guarantees totalling £479m (2012: £493m) were in place in support of such facilities. The company also guarantees the debt obligations of G4S International Finance plc. At 31 December 2013 contingent liabilities of £1,012m (2012: £1,061m) were outstanding in support of such debt obligations. The company is included in a group registration for UK VAT purposes and is therefore jointly and severally liable for all other UK group companies’ unpaid debts in this connection. The liability of the UK group registration at 31 December 2013 totalled £17m (2012: £19m). 150 G4S plc Annual Report and Accounts 2013 Notice of Annual General Meeting THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt about the contents of this document or the action you should take, you should immediately consult your stockbroker, bank manager, solicitor, accountant or other independent professional adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if not, from another appropriately authorised independent fi nancial adviser. If you have sold or otherwise transferred all your shares in G4S plc, please send this notice and the accompanying documents to the person through whom the sale or transfer was effected so that it can be passed on to the purchaser or transferee. Notice is hereby given that the Annual General Meeting of G4S plc will be held at The Platinum Suite, ExCeL London, One Western Gateway, Royal Victoria Dock, London E16 1XL on Thursday, 5 June 2014 at 2.00 pm in order to consider and, if thought fi t, to pass the following Resolutions: Resolutions 1 to 19 and Resolution 22 will be proposed as ordinary resolutions. Resolutions 20, 21 and 23 will be proposed as special resolutions. REPORT AND ACCOUNTS 1. To receive the fi nancial statements of the company for the year ended 31 December 2013 and the reports of the directors and auditor thereon. REMUNERATION 2. To approve the Directors’ Remuneration Policy as set out in the Directors’ remuneration report in the company’s annual report and accounts for the year ended 31 December 2013. 3. To approve the Directors’ remuneration report, other than the part containing the Director’s Remuneration Policy, as set out in the company’s annual report and accounts for the year ended 31 December 2013. 4. That the rules of the G4S Long Term Incentive Plan (“LTIP”), in the form produced at the Annual General Meeting and initialled by the chairman of the meeting for the purposes of identifi cation (a summary of which is set out in the appendix to the explanatory notes to this Notice of Meeting) be and are hereby approved; and that the directors be and are hereby authorised to: (a) adopt the LTIP and to do all such other acts and things as they may consider appropriate to implement the LTIP; and (b) establish further plans based on the LTIP but modifi ed to take account of local tax, exchange control or securities laws in overseas territories, provided that any shares made available under such further plans are treated as counting against the limits on individual or overall participation in the LTIP. DIVIDEND 5. To declare a fi nal dividend for the year ended 31 December 2013 of 5.54p (DKK 0.4954) for each ordinary share in the capital of the company. DIRECTORS 6. To elect Himanshu Raja as a director. 7. To re-elect Ashley Almanza as a director. 8. To re-elect John Connolly as a director. 9. To re-elect Adam Crozier as a director. 10. To re-elect Mark Elliott as a director 11. To re-elect Winnie Kin Wah Fok as a director. 12. To re-elect Grahame Gibson as a director. 13. To re-elect Mark Seligman as a director. 14. To re-elect Paul Spence as a director. 15. To re-elect Clare Spottiswoode as a director 16. To re-elect Tim Weller as a director. AUDITOR 17. To re-appoint KPMG Audit Plc as auditor of the company to hold offi ce until the conclusion of the next Annual General Meeting of the company. 18. To authorise the directors to determine the remuneration of the auditor. DIRECTORS’ AUTHORITY TO ALLOT 19. That the directors be and are hereby generally and unconditionally authorised pursuant to and in accordance with section 551 of the Companies Act 2006 (the” Act”) to exercise all the powers of the company to allot shares in the company or grant rights to subscribe for, or convert any security into, shares in the company: (i) up to an aggregate nominal amount of £129,299,000; and (ii) comprising equity securities (as defi ned in section 560 of the Act) up to a further aggregate nominal amount of £129,299,000 provided that they are offered by way of a rights issue to holders of ordinary shares on the register of members at such record date(s) as the directors may determine where the equity securities respectively attributable to the interests of the ordinary shareholders are proportionate (as nearly as may be practicable) to the respective numbers of ordinary shares held or deemed to be held by them on any such record date(s), subject to such exclusions or other arrangements as the directors may deem necessary or expedient to deal with treasury shares, fractional entitlements, record dates, shares represented by depositary receipts, legal or practical problems arising under the laws of any territory or the requirements of any relevant regulatory body or stock exchange or any other matter; provided that this authority shall expire on the date of the next Annual General Meeting of the company, save that the company shall be entitled to make offers or agreements before the expiry of such authority which would or might require relevant securities to be allotted after such expiry and the directors shall be entitled to allot relevant securities pursuant to any such offer or agreement as if this authority had not expired; and all unexpired authorities granted previously to the directors to allot relevant securities under section 551 of the Act shall cease to have effect at the conclusion of this Annual General Meeting (save to the extent that the same are exercisable pursuant to section 551(7) of the Act by reason of any offer or agreement made prior to the date of this Resolution which would or might require shares to be allotted or rights to be granted on or after that date). 