Was the Carillion collapse foreseeable? Yes! Wednesday 9 May 2018 APM Contracts and Procurement Specific Interest Group presented by: Dr Jon Broome and Philip Reese URL to event write up page: https://www.apm.org.uk/news/was-the-carillion-collapse-foreseeable-yes/

1. Welcome to the
Was the Carillion
Collapse Foreseeable ?
Yes !
Presented by
Dr Jon Broome BEng PhD MAPM &
Philip Reese BSc (Hons) MRICS MAPM MCIPS CBIFM

2. Key Questions for tonight
▪ Carillion recently became insolvent and it seemingly took many by
surprise,
but was it really a ‘surprise’ ?
▪ And importantly,
what can we learn from it
so that we do not appoint Providers for future projects who then
become insolvent?

3. Overview
Philip :
▪ What are bankruptcy and insolvency ?
▪ What impacts can insolvency have
Jon :
▪ Quick overview of financial accounts
▪ Carillion - The warning signs from an amateur investors
perspective
▪ Further publicly available sources of information
Philip :
▪ Typical Pre Qualification Questions : are they fit for
purpose ?
You :
▪ What should we be asking ?
Jon & Philip audience input :
▪ What should we be asking ?

4. Disclaimer
We are not giving you advice over which suppliers to
use or over due process. We are just raising your
awareness, as project managers, so you know
▪ when to seek further advice from accountants,
lawyers &/or procurement professionals and
▪ be able to have more intelligent conversations with
them.

5. About Philip
▪ Chartered Quantity Surveyor and member of CIPS
▪ Honours Degree in Commercial Management
▪ 20+ years C&P experience globally, predominantly
identifying contract strategy and selecting Providers
▪ Responsibilities for selecting supply chains for projects,
programmes and ongoing portfolios across a range of
industry sectors
▪ Construction works, capex projects, facilities
management, other ongoing services
▪ Work includes: major project management companies
and client organisations; ranging from huge multi-
nationals to smaller regional providers
▪ Range of due diligence encountered

6. Section 1: Insolvency
▪ What are bankruptcy and insolvency?
▪ What the potential effects on your project?
▪ Before we begin: How many of you have first hand experience?

7. Insolvency – Terminology & Info
▪ Insolvency is a term used for both companies and individuals.
▪ As an individual = Bankruptcy
▪ For a company = Corporate Insolvency
Different terminology
and;
Different rules
▪ See https://www.gov.uk/government/organisations/insolvency-service

8. Insolvency – What is it?
▪ Company becomes insolvent if it is unable to pay its debts
▪ 2 key tests:
• Cash flow
• Value of assets versus liabilities
Company is technically insolvent if either apply
To begin “Formal Insolvency” proceedings:
- Creditors can either;
- Get a Court Judgement
- Issue a statutory demand
If neither works, then apply to have the company “wound-up”

9. Insolvency – the Types
▪ Informal arrangement with creditors
To try to prevent;
▪ 4 different types of Formal Insolvency procedures:
• Company Voluntary Arrangement (CVA)
• Administration
• Administrative Receivership
• Liquidation (winding up) (closure)
All types run by a qualified and licensed Insolvency Practitioner
Insolvency Act 1986

10. Insolvency – Types (1 & 2)
▪ CVA
• Company’s directors stay in place
• Agree reduced or re-arranged debt payments
▪ Administration
▪ e.g. Toys R Us 2018 http://www.bbc.co.uk/news/business-43401674
• Directors replaced by an Administrator
• Administrator acts for creditors
• Either
• save (re-structure),
• sell the business, or
• “wind it up”
• If “wound-up”, then assets are distributed

11. Insolvency – Types (3)
▪ Administrative Receivership (“in receivership”)
• Normally used if there is a floating charge
• NB. Can also apply post 2003 to projects such as utilities, public/private
partnerships, finance projects, social landlords
• The holder (the bank) will appoint the Receiver (AR)
• AR will sell company assets to satisfy the floating charge
• No payments to other (unsecured) creditors

12. Insolvency – Types (4)
▪ Liquidation
▪ e.g. Carillion, 2018
https://www.pwc.co.uk/services/business-recovery/administrations/carillion.html )
• “winds-up” the company
• Stop trading
• Either;
• Voluntary or compulsory liquidation, by the Directors,
• or
• Creditors can also apply to wind-up an insolvent company
• Overseen by a “Liquidator”
• Ends affairs of the company
• Assets cashed – “liquidate”
• Collect any money owed
• Distribute cash

13. Insolvency – Who gets paid?
▪ If sufficient funds:
▪ Cash will be distributed to the following;
• Fees of the Insolvency Practitioner/Liquidator
• Preferential creditors - including employees
• Prescribed part – max £600K
• Fixed charge costs - secured creditors' claims
• Unsecured creditors' claims
• Shareholders.

14. Insolvency – The Impact
▪ Impacts on:
• Labour
• Suppliers of Materials / goods / services
• Sub-contractors
▪ Worker pensions
▪ Impact on their other customers
▪ Supply chain

15. Insolvency – The Impact / Risks
• Who owns the materials?
• Payment issues
• Morale
• Uncertainty, rumour, perception, half-truths
• “Suddenly occurs”
• Time consuming
• Delay
• Need to re-procure?
• No payments made to the lower tiers of the supply chain?
• A distraction
• Media coverage
• Introspection
• Stress and mental health
• Project viability
• Macro-economic impact

16. Insolvency – The Impact
▪ Customers and/or suppliers may terminate their contracts
▪ A lender (the company’s bank) will be entitled to enforce any security
it holds
▪ While a winding-up petition is in progress, the company would have to
obtain authorisation from the court to continue to trade

17. Carillion – The Impact
▪ Fourteen NHS trusts
▪ Public sector procurement thresholds
▪ Political questioning over delivery models (such as PFI)
▪ 1,141 redundancies
▪ 7,600 jobs transferred to other employers
▪ Multiple public enquiries
▪ Giant pension deficits
▪ Supply chain
▪ Who else relies on their supply chain?
▪ Positive benefits too – review of payment practices

18. Insolvency – More Information
▪ www.Gov.uk
▪ “The Insolvency Service”

19. About Jon
▪ Deputy chair of C&P SIG and past chair.
▪ 25 years C&P experience, but predominantly in use of NEC
family of contracts and contract strategy, NOT selecting
Providers
▪ Got fed up with paying for low returns and poor advice from
financial services sector, so started to do it myself some 6+
years ago
▪ Progressively started to invest directly in public companies
▪ Style : Good to great companies – sustainable growth - at a
discount to fair price (GARP).
▪ Filtering process is : financial publications; financial
websites; company websites & accounts.

