INDRA reached a free cash flow of €137M and a 6% recurrent EBIT margin in 2015 fourth quarter.

Indra’s revenues reached €2,850m in FY15, declining by -2% in local currency (-3% in reported figures). Excluding the seasonality of the Elections Business revenues would have been nearly in line with FY14 (-1%). In 4Q15, the revenues decline accelerated (-6% in local currency and –8% in reported terms) due to, basically, the worse relative performance of IT in the quarter (-14% in local currency), specially in Latam and Spain, and the more selective policy in our order intake.

Other income stands at €86.4m, slightly below the €93.3m registered in FY14 because of the lower R&D capitalization in FY15.

Operating expenses (OPEX) growth slowed and increased just +1.7% to €2,805m (vs. €2,759m in FY14) mainly due to +2% increase in Personnel Expenses. Despite average workforce in FY15 remains stable, final workforce has decreased by -5% in the period thanks to the efforts made in the second half of the year. It is worth highlighting the better relative performance of the OPEX in 4Q15 with a decrease of -10% due to the reduction in Material Consumed and Other operating expenses (thanks to the execution of the cost optimization plan), less subcontractors and the decrease in revenues. Personnel expenses increased +3% in FY15 due to the impact of the reversal provision for labor contingencies registered in 4Q14 (€24m); excluding this impact, Personnel expenses would have decreased by -4% in 4Q15, in line with the reduction of the average workforce in the period as a result of the personnel optimization plan in 4Q15 in Spain and Latam.

Contribution margin of FY15 stands at 9.2% vs. 14.3% in FY14 (-5.1pp). The trend initiated in 3Q15 continues in the quarter with contribution margin at 13.3% in 4Q15:

• T&D contribution margin (Transport & Traffic and Defence & Security) down by -4.6pp to 14.8% in FY15 (vs. 19.4% FY14) hitted by overruns in certain problematic projects (especially in the Transport & Traffic) and the lower contribution from the Eurofighter program.
• IT contribution margin (5.0%) was -5.8pp lower than FY14 (10.8%) due to overruns in Financial Services and Public Administrations & Healthcare verticals.

D&A reached €85m in FY15 vs. €64m in FY14 (+33%) due to the recognition and amortization of the corresponding subsidies related to the R&D projects. Excluding this impact, D&A would have reached similar levels than in the same period last year.

Recurrent operating profit (EBIT before non-recurring costs) in FY15 accounts for €45m (1.6% recurrent operating margin vs. 6.9% in FY14). Despite the -8% sales drop in 4Q15, recurrent EBIT in 4Q15 continues to improve and reached €47m (6.0% recurrent EBIT margin vs. 3.5% in 3Q15) mainly as a consequence of the higher contribution margin (13.3% in 4Q15 vs. 10.1% in 3Q15) backed by the ongoing cost reduction plans, direct margin improvement and lower negative impact from the problematic contracts.

Financial expenditures slightly increased (€56m vs. €54m in FY14). The reduction in the average cost of debt to 4.2% (-0.3pp) more than offset the increase in the average debt in the period. FX impact in certain projects also explains the slight increase.

Share of profits of associates and other investees were -€8m vs. €0m in FY14. The difference is explained by the extraordinary result of +€4m regarding the lower payment for the remaining 22.5% stake of Indra Italia’s acquired company (it will be paid in May 2016 and amounts to €3.7m) and changes in the perimeter associated to the disposals (or closing) of some subsidiaries, mainly those established in Venezuela.

Tax income was €64m vs. €7m in 2014 as a consequence of the fiscal income generated by the losses registered in Spain (which includes both the workforce adjustment plan and the R&D deductions), which was partially compensated by the tax credit impairment of Brazil accounted in 2Q15 (-€31m).

Net Profit stands at -€641m mainly due to the non-recurrent effects (€718m in FY15).

Non-recurring items

Full year 2015

Non-recurring items in FY15 were €718m, of which €687m affected the operating result (with the remaining €31m impacting on Taxes).