20. That the directors be and are hereby empowered, pursuant to section 570 of the Act, subject to the passing of Resolution 19 above, to allot equity securities (as defi ned in section 560 of the Act) for cash pursuant to the authority conferred by Resolution 19 above as if section 561 of the Act did not apply to any such allotment, provided that this power shall be limited to: (i) the allotment of equity securities in connection with an offer or issue of equity securities (but in the case of the authority granted under paragraph (ii) of Resolution 19 above, by way of rights issue only) to or in favour of the holders of shares on the register of members at such record date(s) as the directors may determine where the equity securities respectively attributable to the interests of the shareholders are proportionate (as nearly as may be practicable) to the respective numbers of shares held by them on any such record date(s), but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements, treasury shares, record dates, shares represented by depositary receipts, legal or practical problems arising under the laws of any territory or the requirements of any relevant regulatory body or stock exchange or any other matter; and (ii) the allotment (otherwise than pursuant to sub-paragraph (i) above) of equity securities pursuant to the authority granted under Resolution 19(i) above up to an maximum nominal amount of £19,394,000; Annual Report and Accounts 2013 G4S plc 151 Notice of Annual General Meeting continued and shall expire on the expiry of the authority conferred by Resolution 19 above unless previously renewed, varied or revoked by the company in general meeting, save that the company shall be entitled to make offers or agreements before the expiry of such power which would or might require equity securities to be allotted, or treasury shares to be sold, after such expiry and the directors shall be entitled to allot equity securities or sell treasury shares pursuant to any such offer or agreement as if the power conferred hereby had not expired. All previous unutilised authorities under section 570 of the Act shall cease to have effect at the conclusion of this Annual General Meeting. AUTHORITY TO PURCHASE OWN SHARES 21. That the company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act, to make market purchases (within the meaning of section 693(4) of the Act) of ordinary shares of 25p each in the capital of the company on such terms and in such manner as the directors may from time to time determine, provided that: (i) the maximum number of such shares which may be purchased is 155,159,000; (ii) the minimum price which may be paid for each such share is 25p (exclusive of all expenses); (iii) the maximum price which may be paid for each such share is an amount equal to 105% of the average of the middle market quotations for an ordinary share in the company as derived from The London Stock Exchange Daily Offi cial List for the fi ve business days immediately preceding the day on which such share is contracted to be purchased (exclusive of expenses); and (iv) this authority shall, unless previously revoked or varied, expire at the conclusion of the Annual General Meeting of the company to be held in 2015 (except in relation to the purchase of such shares the contract for which was entered into before the expiry of this authority and which might be executed wholly or partly after such expiry). AUTHORITY TO MAKE POLITICAL DONATIONS 22. That in accordance with sections 366 and 367 of the Act, the company and all companies which are subsidiaries of the company during the period when this Resolution 20 has effect be and are hereby unconditionally authorised to: (i) make political donations to political parties or independent election candidates not exceeding £50,000 in total; (ii) make political donations to political organisations other than political parties not exceeding £50,000 in total; and (iii) incur political expenditure not exceeding £50,000 in total; (as such terms are defi ned in the Act) during the period beginning with the date of the passing of this Resolution and ending at the conclusion of the next Annual General Meeting of the company provided that the authorised sum referred to in paragraphs (i), (ii) and (iii) above may be comprised of one or more amounts in different currencies which, for the purposes of calculating the said sum, shall be converted into pounds sterling at the exchange rate published in the London edition of the Financial Times on the date on which the relevant donation is made or expenditure incurred (or the fi rst business day thereafter) or, if earlier, on the day in which the company enters into any contract or undertaking in relation to the same. NOTICE PERIOD FOR GENERAL MEETINGS OTHER THAN AGMS 23. That a general meeting of the company, other than an Annual General Meeting, may be called on not less than 14 clear days’ notice. By order of the board Peter David Company Secretary 31 March 2014 152 G4S plc Annual Report and Accounts 2013 The Manor Manor Royal Crawley West Sussex RH10 9UN Company No. 4992207 Notes 1. Shareholders are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting. A shareholder may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that shareholder. A proxy need not be a shareholder of the company. A proxy form which may be used to make such appointment and give proxy instructions accompanies this notice. 2. Details of how to appoint a proxy are set out in the notes to the enclosed proxy form. In order to be valid an appointment of proxy must be returned with any power of attorney or any other authority under which it is executed, by one of the following methods: in hard copy form by post to Capita Asset Services, PXS 1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF; in hard copy form to that address by courier or by hand during usual business hours; or, in the case of CREST members, by utilising the CREST electronic proxy appointment service as described in paragraphs 8 and 9 below. In each case the form of proxy must be received by the company no later than 2.00pm on 3 June 2014. To change your proxy instructions you may return a new proxy appointment using the method set out above. The deadline for receipt of proxy appointments also applies in relation to amended instructions. Persons listed on the VP Securities register should follow the instructions on their Voting Request Form. 3. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction will not prevent a shareholder attending the Annual General Meeting and voting in person if he/she wishes to do so. 4. Any person to whom this notice is sent who is a person nominated under section 146 of the Act to enjoy information rights (a “Nominated Person”) may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Annual General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights. 5. The statement of the rights of shareholders in relation to the appointment of proxies in paragraph 1 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the company. 6. To be entitled to attend and vote at the Annual General Meeting (and for the purpose of the determination by the company of the votes they may cast), shareholders must be registered in the Register of Members of the company at 5.30 pm on 3 June 2014 (or, in the event of any adjournment, on the date which is two working days before the time of the adjourned meeting). Changes to the Register of Members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting. 7. As at 28 March 2014 (being the latest practicable date prior to the publication of this Notice) the company’s issued share capital consisted of 1,551,594,436 ordinary shares, carrying one vote each. Therefore, the total voting rights in the company as at 28 March 2014 was 1,551,594,436. 8. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual (available via www.euroclear.com/CREST). CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 15. Any shareholder attending the meeting has the right to ask questions. The company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confi dential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the company or the good order of the meeting that the question be answered. 16. Under sections 338 and 338A of the Act, members meeting the threshold requirements in those sections have the right to require the company (i) to give, to members of the company entitled to receive notice of the meeting, notice of a resolution which those members intend to move (and which may properly be moved) at the meeting; and/or (ii) to include in the business to be dealt with at the meeting any matter (other than a proposed resolution) which may properly be included in the business at the meeting. A resolution may properly be moved, or a matter properly included in the business, unless (a) (in the case of a resolution only) it would, if passed, be ineffective (whether by reason of any inconsistency with any enactment of the company’s constitution or otherwise); (b) it is defamatory of any person; or (c) it is frivolous or vexatious. A request made pursuant to this right may be in hard copy or electronic form, must identify the resolution of which notice is to be given or the matter to be included in the business, must be authenticated by the person(s) making it and must be received by the company not later than 23 April 2014, being the date six clear weeks before the meeting, and (in the case of a matter to be included in the business only) must be accompanied by a statement setting out the grounds for the request. 17. A copy of this notice, and other information required by section 311A of the Act, can be found at www.g4s.com 18. The rules of the new G4S Long Term Incentive Plan (see Resolution 4 above, paragraph 2 of the explanatory notes below and the summary of the rules set out in the appendix to the explanatory notes below) will be available for inspection during normal business hours (Saturdays, Sundays and public holidays excepted) at the offi ces of Herbert Smith Freehills LLP, Exchange House, Primrose Street, London EC2A 2EG and will be available at the place of the meeting from 15 minutes before the start of the meeting until its conclusion. 19. Any electronic address or web site address is provided in this Notice of Meeting solely for the purpose stated expressly herein and may not be used to communicate with the company other than for such purpose. Notwithstanding any telephone number, fax number or email address that appears on this document or elsewhere, neither the company nor Capita Asset Services will accept voting instructions received via media other than post or by CREST Proxy Instruction in accordance with the notes above. 9. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifi cations, and must contain the information required for such instruction, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA10) by 2.00 pm on 3 June 2014. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 10. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. 11. The company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertifi cated Securities Regulations 2001. 12. Voting on all Resolutions will be conducted by way of a poll rather than a show of hands. This is a more transparent method of voting as shareholders’ votes are to be counted according to the number of shares held. As soon as practicable following the Annual General Meeting, the results of the voting at the meeting and the numbers of proxy votes cast for and against and the number of votes actively withheld in respect of each of the Resolutions will be announced via a Regulatory Information Service and also placed on the company’s website: www.g4s.com. 13. Any corporation which is a shareholder can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a shareholder provided that they do not do so in relation to the same shares. 14. Under section 527 of the Act, members meeting the threshold requirements set out in that section have the right to require the company to publish on a website a statement setting out any matter relating to: (i) the audit of the company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (ii) any circumstance connected with an auditor of the company ceasing to hold offi ce since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Act. The company may not require the shareholders requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Act. Where the company is required to place a statement on a website under section 527 of the Act, it must forward the statement to the company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the Annual General Meeting includes any statement that the company has been required under section 527 of the Act to publish on a website. Annual Report and Accounts 2013 G4S plc 153 Recommendation and explanatory notes relating to business to be conducted at the Annual General Meeting on 5 June 2014 The board of G4S plc considers that the Resolutions set out in the Notice of Annual General Meeting are likely to promote the success of the company and are in the best interests of the company and its shareholders as a whole. The directors unanimously recommend that you vote in favour of the Resolutions as they intend to do in respect of their own benefi cial holdings. Explanatory notes in relation to the business to be conducted at the Annual General Meeting are set out below. 