Securitas Annual Report 2007

The Board of Directors and the President of Securitas AB (publ.), corporate registration number 556302-7241, with its registered office in Stockholm, hereby submit the Annual Report and consolidated financial statements for the 2007 financial year.
Securitas provides security services including specialized guarding, mobile services, monitoring, as well as consulting and investigation services. In addition Loomis provides cash handling services. Securitas is present in more than 30 countries in North America, South America, Europe and Asia, with more than 250,000 employees.
Sales and operating income before amortization
Sales amounted to MSEK 62,908 (60,523). Organic sales growth was 5 percent (6). The organic sales growth for Securitas excluding Loomis was on the same level as the previous year primarily as a result of good growth in Security Services Europe.
Sales January–December      
MSEK 2007 2006 %
Total sales 62,908 60,523 4
Acquisitions/Divestitures –1,356 –103  
Currency change from 2006 1,967  
Organic sales 63,519 60,420 5
Operating income before amortization was MSEK 3,182 (3,591). Adjusted for changes in exchange rates, the decrease was 8 percent.
Income January–December      
MSEK 2007 2006 %
Operating income before amortization 3,182 3,591 –11
Currency change from 2006 109  
Operating income before amortization 3,291 3,591 –8
The operational losses, cost for the legal investigations and audits in the LCM operation in the United Kingdom impacted the year by MSEK –308 (49) explaining MSEK 357 of the decrease compared to last year. Provisions related to organizational restructuring in Loomis affected the year negatively by MSEK 41 and an impairment loss of MSEK 29 relating to premises in Austria has also been recognized by Loomis.

The operating margin was 5.1 percent (5.9).
Operating income after amortization
Operating income after amortization was MSEK 1,967 (1,437).
Following the annual impairment test of all cash generating units during the third quarter the goodwill value in the Security Services and Mobile operations in the Netherlands has been adjusted through an impairment of goodwill of MSEK –350 (0).
Acquisition related restructuring costs primarily related to Loomis’ acquisition of G4S cash handling operation in France and Brinks cash handling operation in the United Kingdom of MSEK –39 (0) has affected the result.
Items affecting comparability impacted the year by MSEK –718 (–2,060) and consist of the following items: – The settlement of the Globe/Federal Aviation Administration dispute in the USA had a positive effect of MSEK 50. – The sale of the assets and operations of LCM in the United Kingdom
resulted in a loss of MSEK 160. On November 24, 2007, a final stock take was made when the assets and operation in LCM in the United Kingdom was sold to Vaultex. The reconciliation of all accounts and the results of the stock take mean that no further provisions are necessary in relation to the historic variances beyond the provision of MSEK 824 established as of December 31, 2006. – A total provision for LCM of MSEK 375 for non-compliance to the Note Circulation Rules (NCS) in the United Kingdom has burdened the year. The final amount of possible claims is under discussion between Securitas and the Bank of England. – Re-branding costs in Loomis amounted to MSEK 46. – A provision of MSEK 187, related to labor overtime compensation claims in Spain, has been recognized in the fourth quarter.
Financial income and expense
Financial income and expense amounted to MSEK –565 (–520). Revaluation of financial instruments amounted to MSEK –7 (–36).
Income before taxes
Income before taxes amounted to MSEK 1,397 (883). The LCM operational losses, costs for legal investigations and audits of MSEK 308, the Loomis’ restructuring costs of MSEK 41, the impairment loss relating to Loomis’ premises in Austria of MSEK 29, the impairment losses of goodwill of MSEK 350, the positive Globe/FAA settlement of MSEK 50, the loss related to the sale of LCM of MSEK 160, the total provision related to the NCS non-compliance of MSEK 375, the Loomis’ re-branding costs of MSEK 46 and the provision related to labor overtime compensation claims in Spain of MSEK 187, impacted the result in 2007 by a total of MSEK –1,446. Of this total impact, MSEK –378 has burdened operating income before amortization and consequently the operating margin, while MSEK –350 relates to impairment losses of goodwill and MSEK –718 to items affecting comparability.
As a comparison, the bad debt provision relating to the Globe/Federal Aviation Administration dispute in the USA of MSEK 69 had a negative effect on the result in 2006. Furthermore, 2006 was impacted by MSEK 373 for the write-down of the Welo receivable, the provision of MSEK 824 for historical variances in the LCM in the United Kingdom and a total of MSEK 216 related to the listing projects of Securitas Systems AB and Securitas Direct AB as well as the relocation of the head office. Finally, MSEK 578 relating to other items affecting comparability also impacted 2006 negatively. For further background information regarding items affecting comparability, refer to Note 4.
Impact of impairment losses of goodwill and items affecting comparability  
MSEK 2007 2006
Income before taxes, impairment losses of goodwill    
and items affecting comparability 2,465 2,943
Impairment losses of goodwill 1 -350
Items affecting comparability    
Globe/FAA 50 –69
Write-down of Welo –373
LCM provision for historical variances –824
LCM sale of assets and operations –160
LCM provision for NCS declarations –375
Re-branding –46
Listing and relocation of head office –216
Overtime compensation Spain –187
Other items –578
     
