TIDMSRP
RNS Number : 5870F
Serco Group PLC
22 February 2018
2017 full year results
22 February 2018
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Year ended 31 December 2017 2016
================================================ =========== ===========
Revenue - continuing and discontinued
operations(1) GBP2,953.6m GBP3,047.8m
Reported Revenue (continuing operations
only)(1) GBP2,953.6m GBP3,011.0m
------------------------------------------------ ----------- -----------
Underlying Trading Profit (UTP)(2) GBP69.8m GBP82.1m
Reported Operating Profit (after exceptional
items; continuing operations only)(2) GBP30.0m GBP42.2m
------------------------------------------------ ----------- -----------
Underlying EPS, basic(3) 3.42p 4.13p
Reported EPS, basic (after exceptional
items; continuing and discontinued operations) (0.02p) (0.11p)
Free Cash Flow(4) (GBP6.7m) (GBP33.0m)
------------------------------------------------ ----------- -----------
Net Debt GBP141.1m GBP109.3m
------------------------------------------------ ----------- -----------
Rupert Soames, Serco Group Chief Executive, said: "With profits
at the top end of the expectations we set out some 15 months ago,
net debt lower than we expected, fully funded pension schemes, and
strong order intake, we delivered a solid performance in 2017 in a
difficult market. Most importantly, we expect profits to grow in
both 2018 and 2019. We understand that getting to this point has
been a long haul for investors, and that there is still a long, and
probably bumpy, road ahead before we are producing acceptable
returns. But we are now moving forward, not backward.
"The benefits of our international footprint have never been
more evident as the UK market for public service outsourcing is
afflicted by well-publicised traumas. This environment may produce
opportunities for suppliers with strong track records of delivery,
and Serco also has the advantage of choice as to where we allocate
resources and effort between different markets. Therefore, as well
as ensuring that we support our UK customers, and respond
appropriately to opportunities as they arise, we will also be
investing in our businesses in North America, Europe, the Middle
East and Asia Pacific.
"The challenges facing governments around the world remain
unchanged. Ageing populations are driving demand for more and
better public services; almost all governments spend more than they
receive in tax; citizens have ever-higher expectations of the
quality of public services. In this environment, governments are
likely to want to use all means at their disposal to deliver value
for money and high quality public services, which should mean a
strong continuing role for the private sector as a provider of
innovation, investment and operational management."
Highlights
-- Reported Revenue(1) down 2%, comprising a 6% organic decline
from net contract attrition, partially offset by a 4% currency
benefit.
-- Order intake up 36% at GBP3.4bn (2016: GBP2.5bn), includes
Grafton prison in Australia which is the Group's largest ever
contract win, and over 30 other contract awards worth more than
GBP10m each across the UK, Europe, America and the Middle East;
book-to-bill ratio of over 100% for the first time since 2012;
closing order book increased to GBP10.7bn, up from GBP9.9bn a year
earlier.
-- Underlying Trading Profit(2) was at the top end of our
guidance given at the start of the year; run-rate throughout 2017
has been approximately 10% ahead of that achieved in H2 2016.
-- Operating costs reduced in proportion to the scale of revenue
reduction; further shared services and overhead savings of around
GBP20m achieved, taking total overhead savings over the last three
years to over GBP100m.
-- Reported result includes a GBP16m net charge of Contract
& Balance Sheet Review adjustments, compared to a net release
of GBP14m in 2016; cumulatively over the last three years, we are
tracking 3% better than the Contract & Balance Sheet Review
charges taken in 2014. Closing balance sheet Onerous Contract
Provision (OCP) liability now stands at GBP168m, down from GBP220m
in 2016 and GBP447m in 2014.
-- Pre--exceptional tax costs were GBP14m (2016: GBP16m), and
net exceptional costs were significantly lower at GBP25m (2016:
GBP68m).
-- Free Cash Flow(4) outflow improved by GBP26m to (GBP6.7m),
which includes (GBP8m) of outflow as we reduced our working capital
facility utilisation to zero by the end of 2017. Net Debt at
GBP141m (2016: GBP109m) was some GBP9m below our guidance range at
the start of the year, and Net Debt : EBITDA leverage of 1.4x
remains well within our medium term target of 1-2x.
-- Pension schemes fully funded and in a surplus on an
accounting basis; around half of our pension liabilities are now
fully underwritten by bulk annuity purchases, further reducing
pension scheme residual risks.
-- Pipeline of larger new bid opportunities reduced to GBP4.4bn,
as a number of unusually large opportunities moved through the
pipeline during 2017; GBP3bn of the pipeline are opportunities
added over the course of 2017.
-- Acquisition of BTP Systems completed for $20m, bringing deep
skills in defence satellite communication and radar engineering
technical services, together with a pipeline of $200m.
-- We have signed a revised agreement with the Special Managers
and Provisional Liquidators of Carillion plc, and while it is
subject to requisite third party consents, we continue to work with
all relevant parties to acquire the portfolio of selected UK health
facilities management contracts.
-- IFRS15 estimated restatement to 2017 not anticipated to be
significant; decrease revenue by GBP3m and Underlying Trading
Profit by GBP0.3m.
-- Guidance for 2018 unchanged: we expect revenues to be
GBP2.8-2.9bn, broadly flat in constant currency, and Underlying
Trading Profit to grow to around GBP80m, driven largely by
transformation savings. We expect 2019 to see further good growth
in Underlying Trading Profit.
For further information please contact Serco:
Stuart Ford, Head of Investor Relations T +44 (0) 1256 386
227
Marcus De Ville, Head of Media Relations T +44 (0) 1256 386
226
Presentation:
A presentation for institutional investors and analysts will be
held today at JPMorgan, 60 Victoria Embankment, London EC4Y 0JP,
starting at 9.00am. The presentation will be webcast live on
www.serco.com and subsequently available on demand. A dial-in
facility is also available on +44 (0)330 336 9411 (USA: +1 646 828
8143) with participant pin code 6702165.
Notes to summary table of financial results:
(1) Revenue is as defined under current IFRS (before adoption of
IFRS15), which excludes Serco's share of revenue of its joint
ventures and associates. Revenue including that from discontinued
operations (GBPnil in 2017 and GBP36.8m in 2016) is shown for
consistency with previous disclosures. Reported Revenue excludes
revenue from discontinued operations. Organic revenue growth is the
change at constant currency after adjusting to exclude the impact
of relevant acquisitions or disposals. Change at constant currency
is calculated by translating non-Sterling values for the year ended
31 December 2017 into Sterling at the average exchange rate for the
year ended 31 December 2016.
(2) Trading Profit is defined as IFRS Operating Profit adjusted
for (i) amortisation and impairment of intangibles arising on
acquisition and (ii) exceptional items; it includes the impact of
discontinued operations in 2016. Consistent with IFRS, it includes
Serco's share of profit after interest and tax of its joint
ventures and associates. Underlying Trading Profit additionally
excludes Contract & Balance Sheet Review adjustments
(principally Onerous Contract Provision (OCP) releases or charges),
as well as the beneficial treatment of depreciation and
amortisation of assets held for sale during 2016, and other
material one-time items such as the pension scheme settlement in
the first half of 2016 related to the profit on early exit from a
UK local authority contract that occurred in the second half of
2015. A reconciliation of Underlying Trading Profit to Trading
Profit and Reported Operating Profit is as follows:
Year ended 31 December
GBPm 2017 2016
============================================== ====== ======
Underlying Trading Profit 69.8 82.1
Include: non-underlying items
Contract & Balance Sheet Review adjustments (15.8) 14.2
Assets held for sale depreciation and
amortisation - 0.5
Other one-time items - 3.5
------ ------
Trading Profit 54.0 100.3
Amortisation and impairment of intangibles
arising on acquisition (4.4) (5.1)
------ ------
Operating Profit Before Exceptional Items
(continuing and discontinued operations) 49.6 95.2
Exclude: Operating Loss Before Exceptional
Items from discontinued operations(5) - 3.3
------ ------
Reported Operating Profit Before Exceptional
Items (continuing operations only) 49.6 98.5
Operating Exceptional Items (continuing
operations only) (19.6) (56.3)
------ ------
Reported Operating Profit (after exceptional
items; continuing operations only) 30.0 42.2
---------------------------------------------- ------ ------
(3) Underlying EPS reflects the Underlying Trading Profit
measure after deducting pre-exceptional net finance costs and
related tax effects.
(4) Free Cash Flow is the net cash flow from operating
activities before exceptional items as shown on the face of the
Group's Condensed Consolidated Cash Flow Statement, adding
dividends we receive from joint ventures and associates, and
deducting net interest paid and net capital expenditure on tangible
and intangible asset purchases.
(5) The Global Services division, representing private sector
BPO operations, was classified as a discontinued operation in 2015
and 2016. Disposal of the offshore business was largely completed
in December 2015, with the disposals of two remaining much smaller
elements completed in March 2016 and December 2016. The residual UK
onshore private sector BPO operations were sold or exited in 2016
with the exception of one business, consisting of a single
contract, which completed in July 2017. Total revenues for the
remaining operations were GBP5.4m and the loss before exceptional
items was GBP0.6m for the year ended 31 December 2017, and
therefore the results have been included in continuing operations
in 2017 on the grounds of materiality.
Reconciliations and further detail of financial performance are
included in the Finance Review on pages 18 to 37. This includes
full definitions and explanations of the purpose and usefulness of
each non-IFRS Alternative Performance Measure (APM) used by the
Group. The Condensed Consolidated Financial Statements and
accompanying notes are on pages 38 to 79.
Forward looking statements:
This announcement contains statements which are, or may be
deemed to be, "forward looking statements" which are prospective in
nature. All statements other than statements of historical fact are
forward looking statements. Generally, words such as "expect",
"anticipate", "may", "should", "will", "aspire", "aim", "plan",
"target", "goal", "ambition" and similar expressions identify
forward looking statements. By their nature, these forward looking
statements are subject to a number of known and unknown risks,
uncertainties and contingencies, and actual results and events
could differ materially from those currently being anticipated as
reflected in such statements. Factors which may cause future
outcomes to differ from those foreseen or implied in forward
looking statements include, but are not limited to: general
economic conditions and business conditions in Serco's markets;
contracts awarded to Serco; customers' acceptance of Serco's
products and services; operational problems; the actions of
competitors, trading partners, creditors, rating agencies and
others; the success or otherwise of partnering; changes in laws and
governmental regulations; regulatory or legal actions, including
the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or
regulatory approvals; exchange rate fluctuations; the development
and use of new technology; changes in public expectations and other
changes to business conditions; wars and acts of terrorism; and
cyber-attacks. Many of these factors are beyond Serco's control or
influence. These forward looking statements speak only as of the
date of this announcement and have not been audited or otherwise
independently verified. Past performance should not be taken as an
indication or guarantee of future results and no representation or
warranty, express or implied, is made regarding future performance.
Except as required by any applicable law or regulation, Serco
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward looking statements
contained in this announcement to reflect any change in Serco's
expectations or any change in events, conditions or circumstances
on which any such statement is based after the date of this
announcement, or to keep current any other information contained in
this announcement. Accordingly, undue reliance should not be placed
on the forward looking statements.
Chief Executive's Review
Summary of financial performance
Revenue and Trading Profit
Reported Revenue declined 2% to GBP2,954m (2016: GBP3,011m);
this measure excludes Serco's share of revenue from joint ventures
and associates of GBP357m (2016: GBP481m); also excluded in the
prior year is revenue of GBP37m from discontinued operations, which
reflected the residual run-off of the private sector BPO division.
Net currency movements provided a GBP122m benefit or a 4% increase.
At constant currency and adjusting for minor effects of relevant
acquisitions and disposals, the organic revenue decline was GBP188m
or 6%; around a third of the organic element of the decline relates
to no longer recognising as revenue the value of goods purchased on
behalf of customers following changes to two health procurement
services contracts in the UK; the balance of the decline relates to
the ending or transfer of contracts such as those for the UK
Defence Science and Technology Laboratory (DSTL), Armidale Class
Patrol Boats (ACPB) for the Royal Australian Navy, Virginia
Department of Transportation (VDOT), US Army transition assistance
(SFLTAP) and Western Australia Court Security and Custodial
Services (WACSCS). These and the effect of other smaller contract
attrition were only partially offset by growth elsewhere including
that from the phased start of new services during the year at Barts
Health NHS Trust, University Hospital Southampton NHS Foundation
Trust and Skills Support for the Workforce (SSW).
Underlying Trading Profit was GBP69.8m (2016: GBP82.1m), a
decline of GBP12.3m or, excluding the GBP6.5m net currency benefit,
a decline of GBP18.8m. The reduction was driven by the first half
of 2016 benefitting from GBP11m of non-recurring trading items,
which included: the previous higher shareholding and therefore
larger share of the profits of the Atomic Weapons Establishment
(AWE); the final settlement arrangements on the transfer of the
Northern Rail franchise; the conclusion of the VDOT and SFLTAP
operations; and a spike in activity on a defence logistics contract
in the Middle East. In addition, as well as the attrition impact
from profitable contracts coming to an end, some of the new
contracts added revenue growth in 2017 but were at reduced
profitability due to their initial transition and transformation
stages.
In the second half of 2016 our Underlying Trading Profit was
GBP31.5m, which was a period that did not benefit from the
non-recurring trading items that were a feature of the first half
of 2016, and was a period that had broadly comparable average
currency rates to 2017. Profits in both the first and second half
2017 were GBP35m, and therefore we have delivered a run-rate
approximately 10% ahead of that achieved in the second half of
2016.
Within our performance for the year, we delivered our target of
GBP20m of cost savings from efficiencies in central support
functions and overheads. Cumulatively over the last three years,
over GBP100m of cost has been removed through our programmes to
deliver savings by reducing the number of management layers,
implementing better procurement and driving greater efficiency in
the operation of shared services. These savings have been central
to our efforts to reduce the scale of Serco's cost base in
proportion to the scale of the revenue reduction incurred through
the loss of contracts and the disposals undertaken.
Trading Profit was GBP54.0m (2016: GBP100.3m), with three
categories of adjusting items which are within Trading Profit, but
excluded from our measure of Underlying Trading Profit. First,
there was a GBP15.8m net charge (2016: net release of GBP14.2m)
within Trading Profit arising from the review of Onerous Contract
Provisions (OCPs) and other Contract & Balance Sheet Review
items; the OCP adjustments comprised gross charges totalling GBP62m
(2016: GBP56m), partially offset by gross releases totalling GBP43m
(2016: GBP66m). By far the most significant charge (GBP47m) related
to the future revenue and cost assumptions of operating the
Caledonian Sleepers contract, though across other OCPs in the UK
& Europe division there was a net release of GBP16m and in
AsPac a net release of GBP11m. Notwithstanding this year's net
charge, it is worth noting that cumulatively over the last three
years, the net improvement to Trading Profit from OCPs and other
Contract & Balance Sheet Review items is GBP19m; we are
therefore tracking 3% better than the original charge taken through
Trading Profit in 2014. A detailed review of provisions and
Contract & Balance Sheet Review items is included in the
Finance Review on pages 18 to 37. The second area that we exclude
from Underlying Trading Profit is other material one-time items; in
2016 we therefore excluded from Underlying Trading Profit a GBP3.5m
beneficial pension settlement negotiated as part of the early
termination of the Thurrock contract. Third, and again only related
to 2016, we excluded the beneficial impact of GBP0.2m related to
depreciation and amortisation treatment of assets classified as
held for sale during 2016.
As with prior years, both Trading Profit and Underlying Trading
Profit benefited from losses on previously-identified onerous
contracts being neutralised by the utilisation of OCPs; the GBP69m
utilised in 2017 was both better than our expectations of around
GBP80m, and lower than the GBP84m utilised in 2016. The closing
balance of OCPs now stands at GBP168m, compared to GBP220m a year
earlier and the initial charge of GBP447m taken at the end of 2014.
We expect of the remaining GBP168m provision approximately GBP70m
will be utilised in 2018.
Financing and pensions, tax and exceptional costs
Pre-exceptional net finance costs were GBP11.6m (2016:
GBP12.6m); while average net debt of GBP184m was GBP65m higher than
the prior year, the increased cost of financing this was more than
offset by other small movements. Cash net interest paid was
GBP17.0m (2016: GBP19.0m).
Within net finance costs is a net credit of GBP3.8m (2016:
GBP4.7m) related to the strong funding position of Serco's pension
schemes. This net credit is lower than the prior year following the
purchase in June 2017 by the Trustees of the Serco Pension and Life
Assurance Scheme (SPLAS) of a bulk annuity from an insurer, which,
for a significant proportion of scheme members, has the effect of
fully removing longevity, investment and accounting risks. Assets
of the pension scheme have been transferred to the insurer to
purchase the annuity, resulting in a reduction in the IAS19 net
balance sheet asset. The gross liability remains recognised on our
balance sheet, but there is now an equal and opposite insurance
asset reflecting the perfect hedge established by the
transaction.
Including the effect of the transaction, the overall pension
scheme accounting surplus, before tax, was GBP26m at 31 December
2017 on a scheme gross asset base of GBP1,385m. As described below,
the transaction resulted in an exceptional non-cash tax charge of
GBP16.1m reflecting a deferred tax adjustment related to the
pension asset movements. Further details of Serco's pension funding
and the bulk annuity purchase are described more fully in the
Finance Review.
Tax and exceptional costs
The underlying effective tax cost was GBP20.6m (2016: GBP24.4m),
representing an underlying effective rate of 35% (2016: 35%) based
upon GBP58.2m (2016: GBP69.5m) of Underlying Trading Profit less
pre-exceptional net finance costs. The rate is higher than the UK
statutory rate of corporation tax as there was no deferred tax
credit taken against UK losses incurred in the year, and because it
reflects the tax charges at locally prevailing rates in the
international divisions which tend to be higher than the UK's rate;
these two factors are partially offset by the proportion of Serco's
profit before tax generated by consolidating our share of joint
venture and associate earnings which have already been taxed. The
Underlying effective rate was lower than our initial guidance of
approximately 50% due to a beneficial mix of profitability earned
for the year, and due to a one-off effect of UK tax legislation
enactment being recognised as an exceptional tax cost rather than
within the underlying measure.
Tax on non-underlying items was a net credit of GBP6.6m (2016:
credit of GBP8.5m). The principal driver of this has been a credit
to reflect recognising a UK deferred tax asset of GBP11.1m based
upon the improved outlook of future profitability; there is now UK
deferred tax asset totalling GBP17.4m recognised on the balance
sheet; there is a further estimated GBP160m deferred tax asset in
the UK that is currently unrecognised and therefore contingent upon
further improvement in the outlook. Total pre-exceptional tax costs
were therefore GBP14.0m (2016: GBP15.9m). Exceptional tax costs
were GBP5.0m (2016: credit of GBP3.1m). The principal drivers of
this were one-time non-cash deferred tax adjustments as follows: a
charge of GBP16.1m related to the pension asset movements on the
bulk annuity purchase; a charge of GBP3.7m related to the change in
UK tax legislation regarding the speed of utilising tax losses and
hence our deferred tax assets; and a GBP12.5m credit reflecting the
reduction in the US deferred tax liability following the fall in
future expected US rates primarily due to the enactment of the Tax
Cuts & Jobs Act in December 2017.
Total tax costs were therefore GBP19.0m (2016: GBP12.8m). Cash
net tax paid was GBP11.4m (2016: GBP5.6m). As previously described,
although we expect our cash tax to be reasonably predictable in
future periods, our effective tax rates are likely to be volatile
until we are able to show sufficient profitability in our UK
business to be able to recognise on our balance sheet all of the UK
tax asset arising from losses in 2014 and 2015 principally as a
result of the Contract & Balance Sheet Review. Our guidance of
the underlying effective tax rate for 2018 is however for a modest
reduction towards 30%, reflecting our forecast mix of profitability
and the net effect of US tax reform, and for it to continue to
reduce further over the longer term assuming further improvement in
profits.
The Group incurred operating exceptional costs of GBP19.6m
(2016: GBP56.3m), mainly comprising GBP28.6m of restructuring
programme costs related to the Transformation stage of our
strategy, including redundancy charges, asset impairments and other
incremental costs; these were partially offset by a non-cash credit
of GBP10.3m related to the previous transfer of employees from the
Serco defined pension scheme back to the Principal Civil Service
Pension Scheme (PCSPS). Together with exceptional tax costs of
GBP5.0m (2016: credit of GBP3.1m) and exceptional items related to
discontinued operations were GBPnil (2016: GBP14.6m); total net
exceptional costs were therefore GBP24.6m (2016: GBP67.8m).
Reported result for the year
The reported result for the year, as presented at the bottom of
the Group's Condensed Consolidated Income Statement on page 38, was
a profit of GBP0.1m (2016: loss of GBP1.1m). This reflects: Trading
Profit of GBP54.0m (2016: GBP100.3m); amortisation and impairment
of intangibles arising on acquisition of GBP4.4m (2016: GBP5.1m);
pre-exceptional net finance costs of GBP11.6m (2016: GBP12.6m); a
non-cash fair value gain of GBP0.7m (2016: GBPnil) relating to
increasing our ownership in a joint venture; pre-exceptional tax
costs of GBP14.0m (2016: GBP15.9m); and total net exceptional costs
of GBP24.6m (2016: GBP67.8m).
Earnings Per Share (EPS)
Underlying EPS, which reflects the Underlying Trading Profit
measure after deducting pre-exceptional finance costs and related
tax effects, was 3.42p (2016: 4.13p). The reduction reflects the
lower Underlying Trading Profit, partially offset by lower net
finance costs; the weighted average number of shares in issue was
broadly unchanged at 1,089.7m (2016: 1,088.3m). Reported EPS, which
includes the impact of the other non-underlying items and lower tax
and exceptional costs, was a loss per share of 0.02p (2016: loss
per share of 0.11p).
Cash Flow and Net Debt
Free Cash Flow was negative GBP7m (2016: negative GBP33m). Cash
generated from Underlying Trading Profit was largely offset by the
outflows related to loss-making contracts subject to OCPs. These
cash outflows lessened versus the prior year, as reflected in the
lower rate of OCP utilisation. There was a working capital outflow
of GBP9m (2016: outflow of GBP24m), which included GBP8m (2016:
GBP22m) of reduction in the utilisation of the Group's receivables
financing facility; at 31 December 2017 there was GBPnil
utilisation of the GBP30m facility, whereas GBP8m was utilised a
year earlier.
Closing net debt at 31 December 2017 increased to GBP141m (2016:
GBP109m); the increase includes the Free Cash outflow, together
with a GBP33m cash outflow related to exceptional items. There was
a beneficial gross currency translation effect on net debt of
GBP17m, predominantly reflecting the Group's US Private Placement
debt, however this was partially offset by a GBP3m adverse movement
on hedging instruments. The closing net debt compares to a daily
average of GBP184m (2016: GBP119m) and a peak net debt of GBP243m
(2016: GBP183m).
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.4x EBITDA (2016: 0.7x), which compares with
the covenant requirement to be less than 3.5x and remains well
within our medium term target range of 1-2x.
Dividends
The Board is not recommending the payment of a dividend in
respect of the 2017 financial year. The Board's appraisal of the
appropriateness of dividend payments takes into account the Group's
underlying earnings, cash flows and financial leverage, together
with the requirement to maintain an appropriate level of dividend
cover and the prevailing market outlook. Although the Board is
committed to resuming dividend payments as soon as it believes it
prudent to do so, in assessing whether we should resume dividend
payments in respect of 2017, we have been mindful of the fact there
has been a reduction in earnings, a free cash outflow and an
increase in net debt. In these circumstances, the Board believes
that it would not be prudent to resume dividend payments at the
current juncture. For 2018, our guidance is for an improvement in
Underlying Trading Profit, but we anticipate a further modest Free
Cash outflow and expect net debt to still increase, largely as a
result of cash outflows related to exceptional restructuring costs
and taking opportunities for value-enhancing infill acquisitions.
The Board will continue to keep the dividend policy under close
consideration as we progress with transforming the Group and
implementing our strategy.
The Revenue and Trading Profit performances are described
further in the Divisional Reviews. More detailed analysis of
earnings, cash flow, financing and related matters are described
further in the Finance Review.
Summary of operating performance and strategy implementation
Delivering a financial performance for 2017 at the top end of
our expectations has been accompanied by strong operational
delivery and further progress on implementing our strategy and
transformation. Within our operating framework, we insist that all
our management initiatives fit into one or more of four categories:
winning good business, executing brilliantly, making Serco a place
people are proud to work, and delivering profitability and
sustainability.
Problematic contracts continue to reduce in number and financial
impact versus where we started three years ago, and relationships
with customers in each of our markets are also fundamentally
improved. Where we have exited contracts during the year, we have
done so with pride and excellence, mindful of the military adage
that you judge a battalion as much by how it leaves its barracks,
as by how it arrives. Where we have started new operations, which
have involved the transition and recruitment of several thousand
employees, again I am pleased with the skill of our operational
managers. Where we are making losses on contracts, we are resolute
in still delivering what is required of us to appropriately serve
our customers and service users; and while doing so, working to
improve the financial performance of individual contracts. Three
years on, it is reassuring to note how accurate was our initial
estimation of the total level of onerous provisions required.
Similarly, delivering cost savings at the same time as investing
in and improving the business is challenging, but this has also
been paramount to ongoing transformation. We achieved our savings
target for 2017, and the cumulative reduction of over GBP100m from
efficiencies in central support functions and overheads is
equivalent to approximately 24% over the last three years. Our
guidance, as set out in more detail below, includes that we expect
Underlying Trading Profit to grow over the next two years, and this
will be driven largely by further transformation savings. Over that
period, we are in particular looking to transform our IT systems,
capabilities and structures. This means not only reducing their
cost, but also improving their performance and security. We are
implementing further operating model changes to deliver greater
efficiency and effectiveness of the organisation; there will also
be increased contribution to savings from the transformation of the
finance function and centralising expertise for reporting,
forecasting, planning and analysis with a third party provider, and
seeking additional rationalisation of disparate procurement spend
across the Group.
Our ongoing transformation of the business involves further
strengthening of our sector propositions, building differentiated
capability, and capturing business development opportunities to
enhance our pipeline and order book. As previously reported, we are
using Centres of Excellence (CoEs) for Group-wide propositions and
capabilities in our core markets, which are improving the sharing
of skills, best practice and intellectual property across
Serco.
Whilst demand across our markets has not been as strong as we
anticipated at the time we announced our strategy in 2015, the
availability of value-adding acquisitions, be they of companies or
of contracts, presents an opportunity to increase our scale and
capabilities which was not foreseen in 2015. In our US defence
business, the acquisition of BTP Systems for $20m adds deep skills
in satellite communication and radar engineering technical
services, which complements our existing service offering, and also
brings with it a pipeline of new opportunities of $200m. In
December 2017 we also signed a Business Purchase Agreement to
acquire a portfolio of selected UK health facilities management
contracts from Carillion plc, and have subsequently signed a
revised agreement with the Special Managers and Provisional
Liquidators of Carillion; whilst it is subject to requisite third
party consents, we continue to work with all relevant parties to
give effect to achieving the transfer of the contracts. If it is
executed as envisaged, this transaction would significantly
increase the scale of our equivalent Health business, and would add
around GBP1bn to our order book.
Serco employs (including our joint venture operations) over
50,000 people, the vast majority delivering services to customers.
Motivating and engaging employees is absolutely central to our
business, and will be a key determinant of demonstrating we have
successfully implemented our strategy. The latest results of our
global employee survey, managed independently by Aon Hewitt, and
with some 31,000 responses, showed a fourth successive year of
improvement in the aggregated measure of 'employee engagement'.
During 2017, we also delivered many other elements to build
capabilities and support our ambition to be the best-managed
business in our sector. Some 200 out of 300 senior managers have
completed our highly tailored Oxford Saïd Serco Management course.
We have rolled out Continuous Improvement training to all managers
and embedded it as part of onboarding new staff, and over 1,400
employees are now trained to more advanced levels. And we have
further invested in our Contract Management tools such as apps that
monitor contractual obligations and report in real time, our
Learning Management System for tracking training and
qualifications, and our Serco Management System which covers all
aspects of a contract's lifecycle, processes and compliance
requirements.
Contract awards, order book, rebids and pipeline
Contract awards
The Group signed contracts with a total value of GBP3.4bn during
the year (2016: GBP2.5bn), which was another year of strong
performance. This is the largest order intake since 2012, and
represents a book-to-bill ratio of approximately 115%. There were
over 30 contract awards worth more than GBP10m each, and the large
value of new business won resulted in this being approximately 70%
of the total value signed, with the balance represented by the
value of secured extensions or rebids of existing work; the latter
was also an abnormally small balance by virtue of there being a
relatively small amount of contracts coming up for rebid or
extension during 2017.
The largest new contract signed in the year was to operate the
New Grafton Correctional Centre (NGCC) in New South Wales, which,
when completed, will be the largest correctional facility in
Australia; the estimated total contract value to Serco over a
20-year term is approximately AUD2.6bn (equivalent to approximately
GBP1.5bn). The second largest new contract was with University
Hospital Southampton NHS Foundation Trust to transform catering and
cleaning, with an estimated value of GBP125m over the ten-year
term. The third largest was in the Americas division to deliver US
Army base modernisation services and in particular IT support,
valued at a total of $140m for the five-year base period and five
one-year option periods, with the fourth also in the US to provide
three Navy Fleet Readiness Centers with supply chain management
services for hazardous materials, valued at a total of $101m for
the base period and four one-year option periods. Smaller new bids
won included environmental services for Rushmoor Borough Council,
contact services support in Australia for the Department of Human
Services, facilities management to a financial services company in
Abu Dhabi, safety service patrol for the Texas Department of
Transportation, and numerous US Navy ship and shore defence
equipment modernisation task orders.