20. What is a Corporate Report for?
▪ A statutory requirement
▪ Becomes a public document once filed at Companies House
▪ A report to shareholders/funders on the state of the business
▪ The success or otherwise of the operations (in the recent past) (backward-looking)
▪ Accounts for the transactions made over a stated period and the performance of
management
▪ Identifies, measures and communicates recent business information to enable
judgements and decision making to a wide range of stakeholders, both inside and outside
of the organisation
▪ Accounting data is not precisely accurate – it relies on assumptions, judgements and
accounting policies
▪ Consistent approach from year to year – compare trends
▪ Accepted annually by the shareholders at the AGM of the business and signed by
Directors
▪ Useful as a tool to confirm speculation as to historical performance

21. What is in a Corporate Report?
▪ Profit & Loss Account
▪ Balance Sheet
▪ Cash Flow statement
▪ Notes to the accounts
• Explanations and detailed analysis
▪ Governance arrangements
▪ Directors Report (per Companies Act 1985)
▪ Independent Audit Report
▪ Commentary
• Interpretations
• Statements
• Focus points
• Implications of the accounting data for the business and it’s objectives
• A “Chairman’s Statement”

22. Basic Principles to look out for
▪ Is the business a “going concern”?
• Accounts normally prepared on this basis
• Assets would otherwise be valued differently
▪ Are costs and revenues “matched”?
• Do the costs incurred match the revenues generated by those costs?
• Accruals & provisions
▪ Are the accounts prudent?
• Are profits recorded / over-stated before they are realised?
• Actual value of stocks? NRV?
▪ Consistency
• Same approach used each year
▪ “Off balance sheet”
• Are all liabilities shown as long term loans?
• Are both assets and liabilities matched?
• Who controls the asset?

23. Carillion: What we will look at
Carillion’s
▪ Income Statement
▪ Balance Sheet
▪ Cashflow Statement
▪ Financial Indicators
▪ Other sources
over time

24. Carillion : the profits were fine, weren’t they ?

25. So how did this happen ?
I.e. was it foreseeable ?

26. What is a: Profit & Loss Account ?
▪ Shows transactions during the year
▪ “Matched” and accrued for
• Revenues
• Costs
• Profits
• Gross
• Operating expense
• Net
• Taxes
• Dividends
• Reserves

27. Pre-tax Profit 164.80 110.60 142.60 155.10 1
Tax 9.90 4.30 15.10 15.70
Net Profit 154.90 106.30 127.50 139.40 1
Minority Interests 6.10 6.10 6.80 6.60
Profit For Financial Year 148.80 100.20 120.70 132.80 1
Ordinary Dividends 70.40 74.60 75.70 76.80
Non Equity Dividends 0.00 0.00 0.00 0.00
Retained Profit 78.40 25.60 45.00 56.00
Per Share Data
DPS p 17.00 17.35 17.60 17.85
Normalized EPS p 35.16 34.71 25.46 26.43
Reported EPS p 34.40 23.20 25.40 28.20
Norm Discontinued EPS p 0.00 0.00 0.00 0.00
Investment Ratios
Operating Margin 3.99 4.63 4.18 4.04
DPS Growth % 6.25 2.06 1.44 1.42
Dividend Cover x 2.07 2.00 1.45 1.48
Norm EPS Growth % -8.74 -1.30 -26.63 3.81
Reported EPS Growth % 8.18 -32.56 9.48 11.02
Other
Market Cap at B/S Date 1,363.91 1,422.14 1,444.80 1,303.38 1,0
Foreign Turnover 812.90 864.40 861.70 946.90 1,1
Carillion Income Statement
Source : morningstar
Period Show Report Dates View Rounding Export to Excel
5 Years Ascending
Income Statement
2012 2013 2014 2015
Fiscal Year Ends 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Turnover 3,666.20 3,332.60 3,493.90 3,950.70
Expenses 3,472.30 3,208.20 3,293.80 3,741.30
EBITDA 251.60 254.00 238.40 238.80
EBIT 189.40 190.50 193.60 193.40
Operating Profit (reported) 193.90 124.40 200.10 209.40
Operating Profit (adjusted) 195.50 170.10 200.40 200.00
Investment Income 34.30 26.50 25.10 26.00
Exceptional Items -1.60 -45.20 -0.30 9.40
Net Interest -29.10 -40.30 -57.50 -54.30
Pre-tax Profit 164.80 110.60 142.60 155.10
Tax 9.90 4.30 15.10 15.70
Net Profit 154.90 106.30 127.50 139.40
Minority Interests 6.10 6.10 6.80 6.60
Profit For Financial Year 148.80 100.20 120.70 132.80
Ordinary Dividends 70.40 74.60 75.70 76.80
Non Equity Dividends 0.00 0.00 0.00 0.00
Retained Profit 78.40 25.60 45.00 56.00
Per Share Data
17.00 17.35 17.60 17.85
Show Report Dates View Rounding Export to Excel
Ascending
e Statement
2012 2013 2014 2015 2016
Ends 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016
3,666.20 3,332.60 3,493.90 3,950.70 4,394.90
3,472.30 3,208.20 3,293.80 3,741.30 4,213.00
251.60 254.00 238.40 238.80 255.40
189.40 190.50 193.60 193.40 210.40
Profit (reported) 193.90 124.40 200.10 209.40 181.90
Profit (adjusted) 195.50 170.10 200.40 200.00 215.70
t Income 34.30 26.50 25.10 26.00 36.30
al Items -1.60 -45.20 -0.30 9.40 -23.30
st -29.10 -40.30 -57.50 -54.30 -35.20
ofit 164.80 110.60 142.60 155.10 146.70
9.90 4.30 15.10 15.70 17.20
154.90 106.30 127.50 139.40 129.50
nterests 6.10 6.10 6.80 6.60 5.30
Financial Year 148.80 100.20 120.70 132.80 124.20
Dividends 70.40 74.60 75.70 76.80 78.90
y Dividends 0.00 0.00 0.00 0.00 0.00
rofit 78.40 25.60 45.00 56.00 45.30
e Data
17.00 17.35 17.60 17.85 18.35
st -29.10 -40.30 -57.50 -54.30 -35.20
ofit 164.80 110.60 142.60 155.10 146.70
9.90 4.30 15.10 15.70 17.20
154.90 106.30 127.50 139.40 129.50
nterests 6.10 6.10 6.80 6.60 5.30
Financial Year 148.80 100.20 120.70 132.80 124.20
Dividends 70.40 74.60 75.70 76.80 78.90
y Dividends 0.00 0.00 0.00 0.00 0.00
rofit 78.40 25.60 45.00 56.00 45.30
Data
17.00 17.35 17.60 17.85 18.35
d EPS p 35.16 34.71 25.46 26.43 33.01
EPS p 34.40 23.20 25.40 28.20 25.90
ontinued EPS p 0.00 0.00 0.00 0.00 0.00
nt Ratios
Margin 3.99 4.63 4.18 4.04 4.26
h % 6.25 2.06 1.44 1.42 2.80
Cover x 2.07 2.00 1.45 1.48 1.80
Growth % -8.74 -1.30 -26.63 3.81 24.89
EPS Growth % 8.18 -32.56 9.48 11.02 -8.16
p at B/S Date 1,363.91 1,422.14 1,444.80 1,303.38 1,015.83
812.90 864.40 861.70 946.90 1,100.70
It’s a growth company !
Consistent adjustments
cause concern i.e. not
‘exceptional’ !
Last year’s does not add up.
Not going up with turnover
Depreciation & Amortisation
is small for a large company
High interest vs Profit