Total items affecting comparability –718 –2,060
     
Total impact from impairment losses of goodwill    
and items affecting comparability –1,068 –2,060
     
Income before taxes 1,397 883
1Classified as amortization and impairment losses of acquisition related intangible assets.
Taxes
The Group’s tax rate was 62.4 percent (41.8). Adjusted for non-deductible impairment of goodwill and tax on items affecting comparability the tax rate was 29.1 percent. The tax on these items includes a write-down of a deferred tax asset relating to uncertainty about the use of a tax loss carry-forward arising from the exit of the LCM business in the United Kingdom. The underlying tax rate was 24.3 percent adjusted for the revaluation of deferred tax assets relating to a tax loss carry-forward due to German and Danish tax reforms.
The tax rate of 41.8 percent in 2006 includes the tax effects of items affecting comparability of approximately 16.3 percentage points.
Net income and earnings per share
The net income was MSEK 526 (514). Earnings per share were SEK 1.44 (1.41).
Earnings per share before items affecting comparability and impairment losses of goodwill were SEK 4.78 (6.00). Adjusted also for the LCM and NCS investigation costs but not for the LCM operational losses, the earnings per share was SEK 5.36, which Securitas considers to be the relevant basis for future performance comparisons.
  Condensed Statement of Income according to Securitas’ financial model              
  MSEK                             2007       2006  
  Total sales                         62,907.6     60,523.0  
  Organic sales growth, %                 5           6  
  Production expenses                   –51,135.5   –49,029.8  
  Gross income                       11,772.1     11,493.2  
  Selling and administrative expenses             –8,608.3     –7,907.0  
  Other operating income                 18.2         4.9  
  Share in income of associated companies           0.3            
  Operating income before amortization           3,182.3     3,591.1  
  Operating margin, %                   5.1         5.9  
  Amortization and impairment of                              
  acquisition related intangible assets             –458.0       –93.3  
  Acquisition related restructuring costs             –39.0         –0.4  
  Items affecting comparability               –718.1     –2,060.2  
  Operating income after amortization             1,967.2     1,437.2  
  Financial income and expenses excluding revaluation                        
  of financial instruments                 –565.2     –519.8  
  Revaluation of financial instruments             –6.7       –35.8  
  Share in income of associated companies           2.2         1.2  
  Income before taxes                   1,397.5       882.8  
  Taxes                               –871.5     –369.3  
  Net income for the year, continuing operations         526.0       513.5  
  Net income for the year, discontinued operations               338.5  
  Net income for the year, all operations           526.0       852.0  
Securitas’ financial model is described on pages 25–28. n Operating items.              
  • Net debt related items. n Goodwill, taxes and non-operating items.
  • Items related to shareholder’s equity.
  •                  
    Cash flow
    Operating income before amortization amounted to MSEK 3,182 (3,591). Net investments in fixed assets after depreciation amounted to MSEK –126 (–34).
    Changes in accounts receivable amounted to MSEK –833 (–703).
    Changes in other operating capital employed amounted to MSEK 1,352 (211).
    Cash flow from operating activities amounted to MSEK 3,575 (3,065), equivalent to 112 percent (85) of operating income before amortization. The cash flow from operating activities has been impacted positively by MSEK 181 from the liquidation of Securitas Employee Convertible 2002 Holding S.A.

    Free cash flow was MSEK 2,412 (1,780), equivalent to 115 percent (75) of adjusted income.

    Cash flow from investing activities, acquisitions was MSEK –902 (–362).
    Cash flow from items affecting comparability was MSEK –564 (–129). This is mainly explained by a payment of MSEK 654 to settle part of the cash stock variance for LCM made in the third quarter, partly offset by the cash flow impact from the sale of LCM’s fixed assets.