1. FINANCIAL STATEMENTS OF THE COMPANY (RESOLUTION 1) The chairman will present the fi nancial statements of the company for the year ended 31 December 2013 and the reports of the directors and auditor thereon to the Annual General Meeting. 2. REMUNERATION (RESOLUTIONS 2 TO 4) Changes made to the Companies Act 2006 (the “Act”) have resulted in new requirements this year both for the content of the Directors’ remuneration report (the “Report”) and its approval. Accordingly the Report, which is set out on pages 64 to 79, contains: – A statement by Mark Elliott, chairman of the company’s Remuneration Committee; – The directors’ remuneration policy in relation to future payments to the directors and former directors; and – The annual implementation report on remuneration, which sets out payments made in the fi nancial year ending 31 December 2013. The policy part of the Report, which sets out the company’s forward looking policy on directors’ remuneration (including the approach to exit payments to directors), is subject to a binding shareholder vote by ordinary resolution at least every three years. The statement by the Remuneration Committee chairman and the annual implementation report on remuneration will, as in the past, be put to an annual advisory shareholder vote by ordinary resolution. Resolution 2 is therefore the ordinary resolution to approve the directors’ remuneration policy which is set out within the Report on pages 66 to 72. As noted on page 64, the directors’ remuneration policy will commence on 6 June 2014. Payments will continue to be made to directors and former directors (in their capacity as directors) in accordance with existing contractual arrangements until this date. Once the directors’ remuneration policy commences, all payments by the company to the directors and any former directors must be made in accordance with the policy (unless the payment is separately approved by shareholder resolution). If the directors’ remuneration policy is approved and remains unchanged, it will be valid for up to three fi nancial years without a new shareholder approval. If the company wishes to change the policy, it will need to put the revised policy to a vote again before it can implement the new policy. If the directors’ remuneration policy is not approved, the company will, if and to the extent permitted by the Act, continue to make payments to directors in accordance with existing contractual arrangements and will seek shareholder approval for a revised policy as soon as practicable. Resolution 3 is the resolution to approve the directors’ remuneration report, other than the part containing the directors’ remuneration policy. This is an advisory resolution and does not affect the future remuneration paid to any director. Resolution 4 relates to the Long Term Incentive Plan (“LTIP”) which the company proposes to introduce to replace the Performance Share Plan which was adopted by the Board in July 2004 and will expire in July 2014. In order to ensure executives continue to be incentivised to deliver the group’s strategy over the longer term, the Remuneration Committee has concluded that a replacement long term incentive plan should be introduced and, having consulted widely, has set revised performance measures, including the introduction of average operating cash fl ow as a third measure. The principal terms of the LTIP are set out in the appendix to these explanatory notes on pages 156 and 157. This ordinary resolution seeks shareholder approval of the LTIP. The full rules will be available for inspection during the hours and at the locations set out in note 18 to the Notice of Meeting. 3. FINAL DIVIDEND (RESOLUTION 5) A fi nal dividend of 5.54p (DKK 0.4954) per ordinary share for the year ended 31 December 2013 is recommended for payment by the directors. If the recommended fi nal dividend is approved, it will be paid on Friday 13 June 2014 to all ordinary shareholders who were on the register of members at the close of business on 2 May 2014. 4. ELECTION AND RE-ELECTION OF DIRECTORS (RESOLUTIONS 6 TO 16) Resolution 6 deals with the election of Mr Raja as a director as he was appointed since the company’s last Annual General Meeting and, in accordance with the company’s articles of association, he will retire and stand for election. Resolutions 7 to 16 deal with the re-election of the other directors in accordance with the requirements of the UK Corporate Governance Code which provides for all directors of FTSE 350 companies to be subject to re-election by shareholders every year. Biographies of each of the directors seeking election or re-election are set out on pages 48 and 49. The board has confi rmed following a performance review that all directors standing for re-election continue to perform effectively and demonstrate commitment to their roles. 5. REAPPOINTMENT OF AUDITOR AND AUDITOR’S REMUNERATION (RESOLUTIONS 17 AND 18) Resolution 17 relates to the reappointment of KPMG Audit Plc as the company’s auditor to hold offi ce until the next Annual General Meeting of the company. Resolution 18 authorises the directors to set the auditor’s remuneration. 