 

Concept	(€m)
Provisions, impairments, and overruns	(371)
Impairment of Goodwill	(104)
Impairment of Tangible assets	(9)
Impairment of Intangible assets	(7)
Efficiency improvement costs	(36)
Provision of the redundancy plan	(160)
Non-recurring items to EBIT	(687)
Impairment of Tax credit	(31)
Total Non-recurrent Effects	(718)

 

 

 

 

 

 

 

The breakdown by Provisions, impairments, and overruns is the following:

 

Detail of Provisions, impairments, and overruns – FY15	(€m)
Inventories	(103)
Clients	(117)
Onerous projects	(150)
Total	(371)

 

 

 

 

 

The company believes that these non-recurring items reflect the current impact from the changing market conditions suffered by Indra in 2015 and the changes in estimates coming from new circumstances (and hypothesis) for the expected performance of the projects of the company.

Out of the total amount of the non-recurring items, the cash outflow for 2015 was €138m and the one expected for 2016 will be approximately €120m.

Non-recurrent costs related to Brazil in FY15 were €321m (approximately 60% of the total excluding the efficiency improvement plan and the provision of the redundancy plan in Spain) mainly due to a reduced number of problematic projects (in a context of a macro weakness in the country), deterioration in the payment terms from the Public Administrations, budget restrictions from public clients, and tighter conditions to approve the project’s milestones in the region.

Fourth quarter of 2015

Non-recurrent costs in 4Q15 grew to €130m, of which €64m corresponds to Brazil necessities and the remaining are related to estimation changes as a result of various factors and events that took place in 4Q15.

Non-recurring costs in Brazil (€64m) include the analysis by external firms of all the contracts portfolio in the country. This analysis consisted of a generic review process of all the projects in Brazil in order to identify those ones with the higher risk of future defaults or problems related with its collection periods. As a result, the analysis was focused on a small number of them where an in-depth legal and economic review was concluded, with the recommendation of the agreed closing together with the clients. The majority of the projects are expected to be finished before December 2016.

The remaining non-recurring items (€66m) correspond to worsening conditions of a set of specific contracts that were already being monitored in the rest of the geographical areas.

 

Non-recurring effects 4Q15	(€m)	Brazil	non-Brazil
Provisions, impairments, and overruns	(107)	(55)	(52)
Impairment of Goodwill	(3)	0	(3)
Impairment of Tangible assets	(9)	(9)	0
Impairment of Intangible assets	0	0	0
Efficiency improvement costs	(11)	0	(11)
Provision of the redundancy plan	0	0	0
Non-recurring items to EBIT	(130)	(64)	(66)
Impairment of Tax credit	0	0	0
Total	(130)	(64)	(66)

Provisions, impairments, and overruns

According to the established procedure, Indra’s project managers check periodically the execution performance of the main technical and economical hypotheses of their projects portfolio. Within this analysis, special attention is given to those projects with a higher probability of deviation from its initial schedule (and therefore to have a higher negative financial impact). According to the new organization model this process is monitored by Indra’s management.

A review has been undertaken given the risk tolerance that the Company is willing to assume at the end of December. As a result of it there had been a number of new events that implied a change in the forecasts and expectations of some projects as there were doubts in the recovery of some work done, costs that exceeded the expected income as well as penalties for non-compliance.

All of the above mentioned entailed the need to record a negative result of €371m for 2015, of which €107m has been registered in 4Q15.

Impairment of Goodwill

As a result of the new estimations in those projects (taking into account the new business hypothesis and the current macro situation) and the strategic plan 2014-2018 the company has decided to proceed with a correction of the recoverable amount of goodwill for an amount of -€104m (-€3m in 4Q15) with the following breakdown:

• Brazil: -€83m (€0m after the impairment)
• Consulting: -€9m (€23m after the impairment)
• Portugal: -€9m (€3m after the impairment)
• Diagram & Adepa: -€3m (€0m after the impairment)

Impairment of Tangible assets

Tangibles assets adjustment for an amount of €8.6m related to impairments on Brazil Real Estate.