    Cash flow from financing activities was MSEK 1,746 (–1,106), due to increased short-term borrowings.
    Cash flow for the period was MSEK 2,692 (183).
      Condensed Statement of Cash Flow according to Securitas’ financial model            
      MSEK                             2007       2006  
      Operating income before amortization           3,182.3     3,591.1  
      Investments in fixed assets               –1,574.8     –1,511.8  
      Reversal of depreciation                 1,448.0     1,477.9  
      Net investments in fixed assets             –126.8       –33.9  
      Change in accounts receivable               –832.8     –702.6  
      Change in other operating capital employed           1,351.9       210.5  
      Cash flow from operating activities             3,574.6     3,065.1  
      Cash flow from operational activities, %             112           85  
      Financial income and expenses paid             –505.5     –516.1  
      Current taxes paid                     –656.7     –769.0  
      Free cash flow                       2,412.4     1,780.0  
      Free cash flow, %                     115           75  
      Cash flow from investing activities, acquisitions         –901.8     –361.2  
      Cash flow from items affecting comparability           –564.0     –129.3  
      Cash flow from financing activities             1,745.9     –1,106.3  
      Cash flow for the year, continuing operations         2,692.5       183.2  
      Cash flow for the year, discontinued operations               –1,251.0  
      Cash flow for the year, all operations             2,692.5     –1,067.8  
    Securitas’ financial model is described on pages 25–28. n Operating items.              
  • Net debt related items. n Goodwill, taxes and non-operating items.
  •                  
    Capital employed and financing
    The Group’s operating capital employed was MSEK 4,171 (4,669).
    Acquisitions increased operating capital employed by MSEK 76.
    Acquisitions have increased consolidated goodwill by MSEK 376. The annual impairment test of goodwill in the Group’s cash generating units took place during the third quarter 2007 when the business plans for 2008 were being prepared. As a result of this a decision was made to recognize impairment losses of goodwill amounting to MSEK 350 in Security Services Netherlands and Mobile Netherlands. The impairment does not affect the cash flow. Adjusted for negative exchange rate differences of MSEK 264, the total goodwill for the Group amounted to MSEK 13,794 (14,032).
    Acquisitions have increased acquisition related intangible assets by MSEK 308. After amortization of MSEK 108, reclassifications of MSEK –22 and negative exchange rate differences of MSEK 18, acquisition related intangible assets amounted to MSEK 624 (464).
    The Board of Directors and the President of Securitas AB (publ.), corporate registration number 556302-7241, with its registered office in Stockholm, hereby submit the Annual Report and consolidated financial statements for the 2007 financial year.
     
    Securitas provides security services including specialized guarding, mobile services, monitoring, as well as consulting and investigation services. In addition Loomis provides cash handling services. Securitas is present in more than 30 countries in North America, South America, Europe and Asia, with more than 250,000 employees.
     
    Sales and operating income before amortization
    Sales amounted to MSEK 62,908 (60,523). Organic sales growth was 5 percent (6). The organic sales growth for Securitas excluding Loomis was on the same level as the previous year primarily as a result of good growth in Security Services Europe.
     

    Sales January–December      
    MSEK 2007 2006 %
    Total sales 62,908 60,523 4
    Acquisitions/Divestitures –1,356 –103  
    Currency change from 2006 1,967  
    Organic sales 63,519 60,420 5
     
    Operating income before amortization was MSEK 3,182 (3,591). Adjusted for changes in exchange rates, the decrease was 8 percent.
     

    Income January–December      
    MSEK 2007 2006 %
    Operating income before amortization 3,182 3,591 –11
    Currency change from 2006 109  
    Operating income before amortization 3,291 3,591 –8
     
    The operational losses, cost for the legal investigations and audits in the LCM operation in the United Kingdom impacted the year by MSEK –308 (49) explaining MSEK 357 of the decrease compared to last year. Provisions related to organizational restructuring in Loomis affected the year negatively by MSEK 41 and an impairment loss of MSEK 29 relating to premises in Austria has also been recognized by Loomis.

    The operating margin was 5.1 percent (5.9).
     
    Operating income after amortization
    Operating income after amortization was MSEK 1,967 (1,437).
     
    Following the annual impairment test of all cash generating units during the third quarter the goodwill value in the Security Services and Mobile operations in the Netherlands has been adjusted through an impairment of goodwill of MSEK –350 (0).
     
    Acquisition related restructuring costs primarily related to Loomis’ acquisition of G4S cash handling operation in France and Brinks cash handling operation in the United Kingdom of MSEK –39 (0) has affected the result.
     