Of rebids and extensions secured, the largest was for NHS Forth
Valley to continue providing facilities management services for a
further seven years, followed by the US Patent & Trademark
Office (USPTO) for a further ten years. Others of note included
contact services for Hertfordshire County Council, specialist
scientific and engineering support for the European Space Agency,
facilities management at the Cleveland Clinic in Abu Dhabi, fleet
services for Louisville Gas & Electric Company, air navigation
services in Bahrain and Iraq, environmental services for various
London boroughs, traffic camera support in the Australian state of
Victoria, and support to passenger information services for the
Western Australia Public Transport Authority.
Win rates by volume were over 50% for new bids and over 90% for
rebids and extensions. Win rate by value was around 25% for new
work, with the benefit from the sheer scale of the Grafton win
being offset by the loss of the other big opportunities in Middle
East rail and UK immigration escorting; the win rate by value was
approximately 90% for securing existing work.
Order book
The Group's order book now stands at an estimated GBP10.7bn, up
by GBP0.8bn versus a year earlier. There is GBP2.4bn of revenue
secured in the order book for 2018, equivalent to around 85%
visibility of our GBP2.9bn revenue guidance at current exchange
rates. The secured order book is GBP1.6bn for 2019 and GBP1.2bn for
2020.
Rebids
Through to the end of 2020, across the Group there are around 60
contracts in our order book with annual revenue of over GBP5m where
an extension or rebid will be required, representing current annual
revenue of approximately GBP1.4bn in aggregate or approaching half
of the Group's 2018 GBP2.9bn revenue guidance. This proportion of
revenue that requires securing at some point over the next three
years is not unusual given our average contract length of around
seven years (or approximately ten years on average on a
revenue-weighted basis, as larger contracts typically have longer
terms). Contracts that could potentially end at some point by the
end of 2018 have aggregate annual revenue of around GBP500m, with
the higher amount versus recent years driven in particular by the
US Affordable Care Act contract becoming due for full rebid this
year, and with the next largest being Northern Isles Ferries. In
2019, it increases to around GBP700m, with Australian immigration
services, the Dubai Metro, one of our US Navy installation
contracts and COMPASS all due for rebid or potential extension. In
2020, it is around GBP200m, with PECS the only particularly large
contract anticipated to become due in that year.
Pipeline
Our pipeline is tightly defined as new bid opportunities with
estimated Annual Contract Value (ACV) of at least GBP10m and which
we expect to bid and to be adjudicated within a rolling 24-month
timeframe. The Total Contract Value (TCV) of individual
opportunities is capped at GBP1bn. The definition does not include
rebids and extension opportunities, and on average over the last
five years, more than half of our order intake has come from
opportunities outside the reported pipeline. It is a relatively
small proportion of the total universe of opportunities, many of
which either have annual revenues less than GBP10m, or are likely
to be decided beyond the next 24 months, or are rebids and
extensions. It should also be remembered that in the Americas
division in particular, we have numerous arrangements which are
classed as 'IDIQ' - Indefinite Delivery / Indefinite Quantity -
which are essentially framework agreements under which the customer
issues task orders one at a time; whilst the ultimate value of such
an agreement may be very large and run over many years, a value is
only recorded in our order book as individual task orders are
contracted, and few of them would appear in the pipeline as they
tend to be individually less than GBP10m and contracted on short
lead times.
Following several years of decline, at the start of 2015 the
pipeline stood at around GBP5bn and began to grow again, increasing
to GBP6.5bn at the start of 2016, and stood at GBP8.4bn at the
start of 2017. During the year, around GBP7bn has come out of the
pipeline, predominantly due to: wins, such as Grafton prison (which
was capped in the pipeline at GBP1bn) and Southampton NHS
Foundation Trust; losses, such as those in Middle East rail, UK
immigration escorting and a US Navy systems support opportunity; as
well as due to a small number of other opportunities being removed
such as immigration services in the US. A number of new
opportunities have now matured to the stage where they meet our
pipeline definition, adding in aggregate around GBP3bn over the
course of the year. As a result, the pipeline currently stands at
GBP4.4bn, which consists of around 25 bids that have an ACV
averaging approximately GBP30m and a contract length averaging
around six years.
In the services industry in which Serco operates, pipelines are
often lumpy, as individual opportunities can be very large, and
when they come in and out of the pipeline they can have a material
effect on reported values. In 2017, a number of unusually large
bids travelled through the pipeline, and, as anticipated,
immediately replacing these has been challenging in the prevailing
market conditions. A lower pipeline is not a matter of undue
concern: growing our pipeline should not be expected to be a smooth
progression given the effects of the timing and scale of individual
awards, and we expect profit growth in the next two years to be
driven by transformation savings. However, progress beyond the next
two years will require seeing improvements in the trading
conditions across our markets which will need to be first evidenced
by a pipeline that is growing once again.
Key opportunities in the pipeline are described further in the
Divisional Reviews.
Risks associated with Serco's trading environment
Last year, we reported on the risks around our trading
environment, and focused on the possible impact of Brexit,
instability in the Middle East, and lack of clarity in the US
following the election of President Trump.
None of these risks has markedly reduced in the last twelve
months: in terms of Brexit, our business directly serving European
bodies which accounts for around 5% of Serco's revenue is unlikely
to be greatly affected, as it is served by EU-resident companies.
We believe Brexit may have an impact on labour cost and
availability in the UK if EU citizens cannot come to UK to work in
essential frontline service roles. The greatest impact for us is
that UK Central Government is largely focused upon the overwhelming
need to manage Brexit, which has been described by the Head of the
Civil Service as the greatest peacetime challenge ever faced by the
Civil Service, and it is clear that their priority is going to be
focused in this direction for several years to come. However, in
the medium term the repatriation of swathes of regulatory functions
may lead to important opportunities, and many of our largest
customers - most notably the Ministry of Defence, the Ministry of
Justice and the Home Office - still have pressing needs to reduce
costs and increase efficiency.
In the US, it is clear that the Affordable Care Act or
'Obamacare', and associated contracts such as ours providing
eligibility processing services to those seeking health insurance,
will continue in some form, although the promised expansion in
Defence spending is yet to be seen. Disappointingly, there are few
signs of resolution in the dispute between Qatar and other states
in the Middle East.
However, since last year's report, in addition to the risks set
out above, the UK public sector outsourcing market has in recent
months been thrown into turmoil as the result of the collapse of
Carillion, and the crystallisation on some contracts of very
significant risks which government had transferred to suppliers.
This has reignited the debate about the wisdom of government
outsourcing to private companies the delivery of public services,
and we suspect that this will become a theme in the next General
Election. There is a very real risk that this will make the UK
Government more than normally cautious in dealing with its
suppliers. On the other hand, it may make them more inclined to
deal with suppliers who have established a track record for strong
delivery, prudent accounting and who have a robust balance sheet.
The possible consequences of these events are examined in more
detail under 'Industry Backdrop and Concluding Thoughts',
below.
Guidance and outlook
Our guidance for 2018 and outlook beyond is unchanged from that
initially provided in our update on 13 December 2017.
For 2018, we expect that Underlying Trading Profit will grow to
around GBP80m, on revenues of GBP2.8-2.9bn (i.e. broadly flat
organic revenue growth on a constant currency basis). We therefore
expect some improvement in margins, driven largely by
transformation savings. Our guidance reflects latest currency
rates, which now imply greater pressure from adverse currency
impacts estimated at GBP5-6m for profit and GBP100-120m for revenue
when compared to the average rates for 2017.
As we have noted before in regard to our previous guidance, we
reiterate that the range of potential outcomes is significantly
wider than that implied by our budget's central case, both to the
upside and downside; this reflects Serco's relatively low margins
and the sensitivity of our profits to even small changes in
revenues and costs, as well as movements in currency. Furthermore,
and as described in more detail in the Divisional Reviews, the
outcome of new bids in our pipeline and in our progress securing
extensions or rebids including that for the Affordable Care Act in
the US, could have a material impact on our business both in 2018
and more so the following year.
The 2018 financial year will be the first to be reported under
the new IFRS15 accounting standard. As previously disclosed and
reflective of the prudent accounting practices adopted in recent
years by Serco, we do not anticipate the impact to be significant -
as set out in Note 1 to the Group's Condensed Consolidated
Financial Statements, the estimated restatement to 2017 is to
decrease revenue by GBP3m and Underlying Trading Profit by GBP0.3m.
IFRS15 will be potentially of more relevance to the Group in
relation to the accounting for new contracts rather than those
already in place at the time of adopting the new standard. The
changes brought about by IFRS15 on previous percentage of
completion accounting is expected to have little impact on Serco as
this form of accounting has never been of particular relevance to
Serco. However, if Serco enters into future contracts that have
significant transition phases, this could result in a greater
proportion of revenue and profit being recognised later on in the
life of the contract than under previous accounting. The UK Defence
Fire & Risk Management Organisation (DFRMO) contract, which we
are currently bidding, is one such.
In 2018, we anticipate our net finance costs to increase
modestly to around GBP15m, our underlying effective tax rate to
reduce towards 30%, and exceptional restructuring costs of
approximately GBP35m as we implement further transformation
activity in 2018. Further background to these areas are included in
the Finance Review.
We anticipate a further small Free Cash outflow. After the cash
outflow on exceptional costs, and the acquisition consideration for
BTP Systems, we anticipate closing accounting net debt to increase
to GBP200-250m, equivalent to leverage for covenant purposes in the
range of 1.5-2x EBITDA.
As noted in our previous announcement regarding the potential
acquisition of health facilities management contracts formerly
operated by Carillion plc, the effect of this transaction is not
included in any of our guidance at this stage.
Looking further ahead, we expect 2019 to be a year of further
good growth in Underlying Trading Profit, which is again likely to
be driven by additional transformation savings. The rate of growth
thereafter will be more dependent on our ability to grow revenues.
The Strategy Review announced in March 2015 set out a long term
ambition that the business could grow in line with a market which
was expected to expand at a long term trend rate of 5-7% a year and
deliver margins of 5-6%. Our margin ambition was predicated on
three conditions: first, reducing costs as a percentage of sales;
second, containing losses on onerous contracts and converting a
number of them into profitable contracts on rebid; and, thirdly,
increasing margins by growing revenues whilst bearing down on
overheads. We remain broadly on track on costs and onerous
contracts, but some markets, and in particular the UK, are
currently growing more slowly than their former trend rate. We can
and will partly compensate for a weaker organic revenue outlook
through increased actions on the cost base, and our long term
ambitions of 5-7% revenue growth and 5-6% margin remain intact, but
the timing of achieving this will be dependent upon when demand
reverts to historic levels in our target markets.
Industry backdrop and concluding thoughts
"No plan ever survives first contact with the enemy" was a
phrase first coined by the military strategist Helmuth von Moltke
in the 19(th) century. So far, Serco's three-stage plan (Stabilise
- Transform - Grow), which we conceived in late 2014, has survived
contact with the flow of events surprisingly well. After a period
of decline, our profits have started to grow again; we have
re-established our reputation for operational delivery; we have
kept our promises to our customers; our portfolio of onerous
contracts is running off in line with the expectations we set in
2014; we have had a strong year of order intake in 2017; and we are
taking steps to improve margins to take us to more normal levels,
even if weak demand will probably mean it will take us longer to
get there. We are not yet able to resume dividend payments, but our
pension schemes are fully funded and our balance sheet is
robust.
Into this generally positive scene of Serco's own progress has
intruded a traumatic event in the form of the collapse of one of
the UK's largest suppliers of public services, Carillion. Quite
apart from the usual miseries associated with the bankruptcy of a
major company, it has put at risk the supply of a number of
sensitive public service contracts and caused the UK Government
distraction and expense. Not unnaturally, this has reignited the
already-glowing embers of the debate about the desirability of
allowing private companies to deliver public services. This cuts to
the heart of what we do; the UK is Serco's home market, and
accounts for around half of our revenue, and understanding recent
developments is high on the agenda of many investors.
It must be stressed that the UK Government successfully buys
some GBP200bn of goods and services from private companies and
charities each year. There are over one million people employed by
the private sector delivering services to Government, and the vast
majority of this work is delivered to a high standard. Huge
benefits have been delivered by private companies and charities
providing public services which are both efficient and innovative.
Nevertheless, the collapse of Carillion stands as a reminder that
since 2010 a significant number of businesses supplying Government
services in the UK have suffered very large losses, Serco included,
and that all is not right in the market for Government services in
the UK.
How has this situation arisen? In one sense, this is the market
at work, with a tendency for the balance of advantage to move
between buyers and sellers in accordance with supply and demand. In
the '90's and '00's, Government was keen to enlist the support of
private sector companies to improve the efficiency and productivity
of public services, and many new opportunities came to market; the
Government was feeling its way and trying to develop new
contracting structures such as Private Finance Initiatives which
had never been tested before, and was sometimes outrun by more
sophisticated and canny suppliers, who were double-digit revenue
growth a year with strong margins, cash flows and returns on
capital. As is the way of markets, this strong growth attracted new
competitors, many from abroad or from other sectors. As is also the
way of markets, the flow of milk and honey did not last
indefinitely.
Around 2010, the balance of power in the market began to turn.
Government introduced austerity and sought to reduce expenditure,
the supply of new work slowed, just as new competitors entered the
market. At the same time, Government started to hire poachers and
made them its gamekeepers, and in recent years has improved its
commercial and contracting capabilities beyond all recognition.
Feeling compelled to deliver the growth they had promised,
suppliers competed fiercely for a reducing pool of new business;
prices fell, and a newly-savvy Government discovered it had anxious
suppliers prepared to accept risks and contract terms which in
normal conditions they would not have agreed to. Sophisticated
buying techniques were imported from the private sector; contracts
for sensitive public services such as caring for asylum seekers
were awarded to the lowest bidder by online auction. As margins
fell, suppliers shrank their capital employed and increased their
debt; some made assumptions in their accounting which had the
effect of pulling forward reported profits; some used opaque
financing facilities and extended the payment terms to their
suppliers to make their reported cash flow more nearly match the
stretched profits. At the same time, falling interest rates and
increasing longevity sent pension deficits soaring. So in a matter
of a few years, a sector which previously had delivered healthy
returns and supported well-capitalised balance sheets became
under-capitalised, over-leveraged, and operationally and
financially fragile. Given the amount of contractual risk suppliers
were carrying, that fragility was going to show itself sooner or
later.
Serco was the first major UK public services supplier to reveal
the consequences of carrying those risks. In 2014, we had to take
GBP447m of onerous contract provisions to reflect the cost of
contractual commitments we had made, and in total some GBP1.3bn of
provisions and write-downs were required. Fortunately, our banks
and shareholders backed our decision to stand by our commitments to
our customers, and we raised some GBP700m of equity and a further
GBP250m from disposals to make our balance sheet robust. Since
then, few suppliers in the sector have escaped unscathed, but
Carillion is the first major bankruptcy.
Does this matter? Over 12,000 companies go into insolvency in a
year in the UK, so why should Carillion be of such concern? The
reason is that the nature of public services contracts are that
they often involve the delivery of services of national importance
that need to operate 24 hours a day. Hospitals cannot operate
without cleaners and caterers; courts cannot operate without
prisoner transport; defence bases cannot operate without air
traffic control. The security of supply of these contracts is a
matter of national importance and a proper concern of
Government.
How did we get into this position? The answer is: nobody is
blameless. Company managers and directors should have remembered
the adage that "no deal is better than a bad deal"; and that
over-optimistic accounting judgements, or flattering reported cash
flow, will always be found out in the end; and that pension
deficits were not a temporary aberration but a liability that
needed to be addressed. And for its part, Government has used its
position as a monopoly buyer to push companies, large and small,
into accepting contractual terms and risks that they could not
conceivably manage or hedge. Sooner or later, some of those risks
were bound to crystallise, and when they did, suppliers delivering
vital public services would be mortally wounded and even become
functionally or formally insolvent, which would not be in the
interests of either taxpayers or service users.
Where will the market go next? Clearly, both Government and
suppliers should take time to consider carefully the implications
of recent events. Suppliers will likely become much more wary;
there will be fewer new entrants; existing players may shift the
balance of their attention towards other markets, if they can. The
UK Government runs the risk of being offered less choice and
innovation, less competition and higher risk premiums. And efforts
to encourage small and medium sized suppliers into the market are
likely to be set back, as they see what has happened to some of the
large and strong companies who supply Government.
In the short term, the situation may offer opportunities to
companies such as Serco which have already re-financed their
balance sheets and focused on developing the strength and depth of
their management. But this is no time for schadenfreude. Serco's
interest lies in seeing the market restored to health as soon as
possible, where suppliers have the confidence to invest in bringing
innovation and efficiency to help Government rise to the challenges
of providing what it so badly needs, which is more public services,
of higher quality, at lower cost. And Government needs to feel
confident that it has a choice of strong suppliers, who it can
trust to deliver and stand by their promises, and who have balance
sheets robust enough to sustain them through the lumps and bumps
inherent in the delivery of large and complex contracts.
We believe that recent events present an opportunity for both
Government and its suppliers to work together to construct a new
approach to the provision of public services which will avoid the
problems of the past. There is broad consensus that public service
provision should be a mixed economy of the state, not-for-profit
organisations, and the private sector; and also that the provision
of public services should not be completely exposed to the harshest
rough-and-tumble, boom-and-bust cycle of a totally free market
where the relative powers of either buyer or seller may become
unbalanced. Few people believe that the delivery of public services
should always be a monopoly of employees of the state. The question
is a practical one of how to make the procurement of public
services, whether delivered by the state itself, by
not-for-profits, or private companies, work better.
Serco will be contributing energetically to this discussion, and
we will be proposing four principles which we suggest should govern
relations between Government and its suppliers, be they public
bodies, not-for-profit organisations or private sector
companies.
-- We should strengthen transparency in public contracting. This
means that for large contracts for public services, which are not
commoditised, which do not impinge on National Security, and which
do not include significant amounts of intellectual property, the
presumption should be in favour of open-book accounting, in which
the Cabinet Office and National Audit Office can see the suppliers'
accounts of major contracts, whether they be performed by public or
private operators. There should also be far greater transparency of
operational performance: except in exceptional circumstances,
suppliers, be they private or Government-owned, should be required
to publish every six months their performance against key
operational indicators, so they are held accountable for the
delivery of their promises to the taxpayers who are paying for them
and the users who they are serving. And we believe that there
should be a formal, rigorous and transparent decision-making
process by which Government decides what mechanism it should use,
be it in-house or by a third party, to deliver a given project or
policy. We call this the "Transparency Principle".
-- Both suppliers and the Government should have the right, on
payment of an agreed break fee, to exit a contract at
pre-determined intervals. We call this the "Orderly Exit
Principle". The purpose of this is to give both Government and
supplier the ability to exit contracts which are not working out as
intended. For instance, if the supplier is making greater than
expected profits, or Government policy changes, or performance is
unsatisfactory but still within the bounds of the contract, the
Government should be able, on payment of a break fee, to re-compete
or take back in-house the contract; and likewise if the supplier
was making unexpected losses, or changes in regulation had made it
impossible to deliver the contract as intended, the supplier can
exit the contract on payment of a fee which would compensate the
Government for the cost of re-tendering. This would, for both
Government and supplier, significantly reduce the risk of being
stuck together in unhappy marriages.
-- Suppliers of sensitive contracts should be obliged to lodge
with Government a "living will", being a set of arrangements to
facilitate the transfer of a contract back to Government or to
another supplier if required. This would significantly reduce the
operational risk to Government of supplier failure. This is the
"Security of Supply Principle".
-- Government and suppliers should agree to abide by a
mutually-agreed code of conduct, which would set out expected
standards of behaviour from Government and its contractors. This
would involve the Government agreeing not to impose punitive or
unfair terms and conditions or transfer unmanageable state risk;
and suppliers would agree to maintain certain metrics of financial
stability; pay their sub-contractors in a timely fashion; and
adequately fund their pensions. We think it would be important to
have a process of independent arbitration built into the code of
conduct to ensure that there is some avenue of redress and calling
to account those who do not abide by the code. We call this the
"Fairness Principle".
It is vital to the well-being of any country that public
services are delivered to high standards and offer value for money,
and for the most part, in the UK, private and third-sector
providers have done a good job of doing this. The UK has hundreds
of new hospitals and schools, built and maintained to high
standards; thousands of contracts have delivered innovation,
improved services and lowered costs, along with far higher degrees
of visibility of operational performance than is commonly available
from public sector delivery. And as the UK advances towards Brexit,
it is clear that there will be the need for a whole lot more
Government as we "take back control". With this in mind, we believe
that there is an urgent need to re-think the relationship between
the UK Government and its suppliers. We believe an approach based
on the Four Principles above would serve to restore trust and
common sense in the market; remove the risk of excessive profits or
losses; and encourage a more vibrant and competitive market for
Government services, one in which Serco would be an enthusiastic
participant.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional divisions: UK
& Europe (UK&E); the Americas; the Asia Pacific region
(AsPac); and the Middle East. The Global Services division
previously consisted of Serco's private sector BPO operations,
which for statutory reporting purposes were classified in 2016 as
discontinued operations following the previously announced
strategic exit from this market and the subsequent disposals. Serco
presents alternative measures to include the Revenue and Trading
Profit of these discontinued operations in prior periods for
consistency with previous disclosures. Reflecting statutory
reporting requirements, Serco's share of revenue from its joint
ventures and associates is not included in revenue, while Serco's
share of joint ventures and associates' profit after interest and
tax is included in Underlying Trading Profit. As previously
disclosed and for consistency with guidance, Serco's Underlying
Trading Profit measure excludes Contract & Balance Sheet Review
adjustments (principally OCP releases or charges), and the benefit
in 2016 from not depreciating and amortising assets held for sale,
and other one-time items such as those in 2016 related to the early
exit from the Thurrock contract.
Year ended 31 December UK&E Total
2017 Middle Corporate
GBPm Americas AsPac East costs
--------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,334.7 688.0 579.0 351.9 - 2,953.6
Change (3%) 0% (7%) +8% (2%)
Change at constant currency (4%) (7%) (14%) +2% (6%)
Organic change at constant
currency (4%) (7%) (15%) +2% (6%)
Underlying Trading Profit/(Loss) 35.1 36.4 23.7 16.2 (41.6) 69.8
Change (23%) (15%) (5%) (2%) (4%) (19%)
Change at constant currency (25%) (21%) (13%) (10%) (4%) (27%)
Margin 2.6% 5.3% 4.1% 4.6% n/a 2.4%
Contract & Balance Sheet
Review adjustments (30.6) 3.4 11.4 - - (15.8)
Trading Profit/(Loss) 4.5 39.8 35.1 16.2 (41.6) 54.0
Amortisation of intangibles
arising on acquisition - (3.0) (1.4) - - (4.4)
Operating profit/(loss)
before exceptionals 4.5 36.8 33.7 16.2 (41.6) 49.6
--------------------------------- ------- -------- ----- ------ --------- -------
Year ended 31 December UK&E Sub-total
2016 Middle Corporate continuing Global
GBPm Americas AsPac East costs Services Total
Revenue including discontinued
operations 1,375.1 691.4 619.7 324.8 - 3,011.0 36.8 3,047.8
Discontinued operations
adjustment* - - - - - - (36.8) (36.8)
--------------------------------- ------- -------- ----- ------ --------- ----------- --------- -------
Revenue 1,375.1 691.4 619.7 324.8 - 3,011.0 - 3,011.0
--------------------------------- ------- -------- ----- ------ --------- ----------- --------- -------
Underlying Trading Profit/(Loss) 45.7 43.0 24.9 16.6 (43.5) 86.7 (4.6) 82.1
Margin 3.3% 6.2% 4.0% 5.1% n/a 2.9% (12.5%) 2.7%
Contract & Balance Sheet
Review adjustments 35.3 (36.6) 9.3 2.2 3.2 13.4 0.8 14.2
Assets held for sale
depreciation and amortisation - - - - - - 0.5 0.5
Other one-time items 3.5 - - - - 3.5 - 3.5
Trading Profit/(Loss) 84.5 6.4 34.2 18.8 (40.3) 103.6 (3.3) 100.3
Amortisation of intangibles
arising on acquisition (0.3) (2.8) (2.0) - - (5.1) - (5.1)
Discontinued operations
adjustment* - - - - - - 3.3 3.3
--------------------------------- ------- -------- ----- ------ --------- ----------- --------- -------
Operating profit/(loss)
before exceptionals 84.2 3.6 32.2 18.8 (40.3) 98.5 - 98.5
--------------------------------- ------- -------- ----- ------ --------- ----------- --------- -------
* Statutory reporting only includes the post-tax result of
discontinued operations as a single line in the Condensed
Consolidated Income Statement.
The trading performance and outlook for each division are
described on the following pages. Reconciliations and further
detail of financial performance are included in the Finance Review
on pages 18 to 37. This includes full definitions and explanations
of the purpose of each non-IFRS Alternative Performance Measure
(APM) used by the Group. The Condensed Consolidated Financial
Statements and accompanying notes are on pages 38 to 79.
UK & Europe
Serco's UK & Europe division supports public service
delivery and outcomes across all five of the Group's chosen
sectors: our Justice & Immigration business provides a wide
range of services to support safeguarding society and reducing
reoffending, from secure accommodation management through to
housing and welfare services for asylum seekers; in Defence, we are
trusted to deliver critical support services and operate sensitive
facilities; we operate complex public Transport systems and
services; our Health business provides primarily non-clinical
support services to hospitals; and the Citizen Services business
provides environmental and leisure services, as well as a wide
range of other front, middle and back-office services to support
public sector customers in the UK or European institutions. Serco's
operations in the UK represent approximately 40% of total Revenue
for the Group, and those across the rest of Europe approximately
5%.
Serco announced in September 2017 that it would merge its UK and
European operating divisions to create a single, integrated
business, Serco UK & Europe. This combined the two previous
divisions - UK Central Government and UK & Europe Local &
Regional Government - and will simplify and improve the
efficiencies and capabilities of our operations in the region, in
particular as we continue to drive transformation benefits across
the Group as a whole. Kevin Craven, previously Chief Executive of
UK Central Government became the Chief Executive of Serco UK &
Europe. Kevin joined Serco in September 2014, prior to which he was
CEO of Balfour Beatty Services, leading a business with 16,000
employees and revenues of over GBP1.6bn, covering sectors such as
facilities management, rail, highways and utilities. Before joining
Balfour Beatty, he was the Managing Director for Healthcare,
Education & Defence at Aramark, and the Managing Director of
Transport & Travel for Sodexo.
Revenue for 2017 was GBP1,334.7m (2016: GBP1,375.1m), a decline
of 3%; reported revenue excludes that from our joint venture and
associate holdings which are predominantly the operations of AWE,
Merseyrail and previously Northern Rail, with these representing
the vast majority of the Group's activity in joint ventures and
associates. At constant currency, the decline in revenue was 4%.
Drivers of the reduction included: in our Health business, we
ceased to recognise as revenue the value of goods purchased on our
customers' behalf following changes to two procurement services
contracts; in our Defence business, the phased transfer back during
2016 of services that Serco had previously been providing to the
Defence Science & Technology Laboratory (DSTL) and for Defence
Business Services (DBS); we also saw reduced volumes in our Child
Maintenance Group operations, and the ending or reduced scale of
various other BPO and IT support services contracts. These revenue
reductions were partially offset from growth elsewhere, namely the
start of hospital facility management services for Barts Health NHS
Trust and University Hospital Southampton NHS Foundation Trust, as
well as some growth in our European agency operations and from the
new Skills Support for the Workforce (SSW) contracts.
Underlying Trading Profit was GBP35.1m (2016: GBP45.7m),
representing an implied margin of 2.6% (2016: 3.3%). Trading Profit
includes the profit contribution (from which tax and interest have
already been deducted) of joint ventures and associates; if the
GBP350m (2016: GBP474m) proportional share of revenue from joint
ventures and associates was also included and if the GBP7.0m (2016:
GBP7.4m) share of interest and tax cost was excluded, the overall
divisional margin would have been 2.5% (2016: 2.9%). The joint
venture and associate profit contribution of GBP26.6m (2016:
GBP31.3m) was GBP4.7m lower, reflecting the end of the Northern
Rail franchise in March 2016 and the lower shareholding of AWE from
September 2016. The reduction in Underlying Trading Profit also
included the impact of other contract attrition and in-contract
reductions, and the lower profitability from new contracts in their
initial transition and transformation stages. The non-repeat of
certain costs and impairments that occurred in 2016 and the
progress made on cost efficiencies in 2017 only partially offset
these areas of profit reduction. Within Underlying Trading Profit
there was GBP55m of OCP utilisation (2016: GBP60m), which served to
offset the Division's loss-making operations, principally COMPASS
UK asylum seeker support services, the Caledonian Sleeper, Future
Provision of Marine Services (FPMS), Lincolnshire Country Council,
and the Prisoner Escort & Custody Services (PECS)
contracts.