Impairment of Intangible assets

Under the business review of the main intangible assets, there has been an impairment of €7.4m in 2Q15 related to the total amount of the intangible assets associated to the Politec acquisition (Brazil).

Provision of the redundancy plan and efficiency improvement costs

Non-recurring costs amounts €196m, of which €160m belongs to the provision of the personnel optimization plan in Spain and the remaining to the optimization of additional resources. The provision was made during 3Q15 for the total expenditure associated with the plan, regardless of the timing of the expected cash outflow (concentrated in the coming quarters). The plan ends in December 31st of 2016.

Impairment of Tax credit

Additionally, and regarding what has been mentioned above, the total tax credit that was activated in Brazil has been canceled, implying an impairment of -€31m.

Balance sheet and Cash Flow statement

Free cash flow for FY15 was -€50m vs €47m in FY14 mainly as a consequence of the worse operating performance and the headcount restructuring plan (-€78m). Excluding the latter FCF would have been €28m in FY15. FCF generated in 4Q15 amounted to €137m, including a cash outflow of -€60m due to the workforce adjustment plan. Excluding this impact FCF in 4Q15 would have been €197m.

Net Working Capital has decreased to €232m vs. €648m in December 2014, which is equivalent to 30 days of sales vs. 81 DoS in FY14. The adjustments made have implied an improvement of €287m (35 DoS), while the underlying improvement has been of €130m (16 DoS). It is worth highlighting the improvement in 4Q15 (equivalent to 31 DoS or c. €250m) as a consequence of the non-recurring items adjustments, the better collections, and the new measures put in place on the suppliers management.

Income tax totaled €7m (vs. €53m paid in FY14) basically due to lower payments made as a consequence of losses registered.

Intangible investments (net of the charge in grants) have been €27m vs. €42m in the same period of last year. The tangible investments reached €10m, below last year (€15m).

Net debt position at the end of FY15 amounted to €700m (lower than €837m in 9M15), equivalent to 5.4x LTM recurrent EBITDA. Around 90% of the gross debt is denominated in Euros, while the rest is concentrated in other currencies (mainly in Brazilian reais, which represents 6% of the gross debt). Average cost of debt is 4.2%, improving 0.3 pp. compared to the same period of last year. In the last days of the year, the Brazilian debt was totally repaid.

Non-recourse factoring lines in FY15 amounted to €187m vs. €173m in 9M15 and vs. €187m in FY14.

 

 

 

 

(1)   Before non-recurring costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Human Resources

 

 

 

At the end of FY15, the total workforce amounted to 37,060 professionals, declining -5% vs FY14. This decrease occurred along the second semester as a result of the execution of the restructuring plans in Spain and Latam (1,935 lower number of employees in 6 months):

·         Final workforce in Spain decreased by -6% vs. FY14 (1,210 less employees), of which approximately 85% belong to the workforce adjustment plan.

·         In Latam, headcount declined by -6% compared to FY14 (equivalent to 935 employees) in line with the repositioning in the region. 4Q15 showed a slightly improvement due to a transfer of employees from subcontractors to in-house related to legal requirements of the project.

·         In Asia, Middle East & Africa (AMEA), workforce increased +10% vs. FY14 due to the headcount increase in the Philippines’ offshore factory the higher activity in North Africa.

·         In Europe and North America, the workforce decreased by -4% because of the lower personnel needs in Portugal and the restructuring of different subsidiaries in the region.

The average workforce in 2015 has remained almost flat vs. 2014 as most of the employees that belong to the redundancy plan left the company in the latest part of the year. This fact, together with the reversal provision registered in 2014 explains the +2% increase of the personnel cost in 2015 vs. 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis by Vertical markets

 

 

 

 

Defence & Security

 

Revenues in the Defence & Security vertical increased by +7% in FY15, both in local currency and in reported terms. Revenues went through an acceleration during the fourth quarter of the year (+11%).        