    Items affecting comparability impacted the year by MSEK –718 (–2,060) and consist of the following items: – The settlement of the Globe/Federal Aviation Administration dispute in the USA had a positive effect of MSEK 50. – The sale of the assets and operations of LCM in the United Kingdom
     
    resulted in a loss of MSEK 160. On November 24, 2007, a final stock take was made when the assets and operation in LCM in the United Kingdom was sold to Vaultex. The reconciliation of all accounts and the results of the stock take mean that no further provisions are necessary in relation to the historic variances beyond the provision of MSEK 824 established as of December 31, 2006. – A total provision for LCM of MSEK 375 for non-compliance to the Note Circulation Rules (NCS) in the United Kingdom has burdened the year. The final amount of possible claims is under discussion between Securitas and the Bank of England. – Re-branding costs in Loomis amounted to MSEK 46. – A provision of MSEK 187, related to labor overtime compensation claims in Spain, has been recognized in the fourth quarter.
     
    Financial income and expense
    Financial income and expense amounted to MSEK –565 (–520). Revaluation of financial instruments amounted to MSEK –7 (–36).
     
    Income before taxes
    Income before taxes amounted to MSEK 1,397 (883). The LCM operational losses, costs for legal investigations and audits of MSEK 308, the Loomis’ restructuring costs of MSEK 41, the impairment loss relating to Loomis’ premises in Austria of MSEK 29, the impairment losses of goodwill of MSEK 350, the positive Globe/FAA settlement of MSEK 50, the loss related to the sale of LCM of MSEK 160, the total provision related to the NCS non-compliance of MSEK 375, the Loomis’ re-branding costs of MSEK 46 and the provision related to labor overtime compensation claims in Spain of MSEK 187, impacted the result in 2007 by a total of MSEK –1,446. Of this total impact, MSEK –378 has burdened operating income before amortization and consequently the operating margin, while MSEK –350 relates to impairment losses of goodwill and MSEK –718 to items affecting comparability.
     
    As a comparison, the bad debt provision relating to the Globe/Federal Aviation Administration dispute in the USA of MSEK 69 had a negative effect on the result in 2006. Furthermore, 2006 was impacted by MSEK 373 for the write-down of the Welo receivable, the provision of MSEK 824 for historical variances in the LCM in the United Kingdom and a total of MSEK 216 related to the listing projects of Securitas Systems AB and Securitas Direct AB as well as the relocation of the head office. Finally, MSEK 578 relating to other items affecting comparability also impacted 2006 negatively. For further background information regarding items affecting comparability, refer to Note 4.
     

    Impact of impairment losses of goodwill and items affecting comparability  
    MSEK 2007 2006
    Income before taxes, impairment losses of goodwill    
    and items affecting comparability 2,465 2,943
    Impairment losses of goodwill 1 -350
    Items affecting comparability    
    Globe/FAA 50 –69
    Write-down of Welo –373
    LCM provision for historical variances –824
    LCM sale of assets and operations –160
    LCM provision for NCS declarations –375
    Re-branding –46
    Listing and relocation of head office –216
    Overtime compensation Spain –187
    Other items –578
         
    Total items affecting comparability –718 –2,060
         
    Total impact from impairment losses of goodwill    
    and items affecting comparability –1,068 –2,060
         
    Income before taxes 1,397 883
    1Classified as amortization and impairment losses of acquisition related intangible assets.

    Page 31

     
    Taxes
    The Group’s tax rate was 62.4 percent (41.8). Adjusted for non-deductible impairment of goodwill and tax on items affecting comparability the tax rate was 29.1 percent. The tax on these items includes a write-down of a deferred tax asset relating to uncertainty about the use of a tax loss carry-forward arising from the exit of the LCM business in the United Kingdom. The underlying tax rate was 24.3 percent adjusted for the revaluation of deferred tax assets relating to a tax loss carry-forward due to German and Danish tax reforms.
     
    The tax rate of 41.8 percent in 2006 includes the tax effects of items affecting comparability of approximately 16.3 percentage points.
     
    Net income and earnings per share
    The net income was MSEK 526 (514). Earnings per share were SEK 1.44 (1.41).
     
    Earnings per share before items affecting comparability and impairment losses of goodwill were SEK 4.78 (6.00). Adjusted also for the LCM and NCS investigation costs but not for the LCM operational losses, the earnings per share was SEK 5.36, which Securitas considers to be the relevant basis for future performance comparisons.