Contract & Balance Sheet Review adjustments resulted in a
GBP30.6m net charge, driven by updating the assumptions regarding
operational and maintenance costs of running the Caledonian
Sleepers contract, partially offset by a net GBP16m of releases
across other contracts. The Caledonian Sleepers charge of GBP47m
reflects a sharp increase in the estimated costs related to the
delayed introduction and operation of the new sleeper service. We
will be examining every option for reducing operating costs; the
position under the contract is expected to improve over time, as
the terms of the Franchise Agreement provide a mechanism that
requires Transport Scotland to bear 50% of contract losses from 1
April 2020. In addition, from 1 April 2022, we have the right to
seek adjustments to the financial terms of the Franchise Agreement
that would result either in a small positive profit margin for
Serco from that date, or allow us to exit the contract. A detailed
review of provisions and Contract & Balance Sheet Review items
is included in the Finance Review on pages 18 to 37. After these
adjustments, Trading Profit was GBP4.5m (2016: GBP84.5m, reflecting
GBP35.3m net release for Contract & Balance Sheet Review
adjustments and a GBP3.5m one-time profit arising from a pension
scheme settlement).
The UK & Europe division represented around GBP0.7bn of the
Group's aggregate total value of signed contracts during 2017. The
largest award was a new contract to transform catering and cleaning
for University Hospital Southampton NHS Foundation Trust, with an
estimated value of GBP125m over the ten-year term. Other new work
included adding patient transport services to our relationship with
Barts Health NHS Trust, and environmental services to Rushmoor
Borough Council. Of large new bids where we were unsuccessful,
these included immigration escorting for the Home Office and the
regional MOD contracts for Technical Support Services Provision to
the UK's Royal Air Force.
The largest rebid or extension that was due during the year was
for our provision of facilities management services at NHS Forth
Valley, where we successfully secured these for a further seven
years. Others secured included contact services for Hertfordshire
County Council, specialist scientific and engineering support for
the European Space Agency, our helicopter aircrew training for the
MOD and a number of other defence support services contracts,
parking services for the West London Alliance, environmental
services for Wandsworth Council, and citizen services support to
customers including Invest Northern Ireland, the Department of
Health and the Skills Funding Agency.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 30 contracts with
annual revenue of over GBP5m within the UK & Europe division;
in aggregate, these represent approximately a third of the current
level of annual revenue for the division. The largest of these are
the Northern Isles Ferries operations that are expected to be
extended from April 2018 to the end of 2019; the COMPASS contract
is also due in 2019, along with a large European agency contract;
and in 2020, PECS is now assumed to be rebid if a final extension
option is not exercised by the customer, as well as that year our
Anglia Support Partnership healthcare shared services operations.
The Glasgow ACCESS operations transferred by the end of 2017,
therefore representing known attrition of approximately 4% of
divisional revenue.
Our pipeline of new bid opportunities has been significantly
reduced following the removal of wins such the Barts and
Southampton NHS contracts, as well as from losses such as
immigration escorting for the Home Office. The Defence Fire &
Risk Management Organisation (DFRMO) tender is still ongoing, as is
that for an immigration removal centre. We have partially reloaded
the pipeline with some other smaller tenders for various defence
support, hospital facilities management and environmental services.
For the successor to the COMPASS arrangements, we are also
including in our new bid pipeline the incremental opportunity
beyond the regions where we currently operate.
Americas
Our Americas division accounts for approximately 23% of Serco's
overall revenue, and provides professional, technology and
management services focused on Defence, Transport, and Citizen
Services. The US Federal Government, including the military,
civilian agencies and the national intelligence community, are our
largest customers. We also provide services to the Canadian
Government and to some US state and municipal governments.
Revenue for 2017 was GBP688.0m (2016: GBP691.4m), a modest
reduction in reported currency. In US dollars, the main currency
for operations of the division, revenue was equivalent to
approximately US$890m (2016: US$940m). The strengthening of local
currencies against Sterling increased revenue by GBP42m or 7%; the
organic change at constant currency was therefore a decline of 7%.
The decline was driven by the end of the contracts during 2016 for
the Virginia Department of Transportation (VDOT) and for US Army
transition assistance (SFLTAP). These and other smaller reductions
were partially offset by growth in our support of advanced
anti-terrorism systems for ships and infrastructure at US Navy
ports and federal facilities, and some increases elsewhere in the
volume of workload or task orders.
Underlying Trading Profit was GBP36.4m (2016: GBP43.0m),
representing a margin of 5.3% (2016: 6.2%). While there was a
GBP2.4m favourable currency movement, there was the impact of the
first half of 2016 benefitting from the longer running of the VDOT
and SFLTAP contracts which were only partially offset by cost
efficiencies in 2017. Within Underlying Trading Profit there was
GBP5m (2016: GBP9m) of OCP utilisation, which reflects the offset
of losses on the Ontario Driver Examination Services contract.
Contract & Balance Sheet Review adjustments resulted in a
GBP3.4m net release. After these adjustments, Trading Profit was
GBP39.8m (2016: GBP6.4m, reflecting GBP36.6m net charge for
Contract & Balance Sheet Review adjustments).
Americas represented around GBP0.8bn of the Group's aggregate
total value of signed contracts during the year. The largest new
award was for US Army base modernisation services and in particular
IT support, valued at a total of $140m for the five-year base
period and five one-year option periods. The second largest was to
provide supply chain management services for hazardous materials at
three US Navy Fleet Readiness Centers, valued at a total of $101m
for the base period and four one-year options. Smaller new awards
included safety service patrol for the Texas Department of
Transportation, and numerous US Navy ship and shore defence
equipment modernisation task orders. Of rebids and extensions
secured, the largest was for the US Patent & Trademark Office
(USPTO) for a further ten years, albeit the new contract is for a
reduced volume of work; others secured included fleet services for
Louisville Gas & Electric Company, parking meter management in
San Francisco and support services for the US Federal Retirement
Thrift Investment Board and the US Government Accountability
Office. Serco was unsuccessful in a large new bid opportunity to be
prime contractor for US Navy systems support, but has potential for
a share of work through sub-contract relationships; there were no
other major new pipeline decisions or large rebids or extensions
due during the year.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 12 contracts with
annual revenue of over GBP5m within the Americas division; in
aggregate, these represent around 50% of the current level of
annual revenue for the division; this high proportion reflects that
our contract supporting the US Affordable Care Act (ACA), which
currently accounts for around 30% of divisional revenue, requires
securing a rebid from 30 June 2018; the Global Installation
Contract covering areas of our defence ship modernisation work is
due for rebid in 2019, while our support to the Federal Aviation
Administration's (FAA) Contract Tower (FCT) Program will become due
for rebid once again in 2020.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes further important opportunities
to provide various support functions to the US Navy. A defence
opportunity to support US Air Force radar systems as well as
various other defence support bids were added during the year, as
were other tenders for transport operations and fleet support and
Citizen Services records management. Opportunities for immigration
services were removed from the pipeline due to delays in tender
processes.
Future profitability will as usual be shaped by the outcomes of
the major new bid opportunities in the region, but in particular by
the rebid outcome due by 30 June 2018 and the future scale of
operation of the ACA contract and its absorption of overhead
costs.
Serco was pleased to announce in June 2017 that David J.
Dacquino would become Chief Executive Officer of the Americas
division, with Dan Allen having informed the business back in
February of his intention to retire. Dave Dacquino joined Serco in
2015 to lead the Americas' Defence business, bringing deep
knowledge and experience from across the defence, aeronautics,
logistics and technical services industries.
AsPac
Operations in the Asia Pacific division include Justice,
Immigration, Defence, Health, Transport and Citizen Services in
Australia, New Zealand and Hong Kong. Serco's operations in
Australia are by far the largest element of the division; the
country represents approximately 19% of total Revenue for the
Group.
Revenue for 2017 was GBP579.0m (2016: GBP619.7m), a decline of
7%. In Australian dollars, the main currency for operations of the
division, revenue for the year was equivalent to approximately
A$980m (2016: A$1,140m). The movements in local currencies against
Sterling increased revenue by GBP48m or 7%; the acquisition of the
other 50% of a small defence services joint venture added 1% to
revenue; the organic change at constant currency was therefore a
decline of 15%. This reduction was driven by the end of the
Armidale Class Patrol Boats (ACPB), Western Australia Court
Security & Custodial Services (WACSCS) and Mount Eden
contracts, together with some smaller reductions from other
contracts ending or reducing in scope; there was some growth in
Citizen Services contact and processing support which partially
offset this attrition.
Underlying Trading Profit was GBP23.7m (2016: GBP24.9m),
representing a margin of 4.1% (2016: 4.0%). While there was a
favourable currency movement of GBP2.1m, the net of other movements
reflected contract attrition and other margin pressures with only
partial offset from progress on cost efficiencies and growth from
new work. Within Underlying Trading Profit there was GBP9m of OCP
utilisation (2016: GBP12m).
Contract & Balance Sheet Review adjustments resulted in a
GBP11.4m net release, the largest element of which was a further
OCP release on ACPB reflecting revised assumptions of the residual
liability after the contract transferred to a new operator during
the year. The ACPB contract was the largest of the OCP contracts,
and is the first of the major OCP contracts to come to an end.
After these adjustments, Trading Profit was GBP35.1m (2016:
GBP34.2m, reflecting GBP9.3m net release for Contract & Balance
Sheet Review adjustments).
AsPac represented around GBP1.8bn of the Group's aggregate total
value of signed contracts during the year. By far the largest
element of this was approximately GBP1.5bn for the 20-year contract
valued at A$2.6bn for the operation of New Grafton Correctional
Centre (NGCC) which is expected to commence in 2020; NGCC will be
the largest correctional centre in Australia, consisting of a total
of 1,700 beds in three individual security categories, and draws
upon Serco's experience of managing correctional facilities in the
UK, New Zealand and elsewhere in Australia, which includes
Australia's current largest facility, Acacia Prison. Other smaller
new wins included contact services support in Australia for the
Department of Human Services. Extensions and rebids awarded in the
year included traffic camera support in the Victoria, and passenger
and integrated transport information services for transport
authorities in Western Australia and New South Wales. There were no
other larger rebids or major new bid pipeline decisions made in the
year.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 10 contracts with
annual revenue of over GBP5m within the AsPac division; in
aggregate, these represent just over half of the current level of
annual revenue for the division; this high proportion reflects that
the Australia onshore immigration services contract requires rebid
or extension at the end of 2019, with this accounting for over 30%
of current divisional revenue.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes some further (but far smaller
than Grafton) Justice & Immigration opportunities, as well as
in Defence support services. We will look to build the pipeline
further in these sectors as well as Citizen Services, Transport and
Health.
Middle East
Operations in the Middle East division include Transport,
Defence, Health and Citizen Services, with the region accounting
for approximately 12% of the Group's total revenue.
Revenue for 2017 was GBP351.9m (2016: GBP324.8m), an increase of
8%. The strengthening of local currencies against Sterling provided
growth of GBP21m or 6%; the organic change at constant currency was
therefore growth of 2%. Growth came from new contracts for
facilities management at Dubai Airport and for a financial services
company in Abu Dhabi, though these were partially offset by
reductions related to the Dubai Air Navigation Services and Staff
College training for the Qatar Armed Forces contracts, as well as a
small number of other operations reducing in scope or volume
including the Middle East Logistics & Base Support (MELABS)
contract that supports the Australian Defence Force in the
region.
Underlying Trading Profit was GBP16.2m (2016: GBP16.6m),
representing a margin of 4.6% (2016: 5.1%). While there was a
GBP1.2m favourable currency movement, there was an overall
reduction in profitability due in large part to the non--repeat of
the higher defence logistics volumes experienced in the first half
of 2016, together with the impact of other contract scope
reductions and attrition. There are no OCP contracts in the
division and therefore no OCP utilisation within Underlying Trading
Profit.
There were no Contract & Balance Sheet Review adjustments in
the year, therefore Trading Profit was also GBP16.2m (2016:
GBP18.8m, reflecting GBP2.2m net release for Contract & Balance
Sheet Review adjustments).
The Middle East represented around GBP0.1bn of the Group's
aggregate total value of signed contracts during the year. Amongst
smaller contract awards were new wins to provide facilities
management in Abu Dhabi and defence training support in Qatar.
Serco was unsuccessful however in pursuing the very large tenders
for light rail and tram operations in the region. Extensions to
existing work included facilities management for Cleveland Clinic
Abu Dhabi, and air navigation services and training in Bahrain and
Iraq; there were no other large rebid or extension decisions due in
the year.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 13 contracts with
annual revenue of over GBP5m within the Middle East division; in
aggregate, these represent well over half of the current level of
annual revenue for the division. There is a high proportion of work
to secure in 2019, when the Dubai Metro, MELABS and Cleveland
Clinic Abu Dhabi contracts each require extending or rebidding; by
2020, our Dubai Air Navigation Services will also become due for
further extension or rebid.
Our pipeline of major new bid opportunities in the region has
reduced very significantly following the outcome of the light rail
and tram bids. There are some other smaller opportunities in
transport and defence support services, and effort is ongoing to
rebuild a stronger pipeline.
Corporate costs
Corporate costs relate to typical central function costs of
running the Group, including executive, governance and support
functions such as HR, finance and IT. Where appropriate, these
costs are stated after allocation of recharges to operating
divisions. The costs of Group-wide programmes and initiatives are
also incurred centrally.
Benefiting from actions to deliver savings and improve
efficiencies of our central functions, corporate costs in 2017
reduced to GBP41.6m (2016: GBP43.5m).
Finance Review
Amortisation
and
impairment
of Continuing
intangibles Less and Less
For the year Non arising discontinued Statutory discontinued discontinued
ended underlying on pre pre exceptional exceptional
31 December Underlying items Trading acquisition exceptional* exceptional items items* Statutory
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Revenue 2,953.6 - 2,953.6 - - 2,953.6 - - 2,953.6
Cost of sales (2,688.9) (15.8) (2,704.7) - - (2,704.7) - - (2,704.7)
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Gross profit 264.7 (15.8) 248.9 - - 248.9 - - 248.9
Administrative
expenses (222.2) - (222.2) (4.4) - (226.6) (19.6) - (246.2)
Share of
profits
in joint
ventures
and
associates,
net of
interest
and tax 27.3 - 27.3 - - 27.3 - - 27.3
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Profit before
interest
and tax 69.8 (15.8) 54.0 (4.4) - 49.6 (19.6) - 30.0
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Margin 2.4% 1.8% 1.7% 1.0%
Net finance
costs (11.6) - (11.6) - - (11.6) - - (11.6)
Other gains - 0.7 0.7 - - 0.7 - - 0.7
Profit before
tax 58.2 (15.1) 43.1 (4.4) - 38.7 (19.6) - 19.1
Tax charge (20.6) 5.0 (15.6) 1.6 - (14.0) (5.0) - (19.0)
Effective tax
rate (35.4%) (36.2%) (36.2%) (99.5%)
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Profit / (loss)
for the period 37.6 (10.1) 27.5 (2.8) - 24.7 (24.6) - 0.1
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Minority
interest 0.3 0.3 0.3 0.3
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Earnings /
(loss)
per share
(pence) 3.42 2.50 2.24 (0.02)
---------------- ---------------- ------------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
* No amounts are recorded as discontinued operations for the year ended 31 December 2017.
Amortisation
and
impairment
of Continuing
For the year intangibles Less and Less
ended Non arising discontinued Statutory discontinued discontinued
31 December underlying on pre pre exceptional exceptional
2016 Underlying items Trading acquisition exceptional exceptional items items Statutory
(restated*) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Revenue 3,047.8 - 3,047.8 - (36.8) 3,011.0 - - 3,011.0
Cost of sales* (2,782.9) 18.2 (2,764.7) - 40.1 (2,724.6) - - (2,724.6)
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Gross profit* 264.9 18.2 283.1 - 3.3 286.4 - - 286.4
Administrative
expenses* (216.2) - (216.2) (5.1) - (221.3) (70.5) 14.2 (277.6)
Share of
profits
in joint
ventures
and
associates,
net of
interest
and tax 33.4 - 33.4 - - 33.4 - - 33.4
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Profit before
interest
and tax 82.1 18.2 100.3 (5.1) 3.3 98.5 (70.5) 14.2 42.2
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Margin 2.7% 3.3% 3.3% 1.4%
Net finance
costs (12.6) - (12.6) - - (12.6) (0.4) 0.4 (12.6)
Profit before
tax 69.5 18.2 87.7 (5.1) 3.3 85.9 (70.9) 14.6 29.6
Tax charge (24.4) 6.7 (17.7) 1.8 0.1 (15.8) 3.1 - (12.7)
Effective tax
rate 35.2% 20.2% 18.4% 42.9%
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Profit for the
period from
continuing
operations 45.1 24.9 70.0 (3.3) 3.4 70.1 (67.8) 14.6 16.9
Loss for the
period
from
discontinued
operations - - - - (3.4) (3.4) - (14.6) (18.0)
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Profit / (loss)
for the period 45.1 24.9 70.0 (3.3) - 66.7 (67.8) - (1.1)
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Minority
interest 0.1 0.1 0.1 0.1
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
Earnings /
(loss)
per share
(pence) 4.13 6.42 6.12 (0.11)
---------------- ---------------- ----------- ---------------- ------------- ------------- ---------------- -------------- ------------- ----------------
* Costs included within cost of sales and administrative
expenses have been reallocated, resulting in a restatement. See
note 1 to the Condensed Consolidated Financial Statements.
Change regarding the classification of cost items within cost of
sales and administrative expenses
The Group has undergone a programme of work on its financial
data structures to appropriately allocate and charge costs to the
relevant divisions and between cost of sales and administrative
expenses. As a result of the activities performed in this area, the
Group's classification of cost items in the income statement has
changed. The prior year's results have been restated to reflect the
cost items identified which should have been reallocated in 2016.
This resulted in increasing administrative expenses by GBP43.0m and
decreasing cost of sales by the same amount. The change in policy
has no impact on operating profit, any other item below this on the
income statement, or any of the Group's key performance
measures.
Cost of sales are considered to be the costs of operating
contracts. This includes the unavoidable costs of servicing
contracts and all costs that a contract would incur purely on its
own without a parent company, regardless of how those services are
delivered within the wider Group, such as IT or Human Resource
management services provided centrally.
Alternative Performance Measures (APMs) and other related
definitions
Overview
APMs used by the Group are reviewed below to provide a
definition and reconciliation from each non-IFRS APM to its IFRS
equivalent, and to explain the purpose and usefulness of each
APM.
In general, APMs are presented externally to meet investors'
requirements for further clarity and transparency of the Group's
financial performance. The APMs are also used internally in the
management of our business performance, budgeting and forecasting,
and for determining Directors' remuneration and that of other
management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being
included in an APM, this reflects revenues presented elsewhere
within the reported financial information, except where amounts are
recalculated to reflect constant currency. Where items of profits
or costs are being excluded in an APM, these are included elsewhere
in our reported financial information as they represent actual
profits or costs of the Group, except where amounts are
recalculated to reflect constant currency. As a result, APMs allow
investors and other readers to review different kinds of revenue,
profits and costs and should not be used in isolation. Other
commentary within the preliminary announcement, including the other
sections of this Finance Review, as well as the Condensed
Consolidated Financial Statements and the accompanying notes,
should be referred to in order to fully appreciate all the factors
that affect our business. We strongly encourage readers not to rely
on any single financial measure, but to carefully review our
reporting in its entirety.
The methodology applied to calculating the APMs has not changed
during the year for any measure.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 38, reflects revenue translated at the
average exchange rates. In order to provide a comparable movement
on the previous year's results, reported revenue is recalculated by
translating non-Sterling values for the year to 31 December 2017
into Sterling at the average exchange rate for the year ended 31
December 2016. All revenue in 2017 arose from continuing
activities.
2017
For the year ended 31 December GBPm
--------------------------------------- --------------
Reported revenue at constant currency 2,832.0
Foreign exchange differences 121.6
--------------------------------------- --------------
Reported revenue at reported currency 2,953.6
--------------------------------------- --------------
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses
acquired during a particular year and/or generated by businesses
sold during a particular year up to the date of disposal. In order
to provide a comparable movement which ignores the effect of both
acquisitions and disposals on the previous year's results, Organic
Revenue at constant currency is recalculated by excluding the
impact of any relevant acquisitions or disposals.
For the year ended 31 December 2017, an adjustment was required
for the disposal of the remaining element of the UK private sector
BPO business, consisting of a single contract, sold on 3 July 2017.
This business was previously reported within discontinued
operations but included as continuing in 2017 as it does not have a
material impact on the Group's results. The Group disposed of
Service Glasgow LLP on 1 December 2017, which also consisted of a
single contract. However, this disposal arose as a result of normal
contract attrition rather than as a result of the disposal of a
wider business and hence this is not excluded for the Organic
Revenue calculation.
The only acquisition excluded for the calculation of Organic
Revenue in the year relates to the acquisition of 50% of the issued
share capital of Serco Sodexo Defence Services Pty Ltd, resulting
in full control being obtained. Serco Sodexo Defence Services Pty
Ltd was previously a 50% owned joint venture accounted for on an
equity accounting basis and therefore no revenues had previously
been recorded in the Group's results.
Organic Revenue growth is calculated by comparing the current
year Organic Revenue at constant currency exchange rates with the
prior year Organic Revenue at reported currency exchange rates.
2017
For the year ended 31 December GBPm
--------------------------------------- --------------
Organic Revenue at constant currency 2,823.1
Foreign exchange differences 121.3
--------------------------------------- --------------
Organic Revenue at reported currency 2,944.4
Impact of any relevant acquisitions
or disposals 9.2
--------------------------------------- --------------
Reported revenue at reported currency 2,953.6
--------------------------------------- --------------
2016
For the year ended 31 December GBPm
--------------------------------------- --------------
Organic Revenue at reported currency
(continuing activities only) 3,011.0
Impact of any relevant acquisitions -
or disposals
--------------------------------------- --------------
Reported revenue at reported currency
(continuing activities only) 3,011.0
--------------------------------------- --------------
Revenue from continuing and discontinued operations
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 38, reflects only that from continuing
operations, with the post tax result of discontinued operations
consolidated as a single line at the bottom of the Condensed
Consolidated Income Statement. The alternative measure includes
discontinued operations for the benefit of consistency with
previously reported results and to reflect the overall change in
scale of the Group's operations. The alternative measure allows the
performance of the discontinued operations themselves, and their
impact on the Group as a whole, to be evaluated on measures other
than just the post tax result. No operations were classified as
discontinued in 2017 as there was a single remaining business as at
1 January 2017 which generated insignificant revenue and profit up
to the date of disposal of 3 July 2017. Discontinued operations in
the prior year reflect the former Global Services division which
consisted of the Group's private sector BPO operations.
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------------ -------- --------
Revenue from continuing and discontinued
operations 2,953.6 3,047.8
Exclude revenue from discontinued
operations - (36.8)
------------------------------------------ -------- --------
Reported revenue (continuing activities
only) 2,953.6 3,011.0
------------------------------------------ -------- --------
Revenue from continuing operations, including share of joint
ventures and associates
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 38, excludes the Group's share of revenue
from joint ventures and associates, with Serco's share of profits
in joint ventures and associates (net of interest and tax)
consolidated within Reported Operating Profit as a single line
further down the Condensed Consolidated Income Statement. The
alternative measure includes the share of joint ventures and
associates for the benefit of reflecting the overall change in
scale of the Group's ongoing operations, which is particularly
relevant for evaluating Serco's presence in market sectors such as
Defence and Transport. The alternative measure allows the
performance of the joint venture and associate operations
themselves, and their impact on the Group as a whole, to be
evaluated on measures other than just the post tax result.
2017 2016
For the year ended 31 December GBPm GBPm
----------------------------------------- -------------- --------------
Revenue from continuing operations,
including share of joint ventures
and associates 3,310.3 3,491.8
Exclude share of revenue from joint
ventures and associates (356.7) (480.8)
----------------------------------------- -------------- --------------
Reported revenue (continuing activities
only) 2,953.6 3,011.0
----------------------------------------- -------------- --------------
Alternative profit measures
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------------ ------------- -------------
Underlying Trading Profit 69.8 82.1
Non-underlying items:
Include OCP charges and releases (19.0) 9.6
Include other Contract & Balance
Sheet Review adjustments 3.2 4.6
Include benefit from non-depreciation
and amortisation of assets held
for sale - 0.5
Include other one-time items - 3.5
------------------------------------------ ------------- -------------
(15.8) 18.2
------------------------------------------ ------------- -------------
Trading Profit 54.0 100.3
Include operating exceptional items
(continuing operations only) (19.6) (56.3)
Include amortisation and impairment
of intangibles arising on acquisition
from continuing and discontinued
operations (4.4) (5.1)
Exclude operating loss from discontinued
operations - 3.3
------------------------------------------ ------------- -------------
Operating profit (continuing activities
only) 30.0 42.2
------------------------------------------ ------------- -------------
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur within
Trading Profit and remove the impact of historical issues. UTP
therefore provides a measure of the underlying performance of the
business in the current year. For 2016 there were four items
excluded from UTP, only two of which required adjustment in
2017.
Charges and releases on all Onerous Contract Provisions (OCPs)
are excluded in the current and prior years. OCPs reflect the
future multiple year cost of delivering onerous contracts and do
not reflect only the current cost of operating the contract in the
latest individual year. It should be noted that, as for operating
profit, UTP benefits from OCP utilisation of GBP69.3m in 2017
(2016: GBP84.2m) which neutralises the in-year losses on previously
identified onerous contracts, therefore it is only charges or
releases of OCPs that are adjusted for.
Revisions to accounting estimates and judgements which arose
during the 2014 Contract & Balance Sheet Review are separately
reported where the impact of an individual item is material. Only
one such item was noted in 2017, relating to a release of a
provision made during the Contract & Balance Sheet Review which
has been released following a change in the Group's
obligations.
Both OCP adjustments and other Contract & Balance Sheet
Review adjustments are identified and separated from the APM in
order to give clarity of the underlying performance of the Group
and to separately disclose the progress made on these items.
The benefit of depreciation and amortisation charges not being
taken in the Group accounts in relation to assets held for sale
were excluded in the prior year. Such charges were being taken in
the subsidiary accounts to reflect the reduction in value of the
underlying assets, and we consider it relevant to show the effect
this would have on the Group performance measure. No assets are
included as held for sale in 2017 and therefore no adjustment is
required in 2017.
Finally, any other significant items that have a one-time
financial impact are excluded, which for 2016 related to the
one-time pension settlement associated with the early exit of a UK
local authority contract in 2015. This item was distinct from
exceptional items in that it arose from normal contract exit
conditions. No such material one-time items occurred in 2017.
Underlying trading margin is calculated as UTP divided by
revenue from continuing and discontinued operations.
The non-underlying column in the summary income statement on
page 18 includes the tax impact of the above items and tax items
that, in themselves, are considered to be non-underlying. Further
detail of such items is provided in the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to
operating profit, as shown on the Group's Condensed Consolidated
Income Statement on page 38, by making three adjustments. Trading
Profit is a metric used to determine the performance and
remuneration of the Executive Directors.
First, Trading Profit excludes exceptional items, being those
considered material and outside of the normal operating practice of
the Group to be suitable of separate presentation and detailed
explanation.
Second, amortisation and impairment of intangibles arising on
acquisitions are excluded, because these charges are based on
judgements about the value and economic life of assets that, in the
case of items such as customer relationships, would not be
capitalised in normal operating practice.
Third, the Trading Profit of discontinued operations is included
as this benefits from consistency with previously reported results,
reflects the overall change in scale of the Group's operations and
takes account of the performance of the discontinued operations
themselves. This allows their impact on the Group as a whole to be
evaluated on measures other than just the post tax result. There
were no discontinued operations in 2017.
UTP at constant currency
UTP disclosed above has been translated at the average foreign
exchange rates for the year. In order to provide a comparable
movement on the previous year's results, UTP is recalculated by
translating non-Sterling values for the year to 31 December 2017
into Sterling at the average exchange rate for the year ended 31
December 2016.
2017
For the year ended 31 December GBPm
--------------------------------------- -----------
Underlying Trading Profit at constant
currency 63.3
Foreign exchange differences 6.5
--------------------------------------- -----------
Underlying Trading Profit at reported
currency 69.8
--------------------------------------- -----------
Alternative Earnings or Loss Per Share (EPS) measures
2017 2016
For the year ended 31 December pence pence
--------------------------------------------- ------------- -------------
Underlying EPS from continuing and
discontinued operations, basic 3.42 4.13
Impact of non-underlying items and
amortisation and impairment of intangibles
arising on acquisition (1.18) 1.99
--------------------------------------------- ------------- -------------
EPS from continuing and discontinued
operations before exceptional items 2.24 6.12
Impact of exceptional items (2.26) (6.23)
--------------------------------------------- ------------- -------------
Reported EPS from continuing and
discontinued operations, basic (0.02) (0.11)
--------------------------------------------- ------------- -------------
EPS from continuing and discontinued operations before
exceptional items
EPS from continuing and discontinued operations, as shown on the
Group's Condensed Consolidated Income Statement on page 38,
includes exceptional items charged or credited to the income
statement in the year. EPS before exceptional items aids
consistency with historical results and is a metric used in
assessing the performance and remuneration of the Executive
Directors.