6. AUTHORITY TO ALLOT SHARES (RESOLUTION 19) Resolution 19 seeks shareholder approval for the directors to be authorised to allot shares. At the last Annual General Meeting of the company held on 6 June 2013, the directors were given authority to allot ordinary shares in the capital of the company up to a maximum nominal amount of £235,110,000. This authority expires at the end of this year’s Annual General Meeting. Of this amount 470,220,000 shares could only be allotted pursuant to a rights issue. Resolution 19 will, if passed, renew this authority to allot on the same terms as last year’s resolution (save that the number of shares in question has increased). The board considers it appropriate that the directors be granted the same authority to allot shares in the capital of the company up to a maximum nominal amount of £258,598,000 representing a little under two thirds of the company’s issued ordinary share capital as at 28 March 2014 (the latest practicable date prior to publication of the Notice of Annual General Meeting). Of this amount, 517,196,000 shares (representing a little under one third of the company’s issued ordinary share capital) can only be allotted pursuant to a rights issue. The authority will last until the conclusion of the next Annual General Meeting in 2015. The directors do not have any present intention of exercising this authority. In accordance with best practice, if the directors were to exercise this authority so as to allot shares representing more than one third of the current capital of the company, they would all offer themselves for re-election at the following Annual General Meeting, although it is the directors’ current intention to stand for election annually in any event in accordance with the requirements of the UK Corporate Governance Code. 154 G4S plc Annual Report and Accounts 2013 9. POLITICAL DONATIONS (RESOLUTION 22) Resolution 22 deals with the rules on political donations contained in the Act. Under these rules, political donations to any political parties, independent election candidates or political organisations or the incurring of political expenditure are prohibited unless authorised by shareholders in advance. What constitutes a political donation, a political party, a political organisation, or political expenditure is not easy to decide, as the legislation is capable of wide interpretation. Sponsorship, subscriptions, payment of expenses, paid leave for employees fulfi lling public duties, and support for bodies representing the business community in policy review or reform, may fall within this. Therefore, notwithstanding that the company has not made political donations requiring shareholder authority in the past, and has no intention either now or in the future of making any such political donation or incurring any such political expenditure in respect of any political party, political organisation or independent election candidate, the board has decided to put forward Resolution 20, which is the same as the resolution on this subject which was passed at the company’s Annual General Meeting held on 6 June 2013. This will allow the company to support the community and put forward its views to wider business and government interests without running the risk of being in breach of the law. This authority will cover the period from the date Resolution 20 is passed until the conclusion of the next Annual General Meeting of the company. As permitted under the Act, Resolution 22 also covers political donations made, or political expenditure incurred, by any subsidiaries of the company. 10. PERIOD OF NOTICE FOR CALLING GENERAL MEETINGS (RESOLUTION 23) Resolution 23 is a resolution to allow the company to hold general meetings (other than Annual General Meetings) on 14 days’ notice. The minimum notice period permitted by the Act for general meetings (other than Annual General Meetings) is 21 days. However the Act allows companies to reduce this period back to 14 days (other than for Annual General Meetings) provided that two conditions are met. The fi rst condition is that the company offers a facility for shareholders to vote by electronic means. This condition is met if the company offers a facility, accessible to all shareholders, to appoint a proxy by means of a website. The second condition is that there is an annual resolution of shareholders approving the reduction of the minimum notice period from 21 days to 14 days. The board is therefore proposing Resolution 23 as a special resolution to approve 14 days as the minimum period of notice for all general meetings of the company other than Annual General Meetings. The approval will be effective until the company’s next Annual General Meeting, when it is intended that the approval be renewed. The board will consider on a case by case basis whether the use of the fl exibility offered by the shorter notice period is merited, taking into account the circumstances, including whether the business of the meeting is time sensitive, and will balance that against the need for shareholders to consider their voting decisions, particularly where the proposals concerned are complex and may require more time for proper evaluation. As at the date of the Notice of Annual General Meeting, the company does not hold any ordinary shares in the capital of the company in treasury. However, the 6,934,564 shares held within the G4S Employee Benefi t Trust and referred to on page 137 (note 37 to the consolidated fi nancial statements) are accounted for as treasury shares. 7. DISAPPLICATION OF STATUTORY PRE-EMPTION RIGHTS (RESOLUTION 20) Resolution 20 seeks shareholder approval to give the directors authority to allot shares in the capital of the company pursuant to the authority granted under Resolution 19 for cash without complying with the pre-emption rights in the Companies Act 2006 (the “Act”) in certain circumstances. This authority will permit the directors to allot: (a) shares up to a nominal amount of £258,598,000 (representing a little under two thirds of the company’s issued share capital) on an offer to existing shareholders. However unless the shares are allotted pursuant to a rights issue (rather than an open offer), the directors may only allot shares up to a nominal amount of £129,299,000 (representing a little under one third of the company’s issued share capital) (in each case subject to any adjustments, such as for fractional entitlements and overseas shareholders, as the directors see fi t); and (b) shares up to a maximum nominal value of £19,394,000, representing approximately 5% of the issued ordinary share capital of the company as at 28 March 2014 (the latest practicable date prior to publication of the Notice of Annual General Meeting) otherwise than in connection with an offer to existing shareholders. As with Resolution 19, the terms of Resolution 20 are the same as last year’s resolution (save that the number of shares in question has increased). The directors confi rm their intention to follow the provisions of the Pre-emption Group’s Statement of Principles regarding cumulative usage of authorities within a rolling three-year period. The Principles provide that companies should not issue shares for cash representing more than 7.5% of the relevant company’s issued share capital in any rolling three-year period, other than to existing shareholders, without prior consultation with shareholders. The authority contained in Resolution 20 will expire upon the expiry of the general authority conferred by Resolution 19 (i.e. at the end of the next Annual General Meeting of the company). 