 

The positive development in Simulation, Logistics, Radars, Command and Control, and Electronic Defence more than offset the lower contribution of the Eurofighter program.

 

The recovery phase in Spain consolidates (+63% in FY15 and +102% in 4Q15) supported by certain specific multiannual projects in the context of a new investment cycle put in place by the Ministry of Defence (basically electronic systems associated with the integrated mast of the future F110 frigates, electronic systems of the future 8x8 armored vehicles, and the simulation of the helicopter NH90, among others), and at the same time it will constitute relevant international references for the future.

 

The positive evolution of the order intake in the year (+11%) along with the accumulated pipeline (new national and European programs) pave the way for a sustained growth in the forthcoming years.

 

 

 

Transport & Traffic

 

Sales in the Transport & Traffic vertical grew by +1% in local currency (+2% in reported terms), experiencing a flattish performance in 4Q15.

 

It is worth highlighting our Own Property Solutions (+12% in FY15), specially in the Land & Rail & Road Traffic & Ports Transport segments (highlighting the growth of +40% in AMEA). Regarding ATM (+8% in FY15), it stands out the recovery in the activity in Spain (+25%) as well as the consolidation of our international position in European Programs.

 

Spain has had a very positive performance (+10% in FY15) as a consequence of the good performance in the Rail & ATM segments.

 

Order Intake falls -17% in FY15 with a negatively impacted by the delays in some countries dependent on oil and commodities.

 

 

 

 

 

 

Revenues in the IT business fell -5% in local currency (-7% in reported terms) due to the negative trend of Energy & Industry, Public Administrations, and Telecom & Media. It is worth highlighting the positive performance of Financial Services (+6%). The contribution of our digital services was €313M and counts 19% of our total revenues.

 

Despite the higher focus on the field of our Own Property Solutions and the commercial bet for our digital solutions (grouped into the new brand Minsait), it is expected a contraction of the reported revenues in the IT segment in the forthcoming quarters as a consequence of the negative FX impact, Brazil’s repositioning, the more selected criteria in the order intake, as well as the eventual delay in public tenders in Spain.

 

Energy & Industry

 

Revenues in Energy & Industry decreased by -7% in local currency (8% in reported terms), with an important deceleration in the fourth quarter basically due to the delays in some projects in oil exporting countries.

 

The Energy segment (c. 70% of the vertical’s revenues) fell -7% in FY15, conditioned by the sector consolidation process in Spain as well as the decline in the activity in Latam, in Brazil and in those geographies which are more linked to the oil price.

 

Industry fell -9%, although our Own Property Solutions in Spain (-4%) has had a better performance.

 

Good performance in AMEA (+11% in FY15), meanwhile the repositioning and the commercial effort in Latam (c. 30% of the vertical’s revenues) have led a fall in the activity levels in the area.

 

Although order intake fell -18%, it is expected a recovery in activity levels in the coming quarters, based on our Own Property Solutions, particularly in the Energy Segment and in airlines in Latam.

 

Financial Services

 

The activity in Financial Services registered +6% growth in local currency (+2% in reported terms), experiencing some slowdown in 4Q15.

 

The Banking segment in Spain (+6% in FY15) has led the growth of the vertical because of, among other issues, the increased business opportunities in the main Spanish entities, both in repositioning (Consulting +24%) and in improving efficiency (BPO +10%).

 

The management of different projects of implementation (Outsourcing) and BPO of third party solutions in Brazil has negatively impacted in the current activity levels and in the vertical profitability. The repositioning in Brazil (focus on Own Property Solutions, private clients, and strategic business alliances) as well as the correct execution of the agreed measures in the critical projects allow us to anticipate a better profitability in the business of the company in the area.

 

The Insurance segment grew up +2%, with a worse relative performance in Spain (-7%). However, Latam has registered a significant positive growth (+19%) due to the iOne Solution implementation in a relevant client in the region.

 

The expected ending of the problematic projects in Brazil as well as the repositioning in the area to focus on higher value added segments can anticipate a fall in the current activity levels in the forthcoming quarters.