Underlying EPS from continuing and discontinued operations
Reflecting the same adjustments made to operating profit to
calculate UTP as described above, and including the related tax
effects of each adjustment and any other non underlying tax
adjustments as described in the tax charge section below, an
alternative measure of EPS is presented. This aids consistency with
historical results, and enables performance to be evaluated before
the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS from
continuing and discontinued operations is provided in the summary
income statements on page 18.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect net
cash inflow from operating activities before exceptional items,
which is the measure shown on the Condensed Consolidated Cash Flow
Statement on page 42. This IFRS measure is adjusted to include
dividends we receive from joint ventures and associates and
deducting net interest paid and net capital expenditure on tangible
and intangible asset purchases. FCF is considered relevant to
reflect the cash performance of business operations after meeting
usual obligations of financing and tax. It is therefore a measure
that is before all other remaining cash flows, being those related
to exceptional items, acquisitions and disposals, other
equity-related and debt-related funding movements, and foreign
exchange impacts on financing and investing activities. FCF is
therefore a measure to assess the cash flow generated by the
business and aids consistency for comparison to historical results.
FCF is a metric used to determine the performance and remuneration
of the Executive Directors.
2017 2016
For the year ended 31 December GBPm GBPm
--------------------------------------- ------------- -------------
Free Cash Flow (6.7) (33.0)
Exclude dividends from joint ventures
and associates (28.2) (40.0)
Exclude net interest paid 17.0 18.7
Exclude capitalised finance costs
paid - 0.3
Exclude purchase of intangible
and tangible assets net of proceeds
from disposal 34.6 31.6
--------------------------------------- ------------- -------------
Cash flow from operating activities
before exceptional items 16.7 (22.4)
Exceptional operating cash flows (32.5) (39.9)
--------------------------------------- ------------- -------------
Cash flow from operating activities (15.8) (62.3)
--------------------------------------- ------------- -------------
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In
order to calculate an appropriate cash conversion metric equivalent
to UTP, Trading Cash Flow is derived from FCF by excluding tax and
interest items. UTP cash conversion therefore provides a measure of
the efficiency of the business in terms of converting profit into
cash before taking account of the impact of interest, tax and
exceptional items. As Trading Cash Flow was an outflow in 2016, a
conversion percentage of UTP is not presented.
2017 2016
For the year ended 31 December GBPm GBPm
-------------------------------- ------------ -------------
Free Cash Flow (6.7) (33.0)
Add back:
Tax paid 11.4 5.6
Non-cash R&D expenditure 0.2 0.4
Net interest received 17.0 18.7
Capitalised finance costs paid - 0.3
-------------------------------- ------------ -------------
Trading Cash Flow 21.9 (8.0)
-------------------------------- ------------ -------------
Underlying Trading Profit 69.8 82.1
-------------------------------- ------------ -------------
Underlying Trading Profit cash 31% N/A
conversion
-------------------------------- ------------ -------------
Net Debt
We present an alternative measure to bring together the various
funding sources that are included on the Group's Condensed
Consolidated Balance Sheet on page 41 and the accompanying notes.
Net Debt is a measure to reflect the net indebtedness of the Group
and includes all cash and cash equivalents and any debt or debt
like items, including any derivatives entered into in order to
manage risk exposures on these items.
2017 2016
For the year ended 31 December GBPm GBPm
---------------------------------- -------------- --------------
Cash and cash equivalents 112.1 177.8
Loans receivable 25.7 22.9
Loans payable (271.5) (299.9)
Obligations under finance leases (20.2) (28.2)
Derivatives relating to Net Debt 12.8 18.1
---------------------------------- -------------- --------------
Net Debt (141.1) (109.3)
---------------------------------- -------------- --------------
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used
by the Group and is a metric used to determine the performance and
remuneration of the Executive Directors. ROIC is calculated based
on UTP and Trading Profit using the Condensed Consolidated Income
Statement for the year and a two point average of the opening and
closing balance sheets. The composition of Invested Capital and
calculation of ROIC are summarised in the table below.
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------ -------------- --------------
Non-current assets
Goodwill 551.3 577.9
Other intangible assets 66.7 83.6
Property, plant and equipment 65.2 69.3
Interest in joint ventures and
associates 14.3 14.4
Trade and other receivables 57.3 44.4
Current assets
Inventory 17.4 22.4
Trade and other receivables 506.5 543.5
Total invested capital assets 1,278.7 1,355.5
------------------------------------ -------------- --------------
Current liabilities
Trade and other payables (462.8) (524.5)
Non-current liabilities
Trade and other payables (28.7) (16.8)
------------------------------------ -------------- --------------
Total invested capital liabilities (491.5) (541.3)
------------------------------------ -------------- --------------
Invested Capital 787.2 814.2
------------------------------------ -------------- --------------
Two point average of opening and
closing Invested Capital 800.7 768.7
------------------------------------ -------------- --------------
Trading Profit 54.0 100.3
------------------------------------ -------------- --------------
ROIC% 6.7% 13.0%
------------------------------------ -------------- --------------
Underlying Trading Profit 69.8 82.1
------------------------------------ -------------- --------------
Underlying ROIC% 8.7% 10.7%
------------------------------------ -------------- --------------
Overview of financial performance
Revenue
Reported Revenue declined by 2% in the year to GBP2,953.6m
(2016: GBP3,011.0m), a 6% reduction in constant currency.
No revenue arose in 2017 from operations classified as
discontinued, with total revenues for the year ended 31 December
2016 from continuing and discontinued operations being
GBP3,047.8m.
Commentary on the revenue performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews
sections.
Trading Profit
Trading Profit for the year was GBP54.0m (2016: GBP100.3m).
Trading Profit for the year ended 31 December 2016 included a loss
on discontinued operations of GBP3.3m.
Commentary on the trading performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews
sections.
Underlying Trading Profit
UTP was GBP69.8m (2016: GBP82.1m), down 15%. At constant
currency, UTP was GBP18.8m lower than 2016 at GBP63.3m, with a
movement of GBP4.6m relating to the results of discontinued
operations in 2016.
Commentary on the underlying performance of the Group is
provided in the Chief Executive's Review and the Divisional Reviews
sections.
Excluded from UTP were net charges from OCPs of GBP19.0m (2016:
net releases of GBP9.6m) following the annual reassessment
undertaken as part of the budgeting process. Also excluded from UTP
were net releases of GBP3.2m (2016: net releases of GBP4.6m)
relating to other provisions and accruals for items identified
during the 2014 Contract & Balance Sheet Review. UTP also
excluded the benefit arising from the non-depreciation and
amortisation of assets classified as held for sale in 2016 of
GBP0.5m; there were no such assets in 2017. Other one-time items of
GBP3.5m excluded from UTP in 2016 related to a pension scheme
settlement arising from the early exit of a UK Local Authority
contract in 2015; there were no such adjustments necessary for
one-time items in 2017.
The cumulative to date improvement to Trading Profit as a result
of OCP charges and releases and adjustments to items identified
during the 2014 Contract & Balance Sheet Review is GBP19.3m
(2016: GBP35.1m). This represents 3% of the 2014 total charge to
Trading Profit arising from the Contract & Balance Sheet
Review.
The tax impact of items in UTP and other non underlying tax
items is discussed in the tax section of this Finance Review.
Discontinued operations
The Global Services division, representing private sector BPO
operations, was classified as a discontinued operation in 2015 and
2016. Disposal of the offshore BPO business was largely completed
in December 2015, with the disposals of two much smaller remaining
elements completed in March 2016 and December 2016. The residual UK
onshore private sector BPO operations were sold or exited in 2016
with the exception of one business, consisting of a single
contract, the disposal of which completed in July 2017. Total
revenues for the remaining operations were GBP5.4m and the loss
before exceptional items was GBP0.6m for the year ended 31 December
2017, therefore the results have been included in continuing
operations in 2017 on the grounds of materiality.
The amounts reported as discontinued operations in the prior
year were as follows:
2016
For the year ended 31 December GBPm
------------------------------------- -------------
Revenue 36.8
-------------------------------------- -------------
Underlying Trading Loss (4.6)
Onerous contract and Contract &
Balance Sheet Review adjustments 0.8
Benefit from non-depreciation and
non-amortisation of assets held
for sale 0.5
-------------------------------------- -------------
Trading Loss (3.3)
Amortisation and impairment of -
intangibles arising on acquisition
------------------------------------- -------------
Operating loss before exceptional
items (3.3)
-------------------------------------- -------------
Exceptional loss on disposal of
subsidiaries and operations (2.8)
Other exceptional operating items (11.4)
-------------------------------------- -------------
Exceptional operating items (14.2)
-------------------------------------- -------------
Operating loss (17.5)
-------------------------------------- -------------
Exceptional finance costs (0.4)
-------------------------------------- -------------
Loss before tax (17.9)
-------------------------------------- -------------
Tax charge (0.1)
Net loss on discontinued operations
(attributable to equity owners
of the Company) as presented in
the income statement (18.0)
-------------------------------------- -------------
Joint ventures and associates - share of results
In 2017, the most significant joint ventures and associates in
terms of scale of operations were AWE Management Limited and
Merseyrail Services Holding Company Limited, with dividends
received of GBP17.1m (2016: GBP19.6m) and GBP7.3m (2016: GBP7.3m)
respectively. Total revenues generated by these businesses were
GBP951.8m (2016: GBP968.1m) and GBP155.7m (2016: GBP150.3m)
respectively. From September 2016, there was a change in the AWE
Management Limited shareholding structure, with the Group's
shareholding reducing from 33.3% to 24.5% by way of a return of
shares.
While the revenues and individual line items are not
consolidated in the Group Condensed Consolidated Income Statement,
summary financial performance measures for the Group's proportion
of the aggregate of all joint ventures and associates are set out
below for information purposes.
2017 2016
For the year ended 31 December GBPm GBPm
---------------------------------------- ------------ ------------
Revenue 356.7 480.8
---------------------------------------- ------------ ------------
Operating profit 34.4 40.7
Net investment finance costs (0.1) (0.6)
Income tax expense (7.0) (6.7)
---------------------------------------- ------------ ------------
Profit after tax 27.3 33.4
---------------------------------------- ------------ ------------
Dividends received from joint ventures
and associates 28.2 40.0
---------------------------------------- ------------ ------------
The decline in revenue and profits on the prior year is partly
due to the change in shareholding in AWE Management Limited and
partly due to the end of the Northern Rail franchise on 31 March
2016.
Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the performance of the
Group.
Exceptional items arose on both the continuing and discontinued
operations of the Group in 2016. Exceptional items arising on
discontinued operations are disclosed on the face of the Condensed
Consolidated Income Statement within the profit or loss
attributable to discontinued operations. There were no discontinued
operations in 2017.
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------------- ------------- -------------
Exceptional items arising on continuing
operations
Exceptional profit on disposal
of subsidiaries and operations 0.3 2.9
Other exceptional operating items
on continuing operations
Impairment of goodwill - (17.8)
Restructuring costs (28.6) (17.2)
Aborted transaction costs - (0.1)
Costs associated with UK Government
review (0.4) (0.1)
Release of UK frontline clinical
health contract provisions 0.4 0.6
Settlement of defined benefit pension
obligations 10.3 (10.7)
Impairment of interest in joint
venture and related loan balances 4.5 (13.9)
Impairment of AsPac customer lists (6.1) -
Other exceptional operating items (19.9) (59.2)
------------------------------------------- ------------- -------------
Exceptional operating items arising
on continuing operations (19.6) (56.3)
------------------------------------------- ------------- -------------
Exceptional items arising on discontinued
operations
Exceptional loss on disposal of
subsidiaries and operations - (2.8)
Other exceptional operating items
on discontinued operations
Restructuring costs - (1.1)
Movements in indemnities provided
on business disposals - (13.7)
Movement in the fair value of assets
transferred to held for sale - 3.4
------------------------------------------- ------------- -------------
Other exceptional operating items - (11.4)
------------------------------------------- ------------- -------------
Exceptional operating items arising
on discontinued operations - (14.2)
------------------------------------------- ------------- -------------
Exceptional operating items arising
on continuing and discontinued
operations (19.6) (70.5)
Exceptional finance costs - discontinued - (0.4)
Exceptional tax - continuing (5.0) 3.1
------------------------------------------- ------------- -------------
Total operating and financing exceptional
items in continuing and discontinued
operations (24.6) (67.8)
------------------------------------------- ------------- -------------
Exceptional profit on disposals
There were no material disposals of continuing operations in
2017.
Other exceptional operating items
The annual impairment testing of CGUs in 2017 has identified no
impairment of goodwill.
The Group is incurring costs in relation to restructuring
programmes resulting from the Strategy Review announced in 2015.
These costs include redundancy payments, provisions, external
advisory fees and other incremental costs, including in 2017
GBP2.8m of intangible asset impairment (2016: GBPnil). Due to the
nature and scale of the impact of the transformation phase of the
Strategy Review, the incremental costs associated with this
programme are considered to be exceptional. Costs associated with
the restructuring programme resulting from the Strategy Review must
meet the following criteria: that they are directly linked to the
implementation of the Strategy Review; they are incremental costs
as a result of the activity; and they are non business as usual
costs. In 2017, a charge of GBP28.6m (2016: GBP17.2m) arose in
relation to the restructuring programme resulting from the Strategy
Review. Non-exceptional restructuring charges are incurred by the
business as part of normal operational activity, which in the year
totalled GBP11.1m (2016: GBP6.7m) and were included within
operating profit before exceptional items. We expect restructuring
costs of approximately GBP35m to be incurred in 2018 which will be
treated as exceptional.
There were exceptional costs totalling GBP0.4m (2016: GBP0.1m)
associated with the UK Government reviews and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2017.
There were releases of provisions of GBP0.4m (2016: GBP0.6m)
which were previously charged through exceptional items in relation
to the exit of the UK frontline clinical health contracts.
An exceptional charge of GBP10.7m arose in 2016 in respect of
the bulk transfer of a number of employees that are being
transferred from the Serco Pension and Life Assurance Scheme
(SPLAS) to the Principal Civil Service Pension Scheme. This
transfer was legally agreed in December 2016 at which point all
obligations of SPLAS to pay retirement benefits for these
individuals were eliminated and as a result, a settlement charge of
GBP10.7m arose, for which a provision was made. In 2017 a new
agreement was reached with the UK Government to transfer out the
scheme members on an individual basis and the 2016 legal and
commercial arrangements were cancelled by consent of all parties.
As a result of the changes, the impact of the transfer was treated
as an experience gain adjustment through other comprehensive income
and the majority of the provision made in 2016 was reversed,
resulting in a GBP10.3m credit to exceptional items in 2017.
In 2016, a review of a joint venture's cash flow projections led
to the impairment of certain equity interests and associated
receivables balances, totalling GBP13.9m. The impairment was
outside of the normal course of business and of a significant
value, and was therefore considered to be an exceptional item. In
the year ended 31 December 2017 payments of GBP4.5m were received
against the impaired loan. The likelihood of further cash receipts
against the receivables remains uncertain.
As a result of contracts coming to the end of their natural
lives and no significant new contracts being awarded by the
customer, the remaining customer relationship intangible assets of
the DMS Maritime Pty Limited business acquired in 2012 were
impaired, totalling GBP6.1m.
Exceptional tax
Exceptional tax for the year was a tax charge of GBP5.0m (2016:
GBP3.1m credit), comprising a GBP2.3m credit on exceptional items
within operating profit and a GBP7.3m charge in respect of other
exceptional tax items.
Exceptional costs of GBP19.6m only gave rise to a credit of
GBP2.3m, as the majority of these costs were incurred in the UK
where they only impact our unrecognised deferred tax in relation to
losses.
The other exceptional tax items relate to two matters, the first
is the impact on tax of the pension buy-in disclosed in note 18 to
the Condensed Consolidated Financial Statements which led to a
GBP95.0m reduction in the IFRS valuation of the Group's defined
benefit pension schemes and consequently a deferred tax charge to
the income statement of GBP16.1m. Movements in the valuation of the
Group's defined benefit pension schemes and the associated deferred
tax impact are reported in the Condensed Consolidated Statement of
Comprehensive Income (SOCI) and do not flow through the income
statement, therefore do not impact profit before tax or the tax
charge. However, the net amount of deferred tax recognised in the
balance sheet relates to both the pension accounting and other
timing differences, such as recoverable losses. As the net deferred
tax balance sheet position is at the level supported by future
profit forecasts, the decrease in the deferred tax liability
associated with the pension scheme (with the benefit reported in
the SOCI) leads to a corresponding decrease in the deferred tax
asset to match the future profit forecasts. Such a reduction in the
deferred tax asset therefore leads to a charge to tax in the income
statement.
The second element is a credit of GBP8.8m related to legislative
changes in the UK and the US which have impacted the value of
deferred tax held on the balance sheet. There is a reduction in the
deferred tax liability that is held in connection with our US
operations of GBP12.5m, as future US tax liabilities are expected
to crystallise at lower US tax rates. The fall in future expected
US rates is primarily due to the enactment of the Tax Cuts &
Jobs Act in December 2017 which reduces the corporate income tax
rate in the US from 35% to 21% effective from 1 January 2018. In
addition, there was a change in UK tax law in 2017. This UK change
will reduce the quantum of loss brought forward that can be used to
offset taxable profits arising in a year, and will also enable
losses carried forward in one company to be used to offset profits
in another. The combined impact of these UK law changes results in
a tax charge of GBP3.7m.
Pre exceptional finance costs and investment revenue
Investment revenue of GBP7.6m (2016: GBP9.3m) includes interest
accruing on net retirement benefit assets of GBP3.8m (2016:
GBP4.7m), interest earned on deposits and other receivables of
GBP2.6m (2016: GBP3.6m) and the movement in discounting of other
receivables of GBP1.2m (2016: GBP1.0m).
Finance costs of GBP19.2m (2016: GBP21.9m) includes interest
incurred on the USPP loans and the Revolving Credit Facility of
GBP14.0m (2016: GBP15.6m), facility fees and other charges of
GBP3.0m (2016: GBP3.5m), interest payable on finance leases of
GBP1.3m (2016: GBP1.6m), the movement in discount on provisions of
GBP1.3m (2016: GBP2.4m) and a credit for foreign exchange on
financing activities of GBP0.4m (2016: GBP1.2m).
Other gains
On 24 August 2017 the Group acquired 50% of the issued share
capital of Serco Sodexo Defence Services Pty Ltd for GBP1.6m,
obtaining full control. Serco Sodexo Defence Services Pty Ltd was
previously a 50% owned joint venture accounted for on an equity
accounting basis. As a result of the increase in ownership from 50%
to 100%, the Group fair valued the existing 50% shareholding and
the resulting uplift in value of GBP0.7m was recorded in Other
gains, outside of operating results.
Tax
Tax charge
Underlying tax
In 2017 we recognised a tax charge of GBP20.6m on underlying
trading profits after finance cost. The effective tax rate in 2017
(35.4%) is at a similar level to 2016 (35.2%).
Pre exceptional tax
We recognised a tax charge of GBP14.0m (2016: GBP15.8m) on pre
exceptional profits which includes GBP20.6m underlying tax, GBP1.6m
tax impact of amortisation on intangibles arising on acquisition
and GBP5.0m credit on non-underlying items. The GBP5.0m credit
consists of the tax impact on non-underlying items together with
tax items that are in themselves considered to be non-underlying,
specifically:
-- As noted above with regards to exceptional tax, movements in
the valuation of the Group's defined benefit pension schemes leads
to a corresponding adjustment to the deferred tax asset to match
the future profit forecasts. Such a change in the deferred tax
asset impacts tax in the income statement. Where deferred tax
charges or releases are the result of movements in the pension
scheme valuations rather than trading activity, these are excluded
from the calculation of tax on underlying profit and the underlying
effective tax rate, with the prior periods being restated to
reflect this. These amounted to GBP1.9m for 2017 (2016:
GBPnil).
-- During the current period we have recognised an additional
GBP11.1m of deferred tax asset in relation to UK losses to reflect
the improved forecast profits of our UK operations. This credit
nets against the charge (GBP3.7m) taken to exceptional tax and
described below, which relates to the UK law change in 2017 to give
a net increase in UK deferred tax assets of GBP7.4m.
-- The tax on non-underlying items during the period totalled a
credit of GBP4.2m reflecting the impact of current or future tax
deductions available.
The tax rate on profits before exceptional items on continuing
operations, at 36.2% is higher than the UK standard corporation tax
rate of 19.25%. This is due to the upward impact of higher rates of
tax on profits arising on our international operations, together
with the absence of any deferred tax credit for current year losses
incurred in the UK. This is only partially offset by the downward
impact of our joint ventures whose post-tax results are included in
our pre-tax profit and additional deferred tax assets that have
been recognised in relation to historic UK losses. Our tax charge
in future years will continue to be materially impacted by our
accounting for UK deferred taxes. To the extent that future UK tax
losses are incurred and are not recognised, our effective tax rate
will be higher than prevailing standard corporation tax rates. When
our UK business returns to sustainable profitability our existing
UK tax losses will be recognised or utilised, and the effective
rate will be reduced.
The enactment of the Tax Cuts & Jobs Act in the US has not
impacted our pre exceptional tax charge during 2017 with the impact
on our valuation of deferred tax shown as an exceptional item and
explained further above. In the medium term, the new law is
expected to have only a marginal impact on our tax liability in the
US. This is because although we will benefit from the fall in tax
rate, our US business bears interest cost, associated with historic
funding put in place to acquire US businesses, an element of which
will not lead to tax deductions in the medium term.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items
section above.
Contingent tax assets
A GBP17.4m UK tax asset has been recognised at 31 December 2017
(2016: GBP10.0m) on the basis of utilisation against forecast
taxable profits.
At 31 December 2017, the Group has estimated unrecognised UK
deferred tax assets of an additional GBP160m which are contingent
on further improvement in the UK profit forecast.
Taxes paid
Net corporation tax of GBP15.3m was paid during the year,
relating primarily to our operations in AsPac (GBP5.5m), Europe
(GBP3.2m), Middle East (GBP1.5m) and Americas (GBP5.1m). The
Group's UK operations have transferred tax losses to its profitable
joint ventures and associates giving a cash tax inflow in the UK of
GBP4.4m. In addition there were small cash tax refunds where we
have overpaid tax in previous periods. This results in an overall
tax paid figure in our cash flow statement of GBP11.4m.
The amount of tax paid (GBP11.4m) differs from the tax charge in
the period (GBP19.0m) mainly due to the effect of future expected
cash tax outflows for which a charge has been taken in the current
period and the impact of the time lag on receipts of cash from
joint ventures and associates for losses transferred to them.
Further detail of taxes paid during the year is shown below.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as
determined by local legislation in the countries in which we
operate, means that we pay a variety of taxes across the globe. In
order to increase the transparency of our tax profile, we have
shown below the cash taxes that we have paid across our regional
markets.
In total during 2017, Serco globally contributed GBP578m of tax
to government in the jurisdictions in which we operate.
Taxes by category
Taxes Taxes
For the year ended 31 December borne collected Total
2017 GBPm GBPm GBPm
-------------------------------- ------------ ------------ ------------
Corporation tax 15.3 - 15.3
VAT and similar 9.7 152.2 161.9
People taxes 109.0 284.1 393.1
Other taxes 6.7 0.5 7.2
-------------------------------- ------------ ------------ ------------
Total 140.7 436.8 577.5
-------------------------------- ------------ ------------ ------------
Taxes by region
Taxes Taxes
For the year ended 31 December borne collected Total
2017 GBPm GBPm GBPm
-------------------------------- ------------ ------------ ------------
UK & Europe 82.8 235.7 318.5
AsPac 25.6 121.5 147.1
Americas 30.2 76.8 107.0
Middle East 2.1 2.8 4.9
-------------------------------- ------------ ------------ ------------
Total 140.7 436.8 577.5
-------------------------------- ------------ ------------ ------------
Corporation tax, which is the only cost to be separately
disclosed in our Condensed Consolidated Financial Statements, is
only one element of our tax contribution. For every GBP1 of
corporate tax paid directly by the Group (tax borne), we bear a
further GBP8.20 in other business taxes. The largest proportion of
these is in connection with employing our people.
In addition, for every GBP1 of tax that we bear, we collect
GBP3.10 on behalf of national governments (taxes collected). This
amount is directly impacted by the people that we employ and the
sales that we make.
Dividends
The Board is not recommending the payment of a dividend in
respect of the 2017 financial year. The Board's appraisal of the
appropriateness of dividend payments takes into account the Group's
underlying earnings, cash flows and financial leverage, together
with the requirement to maintain an appropriate level of dividend
cover and the prevailing market outlook. Although the Board is
committed to resuming dividend payments as soon as it believes it
prudent to do so, in assessing whether we should resume dividend
payments in respect of 2017, we have been mindful of the fact there
has been a reduction in earnings, a free cash outflow and an
increase in Net Debt. In these circumstances, the Board believes
that it would not be prudent to resume dividend payments at the
current juncture. For 2018, our guidance is for an improvement in
Underlying Trading Profit, but we expect Net Debt to still
increase, largely as a result of cash outflows related to
exceptional restructuring costs and taking opportunities for
value-enhancing infill acquisitions. The Board will continue to
keep the dividend policy under close consideration as we progress
with transforming the Group and implementing our strategy.
Share count and EPS
The weighted average number of shares for EPS purposes was
1,089.7m for the year ended 31 December 2017 (2016: 1,088.3m). EPS
before exceptional items from both continuing and discontinued
operations was 2.24p per share (2016: 6.12p); including the impact
of exceptional items, EPS was a loss of 0.02p (2016: 0.11p).
Underlying EPS was 3.42p per share (2016: 4.13p).
Cash flows
The UTP of GBP69.8m (2016: GBP82.1m) converts into a trading
cash inflow of GBP21.9m (2016: outflow of GBP8.0m). The negative
conversion in 2016 was primarily due to the adverse working capital
movement of GBP23.7m and the cash outflows arising on the
utilisation of contract provisions of GBP84.2m. In 2017, the
working capital outflow is GBP9.0m and the OCP utilisation is
GBP69.3m.
The table below shows the operating profit and FCF reconciled to
movements in Net Debt. FCF for the year was an outflow of GBP6.7m
compared to an outflow of GBP33.0m in 2016. The improvement in FCF
is largely as a result of a reduction in operating profit before
exceptional items on continuing and discontinued operations from
GBP95.2m in 2016 to GBP49.6m in 2017, which is more than offset by
an improvement in the net movement in non exceptional provisions
from a reduction in 2016 of GBP118.4m to a reduction in 2017 of
GBP46.4m. The movement in non exceptional provisions is partly due
to the reduction in total provision utilisation from GBP123.4m in
2016 to GBP82.2m in 2017.
The movement in Net Debt is an increase of GBP31.8m in 2017, a
reconciliation of which is provided at the bottom of the following
table. The movement includes a net outflow of GBP5.6m arising on
the acquisition and disposal of subsidiaries, primarily relating to
the cash held by Service Glasgow LLP, an entity disposed of in the
year. In 2016 a net cash inflow of GBP19.2m arose primarily as a
result of the disposal of the private sector BPO business. The
movement in Net Debt for 2017 also includes a net exchange gain of
GBP17.4m, compared to a GBP41.8m loss in 2016.
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------------- -------------- --------------
Operating profit on continuing
operations 30.0 42.2
Operating loss on discontinued
operations - (17.5)
Remove exceptional items 19.6 70.5
------------------------------------------- -------------- --------------
Operating profit before exceptional
items on continuing and discontinued
operations 49.6 95.2
Less: profit from joint ventures
and associates (27.3) (33.4)
Movement in provisions (46.4) (118.4)
Depreciation, amortisation and
impairment of property, plant and
equipment and intangible assets 50.0 52.4
Other non-cash movements 11.4 11.5
------------------------------------------- -------------- --------------
Operating cash inflow before movements
in working capital, exceptional
items and tax 37.3 7.3
Working capital movements (9.0) (23.7)
Tax paid (11.4) (5.6)
Non-cash R&D expenditure (0.2) (0.4)
------------------------------------------- -------------- --------------
Cash flow from operating activities
before exceptional items 16.7 (22.4)
Dividends from joint ventures and
associates 28.2 40.0
Interest received 0.5 1.4
Interest paid (17.5) (20.1)
Capitalised finance costs paid - (0.3)
Purchase of intangible and tangible
assets net of proceeds from disposals (34.6) (31.6)
------------------------------------------- -------------- --------------
Free Cash Flow (6.7) (33.0)
Net cash (outflow) / inflow on
acquisition and disposal of subsidiaries (5.6) 19.2
Other movements on investment balances 0.2 0.7
Capitalisation and amortisation
of loan costs (0.8) (0.7)
Unwind of discounting and capitalisation
of interest on loans receivable 3.4 2.9
New, acquired and disposed finance
leases (4.7) (0.5)
Exceptional items (32.5) (40.2)
Cash movements on hedging instruments (2.5) 47.0
Foreign exchange gain / (loss)
on Net Debt 17.4 (41.8)
------------------------------------------- -------------- --------------
Movement in Net Debt including
assets and liabilities held for
sale (31.8) (46.4)
Assets held for sale movement in
Net Debt - 4.7
Net Debt at 1 January (109.3) (67.6)
------------------------------------------- -------------- --------------
Net Debt at 1 January including
assets and liabilities held for
sale (109.3) (62.9)
------------------------------------------- -------------- --------------
Net Debt at 31 December (141.1) (109.3)
------------------------------------------- -------------- --------------
Net Debt
2017 2016
As at 31 December GBPm GBPm
---------------------------------- -------------- --------------
Cash and cash equivalents 112.1 177.8
Loans receivable 25.7 22.9
Loans payable (271.5) (299.9)
Obligations under finance leases (20.2) (28.2)
Derivatives relating to Net Debt 12.8 18.1
---------------------------------- -------------- --------------
Net Debt (141.1) (109.3)
---------------------------------- -------------- --------------
Average Net Debt as calculated on a daily basis for the year
ended 31 December 2017, was GBP184.3m (2016: GBP119.4m), compared
with the opening and closing positions of GBP109.3m and GBP141.1m
respectively. Peak Net Debt was GBP242.7m (2016: GBP182.9m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks
that include liquidity, the effects of changes in foreign currency
exchange rates, interest rates and credit risk. The Group has a
centralised treasury function whose principal role is to ensure
that adequate liquidity is available to meet the Group's funding
requirements as they arise and that the financial risk arising from
the Group's underlying operations is effectively identified and
managed.