28. Per Share data from Income Statement
Net Profit 154.90 106.30 127.50 139.40
Minority Interests 6.10 6.10 6.80 6.60
Profit For Financial Year 148.80 100.20 120.70 132.80
Ordinary Dividends 70.40 74.60 75.70 76.80
Non Equity Dividends 0.00 0.00 0.00 0.00
Retained Profit 78.40 25.60 45.00 56.00
Per Share Data
DPS p 17.00 17.35 17.60 17.85
Normalized EPS p 35.16 34.71 25.46 26.43
Reported EPS p 34.40 23.20 25.40 28.20
Norm Discontinued EPS p 0.00 0.00 0.00 0.00
Investment Ratios
Operating Margin 3.99 4.63 4.18 4.04
DPS Growth % 6.25 2.06 1.44 1.42
Dividend Cover x 2.07 2.00 1.45 1.48
Norm EPS Growth % -8.74 -1.30 -26.63 3.81
Reported EPS Growth % 8.18 -32.56 9.48 11.02
Other
Market Cap at B/S Date 1,363.91 1,422.14 1,444.80 1,303.38
812.90 864.40 861.70 946.90
154.90 106.30 127.50 139.40 129.50
6.10 6.10 6.80 6.60 5.30
r 148.80 100.20 120.70 132.80 124.20
70.40 74.60 75.70 76.80 78.90
0.00 0.00 0.00 0.00 0.00
78.40 25.60 45.00 56.00 45.30
17.00 17.35 17.60 17.85 18.35
35.16 34.71 25.46 26.43 33.01
34.40 23.20 25.40 28.20 25.90
S p 0.00 0.00 0.00 0.00 0.00
3.99 4.63 4.18 4.04 4.26
6.25 2.06 1.44 1.42 2.80
2.07 2.00 1.45 1.48 1.80
-8.74 -1.30 -26.63 3.81 24.89
% 8.18 -32.56 9.48 11.02 -8.16
e 1,363.91 1,422.14 1,444.80 1,303.38 1,015.83
This reflects the reported and adjusted profit divided by number of shares

29. Summary so far
▪ As an investor …
… loosing interest already.
▪ As an organisation, choosing who to do business with
(whether as a key provider or client) …
… some amber flags raised already
that would want to find out more about.

30. What is a: Balance Sheet ?
▪ Shows financial position at a point in time – the end of its financial year
▪ Assets
• Fixed (long-term) – valuable for either generating profit or as a sellable item
• Land, buildings, plant
• Net book value (after depreciation)
• Current – Cashable within a year
• Cash, stocks, trade debtors – Who are their customers? Are they likely to pay on time?
▪ Claims & liabilities – any amounts owed
• Current (due within the year)
• Trade creditors, accruals, bank overdraft, taxes, dividends declared
• Long-term
▪ Asset minus liabilities = Capital (shareholder’s funds or “equity interest”)
▪ Has the capital increased or decreased since last year?
▪ But, Does not usually include other more intangible “assets” such as brand power,
know-how, skill, morale, market demand for the services, or, behind the scenes
efforts to re-position the business for the .future