 

Telecom & Media

 

Revenues in the Telecom & Media vertical decreased by -13% in local currency (-15% in reported terms) with an important deceleration in 4Q15 of -19% in local currency (-24% in reported terms).

 

During FY15, Telco operators has focused on efficiency measures and cost control, mainly in the Business Support Systems (BSS). This has resulted in a more demanding price environment in a highly competitive market place.

 

The Media vertical, although it has a relative less weight, had a worse relative performance than Telecom (-45%), especially in Spain where our market share is very high.

 

Order intake in the year has been falling (-19%) so it is not expected a recovery in the activity in the following quarters.

 

Public Administrations & Healthcare

 

The activity in Public Administrations & Healthcare declined by -10% in local currency (-12% in reported terms) with a worse relative performance in the last quarter.

 

Revenues were negatively affected by demanding comparables in the Elections business (specially in AMEA and Latam). Excluding this impact, its relative performance would have had similar levels as of revenues of FY14 in local currency (-3% in reported terms).

 

The Elections business fell -37% in FY15 as a consequence, among other aspects, of the worse demanding comparable vs. FY14 when we executed the elections contract in Irak. It is expected a deceleration in the next year because of the seasonality of this business, highly dependent on the elections calendar of the countries.

 

Healthcare registered a worse relative performance compared with PPAA, although it improved in the last part of the year due to some certain specific Spanish contracts.

 

The expected performance of the Elections business, the likely slowdown of the public sector in Spain, and the more restricted criteria in our commercial offer anticipates a worse performance in FY16 compared to FY15.

 

 

Analysis by geography

 

 

 

Spain

 

Sales in Spain increased +7% during the year, supported by our Own Property Solutions segment (+15%). 4Q15 showed a fall of -2%, mainly due to the decline in the private sector in this quarter.

 

FY15 growth is explained by the public sector (+23%), although the profitability is still at low levels (mainly in the IT verticals).

 

The private sector performed relatively worse than the public (-4%) in FY15 due to the negative evolution of Energy & Industry and Telecom & Media in Spain, already explained.

 

It worth to highlight the positive sales performance throughout the year in Defence & Security, Public Administrations, Transport & Traffic and Financial Services.

 

Despite the favorable performance of the order intake in Spain (+26%, especially in Defence & Security and Transport & Traffic), it is not expected that the current growth rates will be sustainable in the coming quarters as a consequence of the acceleration of the public expenditure in FY15 and delays in the expected public investments in the forthcoming quarters.      

 

Latam

 

Sales in Latam fell -3% in local currency (-9% in reported figures) with a sharp decline in 4Q15 (-19% in local currency and -29% in reported figures).

 

The IT business concentrates the main activity in Latam (c. 80% of the revenues) with a limited weight of our Own Property Solutions (c. 25% of the sales in the region). This fact has impacted negatively FY15 sales in a context of macro deterioration and political uncertainty in some countries (especially in Brazil).

 

The performance in Brazil (c. 35% of the revenues in Latam) has been focused on the better management of the current operations, mainly on the problematic projects (implementations of Third Party Solutions in the Financial Services and Public Administrations verticals). The repositioning in Brazil (focused on Own Property Solutions, private clients, and strategic commercial alliances) and the non-recurrent items announced anticipate a sales decline and an improvement in the profitability.

 

Revenues in Latam (ex-Brazil) are at similar levels to the previous year in local currency. The positive performance in the Southern Cone (elections in Argentina) offset the worse operating performance in Mexico vs. previous year (Transport & Traffic and Public Administrations).

 

The verticals with the better sales performance were Defence & Security, Public Administrations, and Financial Services.

 

Order intake decrease in the region suggests an activity deceleration in the coming quarters due to FX headwinds, a stricter policy in signing new contracts and the ending of some problematic projects.