Treasury operations are conducted in accordance with policies
and procedures approved by the Board and are reviewed annually.
Financial instruments are only executed for hedging purposes and
speculation is not permitted. A monthly report is provided to
senior management outlining performance against the Treasury Policy
and the treasury function is subject to periodic internal audit
review.
Liquidity and funding
As at 31 December 2017, the Group had committed funding of
GBP741m (2016: GBP770m), comprising GBP261m of private placement
notes and a GBP480m revolving credit facility with a syndicate of
banks, which was undrawn. In addition, the Group had a receivables
financing facility of GBP30.0m which was unutilised at the year-end
(2016: utilisation of GBP7.7m).
Following the further small disposals relating to the private
sector BPO business, the Group was required to offer two thirds of
the net disposal proceeds to the debt holders in prepayment. As a
result of this process, GBP3.7m ($4.9m) of private placement notes
were repaid at par on 29 June 2017.
Interest rate risk
Given the nature of the Group's business, we have a preference
for fixed rate debt to reduce the volatility of net finance costs.
Our Treasury Policy requires us to maintain a minimum proportion of
fixed rate debt as a proportion of overall Net Debt and for this
proportion to increase as the ratio of EBITDA to interest expense
falls. As at 31 December 2017, more than 100% of the Group's Net
Debt was at fixed rates. Interest on the revolving credit facility
is at floating rate, however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to
Sterling of its net investments in overseas subsidiaries. The Group
manages this risk where appropriate, by borrowing in the same
currency as those investments. Group borrowings are predominantly
denominated in Sterling and US Dollar. The Group manages its
currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward
contracts where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise
to credit risk on the amounts due from counterparties. The Group
manages this risk by adhering to counterparty exposure limits based
on external credit ratings of the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across
the private placement loan notes, receivables financing facility
and revolving credit facility, with a maximum Consolidated Total
Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and minimum
covenant EBITDA to net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set
out in the table below.
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------------ ------------- -------------
Operating profit before exceptional
items on continuing and discontinued
operations 49.6 95.2
Remove: Amortisation and impairment
of intangibles arising on acquisition 4.4 5.1
------------------------------------------ ------------- -------------
Trading Profit 54.0 100.3
Exclude: Share of joint venture
post-tax profits (27.3) (33.4)
Include: Dividends from joint ventures 28.2 40.0
Add back: Net non-exceptional charges 19.0 -
to OCPs
Add back: Depreciation, amortisation
and impairment of property, plant
and equipment and non acquisition
intangible assets 45.6 47.3
Add back: Foreign exchange credit
on investing and financing arrangements 0.4 1.2
Add back: Share based payment expense 11.4 9.7
------------------------------------------ ------------- -------------
Covenant EBITDA 131.3 165.1
------------------------------------------ ------------- -------------
Net finance costs on continuing
and discontinued operations 11.6 12.6
Exclude: Net interest receivable
on retirement benefit obligations 3.8 4.7
Exclude: Movement in discount on
other debtors 1.2 1.0
Exclude: Foreign exchange on investing
and financing arrangements 0.4 1.2
Add back: Movement in discount
on provisions (1.3) (2.4)
------------------------------------------ ------------- -------------
Covenant net finance costs 15.7 17.1
------------------------------------------ ------------- -------------
Recourse Net Debt 141.1 109.3
Exclude: Disposal vendor loan note,
encumbered cash and other adjustments 30.3 28.5
Covenant adjustment for average
FX rates 7.8 (23.0)
------------------------------------------ ------------- -------------
CTNB 179.2 114.8
------------------------------------------ ------------- -------------
CTNB / covenant EBITDA (not to
exceed 3.5x) 1.36x 0.70x
------------------------------------------ ------------- -------------
Covenant EBITDA / covenant net
finance costs (at least 3.0x) 8.4x 9.7x
------------------------------------------ ------------- -------------
Net assets summary
2017 2016
As at 31 December GBPm GBPm
------------------------------------- ---------------- ----------------
Non-current assets
Goodwill 551.3 577.9
Other intangible assets 66.7 83.6
Property, plant and equipment 65.2 69.3
Other non-current assets 75.3 73.0
Deferred tax assets 55.0 50.8
Retirement benefit assets 41.8 150.4
------------------------------------- ---------------- ----------------
855.3 1,005.0
------------------------------------- ---------------- ----------------
Current assets
Inventories 17.4 22.4
Trade and other current assets 516.8 548.4
Current tax assets 11.2 11.0
Cash and cash equivalents 112.1 177.8
------------------------------------- ---------------- ----------------
Total current assets 657.5 759.6
------------------------------------- ---------------- ----------------
Total assets 1,512.8 1,764.6
------------------------------------- ---------------- ----------------
Current liabilities
Trade and other current liabilities (464.0) (525.1)
Current tax liabilities (25.3) (25.9)
Provisions (148.5) (172.3)
Obligations under finance leases (8.5) (12.3)
Loans (31.8) (9.7)
------------------------------------- ---------------- ----------------
Total current liabilities (678.1) (745.3)
------------------------------------- ---------------- ----------------
Non-current liabilities
Other non-current liabilities (28.7) (16.8)
Deferred tax liabilities (20.4) (30.5)
Provisions (211.5) (249.4)
Obligations under finance leases (11.7) (15.9)
Loans (239.7) (290.2)
Retirement benefit obligations (15.5) (17.7)
------------------------------------- ---------------- ----------------
(527.5) (620.5)
------------------------------------- ---------------- ----------------
Total liabilities (1,205.6) (1,365.8)
------------------------------------- ---------------- ----------------
Net assets 307.2 398.8
------------------------------------- ---------------- ----------------
At 31 December 2017 the balance sheet had net assets of
GBP307.2m, a movement of GBP91.6m from the closing net asset
position of GBP398.8m as at 31 December 2016. The decrease in net
assets is mainly due to the following movements:
-- A decrease in the net retirement benefit assets of Group
funded defined benefit pension schemes of GBP106.4m. In June 2017,
the Trustees of the Group's primary defined benefit pension scheme
entered into a bulk annuity purchase whereby an insurer will fund
future benefit payments to the relevant members. The liability to
pay the members remains with the pension scheme which continues to
include the relevant pension liabilities, but an insurance asset is
held which is an equal and opposite amount to the liability. This
removes the risk of longevity and investment movements for this
portion of the scheme on a funding basis, and also removes the
accounting risk of movements in underlying assumptions on the
liabilities. The transaction resulted in a significant reduction in
the surplus of the pension scheme under IFRS accounting convention,
but resulted in a reduction in the deficit that is actuarially
assessed for funding purposes of approximately GBP12m. As at 31
December 2017 the estimated actuarial deficit of this scheme was
GBP33.7m (2016: GBP42.6m).
-- A decrease in provisions of GBP61.7m. Further details on
provision movements is provided below.
-- The combined position of trade and other current assets and
trade and other current liabilities increased by GBP29.5m and Net
Debt increased by GBP31.8m. Further details of these movements are
provided in the cash flow and Net Debt sections above.
-- A decrease in goodwill of GBP26.6m, caused by movements in foreign exchange rates.
Provisions
The total of current and non-current provisions has decreased by
GBP61.7m since 31 December 2016. The movement is due to a decrease
in onerous contract provisions of GBP52.0m, an increase in
employee-related provisions of GBP10.6m, a decrease in property
provisions of GBP0.9m and a reduction in other provisions of
GBP19.4m.
The GBP10.6m increase in employee-related provisions is partly
due to the ongoing Strategy Review restructuring programme and
partly relating to obligations arising at the end of certain
contracts. The decrease in other provisions is primarily due to the
release of GBP10.3m of exceptional provisions relating to pensions,
with the remaining movement comprised of contract settlements and
releases for potential claims.
Movements in contract provisions since the 31 December 2016
balance sheet date, are as follows:
Onerous
Contract
Provisions
GBPm
--------------------------------- -------------
At 1 January 2017 220.2
Charged to the income statement
during the year - trading 62.0
Released to the income
statement - trading (43.0)
Released to the income
statement - exceptional (0.4)
Utilisation during the
year (69.3)
Unwinding of discount 1.3
Foreign exchange (2.6)
At 31 December 2017 168.2
--------------------------------- -------------
The balance of OCPs at 31 December 2017 was GBP168.2m (2016:
GBP220.2m). OCP balances are subject to ongoing review and a full
bottom-up assessment of the forecasts that form the basis of the
OCPs is conducted as part of the annual budgeting process. The net
non-exceptional charge to OCPs was GBP19.0m in 2017 and utilisation
was GBP69.3m.
In 2017, additional charges have been made in respect of future
losses on a number of onerous contracts totalling GBP62.0m. This
increase related to revisions to existing OCPs of GBP61.5m and a
new provision raised on one contract totalling GBP0.5m. The new
contract has been operating for a number of years and is expected
to be terminated in 2018.
Included within additional charges made to existing OCPs is
GBP47.0m relating to the Caledonian Sleepers contract. This
increase is partly due to revised assumptions for the higher costs
of running the contract and the impact from delays in the delivery
of new trains, which includes the higher cost of the running old
trains for longer, associated penalties and the forecast benefit of
revenue growth from the new trains being pushed back. In addition,
we have revised our revenue forecast for the contract based on the
2017 performance, where even a modest reduction in annual revenue
can have a significant impact on a multi-year OCP. There continue
to be a number of assumptions underpinning the provision that have
a range of potential outcomes, including the train manufacturer
delivering the new trains to the latest timetable and volume and
pricing increases driven by the improved passenger service from the
new trains. The position under the contract is expected to improve
over time, as the terms of the Franchise Agreement provide a
mechanism that requires Transport Scotland to bear 50% of contract
losses from 1 April 2020. In addition, from 1 April 2022, we have
the right to seek adjustments to the financial terms of the
Franchise Agreement that would result either in a small positive
profit margin for Serco from that date, or allow us to exit the
contract.
In addition to the Caledonian Sleepers contract, there have been
net OCP releases of GBP16.4m in UK & Europe and GBP11.4m in
AsPac.
Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share
capital of BTP Systems, LLC, for consideration of US Dollar $20.5m
in cash. Further details on this post year end transaction are
provided in note 21 to the Condensed Consolidated Financial
Statements.
The Group signed a revised Business Purchase Agreement (BPA) on
13 February 2018 with the Special Managers and Provisional
Liquidators acting on behalf of the relevant Carillion plc
subsidiaries to acquire a portfolio of selected UK health
facilities management contracts. The portfolio has annual revenues
of approximately GBP90m and a weighted average remaining term of 14
years. Upon the receipt by the Special Managers and Provisional
Liquidators of the requisite third party consents, each individual
contract will be transferred to Serco on a cash-free, debt-free
basis, with the consideration to be paid in instalments and to be
satisfied using Serco's existing financing facilities. If all the
contracts are transferred to Serco under the revised BPA process,
the total consideration payable would be GBP29.7m. The
consideration payable is lower than the amount of GBP47.7m
announced on 13 December 2017 in respect of substantially the same
contracts that were subject to the initial BPA signed with
Carillion plc at that date. The change in consideration reflects
the Group's re-evaluation of potential liabilities, indemnities,
warranties and the additional working capital investment required
as a result of Carillion's liquidation. The financial effects of
this transaction have not been recognised at 31 December 2017. As
consents are required for each individual contract to be
transferred and therefore acquired, at the time the financial
statements were authorised for issue, no legal transfer or control
of assets had taken place and so no disclosures have been made in
respect of the assets and liabilities being acquired. The fair
values of the assets and liabilities will be determined at the date
when contracts are acquired. It is also not yet possible to provide
detailed information about each class of acquired receivables and
any contingent liabilities in respect of the acquired
contracts.
As noted in the overview of performance above, the Group
obtained full control of Serco Sodexo Defence Services Pty Ltd by
acquiring the remaining 50% of issued share capital for
GBP1.6m.
IFRS15
The Group has undertaken a robust assessment to determine the
impact of IFRS15 on the opening balance sheet at 1 January 2017 and
for the year ended 31 December 2017. The impact on opening retained
earnings will be a reduction of GBP32.8m and the impact on the
opening OCP balance will be a reduction of GBP21.7m. Underlying
Trading Profit will decrease by GBP0.3m and, as a result of a lower
OCP release, Trading Profit will decrease by GBP8.7m for the year
ended 31 December 2017. This low adjustment is reflective of the
prudent accounting practices adopted by the Group following the
Contract & Balance Sheet Review undertaken in 2014 and the
repeat nature of the services provided. Further detail on the
adjustment is provided in note 1 of the Group's Condensed
Consolidated Financial Statements.
Financial Statements
Condensed Consolidated Income Statement
For the year ended 31 December
2016
(restated
2017 *)
Continuing operations GBPm GBPm
------------------------------------------- --------- ----------
Revenue 2,953.6 3,011.0
Cost of sales* (2,704.7) (2,724.6)
----------------------------------------------- --------- ----------
Gross profit* 248.9 286.4
Administrative expenses*
General and administrative expenses (222.2) (216.2)
Exceptional profit on disposal of
subsidiaries and operations 0.3 2.9
Other exceptional operating items (19.9) (59.2)
Other expenses - amortisation and
impairment of intangibles arising
on acquisition (4.4) (5.1)
----------------------------------------------- --------- ----------
Total administrative expenses* (246.2) (277.6)
Share of profits in joint ventures
and associates, net of interest
and tax 27.3 33.4
----------------------------------------------- --------- ----------
Operating profit 30.0 42.2
----------------------------------------------- --------- ----------
Operating profit before exceptional
items 49.6 98.5
----------------------------------------------- --------- ----------
Investment revenue 7.6 9.3
Finance costs (19.2) (21.9)
Total net finance costs (11.6) (12.6)
----------------------------------------------- --------- ----------
Other gains 0.7 -
----------------------------------------------- --------- ----------
Profit before tax 19.1 29.6
----------------------------------------------- --------- ----------
Tax on profit before exceptional
items (14.0) (15.8)
Exceptional tax (5.0) 3.1
----------------------------------------------- --------- ----------
Tax charge (19.0) (12.7)
----------------------------------------------- --------- ----------
Profit for the year from continuing
operations 0.1 16.9
Loss for the year from discontinued
operations - (18.0)
----------------------------------------------- --------- ----------
Profit / (loss) for the year 0.1 (1.1)
----------------------------------------------- --------- ----------
Attributable to:
Equity owners of the Company (0.2) (1.2)
Non controlling interests 0.3 0.1
----------------------------------------------- --------- ----------
Earnings per share (EPS)
Basic EPS from continuing operations (0.02p) 1.55p
Diluted EPS from continuing operations (0.02p) 1.50p
Basic EPS from discontinued operations - (1.66p)
Diluted EPS from discontinued operations - (1.66p)
Basic EPS from continuing and discontinued
operations (0.02p) (0.11p)
Diluted EPS from continuing and
discontinued operations (0.02p) (0.11p)
----------------------------------------------- --------- ----------
* Costs included within cost of sales and general and
administrative expenses have been reallocated, resulting in a
restatement. See note 1.
Condensed Consolidated Statement of Comprehensive Income
For the year ended 31 December
2017 2016
GBPm GBPm
------------------------------------------ ------- -----
Profit / (loss) for the year 0.1 (1.1)
Other comprehensive income for
the year:
Items that will not be reclassified
subsequently to profit or loss:
Net actuarial (loss) / gain on
defined benefit pension schemes* (106.5) 9.0
Actuarial (loss) / gain on reimbursable
rights* (0.6) 2.9
Tax relating to items not reclassified* 18.1 (1.7)
Share of other comprehensive income
in joint ventures and associates 0.9 14.8
Items that may be reclassified
subsequently to profit or loss:
Net exchange (loss) / gain on translation
of foreign operations** (14.6) 80.3
Fair value (loss) / gain on cash
flow hedges during the year** (0.2) 2.3
Tax relating to items that may - -
be reclassified
Share of other comprehensive income
in joint ventures and associates - 1.0
------------------------------------------- ------- -----
Total other comprehensive income
for the year (102.9) 108.6
Total comprehensive income for
the year (102.8) 107.5
------------------------------------------- ------- -----
Attributable to:
Equity owners of the Company (102.9) 107.1
Non controlling interest 0.1 0.4
------------------------------------------- ------- -----
* Recorded in retirement benefit obligations reserve in the
Condensed Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Condensed
Consolidated Statement of Changes in Equity.
Condensed Consolidated Statement of Changes in Equity
Retirement Share Hedging
Share Capital benefit based Own and Total Non
Share premium redemption Retained obligations payment shares translation shareholders' controlling
capital account reserve earnings reserve reserve reserve reserve equity interest
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
At 1 January
2016 22.0 327.9 0.1 68.5 (101.3) 80.9 (59.8) (57.7) 280.6 1.5
Total
comprehensive
income for
the
year - - - 14.6 10.2 - - 82.3 107.1 0.4
Shares
transferred
to option
holders
on exercise
of
share options - - - - - (7.7) 7.7 - - -
Expense in
relation
to share
based
payments - - - - - 9.7 - - 9.7 -
Change in non
controlling
interest - - - - - - - - - (0.5)
At 1 January
2017 22.0 327.9 0.1 83.1 (91.1) 82.9 (52.1) 24.6 397.4 1.4
Total
comprehensive
income for
the
year - - - 0.6 (89.0) - - (14.5) (102.9) 0.1
Shares
transferred
to option
holders
on exercise
of
share options - - - - - (6.0) 6.0 - - -
Expense in
relation
to share
based
payments - - - - - 11.4 - - 11.4 -
Change in non
controlling
interest - - - - - - - - - (0.2)
At 31 December
2017 22.0 327.9 0.1 83.7 (180.1) 88.3 (46.1) 10.1 305.9 1.3
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
Condensed Consolidated Balance Sheet
At 31 December At 31 December
2017 2016
GBPm GBPm
--------------------------------- -------------- --------------
Non current assets
Goodwill 551.3 577.9
Other intangible assets 66.7 83.6
Property, plant and equipment 65.2 69.3
Interests in joint ventures
and associates 14.3 14.4
Trade and other receivables 57.3 44.4
Derivative financial instruments 3.7 14.2
Deferred tax assets 55.0 50.8
Retirement benefit assets 41.8 150.4
---------------------------------- -------------- --------------
855.3 1,005.0
--------------------------------- -------------- --------------
Current assets
Inventories 17.4 22.4
Trade and other receivables 506.5 543.5
Current tax assets 11.2 11.0
Cash and cash equivalents 112.1 177.8
Derivative financial instruments 10.3 4.9
---------------------------------- -------------- --------------
657.5 759.6
Total assets 1,512.8 1,764.6
---------------------------------- -------------- --------------
Current liabilities
Trade and other payables (462.9) (524.5)
Derivative financial instruments (1.1) (0.6)
Current tax liabilities (25.3) (25.9)
Provisions (148.5) (172.3)
Obligations under finance leases (8.5) (12.3)
Loans (31.8) (9.7)
---------------------------------- -------------- --------------
(678.1) (745.3)
--------------------------------- -------------- --------------
Non current liabilities
Trade and other payables (28.7) (16.8)
Deferred tax liabilities (20.4) (30.5)
Provisions (211.5) (249.4)
Obligations under finance leases (11.7) (15.9)
Loans (239.7) (290.2)
Retirement benefit obligations (15.5) (17.7)
---------------------------------- -------------- --------------
(527.5) (620.5)
--------------------------------- -------------- --------------
Total liabilities (1,205.6) (1,365.8)
---------------------------------- -------------- --------------
Net assets 307.2 398.8
---------------------------------- -------------- --------------
Equity
Share capital 22.0 22.0
Share premium account 327.9 327.9
Capital redemption reserve 0.1 0.1
Retained earnings 83.7 83.1
Retirement benefit obligations
reserve (180.1) (91.1)
Share based payment reserve 88.3 82.9
Own shares reserve (46.1) (52.1)
Hedging and translation reserve 10.1 24.6
---------------------------------- -------------- --------------
Equity attributable to owners
of the Company 305.9 397.4
Non controlling interest 1.3 1.4
---------------------------------- -------------- --------------
Total equity 307.2 398.8
---------------------------------- -------------- --------------
Condensed Consolidated Cash Flow Statement
For the year ended 31 December
2017 2016
GBPm GBPm
------------------------------------------ ------ -------
Net cash inflow / (outflow) from
operating activities before exceptional
items 16.7 (22.4)
Exceptional items (32.5) (39.9)
------------------------------------------- ------ -------
Net cash outflow from operating
activities (15.8) (62.3)
------------------------------------------- ------ -------
Investing activities
Interest received 0.5 1.4
Increase / (decrease) in security
deposits 0.2 (0.4)
Dividends received from joint ventures
and associates 28.2 40.0
Proceeds from disposal of property,
plant and equipment 1.5 0.6
Proceeds from disposal of intangible
assets 0.1 0.1
Net cash (outflow) / inflow on disposal
of subsidiaries and operations (7.1) 19.4
Acquisition of subsidiaries, net
of cash acquired 1.5 (0.2)
Proceeds from loans receivable 0.6 -
Purchase of other intangible assets (18.4) (15.1)
Purchase of property, plant and
equipment (17.8) (17.2)
------------------------------------------- ------ -------
Net cash (outflow) / inflow from
investing activities (10.7) 28.6
------------------------------------------- ------ -------
Financing activities
Interest paid (17.5) (20.1)
Exceptional finance costs paid - (0.3)
Capitalised finance costs paid - (0.3)
Repayment of loans (3.8) (135.5)
Decrease in loans to joint ventures
and associates - 1.1
Capital element of finance lease
repayments (12.6) (17.0)
Cash movements on hedging instruments (2.5) 47.0
Net cash outflow from financing
activities (36.4) (125.1)
------------------------------------------- ------ -------
Net decrease in cash and cash equivalents (62.9) (158.8)
Cash and cash equivalents at beginning
of year 177.8 323.6
Net exchange (loss) / gain (2.8) 7.8
Cash reclassified to assets held
for sale - 5.2
------------------------------------------- ------ -------
Cash and cash equivalents at end
of year 112.1 177.8
------------------------------------------- ------ -------
Notes to the Condensed Consolidated Financial Statements
1. General information, going concern and accounting
policies
The basis of preparation in this preliminary announcement is set
out below.
The financial information in this announcement does not
constitute the Company's statutory accounts as defined in section
434 of the Companies Act 2006 for the years ended 31 December 2017
or 2016, but is derived from these accounts. The auditors' report
on the 2016 and 2017 accounts contained no emphasis of matter and
did not contain statements under S498 (2) or (3) of the Companies
Act 2006 or equivalent preceding legislation.
The preliminary announcement has been prepared in accordance
with International Financial Reporting Standards adopted for use in
the European Union (IFRS). Whilst the financial information
included in this preliminary announcement has been computed in
accordance with IFRS, this announcement does not itself contain
sufficient information to comply with IFRS. The Company expects to
publish full Group and parent company only financial statements
that comply with IFRS and FRS101 respectively, in March 2017.
The financial statements have been prepared on the historical
cost basis, except for the revaluation of financial instruments.
Historical cost is generally based on the fair value of the
consideration given in exchange for goods and services. The
following principal accounting policies adopted have been applied
consistently in the current and preceding financial year except as
stated below.
Going concern
The Directors have a reasonable expectation that the Company and
the Group will be able to operate within the level of available
facilities and cash for the foreseeable future and accordingly
believe that it is appropriate to prepare the financial statements
on a going concern basis.
In assessing the basis of preparation of the financial
statements for the year ended 31 December 2017, the Directors have
considered the principles of the Financial Reporting Council's
'Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting, 2014'; namely assessing the
applicability of the going concern basis, the review period and
disclosures. The Directors have undertaken a rigorous assessment of
going concern and liquidity, taking into account financial
forecasts, which indicate sufficient capacity in our financing
facilities and associated covenants to support the Group. In order
to satisfy themselves that they have adequate resources for the
future, the Directors have reviewed the Group's existing debt
levels, the committed funding and liquidity positions under our
debt covenants, and our ability to generate cash from trading
activities and working capital requirements. The Group's current
principal debt facilities at the year end comprised a GBP480m
revolving credit facility, and GBP261m of US private placement
notes. As at 31 December 2017, the Group had GBP741m of committed
credit facilities and committed headroom of GBP588m.
In undertaking this review the Directors have considered the
business plans which provide financial projections for the
foreseeable future. For the purposes of this review, we consider
that to be the period ending 30 June 2019.
Prior year restatement
The Group has undergone a programme of work on its financial
data structures to appropriately allocate and charge costs to the
relevant divisions and between cost of sales and administrative
expenses. As a result of the activities performed in this area, the
Group's classification of cost items in the income statement has
changed. The prior periods' results have been restated to reflect
the cost items identified which should have been reallocated in
2016.
Cost of sales are considered to be the direct costs of operating
ongoing contracts. This includes the unavoidable costs of servicing
contracts and all costs that a contract would incur purely on its
own without a parent company, regardless of how those services are
delivered within the wider Group, such as IT or Human Resource
management services provided centrally.
The impact on the relevant line items in the Condensed
Consolidated Income Statement for the year ended 31 December 2016
is as follows:
Year ended Year
31 December ended
2016 as 31 December
previously 2016 as
Impact on Condensed Consolidated stated Adjustment restated
Income Statement GBPm GBPm GBPm
------------------------------------ ------------ ---------- -------------
Cost of sales (2,767.6) 43.0 (2,724.6)
Gross profit 243.4 43.0 286.4
General and administrative expenses (173.2) (43.0) (216.2)
------------------------------------ ------------ ---------- -------------
Adoption of new and revised standards
None of the changes to IFRS that became effective in the current
reporting period have had a significant impact on the Group's
financial statements.
New standards and interpretations not applied: IFRS15 Revenue
from Contracts with Customers
IFRS15 Revenue from Contracts with Customers (effective 1
January 2018), provides a single, principles-based five step model
to be applied to all sales contracts, based on the transfer of
control of goods and services to customers. It replaces existing
revenue recognition guidance for goods, services and construction
contracts currently included in IAS11 Construction Contracts and
IAS18 Revenue.
Under the transition rules IFRS15 will be applied
retrospectively to the prior period in accordance with IAS8
Accounting policies, changes in accounting estimates and errors,
subject to the following expedients:
-- contracts completed prior to 1 January 2018 and that begin
and end within the same annual reporting period will not be
restated;
-- for contracts that have variable consideration and which have
completed prior to 1 January 2018, the revenues recognised will
reflect the actual outcome, rather than being estimated and trued
up; and
-- the disclosures required for comparative periods in respect
of amount of revenue allocated to the remaining performance
obligations and an explanation of when that amount is expected to
be recognised will not be made.
The cumulative effect of initially applying the standard will be
shown as an adjustment to brought forward retained earnings as at 1
January 2017.
Below is set out the expected revenue recognition policy under
IFRS15 together with the estimated impact of adopting the
standard.
Revenue recognition: Repeat service based contracts
The majority of the Group's contracts are repeat service based
contracts where value is transferred to the customer over time as
the core services are delivered and therefore in most cases revenue
will be recognised on the output basis, with revenue linked to the
deliverables provided to the customer. Where any price step downs
are required in a contract accounted for under the output basis and
output is not decreasing, revenue will require deferral from
initial years to subsequent years in order for revenue to be
recognised on a consistent basis.
There are some contracts where a separate performance obligation
has been identified for services where the pattern of delivery
differs to the core services and are capable of being distinct. In
these instances, where the transfer of control is most closely
aligned to our efforts in delivering the service, then the input
method is used to measure progress, and revenue is recognised in
direct proportion to costs incurred. Where deemed appropriate, the
Group will utilise the practical expedient within IFRS15, allowing
revenue to be recognised at the amount which the Group has the
right to invoice, where that amount corresponds directly with the
value to the customer of the Group's performance completed to
date.
Under IFRS15, unless upfront fees received from customers
including transition payments can be clearly attributable to a
distinct service the customer is obtaining, then such payments do
not constitute a separate performance obligation and instead are
deferred and spread over the life of the core services.
Any changes to the enforceable rights and obligations with
customers and / or an update to the transaction price will not be
recognised as revenue until there is evidence of customer agreement
in line with the Group's policies.
Any variable amounts will only be recognised where it is highly
probable that a significant reversal will not occur.
Where the Group is required to assess whether it is acting as
principal or as an agent in respect of goods or services procured
for customers, the Group is acting as principal if it is in control
of a good or a service prior to transferring to the customer and an
agent where it is arranging for those goods or services to be
provided to the customer without obtaining control.
Revenue recognition: Long-term project based contracts
The Group has a limited number of long-term contracts for the
provision of complex, project-based services. When control of such
a deliverable is passed onto the customer at the final stage of a
contract, the recognition of revenue is delayed until control has
been passed. However, where the customer has control over the life
of the deliverable or where the Group has a legally enforceable
right to remuneration for the work completed to date, or at
milestone periods, revenue will be recognised in line with the
associated transfer of control or milestone dates.
Revenue recognition: Other
Sales of goods are recognised when goods are delivered and title
has passed.