8. PURCHASE OF OWN SHARES (RESOLUTION 21) Resolution 21 seeks to renew the company’s authority to buy back its own ordinary shares in the market as permitted by the Act. The authority limits the number of shares that could be purchased to a maximum of 155,159,000 (representing a little less than 10% of the company’s issued ordinary share capital as at 28 March 2014 (the latest practicable date prior to publication of the Notice of Annual General Meeting)) and sets minimum and maximum prices. This authority will expire at the conclusion of the company’s Annual General Meeting in 2015. The directors have no present intention of exercising the authority to purchase the company’s ordinary shares but will keep the matter under review, taking into account the fi nancial resources of the company, the company’s share price and future funding opportunities. The authority will be exercised only if the directors believe that to do so would result in an increase in earnings per share and would be in the interests of shareholders generally. No shares were purchased pursuant to the equivalent authority granted to the directors at the company’s last Annual General Meeting. As at 28 March 2014 (the latest practicable date prior to the publication of the Notice of Annual General Meeting), there were no options over the ordinary shares in the capital of the company. Annual Report and Accounts 2013 G4S plc 155 Recommendation and explanatory notes relating to business to be conducted at the Annual General Meeting on 5 June 2014 continued APPENDIX SUMMARY OF THE G4S LONG TERM INCENTIVE PLAN (THE “LTIP”) Administration Awards will be granted, and the LTIP will be administered, by the board, or a duly authorised committee of the board. Awards for executive directors will be determined and administered by the Remuneration Committee (and references to the board shall mean the Remuneration Committee in respect of such awards). Eligibility Awards may be granted to any of the employees of the company or its subsidiaries, including the executive directors. Form of awards Under the LTIP, awards will take the form of either: – a conditional right to receive shares which will be automatically transferred to the award holder following vesting (a ‘’Conditional Award’’); or – an interest in shares which will be held on behalf of the award holder until vesting (a “Forfeitable Share Award’’). The award holder will not be entitled to call for or otherwise deal in the shares subject to a Forfeitable Share Award prior to vesting. Timing of grant of awards Awards under the LTIP may, save in exceptional circumstances, only be granted within a period of 42 days (i) commencing on the date of the adoption of the LTIP or (ii) following the date of announcement by the company of its interim or fi nal results (or as soon as practicable thereafter if the company is restricted from being able to grant awards during such period). Awards under the LTIP may not be granted more than ten years after the rules are approved by shareholders of the company in general meeting. Non-Transferable and Non-Pensionable Awards are non-transferable and do not form part of pensionable earnings. Dividend equivalents Award holders may receive an additional payment (or shares of equivalent value) equal to the dividends during the vesting period which would have been paid on the number of shares that vest. Award holders shall not be, unless the board determines otherwise, entitled to receive any dividends paid in respect of shares subject to a Forfeitable Share Award. Individual limit The maximum market value of the shares over which an employee may be granted an award under the LTIP in any calendar year shall not exceed an amount equal to 250 per cent. of the employee’s gross annual basic salary at that time. Plan Limits Shares may be newly issued, transferred from treasury or market purchased for the purposes of the LTIP. The number of shares subject to outstanding options or awards granted within the previous 10 years and the number of shares issued for the purpose of options and awards granted within the previous 10 years shall not exceed 10 per cent. of the company’s ordinary share capital in issue immediately prior to the proposed date of grant under all employees’ share schemes adopted by the company. The number of shares subject to outstanding options or awards granted within the previous 10 years and the number of shares issued for the purpose of options and awards granted within the previous 10 years shall not exceed fi ve per cent. of the company’s ordinary share capital in issue immediately prior to the proposed date of grant under all discretionary employees’ share schemes adopted by the company. These limits do not include rights to shares which have been released, lapsed or otherwise become incapable of exercise or vesting. Any option or award which the board has determined will only be satisfi ed with existing shares (or which is granted on such terms), will not be subject to or counted in calculating the above limits. Treasury shares will count as new issue shares for the purpose of these limits for so long as institutional investor bodies consider that they should be so counted. Performance conditions The board will determine the performance conditions which will apply to awards and which will be measured, ordinarily, over a period of not less than three years (or