 

 

Asia, Middle East & Africa (AMEA)

 

Revenues in Asia, Middle East & Africa (AMEA) decreased by -13% in local currency (-11% in reported figures) impacted by the Elections Business project in Iraq (ended in 2Q14). 4Q15, as well as in 3Q15, posted a positive performance with a growth of 16% in local currency and 19% in reported figures.

 

Excluding the impact of the elections project in Iraq, revenues would have grown at double digit rates compared to FY14 thanks to the positive evolution in Transport & Traffic, Energy & Industry and Defence & Security.

 

Despite the expected low oil prices could lead to slowdown in the public spending from some countries in Middle East (region that represents c. 30% of total sales in AMEA), the pipeline in the region (specially in Transport & Traffic, Defence & Security, and Energy & Industry) could anticipate positive growth rates in the following quarters.

 

Europe & North America

 

The activity in Europe & North America has registered a -9% drop in local currency and in reported figures.

 

Defence & Security and Transport & Traffic verticals concentrate the majority of the activity in the area (c. 75%).

 

Sales in Defence & Security have been affected by the lower level of activity in the Eurofighter project and there has been some delays of certain projects in some specific countries in the Transport & Traffic vertical.

 

Despite the order intake decrease and the gradual decline in the activity of the Eurofighter project it is expected a better relative performance in the forthcoming quarters.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis by segments

 

 

Sales in the period decreased by -3% in local currency (same level in reported terms), representing Solutions the 64% of total sales. Excluding the Elections business sales would have remained flat.

 

The strong growth experienced in Spain in FY15 (+15%) hasn’t compensated the decline in the rest of the geographical areas, which have been affected negatively by the Elections business as well as due to the exposure to certain countries that are dependent to the oil price and commodities. In the 4Q15, it is worth to highlight the growth in AMEA thanks to the execution of relevant projects in the Transport & Traffic field.

 

Along the year, the vertical markets with the best performance were Defence & Security and Transport & Traffic, while the higher falls were PPAA & Healthcare (partly conditioned by the Elections business) and Energy & Industry.

 

Order Intake fell -9% in local currency (-10% in reported figures), resulting in a Book-to-Bill ratio (Order Intake/Sales) of 1.00x vs. 1.08x in 2014. Defence & Security was the only vertical that posted positive growth rates.

 

The ratio Backlog/ Revenues of LTM was 1.39x, similar level (+1%) vs. 2014 (1.38x). 

 

 

 

Sales were flat in local currency (-3% in reported terms), being Services 36% as of total sales.

 

By vertical markets, Financial Services and PPAA posted positive growth rates, while Energy & Industry and Telecom & Media declined. In 4Q15 sales declined in all vertical markets.

 

By geographical areas, Latam was the region that posted the highest sales decline in 4Q15 affected (apart from the macro complex situation) by a stricter policy in signing new contracts.

 

Order Intake fell -15% in local currency (-17% in reported figures), with a Book-to-Bill ratio of 0.80x vs. 0.94x in 2014.

 

The ratio Backlog/ Revenues of LTM was 0.63x, lower than the one reached in 2014 (0.83x).

 

 

 

 

 

Contribution margins by segment

 

 

 

Contribution margin in Solutions (10.7%) decreased by -5.3% vs. FY14 (16.0%) mainly impacted by the overruns assumed in certain problematic projects (Transport & Traffic, as well as Financial Services and PPAA in Brazil), and by the lower contribution from the Eurofighter program.

 

Contribution margin in Services (6.5%) was lower by -4.7pp vs. the one posted in FY14 (11.2%) affected by problematic projects and pricing pressure in certain verticals.

 

 

Anxex 1: Consolidated Income Statement

 

 

 

Annex 2: Income statements by Business

 

 

 

Figures not audited

Annex 3: Consolidated Balance Sheet

 

 

 

Figures not audited

Annex 4: Consolidated Cash Flow Statement

       

 

 

 

Figures not audited

 

Annex 5: Consolidated Quarterly Cash Flow Statements

 

 

 

Figures not audited

 

 

 

 

Figures not audited

 

 

 

 

Figures not audited