Interest income is accrued for on a time basis, by reference to
the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial
asset to that asset's net carrying amount.
Dividend income from investments is recognised when the right to
receive payment has been established.
Contract costs
Bid costs are capitalised only when they relate directly to a
contract and are incremental to securing the contract. Any costs
which would have been incurred whether or not the contract is
actually won are not considered to be capitalised bid costs.
Contract costs are charged to the income statement as incurred,
including the necessary accrual for costs which have not yet been
invoiced, unless the expense relates to a specific time frame
covering future periods.
Contract costs can only be capitalised when the expenditure
meets all of the following three criteria and are not within the
scope of another accounting standard, such as inventories,
intangible assets, or property, plant and equipment:
-- The costs relate directly to a contract. These include:
direct labour, being the salaries and wages of employees providing
the promised services to the customer; direct materials such as
supplies used in providing the promised services to a customer; and
other costs that are incurred only because an entity entered into
the contract, such as payments to subcontractors.
-- The costs generate or enhance the resources used in
satisfying performance obligations in the future. For initial
contract costs capitalised, such costs only fall into one of the
following two categories: the mobilisation of contract staff, being
the costs of moving existing contract staff to other Group
locations; or directly incremental costs incurred in meeting
contractual obligations incurred prior to contract delivery, which
are required to ensure a proper handover from the previous
contractor. Redundancy costs are never capitalised.
-- The costs are expected to be recovered, i.e. the contract is
expected to be profitable after amortising the capitalised
costs.
Estimated impact of the adoption of IFRS15
The impact for the Group of adopting IFRS15 is as follows:
Year
Year ended ended
31 December 31 December
2017 as 2017 as
reported Adjustment restated
GBPm GBPm GBPm
--------------------------------------- ------------ ---------- -------------
Revenue 2,953.6 (3.0) 2,950.6
Underlying Trading Profit 69.8 (0.3) 69.5
Operating profit before exceptional
items 49.6 (8.7) 40.9
Profit before tax 19.1 (8.7) 10.4
Tax (19.0) 0.4 (18.6)
Profit after tax 0.1 (8.3) (8.2)
--------------------------------------- ------------ ---------- -------------
As at
1 January
2017
GBPm
--------------------------------------- ------------
Retained earnings at 1 January 2017
as reported 83.1
Adjustment to retained earnings
before the impact of onerous contract
provisions (54.5)
Impact of onerous contract provisions 21.7
--------------------------------------- ------------
Retained earnings at 1 January 2017
as restated 50.3
--------------------------------------- ------------
The Group will continue to work to design, implement and refine
procedures to apply the new requirements of IFRS15 and to finalise
accounting policy choices, including in its subsidiaries and joint
ventures. As a result of this ongoing work, it is possible that
there may be some changes to the impact above prior to the 30 June
2018 results being issued. However, at this time these are not
expected to be significant.
The total adjustment to the opening balance of the Group's
equity at 1 January 2017 is a decrease of GBP32.8m. The principal
components of the estimated adjustment are as follows:
-- A decrease of GBP14.4m due to revenues being recognised at a
constant amount over the life of the contract where the level of
services provided is broadly consistent.
-- A decrease of GBP11.4m due to a change in the basis of
measuring progress for asset maintenance and replacement services,
including dry docking. Where the resources used to fulfil the
performance obligations best depicts how control is passed to the
customer, the input method of accounting has been applied.
-- A decrease of GBP6.8m due to upfront fees and transition
payments being deferred and spread in line with delivery of the
core services.
The following table details the specific areas impacted as a
result of the adoption of IFRS15 and cross-referenced below the
table are Serco's policies in adopting the requirements of the
standard:
Operating
profit
Impact on retained earnings as at before
1 January 2017 and the Condensed Retained exceptional
Consolidated Income Statement for earnings Revenue items
the year ended 31 December 2017 GBPm GBPm GBPm
------------------------------------------------- --------- ------- ------------
Under current accounting standards 83.1 2,953.6 49.6
IFRS15 adjustments:
(i) Upfront fees (2.6) 0.9 0.8
Transition, transformation and
(ii) other mobilisation activities (4.2) 2.1 (3.0)
Asset maintenance and replacement,
(iii) including vessel dry docking (11.4) 1.3 (0.8)
(iv) Percentage of completion accounting (0.2) 0.5 0.1
Pass through revenues and procurement
(v) arrangements - (12.6) -
(vi) Consideration payable to a customer - (0.5) (0.4)
(vii) Variable pricing (14.4) 5.3 3.0
(viii) OCP charges and releases - - (8.4)
------- ---------------------------------------- --------- ------- ------------
Adjusted under IFRS15 50.3 2,950.6 40.9
------------------------------------------------- --------- ------- ------------
(i) Upfront fees. For some contracts, the Group receives
non-refundable amounts at the start of the contract to cover
initial costs. Under IFRS15, unless upfront fees are attributable
to a good or a service the customer is in control of, such fees do
not constitute a separate performance obligation and instead are
allocated to the performance obligations of the contract, therefore
being spread over the life of the other services. In some instances
such upfront fees were recognised as revenue under IAS18 but are
deferred under IFRS15. Upfront payments are analysed to determine
whether they constitute a material financing arrangement under
IFRS15.
(ii) Transition, transformation and other mobilisation
activities. Transition activities which are administrative in
nature are not treated as separate performance obligations.
Transition and transformation activities which are more than
administrative in nature are assessed to determine whether they
form a separate performance obligation. Where it can be
demonstrated that the transition activities benefit the customer
without future activities being provided then the transition phase
is accounted for as a separate performance obligation under the
contract and revenue recognised accordingly. Where it is concluded
that the transformation, transition or mobilisation activity does
not form a separate performance obligation under the contract, any
payments received from the customer are allocated to the
performance obligations of the contract and recognised over the
life of the other services. In some instances revenue recognised
under IAS18 is deferred under IFRS15.
(iii) Asset maintenance and replacement, including vessel dry
docking. In many of the contracts the Group enters into, the
provision of maintenance and replacement services are capable of
being distinct and therefore these have been accounted for as
separate performance obligations. The input method of accounting is
used to reflect the pattern of delivery to the customer and the
enhancement of customer owned assets. In some instances the output
method of accounting is used due to the ongoing repetitive nature
and frequency of the services. Adopting IFRS15 will result in the
deferral of revenue recognised under IAS18 on certain
contracts.
(iv) Percentage of completion accounting. Changes to the Group's
current accounting policy arise when the percentage of completion
model under IAS11 is replaced by the output method of accounting.
The output method is used where the customer simultaneously
receives and consumes the benefits in direct proportion to the
deliverable performed rather than the level of expense incurred to
date.
(v) Pass through revenues and procurement arrangements. A pass
through arrangement is where goods or services are provided by a
third party, but sourced by the Group on behalf of the customer. In
this instance, the Group does not recognise revenue for the amount
received from the customer as compensation of the cost of the good
or service but rather only the margin element (if any) is recorded
as revenue. Recognition of such revenues under IFRS15 is linked
directly to whether the Group has control of the deliverable prior
to transfer rather than an assessment of the risks and rewards
associated with the services as was the case under IAS18. For
certain procurement arrangements the Group does not have control
prior to transfer, but does have a level of risk associated with
the activity, and therefore these arrangements are not recognised
on a net basis instead of the gross basis under IAS18.
(vi) Consideration payable to a customer. Under IFRS15 all
amounts payable to a customer (including all payments to the
customer and all reductions to amounts paid by the customer) are
recorded as a reduction in revenue. In 2017, an element of
reductions have been recorded as costs.
(vii) Variable pricing. It is not uncommon in outsourcing
arrangements for the payment terms to be set to decline over the
future periods (i.e. a 5% reduction in fees is built into years
five to six, 6% reduction in years seven to eight and so on).
However, where revenue recognition under IFSR15 is based on the
output method and the service remains consistent over the contract
life, the reduction in the amounts paid by the customer should not
be reflected in declining revenues, even if this was appropriate
under IAS18. As a result, revenue recognised in prior years for
certain contracts will be deferred under IFRS15.
(viii) OCP charges and releases. Where an adjustment is required
by IFRS15 and the relevant contract is loss making, the deferral of
revenue from prior years can result in a decrease in the level of
OCP needed under IFRS15, as future losses will reduce by the level
of deferred revenue. During the year one contract recorded a
release against the OCP balance held under current accounting
standards. As a result of IFRS15, revenues on this contract have
been deferred, reducing the opening OCP balance, increasing
deferred revenue and therefore the release of the relevant OCP
balance is lower under IFRS15.
In addition to the areas where a financial impact has been
identified as a result of adoption of IFRS15 as identified above,
there are certain accounting policies which are new or change
existing policies applied by the Group and may have an impact on
the future financial performance of the Group. The policies in
these areas to be adopted by the Group are set out below:
(ix) Contract variations. Contract modifications such as change
orders, variations, change notices and amendments could be approved
in writing, by oral agreement or implied by customary business
practices. Under IFRS15 contract modification are changes in the
scope or price (or both) of a contract that is approved by the
parties to the contract. If the parties to the contract have not
approved a contract modification, revenue should be recognised in
accordance with the existing contractual terms and associated cash
payments are deferred until the contract modification is approved.
The judgements historically applied have been consistent with this
policy.
(x) Variable revenues requiring estimation. IFRS15 provides
clear guidance on variable income unlike IAS18 and two areas may be
impacted as a result. First, if the consideration paid by a
customer includes a variable amount requiring judgement, it is only
recognised where it is highly probable that a significant reversal
will not occur. Second, service penalties or any claims made by us
against the customer which must be recognised in revenue unless it
is highly probable that they will not result in future settlement.
However, judgements taken historically are consistent with the
requirements of IFRS15 and there is no impact of these changes on
the Group.
(xi) Capitalised redundancy costs. Under certain contracts there
is an obligation to make redundancies and the Group is compensated
for these costs. Historically, the Group may have recognised
revenues as and when the customer makes payments or the Group may
have capitalised the expense to match with payments being made in
the future. Under IFRS15, all redundancy costs must be expensed in
the period they are incurred and revenue is not recognised on these
redundancy transactions, with any cash payments deferred over the
contract in line with the other services being delivered. No
adjustment was required in respect of this difference.
(xii) Licence income. Where the Group receives income for
software licences and maintenance services provided through ongoing
support and operational functionality, this licence revenue is
recognised over the period when the maintenance obligation exists.
There are currently no significant licencing arrangements entered
into by the Group with its customers which are impacted by
IFRS15.
(xiii) Extension periods granted or other options. Providing the
option for a customer to obtain extension periods or other services
may lead to a separate performance obligation where a material
right exists. If a separate performance obligation exists then
there would be an allocation of the transaction price from the
original contract in addition to any revenues earned through the
option period. A separate performance obligation exists for options
under a contract if both of the following conditions are met.
First, if the customer is unable to obtain the right to acquire the
additional goods or services on the same or similar terms without
entering into the original contract (for example they cannot get
the option without first entering into the main contract, which
would be the case for any extension period). Second, the option
does not simply give the customer the right to acquire additional
goods or services at a price that reflects the stand alone selling
price for those goods or services (for example if the pricing of
the option is consistent with what the pricing would have been in
any case there is no separate PO, as the customer gains no
incremental benefit from the existence of the option). No
differences were noted under IFRS15 in this area.
(xiv) Work in progress. Revenue is only recognised when control
is passed to a customer and therefore where revenue is recognised
over time no work in progress is created unlike under current
accounting standards. None of the contracts with revenues
recognised over time have work in progress balances.
(xv) Significant financing component. Where the timing of
payments agreed with the customer provides either party with a
significant benefit of financing (either explicitly or implicitly),
the associated asset/liability is adjusted for the time value of
money and an interest charge or income is recognised and a
corresponding offset in revenue. The Group's policy under IFRS15 is
to consider "significant" to be greater than 5% of the total
transaction price of the contractual arrangement and no such
arrangements are in place.
(xvi) Non cash consideration. If a customer contributes goods or
services (for example, materials, equipment or labour) to
facilitate the fulfilment of the contract, the Group assesses
whether control is obtained for those contributed goods or
services. If the Group obtains control of the contributed goods or
services, then the estimated fair value of these would be
recognised as revenue. No such transactions have been noted.
Other new standards and interpretations not applied
At the date of authorisation of these financial statements, the
following changes to IFRS have not been applied but could
potentially have a significant impact:
(i) IFRS9 Financial Instruments has been endorsed by the EU and
will be effective from 1 January 2018.
This standard replaces IAS39 and introduces new requirements for
classifying and measuring financial instruments and puts in place a
new hedge accounting model that is designed to be more closely
aligned with how entities undertake risk management activities when
hedging financial and non-financial risk exposures.
The impact of IFRS9 on the regular trading activities of the
Group is expected to be immaterial. The key areas of focus for the
Group under IFRS9 are:
-- External loan receivables, including those from equity accounted entities.
-- Debt refinancing not accounted for as a significant modification under IAS39.
-- Expected credit losses being recognised on trade debtors and
contract assets recognised under IFRS15.
-- Intercompany loan recoverability.
IFRS9 replaces the 'incurred loss' model in IAS39 with an
'expected credit loss' model. The new model applies to financial
assets that are not measured at FVTPL (fair value through profit
and loss), including loans, lease and trade receivables, debt
securities, contract assets under IFRS15 and specified financial
guarantees and loan commitments issued. It does not apply to equity
investments.
Under the expected credit loss model, the Group is required to
calculate the allowance for credit losses by considering on a
discounted basis the cash shortfalls it would incur in various
default scenarios for prescribed future periods and multiplying the
shortfalls by the probability of each scenario occurring. The
allowance is the sum of these probability weighted outcomes.
Because every loan and receivable carries with it some risk of
default, it is expected that every such asset has a loss attached
to it from the moment of its origination.
The financial assets held on the balance sheet have been
reviewed in order to determine whether any loss is required to be
recorded based on these expected credit losses. However, given the
fact that the Group's customers are governments it is unlikely that
there will be a default as a result of credit risk and any
provision for bad debts is more likely to be related to a
contractual dispute. In most cases, each amount receivable has
specific risk attached to recoverability which is most likely based
on the services provided under the terms of the contract and, given
the majority of receivables are backed by organisations with a
sovereign credit rating, a general view on recoverability based on
the counterparty credit risk could be misleading.
(ii) IFRS16 Leases is pending EU endorsement, which is expected
prior to the effective date of 1 January 2019.
The standard replaces IAS17 Leases and has been introduced in
order to improve the comparability of financial statements through
developing an approach that is more consistent with the conceptual
framework definitions of assets and liabilities.
The key change will be in respect of leases currently classified
as operating leases. Under the new standard leases will be
recognised on the balance sheet as liabilities with corresponding
assets being created, grossing up the balance sheet but with no net
effect on net assets at the start of the lease. The income
statement impact will be a new interest charge arising from the
rate implicit in the liability and as currently the full impact is
a charge to operating profit, the change will result in an
improvement to operating results.
We have not quantified the likely impact of the new standard,
the transition approach to be taken or concluded whether it will be
adopted early, which is allowed from the date IFRS15 is adopted.
The quantitative impact of the adoption of IFRS16 will be disclosed
prior to the adoption of this new standard.
2. Critical accounting judgements and key sources of estimation
uncertainty
In the process of applying the Group's accounting policies,
which are described in note 1 above, management has made the
following judgements that have the most significant effect on the
amounts recognised in the financial statements. As described below,
many of these areas of judgement also involve a high level of
estimation uncertainty.
Prior year restatement: Change in accounting policy
The accounting policy regarding the classification of cost items
within cost of sales and administrative expenses was changed in the
year. Judgement was applied in reaching the conclusion that it
provides more relevant financial results to exclude these amounts
from the underlying transactions of trading operations. Further
details are provided in note 1.
Use of Alternative Performance Measures: Operating profit before
exceptional items
IAS1 requires material items to be disclosed separately in a way
that enables users to assess the quality of a company's
profitability. In practice, these are commonly referred to as
'exceptional' items, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in arriving at an
Alternative Performance Measure which excludes such exceptional
items. We consider items which are material and outside of the
normal operating practice of the company to be suitable for
separate presentation. Further details can be seen in note 8.
The segmental analysis of continuing operations in note 4
includes the additional performance measure of Trading Profit on
continuing operations which is reconciled to reported operating
profit in that note. The Group uses Trading Profit as an
alternative measure to reported operating profit by making several
adjustments. Firstly, Trading Profit excludes exceptional items,
being those we consider material and outside of the normal
operating practice of the company to be suitable of separate
presentation and detailed explanation. Secondly, amortisation and
impairment of intangibles arising on acquisitions are excluded,
because these charges are based on judgments about the value and
economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating
practice. The CODM reviews the segmental analysis for continuing
operations together with discontinued operations.
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions
requires assumptions and complex judgements to be made about the
future performance of the Group's contracts. The level of
uncertainty in the estimates made, either in determining whether a
provision is required, or in the calculation of a provision booked,
is linked to the complexity of the underlying contract and the form
of service delivery. Due to the level of uncertainty and
combination of variables associated with those estimates there is a
significant risk that there could be material adjustment to the
carrying amounts of onerous contract provisions within the next
financial year.
Major sources of uncertainty which could result in a material
adjustment within the next financial year are:
-- The ability of the company to maintain or improve operational
performance to ensure costs or performance related penalties are in
line with expected levels.
-- Volume driven revenue and costs being within the expected ranges.
-- The outcome of matters dependent on the behaviour of the
customer, such as a decision to extend a contract where it has the
unilateral right to do so.
-- The outcome of open claims made by or against a customer regarding contractual performance.
-- The ability of suppliers to deliver their contractual obligations on time and on budget.
In the current year material revisions have been made to
historic provisions, which have led to a charge to contract
provisions of GBP62.0m, including GBP0.5m in relation to new
provisions, and releases of GBP43.4m. Further details are provided
in the Finance Review. All of these revisions have resulted from
triggering events in the current year, either through changes in
contractual positions or changes in circumstances which could not
have been reasonably foreseen at the previous balance sheet date.
To mitigate the level of uncertainty in making these estimates
Management regularly compares actual performance of the contracts
against previous forecasts and considers whether there have been
any changes to significant judgements. A detailed bottom up review
of the provisions is performed as part of the Group's formal annual
budgeting process.
The future range of possible outcomes in respect of those
assumptions and significant judgements made to determine the
carrying value of onerous contracts could result in either a
material increase or decrease in the value of onerous contract
provisions in the next financial year. The extent to which actual
results differ from estimates made at the reporting date depends on
the combined outcome and timing of a large number of variables
associated with performance across multiple contracts.
The individual provisions are discounted where the impact is
assessed to be significant. Discount rates used are calculated
based on the estimated risk free rate of interest for the region in
which the provision is located and matched against the ageing
profile of the provision. Rates applied are in the range of 0.72%
and 1.95%.
Investigation by the Serious Fraud Office
In November 2013, the UK's Serious Fraud Office announced that
it had opened an investigation, which remains ongoing, into the
Group's Electronic Monitoring Contract.
We are cooperating fully with the Serious Fraud Office's
investigation but it is not possible to predict the outcome.
However, disclosed in the Principal Risks and Uncertainties in this
Report is a description of the range of possible outcomes in the
event that the Serious Fraud Office decides to prosecute the
individuals and / or the Serco entities involved.
Impairment of assets
Identifying whether there are indicators of impairment for
assets involves a high level of judgement and a good understanding
of the drivers of value behind the asset. At each reporting period
an assessment is performed in order to determine whether there are
any such indicators, which involves considering the performance of
our business and any significant changes to the markets in which we
operate.
We seek to mitigate the risk associated with this judgement by
putting in place processes and guidance for the finance community
and internal review procedures.
Determining whether assets with impairment indicators require an
actual impairment involves an estimation of the expected value in
use of the asset (or CGU to which the asset relates). The value in
use calculation involves an estimation of future cash flows and
also the selection of appropriate discount rates, both of which
involve considerable judgement. The future cash flows are derived
from approved forecasts, with the key assumptions being revenue
growth, margins and cash conversion rates. Discount rates are
calculated with reference to the specific risks associated with the
assets and are based on advice provided by external experts. Our
calculation of discount rates are performed based on a risk free
rate of interest appropriate to the geographic location of the cash
flows related to the asset being tested, which is subsequently
adjusted to factor in local market risks and risks specific to
Serco and the asset itself. Discount rates used for internal
purposes are post tax rates, however for the purpose of impairment
testing in accordance with IAS36 Impairment of assets we calculate
a pre tax rate based on post tax targets.
A key area of focus in recent years has been in the impairment
testing of goodwill as a result of the pressure on the results of
the Group. However, no impairment of goodwill was noted in the year
ended 31 December 2017.
Deferred tax
Deferred tax assets are recognised for unused tax losses to the
extent that it is probable that taxable profit will be available
against which the losses can be utilised. Significant management
judgement is required to determine the amount of deferred tax
assets that can be recognised, based upon the likely timing and the
level of future taxable profits. Recognition has been based on
forecast future taxable profits.
Further details on taxes are disclosed in note 12.
Current tax
Liabilities for tax contingencies require management judgement
and estimates in respect of tax audits and also tax exposures in
each of the jurisdictions in which we operate. Management is also
required to make an estimate of the current tax liability together
with an assessment of the temporary differences that arise as a
consequence of different accounting and tax treatments. Key
judgement areas include the correct allocation of profits and
losses between the countries in which we operate and the pricing of
intercompany services. Where management conclude that a tax
position is uncertain, a current tax liability is held for
anticipated taxes that are considered probable based on the current
information available.
These liabilities can be built up over a long period of time but
the ultimate resolution of tax exposures usually occurs at a point
in time, and given the inherent uncertainties in assessing the
outcomes of these exposures, these estimates are prone to change in
future periods. It is not currently possible to estimate the timing
of potential cash outflow, but on resolution, to the extent this
differs from the liability held, this will be reflected through the
tax charge / (credit) for that period. Each potential liability and
contingency is revisited on an annual basis and adjusted to reflect
any changes in positions taken by the company, local tax audits,
the expiry of the statute of limitations following the passage of
time and any change in the broader tax environment.
On the basis of the currently available information, the Group
does not anticipate a material change to the estimated liability in
the short term.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit
obligation as a result of contractual arrangements entered into
requires a level of judgement, largely driven by the legal position
held between the Group, the customer and the relevant pension
scheme. The Group's retirement benefit obligations are covered in
note 18.
The calculation of retirement benefit obligations is dependent
on material key assumptions including discount rates, mortality
rates, inflation rates and future contribution rates.
In accounting for the defined benefit schemes, the Group has
applied the following principles:
-- The asset recognised for the Serco Pension and Life Assurance
Scheme is based on the assumption that the full surplus will
ultimately be available to the Group as a future refund of
surplus.
-- No foreign exchange item is shown in the disclosures as the
non UK liabilities are not material.
-- No pension assets are invested in the Group's own financial instruments or property.
-- Pension annuity assets are remeasured to fair value at each
reporting date based on the share of the defined benefit obligation
covered by the insurance contract.
3. Discontinued operations
The Global Services division, representing private sector BPO
operations, was classified as a discontinued operation in 2015 and
2016. The most significant part of this business was disposed in
2015, and the disposal of one of the two remaining elements of the
offshore business was completed in March 2016 and the final element
completed in December 2016. The residual UK onshore private sector
BPO operations were sold or exited in 2016 with the exception of
one business consisting of a single contract, where disposal was
completed in July 2017. Total revenues for the remaining operations
were GBP5.4m and the loss before exceptional items was GBP0.6m up
to the point of disposal, therefore the results have been included
in continuing operations in 2017 on the grounds of materiality. The
final contract was sold with no profit or loss on disposal, with a
net cash outflow of GBP0.5m.
The results of the discontinued operations were as follows:
2016
For the year ended 31 December GBPm
---------------------------------------------- ------
Revenue 36.8
Expenses (40.1)
----------------------------------------------- ------
Operating loss before exceptional items (3.3)
Exceptional loss on disposal of subsidiaries
and operations (2.8)
Other exceptional operating items (11.4)
----------------------------------------------- ------
Operating loss (17.5)
Exceptional finance costs (0.4)
----------------------------------------------- ------
Loss before tax (17.9)
Tax charge on loss before exceptional
items (0.1)
Net loss attributable to discontinued
operations presented in the income statement (18.0)
----------------------------------------------- ------
Attributable to:
Equity owners of the Company (18.1)
----------------------------------------------- ------
Non controlling interests 0.1
----------------------------------------------- ------
Included above are items classified as exceptional as they are
considered to be material and outside of the normal course of
business. These are summarised as follows:
2016
For the year ended 31 December GBPm
------------------------------------------ ------
Exceptional items arising on discontinued
operations
Exceptional loss on disposal (2.8)
Other exceptional operating items
Restructuring costs (1.1)
Impairment of goodwill -
Movements in indemnities provided on
business disposals (13.7)
Movement in the fair value of assets
transferred to held for sale 3.4
Other exceptional operating items (11.4)
------------------------------------------- ------
Exceptional operating items arising on
discontinued operations (14.2)
------------------------------------------- ------
In 2016 a charge of GBP1.1m arose in discontinued operations in
relation to the restructuring programme resulting from the Strategy
Review. This included redundancy payments, provisions and other
charges relating to the exit of the UK private sector BPO business,
external advisory fees and other incremental costs.
A charge of GBP13.7m arose in 2016 in relation to the movement
in the value of indemnities provided on business disposals made in
previous years. These relate to changes in exchange rates where
indemnities were provided in foreign currencies and increases to
provisions for interest and penalties on any indemnities. There
were no changes in the value of these indemnities in 2017.
A charge of GBP0.4m was incurred in 2016 as a result of early
payments to the US Private Placement (USPP) Noteholders following
the disposal of the offshore private sector BPO business. These
charges were treated as exceptional finance costs as they were
directly linked to the restructuring resulting from the Strategy
Review.
The net cash flows resulting from the discontinued operations
were as follows:
2016
For the year ended 31 December GBPm
------------------------------------------- ------
Net cash inflow from operating activities
before exceptional items 5.5
Exceptional items -
------------------------------------------- ------
Net cash inflow from operating activities 5.5
Net cash inflow from investing activities 12.5
Net cash outflow from financing activities (11.4)
-------------------------------------------- ------
Net increase in cash and cash equivalents
attributable to discontinued operations 6.6
-------------------------------------------- ------
4. Segmental information
The Group's operating segments reflecting the information
reported to the Board in 2017 under IFRS8 Operating Segments are as
set out below.
Reportable
segments Operating segments
----------- -------------------------------------------------
UK & Europe Services for sectors including Citizen
Services, Defence, Health, Justice & Immigration
and Transport delivered to UK Government,
UK devolved authorities and other public
sector customers in the UK and Europe;
----------- -------------------------------------------------
Americas Services for sectors including Defence,
Transport and Citizen Services delivered
to US federal and civilian agencies, selected
state and municipal governments and the
Canadian Government;
----------- -------------------------------------------------
AsPac Services for sectors including Defence,
Justice & Immigration, Transport, Health
and Citizen Services in the Asia Pacific
region including Australia, New Zealand
and Hong Kong;
----------- -------------------------------------------------
Middle East Services for sectors including Defence,
Transport and Health in the Middle East
region; and
----------- -------------------------------------------------
Corporate Central and head office costs.
----------- -------------------------------------------------
Each operating segment is focused on a narrow group of customers
in a specific geographic region and is run by a local management
team which report directly to the CODM on a regular basis. As a
result of this focus, the sectors in each region have similar
economic characteristics and are aggregated at the operating
segment level in these condensed financial statements.
During the year two existing divisions, UK Central Government
and UK & Europe Local & Regional Government, were merged to
form the new UK & Europe division (UK&E) with the
management team structure and responsibilities altered to match the
segment. This note has been adjusted to reflect the impact of this,
which has been to add together the results of the two former
divisions in the comparative period.
Geographic information
Non current Non current
Revenue assets* Revenue assets*
2017 2017 2016 2016
Year ended 31 December GBPm GBPm GBPm GBPm
----------------------- ------- ----------- ------- -----------
United Kingdom 1,185.2 340.3 1,244.9 444.7
United States 623.6 273.3 632.9 309.1
Australia 559.3 143.2 593.1 146.0
Middle East 351.9 18.0 324.8 19.7
Other countries 235.3 21.7 215.3 20.4
----------------------- ------- ----------- ------- -----------
Total 2,953.6 796.5 3,011.0 939.9
----------------------- ------- ----------- ------- -----------
* Non current assets exclude financial instruments, deferred tax
assets and loans to joint ventures and associates
Revenues from external customers are attributed to individual
countries on the basis of the location of the customer.
Information about major customers
The Group has four major governmental customers which each
represent more than 10% of Group revenues. The customers' revenues
were GBP1,102.9m for the UK Government within the UK & Europe
segment, GBP569.7m for the US Government within the Americas
segment, GBP522.1m for the Australian Government within the AsPac
segment and GBP238.4m for the Government of the United Arab
Emirates within the Middle East segment.
In 2016 the Group had three major governmental customers which
each represented more than 10% of Group revenues. The customers'
revenues were GBP1,233.7m for the UK Government within the UK &
Europe segment, GBP623.1m for the US Government within the Americas
segment and GBP581.4m for the Australian Government within the
AsPac segment.