31. Carillion Balance Statement part 1
Source : morningstar
Carillion PLC CLLN
Period Show Report Dates View Rounding Export to Excel
5 Years Ascending
Balance Sheet
2012 2013 2014 2015 2016
Fiscal Year Ends 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016
Assets
Non Current Assets
Intangible 1,536.60 1,552.80 1,614.10 1,634.20 1,669.30
Tangible 125.80 128.20 141.90 140.50 144.10
Investments 237.90 159.30 139.90 165.20 180.30
Other 124.50 116.40 147.80 116.50 169.60
Total 2,024.80 1,956.70 2,043.70 2,056.40 2,163.30
Current Assets
Stock 55.30 48.60 50.10 64.30 78.80
Debtors 1,122.30 1,216.30 1,328.70 1,272.00 1,674.80
Cash and Securities 660.00 418.30 473.90 476.80 516.20
Total 1,837.60 1,683.20 1,852.70 1,813.10 2,269.80
Held for Disposal 0.00 0.00 0.00 0.00 0.00
Total Assets 3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
Liabilities and Equity
Liabilities
Current 1,687.80 1,661.60 1,808.20 1,771.60 2,217.40
Non-Current 1,163.90 994.70 1,193.70 1,081.30 1,485.80
Total 2,851.70 2,656.30 3,001.90 2,852.90 3,703.20
Equity
LC CLLN
Show Report Dates View Rounding Export to Excel
Ascending
2012 2013 2014 2015 2016
31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016
ts
1,536.60 1,552.80 1,614.10 1,634.20 1,669.30
125.80 128.20 141.90 140.50 144.10
237.90 159.30 139.90 165.20 180.30
124.50 116.40 147.80 116.50 169.60
2,024.80 1,956.70 2,043.70 2,056.40 2,163.30
55.30 48.60 50.10 64.30 78.80
1,122.30 1,216.30 1,328.70 1,272.00 1,674.80
es 660.00 418.30 473.90 476.80 516.20
1,837.60 1,683.20 1,852.70 1,813.10 2,269.80
0.00 0.00 0.00 0.00 0.00
3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
1,687.80 1,661.60 1,808.20 1,771.60 2,217.40
1,163.90 994.70 1,193.70 1,081.30 1,485.80
2,851.70 2,656.30 3,001.90 2,852.90 3,703.20
Intangibles = Goodwill, Intellectual Property (inc capitalised R&D), Brands etc.
Carillion, as a FM/ construction company does not have any obvious IP, Brands etc,
so likely to be ‘goodwill’ from purchases.
In 2009, Carillion Intangibles went up £220m due to a purchase.
Does not appear to be any
writing down of goodwill,
although is at £45m pa
Turnover went up £450m &
debtors £400m. Increase is not
proportional. Debtor days ?
But cash increased. How ?

32. Carillion Balance Statement part 2
Source : morningstar
1,122.30 1,216.30 1,328.70 1,272.00 1,674.80
ities 660.00 418.30 473.90 476.80 516.20
1,837.60 1,683.20 1,852.70 1,813.10 2,269.80
al 0.00 0.00 0.00 0.00 0.00
3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
ity
1,687.80 1,661.60 1,808.20 1,771.60 2,217.40
1,163.90 994.70 1,193.70 1,081.30 1,485.80
2,851.70 2,656.30 3,001.90 2,852.90 3,703.20
236.30 236.30 236.30 236.30 236.30
762.60 730.90 636.40 757.20 464.80
unds 998.90 967.20 872.70 993.50 701.10
11.80 16.40 21.80 23.10 28.80
1,010.70 983.60 894.50 1,016.60 729.90
and Equity 3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
155.80 215.20 177.30 169.80 218.90
alue Per Share -124.96 -136.09 -172.32 -148.90 -225.01
Debtors 1,122.30 1,216.30 1,328.70
Cash and Securities 660.00 418.30 473.90
Total 1,837.60 1,683.20 1,852.70
Held for Disposal 0.00 0.00 0.00
Total Assets 3,862.40 3,639.90 3,896.40
Liabilities and Equity
Liabilities
Current 1,687.80 1,661.60 1,808.20
Non-Current 1,163.90 994.70 1,193.70
Total 2,851.70 2,656.30 3,001.90
Equity
Share Capital 236.30 236.30 236.30
Reserves 762.60 730.90 636.40
Shareholders Funds 998.90 967.20 872.70
Minorities 11.80 16.40 21.80
Total 1,010.70 983.60 894.50
Total Liabilities and Equity 3,862.40 3,639.90 3,896.40
Net Borrowings 155.80 215.20 177.30
Investment Ratios
-124.96 -136.09 -172.32
Total 1,837.60 1,683.20 1,852.70 1,81
Held for Disposal 0.00 0.00 0.00
Total Assets 3,862.40 3,639.90 3,896.40 3,86
Liabilities and Equity
Liabilities
Current 1,687.80 1,661.60 1,808.20 1,77
Non-Current 1,163.90 994.70 1,193.70 1,08
Total 2,851.70 2,656.30 3,001.90 2,85
Equity
Share Capital 236.30 236.30 236.30 23
Reserves 762.60 730.90 636.40 75
Shareholders Funds 998.90 967.20 872.70 99
Minorities 11.80 16.40 21.80
Total 1,010.70 983.60 894.50 1,01
Total Liabilities and Equity 3,862.40 3,639.90 3,896.40 3,86
Net Borrowings 155.80 215.20 177.30 16
Investment Ratios
Net Tangible Asset Value Per Share -124.96 -136.09 -172.32 -14
ROCE 29.48 42.08 37.57
ROE 11.05 11.06 8.62
al
3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
ity
1,687.80 1,661.60 1,808.20 1,771.60 2,217.40
1,163.90 994.70 1,193.70 1,081.30 1,485.80
2,851.70 2,656.30 3,001.90 2,852.90 3,703.20
236.30 236.30 236.30 236.30 236.30
762.60 730.90 636.40 757.20 464.80
unds 998.90 967.20 872.70 993.50 701.10
11.80 16.40 21.80 23.10 28.80
1,010.70 983.60 894.50 1,016.60 729.90
and Equity 3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
155.80 215.20 177.30 169.80 218.90
alue Per Share -124.96 -136.09 -172.32 -148.90 -225.01
29.48 42.08 37.57 43.40 39.28
11.05 11.06 8.62 8.81 10.34
Amounts it owes (debt) has gone up by £850m (on £4.5bn turnover),
and amount it is owed (from previous) went up by £400m,
Cash and Securities 660.00 418.30 473.90
Total 1,837.60 1,683.20 1,852.70
Held for Disposal 0.00 0.00 0.00
Total Assets 3,862.40 3,639.90 3,896.40
Liabilities and Equity
Liabilities
Current 1,687.80 1,661.60 1,808.20
Non-Current 1,163.90 994.70 1,193.70
Total 2,851.70 2,656.30 3,001.90
Equity
Share Capital 236.30 236.30 236.30
Reserves 762.60 730.90 636.40
Shareholders Funds 998.90 967.20 872.70
which is reflected in Net Value
uity
1,687.80 1,661.60 1,808.20 1,771.60 2,217.40
1,163.90 994.70 1,193.70 1,081.30 1,485.80
2,851.70 2,656.30 3,001.90 2,852.90 3,703.20
236.30 236.30 236.30 236.30 236.30
762.60 730.90 636.40 757.20 464.80
Funds 998.90 967.20 872.70 993.50 701.10
11.80 16.40 21.80 23.10 28.80
1,010.70 983.60 894.50 1,016.60 729.90
and Equity 3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
155.80 215.20 177.30 169.80 218.90
s
Value Per Share -124.96 -136.09 -172.32 -148.90 -225.01
However, a large part of that Net Value is ‘old’ (and worthless) intangibles (goodwill).
So what is it actually worth per share ?