      Condensed Statement of Income according to Securitas’ financial model              
      MSEK                             2007       2006  
      Total sales                         62,907.6     60,523.0  
      Organic sales growth, %                 5           6  
      Production expenses                   –51,135.5   –49,029.8  
      Gross income                       11,772.1     11,493.2  
      Selling and administrative expenses             –8,608.3     –7,907.0  
      Other operating income                 18.2         4.9  
      Share in income of associated companies           0.3            
      Operating income before amortization           3,182.3     3,591.1  
      Operating margin, %                   5.1         5.9  
      Amortization and impairment of                              
      acquisition related intangible assets             –458.0       –93.3  
      Acquisition related restructuring costs             –39.0         –0.4  
      Items affecting comparability               –718.1     –2,060.2  
      Operating income after amortization             1,967.2     1,437.2  
      Financial income and expenses excluding revaluation                        
      of financial instruments                 –565.2     –519.8  
      Revaluation of financial instruments             –6.7       –35.8  
      Share in income of associated companies           2.2         1.2  
      Income before taxes                   1,397.5       882.8  
      Taxes                               –871.5     –369.3  
      Net income for the year, continuing operations         526.0       513.5  
      Net income for the year, discontinued operations               338.5  
      Net income for the year, all operations           526.0       852.0  
    Securitas’ financial model is described on pages 25–28. n Operating items.              
  • Net debt related items. n Goodwill, taxes and non-operating items.
  • Items related to shareholder’s equity.
  •                  
     
    Cash flow
    Operating income before amortization amounted to MSEK 3,182 (3,591). Net investments in fixed assets after depreciation amounted to MSEK –126 (–34).
     
    Changes in accounts receivable amounted to MSEK –833 (–703).
    Changes in other operating capital employed amounted to MSEK 1,352 (211).
     
    Cash flow from operating activities amounted to MSEK 3,575 (3,065), equivalent to 112 percent (85) of operating income before amortization. The cash flow from operating activities has been impacted positively by MSEK 181 from the liquidation of Securitas Employee Convertible 2002 Holding S.A.

    Free cash flow was MSEK 2,412 (1,780), equivalent to 115 percent (75) of adjusted income.

    Cash flow from investing activities, acquisitions was MSEK –902 (–362).
     
    Cash flow from items affecting comparability was MSEK –564 (–129). This is mainly explained by a payment of MSEK 654 to settle part of the cash stock variance for LCM made in the third quarter, partly offset by the cash flow impact from the sale of LCM’s fixed assets.

    Cash flow from financing activities was MSEK 1,746 (–1,106), due to increased short-term borrowings.
     
    Cash flow for the period was MSEK 2,692 (183).

      Condensed Statement of Cash Flow according to Securitas’ financial model            
      MSEK                             2007       2006  
      Operating income before amortization           3,182.3     3,591.1  
      Investments in fixed assets               –1,574.8     –1,511.8  
      Reversal of depreciation                 1,448.0     1,477.9  
      Net investments in fixed assets             –126.8       –33.9  
      Change in accounts receivable               –832.8     –702.6  
      Change in other operating capital employed           1,351.9       210.5  
      Cash flow from operating activities             3,574.6     3,065.1  
      Cash flow from operational activities, %             112           85  
      Financial income and expenses paid             –505.5     –516.1  
      Current taxes paid                     –656.7     –769.0  
      Free cash flow                       2,412.4     1,780.0  
      Free cash flow, %                     115           75  
      Cash flow from investing activities, acquisitions         –901.8     –361.2  
      Cash flow from items affecting comparability           –564.0     –129.3  
      Cash flow from financing activities             1,745.9     –1,106.3  
      Cash flow for the year, continuing operations         2,692.5       183.2  
      Cash flow for the year, discontinued operations               –1,251.0  
      Cash flow for the year, all operations             2,692.5     –1,067.8  
    Securitas’ financial model is described on pages 25–28. n Operating items.              
  • Net debt related items. n Goodwill, taxes and non-operating items.
  •                  
     
    Capital employed and financing
    The Group’s operating capital employed was MSEK 4,171 (4,669).
     
    Acquisitions increased operating capital employed by MSEK 76.
     
    Acquisitions have increased consolidated goodwill by MSEK 376. The annual impairment test of goodwill in the Group’s cash generating units took place during the third quarter 2007 when the business plans for 2008 were being prepared. As a result of this a decision was made to recognize impairment losses of goodwill amounting to MSEK 350 in Security Services Netherlands and Mobile Netherlands. The impairment does not affect the cash flow. Adjusted for negative exchange rate differences of MSEK 264, the total goodwill for the Group amounted to MSEK 13,794 (14,032).
     
    Acquisitions have increased acquisition related intangible assets by MSEK 308. After amortization of MSEK 108, reclassifications of MSEK –22 and negative exchange rate differences of MSEK 18, acquisition related intangible assets amounted to MSEK 624 (464).