The following is an analysis of the Group's revenue, results,
assets and liabilities by reportable segment:
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2017 GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,334.7 688.0 579.0 351.9 - 2,953.6
----------------------------- ------- -------- ----- ------ --------- -------
Result
----------------------------- ------- -------- ----- ------ --------- -------
Trading profit / (loss) from
continuing operations* 4.5 39.8 35.1 16.2 (41.6) 54.0
Amortisation and impairment
of intangibles arising on
acquisition - (3.0) (1.4) - - (4.4)
----------------------------- ------- -------- ----- ------ --------- -------
Operating profit / (loss)
before exceptional items 4.5 36.8 33.7 16.2 (41.6) 49.6
Exceptional profit / (loss)
on disposal of subsidiaries
and operations 0.3 - - - - 0.3
Other exceptional operating
items** 11.9 (0.3) (7.4) 0.1 (24.2) (19.9)
Operating profit / (loss) 16.7 36.5 26.3 16.3 (65.8) 30.0
Investment revenue 7.6
Finance costs (19.2)
Other gains 0.7
----------------------------- ------- -------- ----- ------ --------- -------
Profit before tax 19.1
Tax charge (14.0)
Tax on exceptional items (5.0)
----------------------------- ------- -------- ----- ------ --------- -------
Profit for the year from
continuing operations 0.1
----------------------------- ------- -------- ----- ------ --------- -------
* Trading profit / (loss) is defined as operating profit /
(loss) before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business.
Supplementary information
---------------------------------- ------- ------- ------- ------ ------- ---------
Share of profits in joint
ventures and associates,
net of interest and tax 26.6 - 0.8 - (0.1) 27.3
---------------------------------- ------- ------- ------- ------ ------- ---------
Depreciation of plant, property
and equipment (14.0) (3.2) (4.9) (0.8) (1.4) (24.3)
Impairment of plant, property
and equipment 0.1 - - - - 0.1
---------------------------------- ------- ------- ------- ------ ------- ---------
Total depreciation and impairment
of plant, property and equipment (13.9) (3.2) (4.9) (0.8) (1.4) (24.2)
---------------------------------- ------- ------- ------- ------ ------- ---------
Amortisation of intangible
assets arising on acquisition - (3.0) (1.4) - - (4.4)
Exceptional impairment and
write down of intangible
assets arising on acquisition - - (6.1) - - (6.1)
Amortisation of other intangible
assets (1.1) (1.5) (4.8) (0.2) (13.8) (21.4)
Exceptional impairment of
other intangible assets - - - - (2.8) (2.8)
Total amortisation and impairment
of intangible assets (1.1) (4.5) (12.3) (0.2) (16.6) (34.7)
---------------------------------- ------- ------- ------- ------ ------- ---------
Segment assets
Interests in joint ventures
and associates 13.5 - 0.4 0.4 - 14.3
Other segment assets*** 445.9 391.3 223.4 112.0 133.2 1,305.8
---------------------------------- ------- ------- ------- ------ ------- ---------
Total segment assets 459.4 391.3 223.8 112.4 133.2 1,320.1
Unallocated assets 192.7
---------------------------------- ------- ------- ------- ------ ------- ---------
Consolidated total assets 1,512.8
---------------------------------- ------- ------- ------- ------ ------- ---------
Segment liabilities
Segment liabilities*** (368.5) (128.6) (148.5) (80.7) (142.0) (868.3)
Unallocated liabilities (337.3)
---------------------------------- ------- ------- ------- ------ ------- ---------
Consolidated total liabilities (1,205.6)
---------------------------------- ------- ------- ------- ------ ------- ---------
*** The Corporate segment assets and liabilities include balance
sheet items which provide benefit to the wider Group, including
defined benefit pension schemes and corporate intangible
assets.
Middle
Year ended 31 December 2016 UK&E Americas AsPac East Corporate Total
(restated***) GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,375.1 691.4 619.7 324.8 - 3,011.0
----------------------------- ------- -------- ----- ------ --------- -------
Result -
----------------------------- ------- -------- ----- ------ --------- -------
Trading profit / (loss) from
continuing operations* 84.5 6.4 34.2 18.8 (40.3) 103.6
Amortisation and impairment
of intangibles arising on
acquisition (0.3) (2.8) (2.0) - - (5.1)
----------------------------- ------- -------- ----- ------ --------- -------
Operating profit / (loss)
before exceptional items 84.2 3.6 32.2 18.8 (40.3) 98.5
Exceptional profit / (loss)
on disposal of subsidiaries
and operations 4.4 - 0.4 - (1.9) 2.9
Other exceptional operating
items** (25.9) - (0.9) - (32.4) (59.2)
----------------------------- ------- -------- ----- ------ --------- -------
Operating profit / (loss) 62.7 3.6 31.7 18.8 (74.6) 42.2
Investment revenue 9.3
Finance costs (21.9)
----------------------------- ------- -------- ----- ------ --------- -------
Profit before tax 29.6
Tax charge (15.8)
Tax on exceptional items 3.1
----------------------------- ------- -------- ----- ------ --------- -------
Profit for the year from
continuing operations 16.9
----------------------------- ------- -------- ----- ------ --------- -------
* Trading profit / (loss) is defined as operating (loss) /
profit before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business.
*** During the year two existing divisions, UK Central
Government and UK & Europe Local & Regional Government,
were merged to form the new UK & Europe division. This note has
been adjusted to reflect the impact of this, which has been to add
together the results of the two former divisions.
Supplementary information
---------------------------------- ------- ------- ------- ------ ------- ---------
Share of profits in joint
ventures and associates,
net of interest and tax 31.3 - 2.0 - 0.1 33.4
---------------------------------- ------- ------- ------- ------ ------- ---------
Depreciation of plant, property
and equipment (15.0) (3.1) (4.5) (0.9) (1.3) (24.8)
Impairment of plant, property
and equipment (0.3) - (0.4) - - (0.7)
---------------------------------- ------- ------- ------- ------ ------- ---------
Total depreciation and impairment
of plant, property and equipment (15.3) (3.1) (4.9) (0.9) (1.3) (25.5)
---------------------------------- ------- ------- ------- ------ ------- ---------
Amortisation of intangible
assets arising on acquisition (0.3) (2.8) (1.3) - - (4.4)
Impairment and write down
of intangible assets arising
on acquisition - - (0.7) - - (0.7)
Amortisation of other intangible
assets (0.6) (1.5) (3.3) (0.7) (15.7) (21.8)
------- ------- ------- ------ ------- ---------
Total amortisation and impairment
of intangible assets (0.9) (4.3) (5.3) (0.7) (15.7) (26.9)
---------------------------------- ------- ------- ------- ------ ------- ---------
Segment assets
Interests in joint ventures
and associates 12.3 - 1.7 0.4 - 14.4
Other segment assets**** 467.0 428.8 252.1 108.7 228.6 1,485.2
---------------------------------- ------- ------- ------- ------ ------- ---------
Total segment assets 479.3 428.8 253.8 109.1 228.6 1,499.6
Unallocated assets, including
assets held for sale 265.0
---------------------------------- ------- ------- ------- ------ ------- ---------
Consolidated total assets 1,764.6
---------------------------------- ------- ------- ------- ------ ------- ---------
Segment liabilities
Segment liabilities**** (442.9) (140.7) (182.8) (79.3) (139.7) (985.4)
Unallocated liabilities,
including liabilities held
for sale (380.4)
---------------------------------- ------- ------- ------- ------ ------- ---------
Consolidated total liabilities (1,365.8)
---------------------------------- ------- ------- ------- ------ ------- ---------
****The Corporate segment assets and liabilities include balance
sheet items which provide benefit to the wider Group, including
defined benefit pension schemes and corporate intangible
assets.
5. Joint ventures and associates
AWE Management Limited (AWEML), Merseyrail Services Holding
Company Limited (MSHCL) and Northern Rail Holdings Limited (NRHL)
were the only equity accounted entities which were material to the
Group during the year or prior year. Dividends of GBP17.1m (2016:
GBP19.6m), GBP7.3m (2016: GBP7.3m) and GBP1.8m (2016: GBP10.0m)
respectively were received from these companies in the year. The
Northern Rail franchise ended on 31 March 2016.
Summarised financial information of AWEML, MSHCL, NRHL and an
aggregation of the other equity accounted entities in which the
Group has an interest is as follows:
31 December 2017
Group
portion
of other
Group portion joint
AWEML MSHCL NRHL of material venture
(100% (100% (100% joint ventures arrangements
Summarised financial of results) of results) of results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Revenue 951.8 155.7 0.3 311.2 45.5 356.7
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Operating profit 90.8 17.8 3.8 33.0 1.4 34.4
Net investment revenue
/ (finance costs) 0.2 (0.2) - (0.1) - (0.1)
Income tax charge (18.8) (3.9) (0.5) (6.9) (0.1) (7.0)
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Profit from continuing
operations 72.2 13.7 3.3 26.0 1.3 27.3
Other comprehensive
income - 2.0 - 1.0 (0.1) 0.9
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Total comprehensive
income 72.2 15.7 3.3 27.0 1.2 28.2
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Non current assets 665.6 8.7 - 167.5 2.2 169.7
Current assets 197.3 43.5 5.2 72.7 14.5 87.2
Current liabilities (179.0) (37.0) (2.0) (63.4) (13.0) (76.4)
Non current liabilities (664.3) (1.6) - (163.5) (2.7) (166.2)
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Net assets 19.6 13.6 3.2 13.3 1.0 14.3
Proportion of group
ownership 24.5% 50.0% 50.0% - - -
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
Carrying amount
of investment 4.8 6.8 1.6 13.3 1.0 14.3
------------------------ ------------ ------------ ------------ ---------------- ---------------- -------
* Total results of the entity multiplied by the respective proportion of Group ownership.
Group
portion
of other
Group portion joint
AWEML MSHCL NRHL of material venture
(100% of (100% of (100% joint ventures arrangements
results) results) of results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- --------- ------------ ---------------- ---------------- -----
Cash and cash equivalents 77.2 33.6 6.0 38.7 2.5 41.2
Current financial
liabilities excluding
trade and other
payables and provisions (8.3) (1.9) 0.1 (2.9) (0.6) (3.5)
Non current financial
liabilities excluding
trade and other
payables and provisions - - - - (2.7) (2.7)
Depreciation and
amortisation - (2.2) - (1.1) (1.4) (2.5)
Interest income 0.2 0.1 - 0.1 - 0.1
Interest expense - (0.3) - (0.2) - (0.2)
-------------------------- --------- --------- ------------ ---------------- ---------------- -----
* Total results of the entity multiplied by the respective proportion of Group ownership.
The financial statements of MSHCL are for a period which is
different from that of the Group, being for the 52 week period
ended 6 January 2018 (2016: 52 week period ended 7 January 2017).
The 52 week period reflects the joint venture's internal reporting
structure and is sufficiently close so as to not require adjustment
to match that of the Group. The NRHL franchise ended on 31 March
2016, with the results reflected in year ended 31 December 2017
reflecting the ongoing post contract negotiations.
Certain employees of the groups headed by AWEML and MSHCL are
members of sponsored defined benefit pension schemes. Given the
significance of the schemes to understanding the position of the
entities the following key disclosures are made:
Main assumptions: 2017 AWEML MSHCL
----------------------------------------- ----- -----
Rate of salary increases (%) 2.2% 3.1%
Inflation assumption (CPI %) 2.2% 2.2%
Discount rate (%) 2.6% 2.5%
Post-retirement mortality:
Current male industrial pensioners at 22.9 N/A
65 (years)
Future male industrial pensioners at 25.2 N/A
65 (years)
----------------------------------------- ----- -----
Retirement benefit funding position (100%
of results) GBPm GBPm
------------------------------------------ --------- -------
Present value of scheme liabilities (2,233.3) (304.4)
Fair value of scheme assets 1,569.1 193.9
------------------------------------------ --------- -------
Net amount recognised (664.2) (110.5)
Members' share of deficit - 44.2
Franchise adjustment* - 66.3
Related asset, right to reimbursement 664.2 -
------------------------------------------ --------- -------
Net retirement benefit obligation - -
------------------------------------------ --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
31 December 2016
Group
portion
of other
Group portion joint
AWEML MSHCL NRHL of material venture
(100% of (100% of (100% of joint ventures arrangements
Summarised financial results) results) results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Revenue 968.1 150.3 132.7 437.5 43.3 480.8
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Operating profit 72.9 18.9 13.2 37.4 3.3 40.7
Net investment revenue
/ (finance costs) 0.2 (1.3) 0.1 (0.5) (0.1) (0.6)
Income tax (charge)
/ credit (11.3) (3.7) (3.4) (6.8) 0.1 (6.7)
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Profit from continuing
operations 61.8 13.9 9.9 30.1 3.3 33.4
Other comprehensive
income - 34.0 0.8 17.4 (1.6) 15.8
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Total comprehensive
income 61.8 47.9 10.7 47.5 1.7 49.2
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Non current assets 1,097.0 12.5 - 275.1 3.2 278.3
Current assets 149.3 32.8 14.2 60.1 16.0 76.1
Current liabilities (133.9) (31.9) (10.7) (54.2) (14.0) (68.2)
Non current liabilities (1,095.2) (0.9) - (268.7) (3.1) (271.8)
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Net assets 17.2 12.5 3.5 12.3 2.1 14.4
Proportion of group
ownership 33% / 24.5% 50% 50% - - -
------------------------ ----------- --------- --------- ---------------- ---------------- -------
Carrying amount
of investment 4.2 6.3 1.8 12.3 2.1 14.4
------------------------ ----------- --------- --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective proportion of Group ownership.
Group
portion
of other
Group portion joint
AWEML MSHCL NRHL of material venture
(100% of (100% of (100% of joint ventures arrangements
results) results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- --------- --------- ---------------- ---------------- -----
Cash and cash equivalents 72.4 21.1 14.5 35.4 4.7 40.1
Current financial
liabilities excluding
trade and other
payables and provisions (7.0) (2.3) (0.5) (3.1) (0.9) (4.0)
Non current financial
liabilities excluding
trade and other
payables and provisions - (0.6) - (0.3) (3.0) (3.3)
Depreciation and
amortisation - (2.3) (1.7) (2.1) (1.0) (3.1)
Interest income 0.2 - 0.1 0.2 - 0.2
Interest expense - (1.3) - (0.6) (0.1) (0.7)
-------------------------- --------- --------- --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective proportion of Group ownership.
Key disclosures with respect of the defined benefit pension
schemes of material joint ventures and associates:
Main assumptions: 2016 AWEML MSHCL
----------------------------------------- ----- -----
Rate of salary increases (%) 2.3% 2.3%
Inflation assumption (CPI %) 2.3% 2.3%
Discount rate (%) 2.7% 2.7%
Post-retirement mortality:
Current male industrial pensioners at 22.8 N/A
65 (years)
Future male industrial pensioners at 24.9 N/A
65 (years)
----------------------------------------- ----- -----
Retirement benefit funding position (100% AWEML MSHCL
of results) GBPm GBPm
------------------------------------------ --------- -------
Present value of scheme liabilities (2,556.0) (275.7)
Fair value of scheme assets 1,460.9 171.1
------------------------------------------ --------- -------
Net amount recognised (1,095.1) (104.6)
Members' share of deficit - 62.8
Franchise adjustment* - 41.8
Related asset, right to reimbursement 1,095.1 -
------------------------------------------ --------- -------
Net retirement benefit obligation - -
------------------------------------------ --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
6. Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share
capital of BTP Systems, LLC, for consideration of US Dollar $20.5m
in cash. Further details on this post year end transaction are
provided in note 21.
The Group signed a revised Business Purchase Agreement (BPA) on
13 February 2018 with the Special Managers and Provisional
Liquidators acting on behalf of the relevant Carillion plc
subsidiaries to acquire a portfolio of selected UK health
facilities management contracts. The portfolio has annual revenues
of approximately GBP90m and a weighted average remaining term of 14
years. Upon the receipt by the Special Managers and Provisional
Liquidators of the requisite third party consents, each individual
contract will be transferred to Serco on a cash-free, debt-free
basis, with the consideration to be paid in instalments and to be
satisfied using Serco's existing financing facilities. If all the
contracts are transferred to Serco under the revised BPA process,
the total consideration payable would be GBP29.7m. The
consideration payable is lower than the amount of GBP47.7m
announced on 13 December 2017 in respect of substantially the same
contracts that were subject to the initial BPA signed with
Carillion plc at that date. The change in consideration reflects
the Group's re-evaluation of potential liabilities, indemnities,
warranties and the additional working capital investment required
as a result of Carillion's liquidation. The financial effects of
this transaction have not been recognised at 31 December 2017. As
consents are required for each individual contract to be
transferred and therefore acquired, at the time the financial
statements were authorised for issue no legal transfer or control
of assets had taken place and so no disclosures have been made in
respect of the assets and liabilities being acquired. The fair
values of the assets and liabilities will be determined at the date
when contracts are acquired. It is also not yet possible to provide
detailed information about each class of acquired receivables and
any contingent liabilities in respect of the acquired
contracts.
On 24 August 2017 the Group acquired 50% of the issued share
capital of Serco Sodexo Defence Services Pty Ltd (SSDS) for
GBP1.6m, obtaining full control. SSDS was previously a 50% owned
joint venture accounted for on an equity accounting basis. The
business has a contract with the Australian Defence Forces Joint
Logistics Command relating to the operation of the Defence Forces
national clothing stores and strengthens the financial performance
of the AsPac division. As a result of the increase in ownership
from 50% to 100% the Group fair valued the existing 50%
shareholding held at GBP0.2m, with the resulting uplift in value of
GBP0.7m being recorded in Other gains, outside of operating
results. The amounts recognised in respect of the identifiable
assets acquired and the liabilities assumed are as set out in the
table below:
Provisional
fair value
GBPm
-------------------------------------- -----------
Intangible assets, excluding goodwill 0.9
Trade and other receivables 1.6
Deferred tax assets 1.0
Cash and cash equivalents 3.1
Trade and other payables (3.3)
Provisions (1.7)
Acquisition date fair value of
consideration transferred 1.6
---------------------------------------- -----------
Satisfied by:
Cash 0.4
Deferred consideration 1.2
---------------------------------------- -----------
Total consideration 1.6
---------------------------------------- -----------
The net cash inflow as a result of the acquisition was GBP2.7m,
being GBP3.1m cash acquired less GBP0.4m consideration paid.
No acquisition related costs were incurred.
The additional stake in SSDS contributed GBP3.8m and GBP0.7m to
operating profit before exceptional items in the period from
acquisition to 31 December 2017. Had the acquisition taken place on
1 January 2017 Group revenue and operating profit before
exceptional items for the year would have increased by GBP4.2m and
GBP0.6m respectively, taking total Group revenue to GBP2,957.8m and
total Group operating profit before exceptional items to
GBP50.2m.
Cash payments were made in the year relating to historic
acquisitions. The total impact of acquisitions in the year to the
Group's cash flow position was as follows:
GBPm
---------------------------------------- -----
Cash and cash equivalents in SSDS 3.1
Cash payments in respect of SSDS
consideration (0.4)
Deferred consideration paid in
respect of Anglia Support Partnership (1.2)
Net cash inflow arising on acquisitions
in the year 1.5
------------------------------------------ -----
7. Disposals
A summary of the disposals taking place in the year ended 31
December 2017 were as follows:
Profit
/ (loss) Cash
on disposal flow
GBPm GBPm
------------------------------------- ------------ -----
Disposal of Service Glasgow LLP - (6.7)
Disposal of final remaining UK
onshore private sector BPO contract - (0.5)
Impact of historic transactions 0.3 0.1
0.3 (7.1)
------------------------------------- ------------ -----
There were no disposals of continuing operations in 2016, the
profit on disposal of GBP2.9m related to transactions completing in
prior years.
In December 2017 the Group's interest in Service Glasgow LLP was
disposed of, resulting in a net cash outflow of GBP6.7m with no
profit or loss on disposal. Further details are provided below.
Service
Glasgow
LLP
GBPm
---------------------------- --------
Inventories 0.9
Trade and other receivables 4.7
Cash and cash equivalents 6.7
Trade and other payables (9.9)
Provisions (0.5)
----------------------------- --------
Net assets disposed 1.9
----------------------------- --------
No profit or loss was made on the disposal:
Service
Glasgow
LLP
GBPm
-------------------------------------- --------
Consideration 1.6
Less:
Net assets disposed (1.9)
Non controlling interests disposed
of 0.3
---------------------------------------- --------
Income statement impact of disposal -
---------------------------------------- --------
The net cash inflow arising on disposal of discontinued
operations and the impact on Net Debt is as follows:
Service
Glasgow
LLP
GBPm
--------------------------------------- --------
Consideration 1.6
Less:
Deferred consideration (1.6)
Cash and cash equivalents disposed (6.7)
Net cash flow on disposal and movement
in Net Debt (6.7)
----------------------------------------- --------
8. Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the underlying
performance of the Group.
Exceptional items arising on discontinued operations are
disclosed on the face of the income statement within the loss
attributable to discontinued operations, of which there are none in
2017 (2016: charge of GBP3.4m), whereas those arising on continuing
operations are disclosed on the face of the income statement within
exceptional operating items. Further information regarding the
exceptional items arising on discontinued operations in 2016 can be
seen in note 3.
Exceptional gain on disposal of subsidiaries and operations
The exceptional net gain on disposals is included in note 7.
Other exceptional operating items arising on continuing
operations
2017 2016
For the year ended 31 December GBPm GBPm
------------------------------------------- ------ ------
Impairment of goodwill - (17.8)
Restructuring costs (28.6) (17.2)
Aborted transaction costs - (0.1)
Costs associated with UK Government review (0.4) (0.1)
Release of UK frontline clinical health
contract provisions 0.4 0.6
Settlement of defined benefit pension
obligations 10.3 (10.7)
Impairment of interest in joint venture
and related loan balances 4.5 (13.9)
Impairment of AsPac customer lists (6.1) -
Other exceptional operating items (19.9) (59.2)
------------------------------------------- ------ ------
Goodwill is tested for impairment annually or more frequently if
there are indications that there is a risk that it could be
impaired. The recoverable amount of each cash generating unit (CGU)
is based on value in use calculations derived from forecast cash
flows based on past experience, adjusted to reflect market trends,
economic conditions, the Group's strategy and key risks. These
forecasts include an estimated level of new business wins and
contract attrition and an assumption that the final year forecast
continues into perpetuity at a CGU specific terminal growth rate.
The terminal growth rates are provided by external sources and are
based on the long-term inflation rates of the geographic market in
which the CGUs operate and therefore do not exceed the average
long-term growth rates forecast for the individual markets.
In 2016, goodwill of GBP17.8m arose following the acquisition of
Orchard & Shipman (Glasgow) Limited, the Group's subcontractor
on the COMPASS contract, providing accommodation to asylum seekers
in Scotland and Northern Ireland on behalf of the Home Office. This
goodwill was then immediately impaired as the CGU is forecast to be
loss making and therefore the asset cannot be supported. The annual
impairment testing of CGUs in 2017 has identified no other
impairment of goodwill.
The Group is incurring costs in relation to restructuring
programmes resulting from the Strategy Review announced in 2015.
These costs include redundancy payments, provisions, external
advisory fees and other incremental costs, including in 2017
GBP2.8m of intangible asset impairment (2016: GBPnil). Due to the
nature and scale of the impact of the transformation phase of the
Strategy Review the incremental costs associated with this
programme are considered to be exceptional. Costs associated with
the restructuring programme resulting from the Strategy Review must
meet the following criteria: that they are directly linked to the
implementation of the Strategy Review; they are incremental costs
as a result of the activity; and they are non business as usual
costs. In 2017, a charge of GBP28.6m (2016: GBP17.2m) arose in
relation to the restructuring programme resulting from the Strategy
Review. Non-exceptional restructuring charges are incurred by the
business as part of normal operational activity, which in the year
totalled GBP11.1m (2016: GBP6.7m). We expect restructuring costs of
approximately GBP35m to be incurred in 2018 which will be treated
as exceptional.
The disposal of the Environmental and Leisure businesses was
aborted in 2015 and during 2016 costs related to the aborted
transaction were finalised, resulting in a charge of GBPnil (2016:
GBP0.1m).
In 2017, there were exceptional costs totalling GBP0.4m (2016:
GBP0.1m) associated with the UK Government reviews and the
programme of Corporate Renewal. These costs were treated as
exceptional when the matter first arose and consistent treatment is
applied in 2017.
In 2017 there were releases of provisions of GBP0.4m (2016:
GBP0.6m) which were previously charged through exceptional items in
relation to the exit of the UK Frontline Clinical Health
contracts.
An exceptional charge of GBP10.7m arose in 2016 in respect of
the bulk transfer of a number of employees that are being
transferred from the Serco Pension and Life Assurance Scheme
(SPLAS) to the Principal Civil Service Pension Scheme. This
transfer was legally agreed in December 2016 at which point all
obligations of SPLAS to pay retirement benefits for these
individuals were eliminated and as a result a settlement charge of
GBP10.7m arose. In 2017 a new agreement was reached with the UK
Government to transfer out the scheme members on an individual
basis and the 2016 legal and commercial arrangements were cancelled
by consent of all parties. As a result of the changes, the impact
of the transfer was treated as an experience gain adjustment
through other comprehensive income and the majority of the
provision made in 2016 was reversed, resulting in a GBP10.3m credit
to exceptional items.
In 2016 a review of a joint venture's cash flow projections led
to the impairment of certain equity interests and associated
receivables balances, totalling GBP13.9m. The impairment was
outside of the normal course of business and of a significant
value, and was therefore considered to be an exceptional item. In
the year ended 31 December 2017 payments of GBP4.5m were received
against the impaired loan. The likelihood of further receivables
remains uncertain.
As a result of contracts coming to the end of their natural
lives and no significant new contracts being awarded by the
customer, the remaining customer relationship intangible assets of
the DMS Maritime Pty Limited business acquired in 2012 were
impaired, totalling GBP6.1m.
Tax impact of above items
Exceptional tax for the year was a tax charge of GBP5.0m (2016:
GBP3.1m credit) comprising a GBP2.3m credit on exceptional items
within operating profit and a GBP7.3m charge in respect of other
exceptional tax items.
Exceptional costs of GBP19.6m only gave rise to a credit of
GBP2.3m, as the majority of these costs were incurred in the UK
where they only impact our unrecognised deferred tax in relation to
losses.
The other exceptional tax items relate to two matters, the first
is the impact on tax of the pension buy-in in the year which led to
a GBP95.0m reduction in the IFRS valuation of the Group's defined
benefit pension schemes and consequently a deferred tax charge to
the income statement of GBP16.1m. Movements in the valuation of the
Group's defined benefit pension schemes and the associated deferred
tax impact are reported in the Statement of Comprehensive Income
(SOCI) and do not flow through the income statement, therefore do
not impact profit before tax or the tax charge. However, the net
amount of deferred tax recognised in the balance sheet relates to
both the pension accounting and other timing differences, such as
recoverable losses. As the net deferred tax balance sheet position
is at the level supported by future profit forecasts, the decrease
in the deferred tax liability associated with the pension scheme
(with the benefit reported in the SOCI) leads to a corresponding
decrease in the deferred tax asset to match the future profit
forecasts. Such a reduction in the deferred tax asset therefore
leads to a charge to tax in the income statement. Where deferred
tax charges or releases are the result of movements in the pension
scheme valuations rather than trading activity, these are excluded
from the calculation of tax on underlying profit and the underlying
effective tax rate, with the prior periods being restated to
reflect this. These amounted to GBP1.9m for 2017 (2016:
GBPnil).
The second element is a credit of GBP8.8m related to legislative
changes in the UK and the US which have impacted the value of
deferred tax held on the balance sheet. There is a reduction in the
deferred tax liability that is held in connection with our US
operations of GBP12.5m, as future US tax liabilities are expected
to crystallise at lower US tax rates. The fall in future expected
US rates is primarily due to the enactment of the Tax Cuts &
Jobs Act in December 2017 which reduces the corporate income tax
rate in the US from 35% to 21% effective from 1 January 2018. In
addition, there was a change in UK tax law in 2017. This UK change
will reduce the quantum of loss brought forward that can be used to
offset taxable profits arising in a year, and will also enable
losses carried forward in one company to be used to offset profits
in another. The combined impact of these UK law changes results in
a tax charge of GBP3.7m.