33. Some other Balance Sheet Ratios
Reserves
Shareholders Funds 998.90 967.20 872.70 993.50
Minorities 11.80 16.40 21.80 23.10
Total 1,010.70 983.60 894.50 1,016.60
Total Liabilities and Equity 3,862.40 3,639.90 3,896.40 3,869.50
Net Borrowings 155.80 215.20 177.30 169.80
Investment Ratios
Net Tangible Asset Value Per Share -124.96 -136.09 -172.32 -148.90
ROCE 29.48 42.08 37.57 43.40
ROE 11.05 11.06 8.62 8.81
Net Gearing 15.60 22.25 20.32 17.09
Gross Gearing 81.38 65.02 74.40 63.61
Cash 65.78 42.77 54.09 46.52
Interest Cover x 6.66 5.85 5.69 4.44
Quick Ratio r 1.06 0.98 1.00 0.99
Current Ratio r 1.09 1.01 1.03 1.02
Borrowings
Total Borrowings 812.90 628.90 649.30 632.00
Due < 1 Yr 35.30 22.50 35.30 33.50
Due 1-2 Yrs 0.00 0.00 0.00 0.00
Due 2-5 Yrs 0.00 0.00 0.00 0.00
Due > 5 Yrs 3.60 3.10 2.50 0.00
GBP in Millions except per share data.
236.30 236.30 236.30 236.30 236.30
762.60 730.90 636.40 757.20 464.80
998.90 967.20 872.70 993.50 701.10
11.80 16.40 21.80 23.10 28.80
1,010.70 983.60 894.50 1,016.60 729.90
quity 3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
155.80 215.20 177.30 169.80 218.90
er Share -124.96 -136.09 -172.32 -148.90 -225.01
29.48 42.08 37.57 43.40 39.28
11.05 11.06 8.62 8.81 10.34
15.60 22.25 20.32 17.09 31.22
81.38 65.02 74.40 63.61 98.23
65.78 42.77 54.09 46.52 67.01
6.66 5.85 5.69 4.44 4.95
1.06 0.98 1.00 0.99 0.99
1.09 1.01 1.03 1.02 1.02
812.90 628.90 649.30 632.00 688.70
35.30 22.50 35.30 33.50 96.70
0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00
3.60 3.10 2.50 0.00 0.00
Shareholders Funds 998.90 967.20 872.70 993.50
Minorities 11.80 16.40 21.80 23.10
Total 1,010.70 983.60 894.50 1,016.60
Total Liabilities and Equity 3,862.40 3,639.90 3,896.40 3,869.50
Net Borrowings 155.80 215.20 177.30 169.80
Investment Ratios
Net Tangible Asset Value Per Share -124.96 -136.09 -172.32 -148.90
ROCE 29.48 42.08 37.57 43.40
ROE 11.05 11.06 8.62 8.81
Net Gearing 15.60 22.25 20.32 17.09
Gross Gearing 81.38 65.02 74.40 63.61
Cash 65.78 42.77 54.09 46.52
Interest Cover x 6.66 5.85 5.69 4.44
Quick Ratio r 1.06 0.98 1.00 0.99
Current Ratio r 1.09 1.01 1.03 1.02
Borrowings
Total Borrowings 812.90 628.90 649.30 632.00
Due < 1 Yr 35.30 22.50 35.30 33.50
Due 1-2 Yrs 0.00 0.00 0.00 0.00
Due 2-5 Yrs 0.00 0.00 0.00 0.00
Due > 5 Yrs 3.60 3.10 2.50 0.00
GBP in Millions except per share data.
998.90 967.20 872.70 993.50 701.10
11.80 16.40 21.80 23.10 28.80
1,010.70 983.60 894.50 1,016.60 729.90
quity 3,862.40 3,639.90 3,896.40 3,869.50 4,433.10
155.80 215.20 177.30 169.80 218.90
er Share -124.96 -136.09 -172.32 -148.90 -225.01
29.48 42.08 37.57 43.40 39.28
11.05 11.06 8.62 8.81 10.34
15.60 22.25 20.32 17.09 31.22
81.38 65.02 74.40 63.61 98.23
65.78 42.77 54.09 46.52 67.01
6.66 5.85 5.69 4.44 4.95
1.06 0.98 1.00 0.99 0.99
1.09 1.01 1.03 1.02 1.02
812.90 628.90 649.30 632.00 688.70
35.30 22.50 35.30 33.50 96.70
0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00
3.60 3.10 2.50 0.00 0.00
share data.