such shorter period as the board may determine to be appropriate on the recruitment of an employee). There will be no provision for re-testing. The board may alter the performance conditions if events happen after the date of grant that cause the board to consider that any element of the performance condition is no longer a fair measure of the company’s performance, provided that the revised target is not considered to be materially less challenging in the circumstances. Performance conditions proposed for executive directors are outlined in the company’s remuneration policy, and will be set out in the annual report on directors’ remuneration. Vesting Awards will normally only vest three years after the date of grant (or such earlier date as the board may determine to be appropriate on the recruitment of an employee), while the award holder remains in offi ce or employment with the group, and to the extent that relevant performance conditions have been met. For those awards that are to be granted in June 2014, the board has determined that any such awards will be treated as if they were granted in March 2014 (both in respect of the vesting period and the share price that is to be used to calculate the number of shares over which an award can be granted) in order to bring these awards in line with the company’s usual grant cycle. This is because the board has historically granted allocations under the company’s existing Performance Share Plan in March each year, but as noted in paragraph 2 of the Explanatory Notes on page 154, the Performance Share Plan will shortly be expiring and therefore new awards will be granted under the LTIP. As the LTIP will not be adopted by the board until after it has been approved by shareholders at the Annual General Meeting, awards under the LTIP cannot be granted until June 2014 at the earliest. If the board so determines, an award may be satisfi ed in whole or in part by a cash payment as an alternative to the issue or transfer of shares. Leavers An award will normally lapse where the award holder ceases to hold offi ce or employment with the group. Awards will not lapse on death or where the cessation of offi ce or employment with the group is due to injury, disability, ill-health, redundancy, retirement, the transfer of the award holder’s employment in connection with a business sale, the company with which the award holder holds offi ce or employment ceasing to be a member of the group, or any other reason if the board so determines (a “Good Leaver’’). Where an award holder ceases employment for a Good Leaver reason, the award will continue and vest on its normal vesting date. However, the board may determine that the award will instead vest on or at any time following the date of cessation. On the death of a participant, an award shall immediately vest. 156 G4S plc Annual Report and Accounts 2013 Corporate actions In the event of a change of control, awards will normally vest. In the event of the passing of a resolution for the voluntary winding-up of the company, awards will vest. In the event of a demerger of a substantial part of the group’s business, a special dividend or a similar event affecting the value of the shares to a material extent, awards may be adjusted as set out below or the board may allow awards to vest. Where the corporate action forms part of an internal re-organisation, unless the board determines otherwise, an award shall not vest, and instead will be rolled-over into an award over shares in the new controlling company of equivalent value. Extent of vesting Awards will only vest (including for leavers or on a corporate action) to the extent that the relevant performance conditions have been satisfi ed. Where an award vests prior to the normal vesting date, the board will assess performance using such information as it determines to be appropriate. Where, prior to the normal vesting date, an award holder ceases employment for a Good Leaver reason or there is a corporate action, the number of shares in respect of which an award vests will, unless the board determines otherwise, be pro-rated on the basis of the number of whole months which have elapsed from grant to the date of cessation or the corporate action (as applicable). Variation of capital The number of shares subject to awards may be adjusted, in such manner as the board may determine, following any variation of share capital of the company, a demerger of a substantial part of the group’s business, a special dividend or a similar event affecting the value of shares to a material extent. Alterations The board may amend the LTIP rules as it considers appropriate, subject to any relevant legislation, provided that no modifi cation may be made which confers any additional advantage on participants relating to eligibility, plan limits, the basis of individual entitlement, the price payable for the acquisition of shares and the provisions for the adjustment of awards without prior shareholder approval, except in relation to performance conditions or minor amendments to benefi t the administration of the LTIP, to take account of a change in legislation, or to obtain or maintain favourable tax exchange control or regulatory treatment for participants or the company (or other group companies). Clawback The board may apply clawback where at any time before or within two years of vesting it determines that the fi nancial results of the company were misstated, an error was made in any calculation or in assessing performance, which resulted in the number of shares in respect of which the award was granted or vested being more than it should have been. The board may also apply a claw-back where the award holder has been dismissed for misconduct. A clawback may be satisfi ed in a number of ways, including by reducing the amount of any future bonus, by reducing the vesting of any subsisting or future options or awards (other than tax-advantaged options or awards), by reducing the number of shares under any vested but unexercised option and/or by either one or both of a requirement to make a cash payment or transfer of shares to the company. The clawback provisions will not apply following the occurrence of a takeover or similar corporate event. Overseas plans The LTIP contains provisions which permit