Securitas Annual Report 2007

by investments in, and depreciation of, fixed assets used in operations and by changes in working capital. Cash flow from operating activities is an important indicator at the operational level. It is defined as operating income plus depreciation, less net investments, change in accounts receivable and change in other operating capital employed.
Free cash flow is cash flow from operating activities less net financial items paid and current taxes paid. Cash flow for the year is arrived at when cash flow relating to acquisitions and shareholders’ equity are deducted from free cash flow. The consolidation of net debt in foreign currencies usually generates a translation difference that is reported separately. Change in net debt is cash flow for the year plus the change in loans and translation differences.
Balance sheet
Securitas uses the terms capital employed and financing of capital employed to describe the balance sheet and financial position. Capital employed consists of operating capital employed plus goodwill, acquisition related intangible assets and shares in associated companies. Operating capital employed,
which consists of operating fixed assets and working capital, is constantly monitored at the operating level to avoid unnecessary tied-up capital. Capital employed is financed by net debt and shareholders’ equity.
Securitas’ financial model
To create a simple, clear internal reporting method for timely and accurate follow-up, Securitas has used a financial model called Six Fingers since the late 1980s. In 2007 the model was adapted to reflect the new organization within the Group’s European guarding operations and the continuing specialization and differentiation within the Group.
Our model focuses on the key factors that impact profit, not the profit itself. These key factors are clearly linked to operations. They are grouped into categories – volume-related factors, efficiency-related factors and capital-usage-related factors and allow managers to make decisions based on precise determinations so as to act quickly to improve results. The model is also used to analyze acquisition targets.
The diagram on page 27 shows the key factors, how they are applied in the divisions, and how they are linked to the Group’s key ratios.
Volume-related factors
Selling services and sustaining and increasing income are based on establishing long-termers. Guarding and cash handling services are often purchased on an annual or multiyear basis. The first three key factors,
1. New sales (of contracts),
2. Net change (of contract portfolio), and
3. Total sales
therefore relate to the development of the customer contract portfolio.
Details of contract portfolios (example)  
     
    % change
  Value in op. portfolio
Opening balance 100  
+ New starts 15  
+ Increases 5  
– Terminations 12  
– Reductions 4  
Net change 4 +4
Price change 3 +3
Closing balance 107 +7
Net change in the customer contract portfolio is new sales plus increased sales in existing contracts, less terminated customer contracts and reduced sales in existing contracts.
The diagram shows the connection between the statement of income, the statement of cash flow and the balance sheet. Different colors are used for the sake of clarity.
Price changes are measured separately and added to the net change to determine the period’s closing balance. Total sales, in addition to contract-based sales, includes short-term assignments.
Efficiency related factors
The efficiency-related factors provide managers with tools to monitor service efficiency and cost trends. Accordingly, the fourth and fifth key factors are the following: 4. Gross margin, which is defined as total sales less direct expenses as a percentage of total sales. 5. Indirect expenses, which relate to the organization and include administrative expenses, that is the costs of branch, area and regional/ country offices.
Gross income less indirect expenses equals operating income before amortization of acquisition related intangible assets. When this is expressed as a percentage of total sales, it indicates the Group’s operating margin, which in Securitas’ financial model comes before acquisition related items.
Capital-usage-related factors
Although Securitas’ operations in general are not capital-intensive, there are differences between the divisions. Security Services has the lowest capital requirements and Loomis has the highest. Accounts receivable tie up the most capital and the sixth key factor is therefore: 6. Days of sales outstanding (DSO). Payment terms and effective collection procedures are
Securitas’ model for financial key ratios
by investments in, and depreciation of, fixed assets used in operations and by changes in working capital. Cash flow from operating activities is an important indicator at the operational level. It is defined as operating income plus depreciation, less net investments, change in accounts receivable and change in other operating capital employed.
 
Free cash flow is cash flow from operating activities less net financial items paid and current taxes paid. Cash flow for the year is arrived at when cash flow relating to acquisitions and shareholders’ equity are deducted from free cash flow. The consolidation of net debt in foreign currencies usually generates a translation difference that is reported separately. Change in net debt is cash flow for the year plus the change in loans and translation differences.
 
Balance sheet
Securitas uses the terms capital employed and financing of capital employed to describe the balance sheet and financial position. Capital employed consists of operating capital employed plus goodwill, acquisition related intangible assets and shares in associated companies. Operating capital employed,
 
which consists of operating fixed assets and working capital, is constantly monitored at the operating level to avoid unnecessary tied-up capital. Capital employed is financed by net debt and shareholders’ equity.
 
Securitas’ financial model
To create a simple, clear internal reporting method for timely and accurate follow-up, Securitas has used a financial model called Six Fingers since the late 1980s. In 2007 the model was adapted to reflect the new organization within the Group’s European guarding operations and the continuing specialization and differentiation within the Group.
 
Our model focuses on the key factors that impact profit, not the profit itself. These key factors are clearly linked to operations. They are grouped into categories – volume-related factors, efficiency-related factors and capital-usage-related factors and allow managers to make decisions based on precise determinations so as to act quickly to improve results. The model is also used to analyze acquisition targets.
 
The diagram on page 27 shows the key factors, how they are applied in the divisions, and how they are linked to the Group’s key ratios.
 
Volume-related factors
Selling services and sustaining and increasing income are based on establishing long-termers. Guarding and cash handling services are often purchased on an annual or multiyear basis. The first three key factors,
1. New sales (of contracts),
2. Net change (of contract portfolio), and
3. Total sales
therefore relate to the development of the customer contract portfolio.
 

Details of contract portfolios (example)  
     
    % change
  Value in op. portfolio
Opening balance 100  
+ New starts 15  
+ Increases 5  
– Terminations 12  
– Reductions 4  
Net change 4 +4
Price change 3 +3
Closing balance 107 +7
 
Net change in the customer contract portfolio is new sales plus increased sales in existing contracts, less terminated customer contracts and reduced sales in existing contracts.
 
The diagram shows the connection between the statement of income, the statement of cash flow and the balance sheet. Different colors are used for the sake of clarity.

Page 27

 
Price changes are measured separately and added to the net change to determine the period’s closing balance. Total sales, in addition to contract-based sales, includes short-term assignments.
 
Efficiency related factors
The efficiency-related factors provide managers with tools to monitor service efficiency and cost trends. Accordingly, the fourth and fifth key factors are the following: 4. Gross margin, which is defined as total sales less direct expenses as a percentage of total sales. 5. Indirect expenses, which relate to the organization and include administrative expenses, that is the costs of branch, area and regional/ country offices.
 
Gross income less indirect expenses equals operating income before amortization of acquisition related intangible assets. When this is expressed as a percentage of total sales, it indicates the Group’s operating margin, which in Securitas’ financial model comes before acquisition related items.
 
Capital-usage-related factors
Although Securitas’ operations in general are not capital-intensive, there are differences between the divisions. Security Services has the lowest capital requirements and Loomis has the highest. Accounts receivable tie up the most capital and the sixth key factor is therefore: 6. Days of sales outstanding (DSO). Payment terms and effective collection procedures are
 
Securitas’ model for financial key ratios