34. Balance Sheet · Income Statement · CashfloFinancial Summary
Year End 31st Dec 2011 2012 2013 2014 2015 2016 2017E 2018E CAGR / A
Revenue £m 4,153 3,666 3,333 3,494 3,951 4,395 4,954 5,100 +1.1
Operating Profit £m 146.7 192.7 150.2 190.2 206.9 196.4 +6.0
Net Profit £m 134.6 148.8 100.2 120.7 132.8 124.2 142.4 150.1 -1.6
EPSReported p 31.8 34.4 23.2 25.4 28.0 26.1 -3.8
EPSNormalised p 46.0 34.7 33.7 27.2 32.1 32.0 34.0 35.3 -7.0
EPSGrowth % +30.9 -24.6 -2.8 -19.2 +17.9 -0.2 +6.15 +3.68
PERatio x 7.26 6.84 6.60
x 1.18 1.86 2.28
Profitability
% 3.5 5.3 4.5 5.4 5.2 4.5 +4.7
% 3.9 2.7 3.2 3.4 3.0
% 8.0 8.9 7.6 9.1 9.9 8.9 +8.7
% 15.1 10.2 13.1 14.2 14.7 +13.5
Cashflow
Last ex-div: 11th May, paid: 9th Jun more
£m 134.6 148.8 100.2 120.7 132.8 124.2 142.4 150.1 -1.6
p 31.8 34.4 23.2 25.4 28.0 26.1 -3.8
p 46.0 34.7 33.7 27.2 32.1 32.0 34.0 35.3 -7.0
% +30.9 -24.6 -2.8 -19.2 +17.9 -0.2 +6.15 +3.68
x 7.26 6.84 6.60
x 1.18 1.86 2.28
Profitability
% 3.5 5.3 4.5 5.4 5.2 4.5 +4.7
% 3.9 2.7 3.2 3.4 3.0
% 8.0 8.9 7.6 9.1 9.9 8.9 +8.7
ROE % 15.1 10.2 13.1 14.2 14.7 +13.5
Cashflow
Op. Cashflow ps p 24.4 -5.92 -18.2 26.1 15.4 15.4 -8.8
Capex ps p 2.98 4.23 6.51 6.07 6.40 7.85 +21.4
Free Cashflow ps p 21.4 -10.2 -24.7 20.0 9.03 7.57 -18.8
Dividends
Dividend ps p 16.9 17.3 17.5 17.8 18.3 18.5 18.9 19.1 +1.8
Dividend Growth % +9.03 +2.07 +1.45 +1.43 +2.82 +1.10 +2.17 +1.48
Cashflow statement vs Income Statement Source : Stockopedia
Last ex-div: 11th May, paid: 9th Jun more
x 7.26 6.84 6.60
x 1.18 1.86 2.28
Profitability
% 3.5 5.3 4.5 5.4 5.2 4.5 +4.7
% 3.9 2.7 3.2 3.4 3.0
% 8.0 8.9 7.6 9.1 9.9 8.9 +8.7
% 15.1 10.2 13.1 14.2 14.7 +13.5
Cashflow
p 24.4 -5.92 -18.2 26.1 15.4 15.4 -8.8
p 2.98 4.23 6.51 6.07 6.40 7.85 +21.4
p 21.4 -10.2 -24.7 20.0 9.03 7.57 -18.8
Dividends
p 16.9 17.3 17.5 17.8 18.3 18.5 18.9 19.1 +1.8
% +9.03 +2.07 +1.45 +1.43 +2.82 +1.10 +2.17 +1.48
% 7.93 8.10 8.22
Dividend Cover x 1.88 2.00 1.33 1.43 1.53 1.42 1.80 1.84
We’ve covered this.
“Owner’s earning” are
consistently much much
less than earnings. Cash
conversion is appalling.
Dividend is not normally
being covered by FCF

35. Stockopedia’s
first summary
page

36. But that’s not all … A+
Liquidity (ttm)
Curr. Ratio 1.02
Quick Ratio 0.99
Interest Cov. 23.1
Efficiency (ttm)
Asset Turnover 1.04
Rec's Turnover 3.82
Stock Turnover 56.5
Other Ratios
Leverage (ttm) total -intang +pension
Gross Gearing % 98.2 213
Net Gearing % 31.2 146
Cash / Assets % 10.6 12.9
Latest interim period (ended 31st Dec '16) vs. prior year
Everything I have said so far
ignores Carillion’s pension deficit.
How was it going to finance that ?

37. Stockopedia’s
first summary
page

38. Some indicators for 2016’s accounts
5PiotroskiF-Score
1.01Altman Z2-Score
Health Trend
BankruptcyRisk
EarningsManipulation Risk
The Piotroski F-Score is a nine-criteria scoring system, each of
which relate to the change in a ratio based on the company's
accounts. The weakest stocks, scoring 2 or lower, are five times
more likely to fall into financial problems.
The Bankruptcy Risk Meter is a visual representation of how
likely a company is to head into serious financial difficulty within
2 years. The metric is derived from the Altman Z-Score, a
statistical indicator generated from balance sheet ratios. Tests
have shown that the Distress Zone is 80-90% accurate in
predicting bankruptcy.
The Earnings Manipulation Risk Indicator gives a representation
of how likely a company has been manipulating accounts to
inflate earnings. It is based on the Beneish M-Score, derived from
a set of 8 ratios from a company's accounts. If the switch is on,
Beneish's research implies an 86% probability that the firm is
manipulating earnings.