the board to establish further plans for the benefi t of overseas employees based on the LTIP but modifi ed as necessary or desirable to take account of overseas tax, exchange control or securities laws. Any new shares issued under such plans would count towards the individual and overall plan limits outlined above. Annual Report and Accounts 2013 G4S plc 157 Group fi nancial record G4S plc was formed in 2004 from the merger of the security business of Group 4 Falck and Securicor. Since that time, the group has delivered robust shareholder returns and its fi ve year fi nancial performance is shown by the following fi nancial record: UNDERLYING TURNOVER AT CONSTANT EXCHANGE RATES G4S revenues have grown consistently during the last fi ve years. REVENUE* £7.4bn * At 2013 exchange rates and adjusted for discontinued operations. Re-presented for specifi c items including profi t or loss on disposals consistent with the 2013 presentation. UNDERLYING PBITA AT CONSTANT EXCHANGE RATES Operating profi t, defi ned as profi t before interest, tax and amortisation and excluding specifi c items, declined 6% to £442m (2012: £470m). Adjusting for the prior year impact of the review of assets and liabilities in 2013, underlying operating profi t grew 2.8% to £442m (2012: £430m), with strong growth in profi ts from emerging markets of 25%. PBITA* £442m * At 2013 exchange rates and adjusted for discontinued operations. Re-presented for specifi c items including profi t or loss on disposals consistent with the 2013 presentation. (£m) 8,000 6,000 5,973 6,148 6,503 7,024 7,428 4,000 2,000 0 (£m) 500 400 300 200 100 0 09 10 11 12 13 428 415 424 470 430 442 09 10 11 12 13 DIVIDEND In the fi ve years since 2009, G4S has delivered average dividend per share growth of 5.7%. (pence per share) Pence per share 8.96p 10 8 6 4 2 0 7.90 8.53 7.18 8.96 8.96 09 10 11 12 13 158 G4S plc Annual Report and Accounts 2013 CASH GENERATED BY CONTINUING OPERATIONS (£m) £460m CONTINUED GROWTH IN REVENUE FROM EMERGING MARKETS The group has a strong and growing emerging markets business and they form a growing part of revenues and profi ts. +16% revenue growth from emerging markets in 2013 SHARE PRICE From the merger in July 2004 to the end of 2013, the G4S share price has increased 113% outperforming the FTSE 100 by 58% (see page 77 for its comparative TSR performance against that of the FTSE 100). +113% +8.4% share price increase since 2004 G4S share price CAGR* from 2004 to 2013 * CAGR is compound average growth rate. 522 473 460 406 337 600 400 200 0 09 10 11 12 13 GROUP REVENUE (%) 30 31 33 34 37 40 30 20 10 0 09 10 11 12 13 2004 – 2013 SHARE PRICE PERFORMANCE (p) 300 250 200 150 100 50 0 Jul 04 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 G4S FTSE 100 index rebased EMPLOYEE NUMBERS (as at 31 December) 618,000 700,000 600,000 500,000 400,000 618,000 607,000 618,000 586,000 561,000 09 10 11 12 13 Annual Report and Accounts 2013 G4S plc 159 General information FINANCIAL CALENDAR Results announcements Half-year results – August Final results – March Dividend payment Interim paid – 18 October 2013 Final payable – 13 June 2014 Annual General Meeting 5 June 2014 CORPORATE ADDRESSES Registered offi ce The Manor Manor Royal Crawley West Sussex RH10 9UN Telephone +44 (0) 1293 554 400 Registered number 4992207 Auditor KPMG Audit Plc 15 Canada Square London E14 5GL Stockbrokers J.P. Morgan Cazenove 125 London Wall London EC2Y 5AJ Citigroup Global Markets Limited Citigroup Centre Canada Square, Canary Wharf London E14 5LB Financial advisors J.P. Morgan Cazenove 125 London Wall London EC2Y 5AJ Barclays Capital 5 The North Colonnade Canary Wharf London E14 4BB G4S website www.g4s.com 160 G4S plc Annual Report and Accounts 2013 GENERAL SHAREHOLDER INFORMATION Registrars and transfer offi ce All enquiries relating to the administration of shareholdings should be directed to: Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone: within the UK 0871 664 0300 (calls cost 10p per minute plus network extras); from outside the UK +44 20 8639 3399 Fax: +44 (0) 1484 600 911 Email: shareholderenquiries@capita.co.uk Secure share portal: www.capitashareportal.com Please note that benefi cial owners of shares who have been nominated by the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the company or the company’s registrar. Capita share portal The share portal is an online facility provided by the company’s registrars, Capita Asset Services, for shareholders to manage their holding securely online reducing the need for paperwork. By registering for a free portal account, shareholders are able to access a range of online facilities 24 hours a day including those described below. View account holding details Allows shareholders to access their personal account, shareholding balance, share transaction history, indicative share valuation and dividend payment history. It also enables shareholders to buy and sell shares. Change of address, bank mandates, downloadable forms Allows shareholders to update their postal address and complete, change or delete bank mandate instructions for dividends. A wide range of shareholder information, including downloadable forms such as stock transfer forms, is also available. Dedicated helpline Capita Asset Services also has a helpline to help users with all aspects of the service. Telephone (from the UK): 0871 664 0391 Calls cost 10p per minute plus network extras, lines are open 8.30am to 5.30pm Monday to Friday) Telephone (outside the UK): +44 (0) 20 8639 3367 Email: shareportal @capita.co.uk FIND OUT MORE ONLINE Visit www.g4s.com www.g4s.com G4S plc The Manor Manor Royal Crawley West Sussex RH10 9UN United Kingdom Telephone: +44 (0) 20 8770 7000 Email: investor@g4s.com Registered in England No. 4992207 Printed by Park Communications on FSC® certifi ed paper. Park is an EMAS certifi ed company and its Environmental Management System is certifi ed to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled. This document is printed on Cocoon 50 Silk; a paper containing 50% recycled fi bre from genuine waste paper and 50% virgin fi bre sourced from well-managed, responsible, FSC® certifi ed forests. Designed and produced by Black Sun Plc. 

Continue reading text version or see original annual report in PDF format above