39. Table&showing&trend
Altman'
Date
For'2013'(at'08/04/14)' 1.63
For'2014'(at'04/04/15) 1.47
For'2015'(at'09/04/16) 1.56
For'2016'(at'14/03/17) 1.01
Mid'2017'(at'05/08/17) 0.80
End'2017'(at'02/12/17) )3.45

40. Who could have seen this coming?
The company
Percentage of equity which has
been shorted
Carillion 27.2 per cent
Ocado Group 19.5 per cent
WM Morrison Supermarkets 16.1 per cent
Wood Group 12.3 per cent
Tullow Oil 12.2 per cent
Debenhams 12 per cent
Marks and Spencer 10.8 per cent
Mitie Group 10.6 per cent
Lancashire Holdings 9 per cent
Pets at Home 8.8 per cent
Sainsbury's 8.7 per cent
Hansteen Holding 8.3 per cent
“The dirty dozen”:
Source:
City AM
25th July 2017
Info: Short selling is the sale
of a security that is not
owned by the seller or that
the seller has borrowed.
Short selling is motivated by
the belief that a security's
price will decline, enabling
it to be bought back at a
lower price to make a profit.

41. Obtaining Financial Information
▪ Companies House beta service
• Financial accounts / Corporate report
• Director details – beware GDPR requirements – take your own legal advice
• Filing history
• Charges
• Insolvency
• Follow companies
Anyone can access this
If a supplier will not provide their accounts details, you can get them yourself
▪ https://beta.companieshouse.gov.uk/

42. Interpreting Ratios – Caution!
• Ratios offer a simple explanation
• Beware coming to wrong conclusions
• See them as a “guide” to make conclusions – they are not conclusive proof of
anything
• Take professional and qualified advice
• The bigger your project / package / risk; the more advice would be warranted
• A Corporate Report provides a “true and fair view” – it is reliable but it is not
perfect
• Beware; accounting policies, valuation methods, effect of goodwill, brand equity,
estimation, optimism bias, sophistication of notes.
Ask further questions, dig deeper, look for trends, check / test your findings,
seek professional help if it doesn’t make sense &/or not happy with answers.

43. About Philip
▪ Chartered Quantity Surveyor and member of CIPS
▪ Honours Degree in Commercial Management
▪ 20+ years C&P experience globally, predominantly
identifying contract strategy and selecting Providers
▪ Responsibilities for selecting supply chains for projects,
programmes and ongoing portfolios across a range of
industry sectors
▪ Construction works, capex projects, facilities
management, other ongoing services
▪ Work includes: major project management companies
and client organisations; ranging from huge multi-
nationals to smaller regional providers
▪ Range of due diligence encountered

44. Section 3 : Common Pre-Qualification Activities
▪ Prioritizing Due Diligence
▪ A look at commonly asked questions in typical industry Pre-
Qualification Questionnaires (PQQ).
▪ Do they go far enough?
▪ Do we understand what the provider’s responses are telling us?

45. Priorities
▪ C&P Guide (chapter 3)
▪ Prioritising high priority or high
risk packages

46. Risk?
▪ Do we assess the package risk?
▪ E.g. particular suppliers or sectors?
• Less frequently used items
• Are they cash-dependent trades?
• Long lead times, specialisms
• Is there any choice?
• Mission critical
• Heavily reliant on one particular customer type?
▪ Do you need them to stand behind their product warranties?
▪ FMJ.co.uk (March 2018) “The UK FTSE support services sector issued
42 profit warnings in 2017 – the most of any sector”

47. Risk?
▪ Risk factors identified by EY include:
• Delays in other projects or cancellations
• Other clients and their reputations
• Pricing pressures, e.g. the financial crisis of 2008/9 and the indexation of
budgets/funding
• Heavy exposure to public sector, with unrealistic funding expectations
• Exposing problem contracts
• Poor internal controls
• Increasing turnover with stagnant or decreasing profit
• Have they issued profit warnings?
• Inflationary pressures
• Uncertainties
• Potential Brexit impacts
• Labour or material pressures
• Increasing competition
• Slow growth in their sector
• Changes in their sector

48. Warning Signs – Should we do more DD?
▪ Providers exposed in more than one sector
▪ Do you know and understand your provider’s wider business
exposures?
▪ Are they really too big to fail?
▪ 40% of support services companies cited delays or cancellations
during 2017
▪ Are you aware of the wider industry trends affecting your supply
chain?
▪ Does your supply chain operate in sectors experiencing squeezed
margins?

49. Common Pre-Qualification Activities
▪ Principle in English Law: “Caveat Emptor” (Buyer Beware)
▪ When do we do Financial Due diligence:
• Prior to PQQ?
• As part of the PQQ?
• After tender (RFP) (and hopefully prior to award)?
• Detailed recommendation report(s)

50. PQQ options
• Credit agencies / Companies House
• Company specific PQQS – private sector
• Industry standard PQQs
• Accreditation bodies
• Industry schemes
Will you use them;
• One off
• Or
• Used for continuous improvement over time?

51. Private Company’s PQQs
• Typically can include sections selected
from the following topics:
• Company overview & registration
details, ownership details, conflicts of
interest?
• Contact info & authority to transact
• Geographic locations – where do they
operate
• Staff make-up & turnover
• Their strategy & goals
• Their client base, turnover, trends,
references
• Trading history – how long, where,
whom
• Contract’s they have lost
• Professional memberships and
accreditations
• Financial history, bankruptcy, court
orders, tax obligations, director’s
history
• Credit Agency checks
• Operational approaches
• Insurances – check them
carefully – not all policies are
created equally
• Anti-discrimination, equality,
ethics policies
• Environmental
• Health & Safety
• Quality management
• Previous 2-3 year’s financial
statements or audited accounts
• Projected financials
• Acceptance of payment terms
and financial processes
• Supply chain processes, Bribery
Act, Modern Slavery Act,
employment practices
• Do they intend to sub-contract
and to whom?
• Banking details

52. Industry Standard PQQs
• Bsi: PAS 91:2013 – Construction
• A standardised pre-qualification questionnaire
• Reduce duplication
• Updated late 2017
• Recommended common minimum standard for construction procurement
• It’s Free of Charge from the BSI online shop
• Question: Who is aware of it / uses it?

53. Bsi: PAS 91:2013 – Construction
• To be eligible for prequalification, it is necessary that:
• suppliers are able to demonstrate that they possess or have access to the governance,
qualifications and references, expertise, competence, health and safety/ environmental/financial
and other essential capabilities
• to the extent necessary for them to be considered appropriate to undertake work and deliver
services for potential buyers.
• Important to recognise that:
• the information obtained from applying PAS 91 does not remove a buyer’s legal or other
requirements to make further enquiries about the supplier’s capabilities, beyond the
questions in these modules, to satisfy specific requirements for projects, services or other
activities.
• Core and Optional question modules

54. Bsi: PAS 91:2013 – Construction
• Bsi: PAS 91:2013 – Construction
• Core modules
• C1 Supplier identity, key roles and contacts
• C2 Financial information
• C3 Business and professional standing
• C4 Health & safety
• Optional Modules
• O1 Equal opportunity, diversity, capability
• O2 Environmental
• O3 Quality
• O4 BIM

55. Bsi: PAS 91:2013 – Construction
• C2 Financial Information
• Info for start-up companies
• Most recent formal accounts info for sole-trader organisations
• 2 years full accounts for small companies
• 2 years audited accounts for medium and large companies
• Insurance details
• C3 Business & Professional Standing
• Criminal or court action, including for bankruptcy proceedings
• Enforcement notices or actions
• Alternate questions available for public sector, including the grounds for:
• mandatory exclusion; such as failure to pay taxes or social security contributions.
• Discretionary exclusion; such as bankruptcy, insolvency,
• Further mandatory exclusions apply for works associated with security and defence
contracts

56. Accreditation bodies / Schemes
• Various organizations provide
• Many focused on Health and Safety
• “PAS does not address the capability of assessment providers, whether by UKAS
accreditation or other means.
• Accordingly, it is a matter for buyers to satisfy themselves that the assessment
provider(s) whose members they accept through the prequalification services
provided, are sufficiently able to carry out a reliable assessment of suppliers.”
• Credit agencies
• Check what methods they use
• Questionnaire is just the start

57. Reviewing Responses
Chapter 7 summary:
“This was an example of mental
shotgun’.
He was asked whether he
thought the company was
financially sound, but he
couldn’t forget that he likes their
product”

58. Reviewing Responses
• Proportional resource : package risk
• Reviewed in–house?
• Competence required?
• For how long will you rely on the Supplier? (Project, programme or portfolio?)
• Duration of the project? 1 year, 25 years or 100 years?
• The more due diligence you do, the more costly the process (at least in the short
term)

59. Reviewing Responses
• Does anyone read it?
• Do you understand what it actually means?
• Why have you asked the question in the first place?
• Is information still current?
• How do you score the response?
• Do you score the response? (mandatory for public sector)
• Have you established pass/fail criteria in advance?
• Blind or open review?
• Expertise?
• Is it in English?
• What is the outcome?

60. Section 5: What more can we do?
In Groups of 5’ish:
1. Do you currently apply Due Diligence (and/or PQQ) to all
“packages”, and is it the same process / level of diligence?
2. PQQ questions should be easy to answer and definitive e.g.
Yes/No or a stated threshold, so
What specific questions do you think should be asked? and
What is the ‘pass’ answer?
Try for one per Income Statement, Balance Sheet and
Cashflow statement.
Feedback session

61. 2. Our Income Statement Checklist
Warning signs
▪ Is it (consistently) profitable ?
▪ Are there frequent profit adjustments wrt reported vs. adjusted profits /
exceptional items ?
▪ What is the interest cover (net profit before tax / interest) ?
▪ What is the dividend cover (net profit after tax / dividend ?
▪ What is interest + dividend cover (invert above and add, then un-invert) ?

62. 2. Our Balance Sheet Checklist
▪ Are Net Tangible Assets positive ?
▪ Quick Ratio > 1 (but depends on sector)
▪ Current Ratio > 1.5 (but depends on sector)
▪ Have debtors increased significantly over last year ?
▪ Have current &/or non-current liabilities increased significantly over
last year ?
▪ What are the net gearing and gross gearing ratios ? (sector dependent)
▪ As above after taking off Intangibles and Pension Deficits.

63. 2. Our cashflow checklist
▪ Is Free Cash Flow / Owner’s Earning approx. equal to earnings ?
(Suggest Earnings consistently > 0.6 x FCF)
▪ Does Free Cash Flow consistently cover dividends ?
(Suggest FCF consistently > 1.25 dividend payments)

64. Section 6: What Next ?
▪ How do we develop appropriate competence?
• Pre-qualification
• Procurement
• Contract management
• Governance
▪ Knowledge, Skills, Application, Expertise
▪ Cross-industry collaboration initiatives
▪ Standards
▪ This is the first of a series of seminars by the Contracts & Procurement SIG on spotting the
warning signs, taking practical steps to protect your organization and project, and dealing
with Provider insolvency.

65. Further Workshops?
▪ Contract drafting / risk mitigation
▪ Contract management & ongoing due diligence
▪ Dealing with insolvency – practical steps / contractual provisions /
timing of payments
▪ Contracting strategies
▪ Competence and professional standards

66. This presentation was delivered
at an APM event
To find out more about
upcoming events please visit our
website www.apm.org.uk/events