9. Investment revenue
2017 2016
Year ended 31 December GBPm GBPm
--------------------------------------- ----- -----
Interest receivable on other loans and
deposits 2.6 3.6
Net interest receivable on retirement
benefit obligations (note 18) 3.8 4.7
Movement in discount on other debtors 1.2 1.0
--------------------------------------- ----- -----
7.6 9.3
--------------------------------------- ----- -----
10. Finance costs
2017 2016
Year ended 31 December GBPm GBPm
----------------------------------------- ----- -----
Interest payable on obligations under
finance leases 1.3 1.6
Interest payable on other loans 14.0 15.6
Facility fees and other charges 3.0 3.5
Movement in discount on provisions 1.3 2.4
----------------------------------------- ----- -----
19.6 23.1
Foreign exchange on financing activities (0.4) (1.2)
----------------------------------------- ----- -----
19.2 21.9
----------------------------------------- ----- -----
11. Tax
11 (a) Income tax recognised in the income statement
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
2017 2017 2017 2016 2016 2016
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------------ ----------- ----- ------------ ----------- -----
Current income tax
Current income tax charge / (credit) 14.6 (2.3) 12.3 12.1 (1.3) 10.8
Adjustments in respect of prior
years (0.8) - (0.8) 3.6 - 3.6
Deferred tax
Current year charge / (credit) 2.1 7.3 9.4 1.2 (1.8) (0.6)
Adjustments in respect of prior
years (1.9) - (1.9) (1.1) - (1.1)
------------------------------------- ------------ ----------- ----- ------------ ----------- -----
14.0 5.0 19.0 15.8 (3.1) 12.7
------------------------------------- ------------ ----------- ----- ------------ ----------- -----
The tax expense for the year can be reconciled to the profit in
the Condensed Consolidated Income Statement as follows:
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
2017 2017 2017 2016 2016 2016
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------ ----------- ----- ------------ ----------- -----
Profit before tax 38.7 (19.6) 19.1 85.9 (56.3) 29.6
----------------------------------- ------------ ----------- ----- ------------ ----------- -----
Tax calculated at a rate of 19.25%
(2016: 20.00%) 7.5 (3.8) 3.7 17.1 (11.2) 5.9
Expenses not deductible for tax
purposes* 5.9 0.3 6.2 5.7 9.2 14.9
UK unprovided deferred tax** (4.6) 2.9 (1.7) (3.9) - (3.9)
Other unprovided deferred tax 2.3 0.1 2.4 0.3 1.0 1.3
Effect of the use of unrecognised
tax losses (1.2) (0.5) (1.7) (3.1) - (3.1)
Impact of changes in statutory
tax rates on current income tax 1.3 (2.2) (0.9) - - -
Change in deferred tax as a result
of legislative changes - (8.8) (8.8) - - -
Overseas rate differences 9.6 (0.8) 8.8 4.6 - 4.6
Other non taxable income (0.9) (0.5) (1.4) (0.7) (0.4) (1.1)
Adjustments in respect of prior
years (2.9) - (2.9) 2.5 - 2.5
Adjustments in respect of deferred
tax on pensions 2.2 18.3 20.5 - (1.7) (1.7)
Adjustments in respect of equity
accounted investments (5.2) - (5.2) (6.7) - (6.7)
----------------------------------- ------------ ----------- ----- ------------ ----------- -----
Tax charge 14.0 5.0 19.0 15.8 (3.1) 12.7
----------------------------------- ------------ ----------- ----- ------------ ----------- -----
* Relates to costs that are not allowable for tax deduction
under local tax law. Non deductible expenses in relation to
exceptional items relate mainly to capital expenses, such as the
impairments that are not deductible for tax.
** Arises due to timing differences between when an amount is
recognised in the income statement and when the amount is subject
to UK tax. In the current year, the Group has received tax
deductions for amounts which have been charged to the income
statement in previous periods in connection with items such as
fixed assets.
The income tax charge for the year is based on the blended UK
statutory rate of corporation tax for the period of 19.25% (2016:
20.00%). Taxation for other jurisdictions is calculated at the
rates prevailing in the respective jurisdictions.
11 (b) Income tax recognised in the SOCI
2017 2016
Year ended 31 December GBPm GBPm
---------------------------------------- ----- -----
Current tax
Taken to retirement benefit obligations - -
reserve
Deferred tax
Taken to retirement benefit obligations
reserve 18.1 (1.7)
---------------------------------------- ----- -----
18.1 (1.7)
---------------------------------------- ----- -----
12. Deferred tax
Deferred income taxes are calculated in full on temporary
differences under the liability method using local substantively
enacted tax rates.
The movement in net deferred tax assets during the year was as
follows:
2017 2016
GBPm GBPm
---------------------------------------- ------ ------
At 1 January - asset (20.3) (19.9)
Income statement charge/(credit) 7.6 (2.0)
Items recognised in equity and in other
comprehensive income (18.1) 1.7
Arising on acquisition (1.0) -
Exchange differences (2.8) (0.1)
At 31 December - asset (34.6) (20.3)
---------------------------------------- ------ ------
The movement in deferred tax assets and liabilities during the
year was as follows:
Share
Temporary based
differences payment Retirement Other
on assets and employee benefit Tax temporary
/ intangibles benefits schemes OCPs losses differences Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ -------------- ------------- ---------- ------ ------- ------------ ------
At 1 January 2017 36.5 (12.0) 17.6 (17.8) (10.3) (34.3) (20.3)
(Credited) / charged
to income statement
(note 11a) (6.7) 0.3 2.8 9.2 (8.4) 10.4 7.6
Items recognised
in equity and
in other comprehensive
income (note 11b) - - (18.1) - - - (18.1)
Arising on acquisition (0.1) (0.9) - - - - (1.0)
Exchange differences (3.9) 0.4 0.2 0.7 - (0.2) (2.8)
------------------------ -------------- ------------- ---------- ------ ------- ------------ ------
At 31 December
2017 25.8 (12.2) 2.5 (7.9) (18.7) (24.1) (34.6)
------------------------ -------------- ------------- ---------- ------ ------- ------------ ------
Of the amount credited to the income statement, GBP0.1m (2016:
GBP0.3m) has been taken to costs of sales in respect of the R&D
Expenditure credit. Other temporary differences include a deferred
tax asset of GBPnil in respect of derivative financial instruments
(2016: GBP0.1m).
The movement in deferred tax assets and liabilities during the
previous year was as follows:
Share
Temporary based
differences payment Retirement Other
on assets and employee benefit Tax temporary
/ intangibles benefits schemes OCPs losses differences Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ -------------- ------------- ---------- ------ ------- ------------- ------
At 1 January 2016 26.8 (9.7) 17.8 (28.3) (10.8) (15.7) (19.9)
(Credited) / charged
to income statement
(note 11a) 0.9 (0.5) (1.5) 14.7 0.6 (16.2) (2.0)
Items recognised
in equity and
in other comprehensive
income (note 11b) - - 1.7 - - - 1.7
Exchange differences 8.8 (1.8) (0.4) (4.2) (0.1) (2.4) (0.1)
------------------------ -------------- ------------- ---------- ------ ------- ------------- ------
At 31 December
2016 36.5 (12.0) 17.6 (17.8) (10.3) (34.3) (20.3)
------------------------ -------------- ------------- ---------- ------ ------- ------------- ------
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to set off current tax assets
against current tax liabilities and when the deferred income taxes
relate to the same fiscal authority. The following is the analysis
of the deferred tax balances (after offset) for financial reporting
purposes:
2017 2016
GBPm GBPm
------------------------- ------ ------
Deferred tax liabilities 20.4 30.5
Deferred tax assets (55.0) (50.8)
------------------------- ------ ------
(34.6) (20.3)
------------------------- ------ ------
As at the balance sheet date, the UK has a potential deferred
tax asset of GBP177m (2016: GBP147m) available for offset against
future profits. A deferred tax asset has currently been recognised
of GBP17.4m. Recognition has been based on forecast future taxable
profits. No deferred tax asset has been recognised in respect of
the remaining asset (net GBP160m) based on current forecasts;
additional asset recognition is contingent on further improvement
in the UK profit forecast. In the summer of 2016, UK Government
announced a reduction in the UK corporation tax rate from 20% to
19% effective from April 2017. Further measures enacted during 2016
cut the rate further from April 2020 to 17%. These measures have
reduced the UK 2017 current tax credit and will reduce the Group's
future current tax charge accordingly. The deferred tax balance at
31 December 2017 has been calculated reflecting these rates. In
addition, the fall in the future expected US tax rates due to the
enactment of the Tax Cuts & Jobs Act in December 2017 has
generated a GBP12.5m deferred tax credit in 2017 due to the
calculation of the US deferred tax liability at 31 December 2017
using these reduced rates.
Losses of GBP0.1m (2016: GBP0.1m) expire within 5 years, losses
of GBP0.1m (2016 GBP0.2m) expire within 6-10 years, losses of
GBP4.1m (2016 GBP8.6m) expire within 20 years and losses of
GBP998.4m (2016 GBP884.6m) may be carried forward indefinitely.
13. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been
calculated in accordance with IAS33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the
following data:
2017 2016
Number of shares millions millions
------------------------------------------- --------- ---------
Weighted average number of ordinary shares
for the purpose of basic EPS 1,089.7 1,088.3
Effect of dilutive potential ordinary
shares: Share options 44.9 37.3
------------------------------------------- --------- ---------
Weighted average number of ordinary shares
for the purpose of diluted EPS 1,134.6 1,125.6
------------------------------------------- --------- ---------
At 31 December 2017 options over 236,616 (2016: 246,818) shares
were excluded from the weighted average number of shares used for
calculating diluted earnings per share because their exercise price
was above the average share price for the year and they were,
therefore, anti-dilutive.
Due to the loss making position of the combined continuing and
discontinued operations in 2016 and for continuing in 2017, the
dilutive impact has not been separately disclosed for those
measures of profitability.
Earnings per share for continuing and discontinued
operations
Per
Per share share
Earnings amount Earnings amount
2017 2017 2016 2016
Basic EPS GBPm pence GBPm pence
---------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS (0.2) (0.02) (1.2) (0.11)
Basic EPS excluding exceptional
items
---------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS (0.2) (0.02) (1.2) (0.11)
Add back exceptional items 19.6 1.80 70.9 6.51
Add back tax on exceptional items 5.0 0.46 (3.1) (0.28)
---------------------------------- -------- --------- -------- -------
Earnings excluding exceptional
operating items for the purpose
of basic EPS 24.4 2.24 66.6 6.12
---------------------------------- -------- --------- -------- -------
Earnings per share for continuing operations
Per
Per share share
Earnings amount Earnings amount
2017 2017 2016 2016
Basic EPS GBPm pence GBPm pence
-------------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS (0.2) (0.02) 16.9 1.55
Effect of dilutive potential ordinary
shares - - - (0.05)
-------------------------------------- -------- --------- -------- -------
Diluted EPS (0.2) (0.02) 16.9 1.50
-------------------------------------- -------- --------- -------- -------
Basic EPS excluding exceptional
items
-------------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS (0.2) (0.02) 16.9 1.55
Add back exceptional items 19.6 1.80 56.3 5.17
Add back tax on exceptional items 5.0 0.46 (3.1) (0.28)
-------------------------------------- -------- --------- -------- -------
Earnings excluding exceptional
operating items for the purpose
of basic EPS 24.4 2.24 70.1 6.44
-------------------------------------- -------- --------- -------- -------
Earnings per share discontinued
Per
Per share share
Earnings amount Earnings amount
2017 2017 2016 2016
Basic EPS GBPm pence GBPm pence
----------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS - - (18.1) (1.66)
Basic EPS excluding exceptional
items
----------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS - - (18.1) (1.66)
Add back exceptional items - - 14.6 1.34
Earnings excluding exceptional
operating items for the purpose
of basic EPS - - (3.5) (0.32)
----------------------------------- -------- --------- -------- -------
14. Goodwill
Accumulated
impairment Carrying
Cost losses amount
GBPm GBPm GBPm
------------------------- ------ ----------- --------
At 1 January 2016 799.1 (289.2) 509.9
Exchange differences 109.6 (41.6) 68.0
Acquisitions 17.8 - 17.8
Impairment (exceptional) - (17.8) (17.8)
At 1 January 2017 926.5 (348.6) 577.9
Exchange differences (48.5) 21.9 (26.6)
At 31 December 2017 878.0 (326.7) 551.3
------------------------- ------ ----------- --------
Movements in the balance since the prior year end can be seen as
follows:
Goodwill Goodwill Headroom Headroom
balance Exchange balance on impairment on impairment
1 January Additions differences Impairment 31 December analysis analysis
2017 2017 2017 2017 2017 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- --------- ------------ ---------- ------------- -------------- --------------
UK & Europe
Justice &
Immigration 49.6 - - - 49.6 127.4 126.3
Health 60.6 - - - 60.6 19.4 3.2
Direct Services
& Europe 66.5 - 0.8 - 67.3 71.5 99.0
Americas 277.9 - (24.9) - 253.0 151.8 66.5
AsPac 112.4 - (1.6) - 110.8 231.6 203.2
Middle East 10.9 - (0.9) - 10.0 145.6 114.7
---------------------- ---------- --------- ------------ ---------- ------------- -------------- --------------
577.9 - (26.6) - 551.3 747.3 612.9
---------------------- ---------- --------- ------------ ---------- ------------- -------------- --------------
Included above is the detail of the headroom on the CGUs
existing at the year end which reflects where future discounted
cash flows are greater than the underlying assets and includes all
relevant cash flows, including where provisions have been made for
future costs and losses.
The key assumptions applied in the impairment review are set out
below:
Terminal Terminal
Discount Discount growth growth
rate rate rates rates
2017 2016* 2017 2016
% % % %
---------------------------- -------- -------- ----------- --------
UK & Europe
Justice & Immigration 10.4 11.2 2.0 2.0
Health 10.4 11.2 2.0 2.0
Direct Services & Europe 11.7 12.5 2.0 2.0
Americas 10.5 12.3 2.4 2.4
AsPac 9.7 11.2 2.4 2.4
Middle East 10.8 10.7 2.5 2.2
---------------------------- -------- -------- ----------- --------
* Restated based on rates applied in impairment testing calculations in the prior year.
Discount rate
Pre-tax discount rates, derived from the Group's post-tax
weighted average cost of capital have been used in discounting the
projected cash flows. These rates are reviewed annually with
external advisers and are adjusted for risks specific to the market
in which the CGU operates.
Short term growth rates
The annual impairment test is performed immediately prior to the
year end, based initially on five year cash flow forecasts approved
by senior management. Short term revenue growth rates used in each
CGU five year plan are based on internal data regarding our current
contracted position, the pipeline of opportunities and forecast
growth for the relevant market.
Short term profitability and cash conversion is based on our
historic experiences and a level of judgement is applied to
expected changes in both. Where businesses have been poor
performers in recent history, turnaround has only been assumed
where a detailed and achievable plan is in place and all forecasts
include cash flows relating to contracts where onerous contract
provisions have been made.
Terminal growth rates
The calculations include a terminal value based on the
projections for the fifth year of the short term plan, with a
growth rate assumption applied which extrapolates the business into
perpetuity. The terminal growth rates are based on long term
inflation rates of the geographic market in which the CGUs operate
and therefore do not exceed the average long term growth rates
forecast for the individual markets. These are provided by external
sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption,
a 1% movement in discount rates and a 1% movement in terminal
growth rates are considered to be reasonably possible. The only CGU
impacted by a reasonably possible change in a key assumption is
Health where a 1% increase in discount rates and a 1% decrease in
terminal growth rates would result in an impairment of GBP4.2m. The
breakeven point of Health goodwill impairment is a 0.8% increase in
discount rate combined with a 0.8% decrease in terminal growth
rate. A reduction of GBP2.0m in the terminal year cash flows for
the Health CGU would lead to the recoverable amount no longer
exceeding the carrying value. Any additional reduction in terminal
year cash flows would result in an impairment of the goodwill of
this CGU.
15. Analysis of Net Debt
At Reclassified Non At 31
1 January Cash as held Exchange cash December
2017 flow for sale Acquisitions* Disposals differences movements 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ---------- ------ ------------ ------------- --------- ------------ ----------- ---------
Loans payable (299.9) 3.8 - - - 25.4 (0.8) (271.5)
Obligations under
finance leases (28.2) 12.6 - - - 0.1 (4.7) (20.2)
-------------------- ---------- ------ ------------ ------------- --------- ------------ ----------- ---------
Liabilities arising
from financing
activities (328.1) 16.4 - - - 25.5 (5.5) (291.7)
Cash and cash
equivalents 177.8 (57.3) - 1.5 (7.1) (2.8) - 112.1
Loan receivables 22.9 (0.6) - - - - 3.4 25.7
Derivatives relating
to Net Debt 18.1 - - - - (5.3) - 12.8
-------------------- ---------- ------ ------------ ------------- --------- ------------ ----------- ---------
Net Debt (109.3) (41.5) - 1.5 (7.1) 17.4 (2.1) (141.1)
-------------------- ---------- ------ ------------ ------------- --------- ------------ ----------- ---------
At Reclassified Non At 31
1 January Cash as held Exchange cash December
2016 flow for sale Acquisitions* Disposals differences movements 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ---------- ------- ------------ ------------- --------- ------------ ----------- ---------
Loans payable (381.9) 135.8 - - - (52.8) (1.0) (299.9)
Obligations under
finance leases (43.8) 16.7 (0.2) - - (0.4) (0.5) (28.2)
------------------- ---------- ------- ------------ ------------- --------- ------------ ----------- ---------
Liabilities arising
from financing
activities (425.7) 152.5 (0.2) - - (53.2) (1.5) (328.1)
Cash and cash
equivalents 323.6 (153.7) - 0.1 - 7.8 - 177.8
Loan receivables 19.9 - - - - 0.1 2.9 22.9
Derivatives
relating
to Net Debt 14.6 - - - - 3.5 - 18.1
------------------- ---------- ------- ------------ ------------- --------- ------------ ----------- ---------
Net Debt (67.6) (1.2) (0.2) 0.1 - (41.8) 1.4 (109.3)
------------------- ---------- ------- ------------ ------------- --------- ------------ ----------- ---------
* Acquisitions represent the net cash / (debt) acquired on acquisition.
16. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- -------- --------- --------- ------ ------
At 1 January 2017 45.1 15.2 220.2 141.2 421.7
Arising on acquisition 1.7 - - - 1.7
Eliminated on disposal
of subsidiary - - - (0.5) (0.5)
Charged to income statement
- exceptional 4.5 2.7 - 0.1 7.3
Charged to income statement
- other 17.5 2.4 62.0 8.6 90.5
Released to income
statement - exceptional (0.9) (1.3) (0.4) (10.5) (13.1)
Released to income
statement - other (4.9) (1.4) (43.0) (9.0) (58.3)
Utilised during the
year (4.9) (3.1) (69.3) (5.0) (82.3)
Unwinding of discount - - 1.3 - 1.3
Exchange differences (2.4) (0.2) (2.6) (3.1) (8.3)
---------------------------- -------- --------- --------- ------ ------
At 31 December 2017 55.7 14.3 168.2 121.8 360.0
---------------------------- -------- --------- --------- ------ ------
Analysed as:
Current 17.1 4.4 68.0 59.0 148.5
Non current 38.6 9.9 100.2 62.8 211.5
---------------------------- -------- --------- --------- ------ ------
55.7 14.3 168.2 121.8 360.0
---------------------------- -------- --------- --------- ------ ------
Contract provisions relate to onerous contracts which will be
utilised over the life of each individual contract, up to a maximum
of 7 years from the balance sheet date. The present value of the
estimated future cash outflow required to settle the contract
obligations as they fall due over the respective contracts has been
used in determining the provision. The individual provisions are
discounted where the impact is assessed to be significant. Discount
rates used are calculated based on the estimated risk free rate of
interest for the region in which the provision is located and
matched against the ageing profile of the provision. In 2017,
additional charges have been made in respect of future losses on a
number of onerous contracts totalling GBP62.0m. This increase
related to revisions to existing OCPs of GBP61.5m and a new
provision raised on one contract totalling GBP0.5m.
17. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and
bonding facilities of its joint ventures and associates up to a
maximum value of GBP4.3m (2016: GBP20.4m). The actual commitment
outstanding at 31 December 2017 was GBP4.3m (2016: GBP17.9m).
The Company and its subsidiaries have provided certain
guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of
business. The total commitment outstanding as at 31 December 2017
was GBP227.1m (2016: GBP252.1m).
As we have disclosed before, we are under investigation by the
Serious Fraud Office. In November 2013, the UK's Serious Fraud
Office announced that it had opened an investigation, which remains
ongoing, into the Group's Electronic Monitoring Contract.
We are cooperating fully with the Serious Fraud Office's
investigation but it is not possible to predict the outcome.
However, a description of the range of possible outcomes in the
event that the Serious Fraud Office decides to prosecute the
individuals and /or the Serco entities involved will be disclosed
in the Principal Risks and Uncertainties section of the Group's
Annual Report and Accounts.
The Group is aware of other claims and potential claims which
involve or may involve legal proceedings against the Group. The
Directors are of the opinion, having regard to legal advice
received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material
effect on the Group's financial position.
18. Defined benefit schemes
Characteristics
The Group contributes to defined benefit schemes for qualifying
employees of its subsidiaries in the UK and Europe. The normal
contributions expected to be paid during the financial year ending
31 December 2018 are GBP7.1m (2017: GBP9.7m).
Among our non contract specific schemes, the largest is the
Serco Pension and Life Assurance Scheme (SPLAS). The most recent
full actuarial valuation of this scheme was undertaken as at 5
April 2015 and resulted in an actuarially assessed deficit of
GBP4.0m for funding purposes. Pension obligations are valued
separately for accounting and funding purposes and there is often a
material difference between these valuations. As at 31 December
2017 the estimated actuarial deficit of SPLAS was GBP33.7m (2016:
GBP42.6m) based on the actuarial assessment on the funding basis
whereas the accounting valuation resulted in an asset of GBP41.8m.
The primary reason a difference arises is that pension scheme
accounting requires the valuation to be performed on the basis of a
best estimate whereas the funding valuation used by the trustees
makes more prudent assumptions. A revised schedule of contributions
for SPLAS was agreed during the year, with 29% of pensionable
salaries due to be paid from 1 November 2017 to 31 October 2018 and
28% from 1 November 2018 to 18 December 2022. An additional
shortfall contribution of GBP1.0m is due by 30 April 2018 and four
further payments of GBP0.5m payable at the end of each April
through to 2022.
Events in the year
In June 2017 the Trustees of SPLAS entered into a bulk annuity
purchase whereby an insurer will fund future benefit payments to
the relevant members, commonly referred to as a "buy-in". The
liability to pay the members remains with SPLAS and therefore the
pension scheme will continue to include the relevant pension
liabilities. However, but an insurance asset is held at fair value,
which, in line with IAS19 for qualifying insurance policies, is
deemed to be equal to the present value of the related obligations.
This removes the risk of longevity and investment movements for
this portion of the scheme on a funding basis, and also removes the
accounting risk of movements in underlying assumptions on the
liabilities. Of the total remeasurements recognised in the
statement of other comprehensive income in the year ended 31
December 2017 of GBP106.5m, GBP95.0m related to the revaluation of
the assets and liabilities as a result of this transaction. Whilst
the impact substantially reduced the asset on an IAS19 valuation
basis, on an actuarial basis the transaction decreased the deficit
of the scheme by approximately GBP12m. As a result of the
transaction, the scheme also exited a longevity swap arrangement
early, at a cost borne by the scheme of GBP7.5m.
In 2016, certain active former members of SPLAS on a specific
contract were transferred back to a Government backed pension
scheme they had previously been members of. This resulted in
contribution savings due to lower rates required under the
Government Serco scheme and a curtailment gain of GBP1.9m was
recognised in 2016. In 2017 certain of these deferred members
transferred their accrued benefits from SPLAS to the Government
scheme. The arrangements for this process had been made by a
planned transfer on a bulk basis, which resulted in settlement
accounting being applied in 2016 and an exceptional charge booked
at the time. However, it was subsequently agreed that the
Government would allow the transfer of members on an individual
basis and as the members are taking an existing option to take an
individual transfer out of the scheme, settlement accounting was no
longer applicable following the change of arrangements in 2017. The
impact of the individuals transferring out is now treated as a
change in actuarial assumptions and impacts on reserves, not
through the income statement. The remaining provision of GBP10.3m
was therefore reversed through exceptional items in 2017. The
impact of the transfer resulted in a charge to other comprehensive
income of GBP5.1m, included within the effect of experience
assumptions.
In November 2017 certain members of SPLAS agreed to transfer
their active membership to defined contribution schemes and a
curtailment gain of GBP2.0m is recognised in the year in the
Group's income statement.
Values recognised in total comprehensive income in the year
The amounts recognised in the financial statements for the year
are analysed as follows:
Contract Non contract
specific specific Total
2017 2017 2017
Recognised in the income statement GBPm GBPm GBPm
------------------------------------ --------- ------------ ------
Current service cost - employer 1.0 7.6 8.6
Past service cost - 0.3 0.3
Curtailment gain recognised - (2.0) (2.0)
Administrative expenses and taxes - 5.3 5.3
------------------------------------ --------- ------------ ------
Recognised in arriving at operating
profit 1.0 11.2 12.2
------------------------------------ --------- ------------ ------
Interest income on scheme assets
- employer (0.4) (41.4) (41.8)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities
- employer 0.5 37.6 38.1
------------------------------------ --------- ------------ ------
Finance income - (3.8) (3.8)
------------------------------------ --------- ------------ ------
Contract Non contract
specific specific Total
2017 2017 2017
Included within the SOCI GBPm GBPm GBPm
--------------------------------- --------- ------------ -------
Actual return on scheme assets 11.0 (50.7) (39.7)
Less: interest income on scheme
assets (0.4) (41.4) (41.8)
--------------------------------- --------- ------------ -------
10.6 (92.1) (81.5)
Effect of changes in demographic
assumptions - 1.0 1.0
Effect of changes in financial
assumptions (10.3) (21.3) (31.6)
Effect of experience adjustments 0.8 4.8 5.6
--------------------------------- --------- ------------ -------
Remeasurements 1.1 (107.6) (106.5)
--------------------------------- --------- ------------ -------
Change in franchise adjustment (0.2) - (0.2)
Change in members' share (0.4) - (0.4)
--------------------------------- --------- ------------ -------
Actuarial losses on reimbursable
rights (0.6) - (0.6)
--------------------------------- --------- ------------ -------
Total pension gain recognised in
the SOCI 0.5 (107.6) (107.1)
--------------------------------- --------- ------------ -------
Contract Non contract
specific specific Total
2016 2016 2016
Recognised in the income statement GBPm GBPm GBPm
------------------------------------ --------- ------------ ------
Current service cost - employer 0.4 7.4 7.8
Past service cost - 0.4 0.4
Curtailment loss recognised - (1.9) (1.9)
Administrative expenses and taxes - 5.4 5.4
------------------------------------ --------- ------------ ------
Recognised in arriving at operating
profit 0.4 11.3 11.7
------------------------------------ --------- ------------ ------
Interest income on scheme assets
- employer (0.1) (49.0) (49.1)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities
- employer 0.2 44.3 44.5
------------------------------------ --------- ------------ ------
Finance income - (4.7) (4.7)
------------------------------------ --------- ------------ ------
Contract Non contract
specific specific Total
2016 2016 2016
Included within the SOCI GBPm GBPm GBPm
--------------------------------- --------- ------------ -------
Actual return on scheme assets 0.9 285.2 286.1
Less: interest income on scheme
assets (0.2) (49.0) (49.2)
--------------------------------- --------- ------------ -------
0.7 236.2 236.9
Effect of changes in demographic
assumptions - 26.2 26.2
Effect of changes in financial
assumptions (3.5) (279.3) (282.8)
Effect of experience adjustments - 28.7 28.7
--------------------------------- --------- ------------ -------
Remeasurements (2.8) 11.8 9.0
--------------------------------- --------- ------------ -------
Change in franchise adjustment 1.7 - 1.7
Change in members' share 1.2 - 1.2
--------------------------------- --------- ------------ -------
Actuarial losses on reimbursable
rights 2.9 - 2.9
--------------------------------- --------- ------------ -------
Total pension gain recognised in
the SOCI 0.1 11.8 11.9
--------------------------------- --------- ------------ -------
Balance sheet values
The assets and liabilities of the schemes at 31 December
are:
Contract Non contract
specific specific Total
2017 2017 2017
Scheme assets at fair value GBPm GBPm GBPm
------------------------------------ --------- ------------ ---------
Equities 9.9 46.3 56.2
Bonds except LDIs 2.9 20.8 23.7
LDIs - 709.8 709.8
Gilts 0.2 - 0.2
Property 1.6 - 1.6
Cash and other 2.8 3.2 6.0
Annuity policies - 587.5 587.5
------------------------------------ --------- ------------ ---------
Fair value of scheme assets 17.4 1,367.6 1,385.0
Present value of scheme liabilities (23.4) (1,341.3) (1,364.7)
------------------------------------ --------- ------------ ---------
Net amount recognised (6.0) 26.3 20.3
Franchise adjustment* 3.6 - 3.6
Members' share of deficit 2.4 - 2.4
------------------------------------ --------- ------------ ---------
Net retirement benefit asset - 26.3 26.3
------------------------------------ --------- ------------ ---------
Net pension liability - (15.5) (15.5)
Net pension asset - 41.8 41.8
------------------------------------ --------- ------------ ---------
Net retirement benefit asset - 26.3 26.3
Deferred tax liabilities - (2.5) (2.5)
------------------------------------ --------- ------------ ---------
Net retirement benefit asset (after
tax) - 23.8 23.8
------------------------------------ --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Contract Non contract
specific specific Total
2016 2016 2016
Scheme assets at fair value GBPm GBPm GBPm
------------------------------------ --------- ------------ ---------
Equities 3.3 43.3 46.6
Bonds except LDIs 0.7 20.2 20.9
LDIs - 1,390.6 1,390.6
Gilts - 72.4 72.4
Property 0.6 - 0.6
Cash and other 1.2 4.2 5.4
Annuity policies - 20.0 20.0
------------------------------------ --------- ------------ ---------
Fair value of scheme assets 5.8 1,550.7 1,556.5
Present value of scheme liabilities (12.0) (1,418.0) (1,430.0)
------------------------------------ --------- ------------ ---------
Net amount recognised (6.2) 132.7 126.5
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.5 - 2.5
------------------------------------ --------- ------------ ---------
Net retirement benefit asset - 132.7 132.7
------------------------------------ --------- ------------ ---------
Net pension liability - (17.7) (17.7)
Net pension asset - 150.4 150.4
------------------------------------ --------- ------------ ---------
Net retirement benefit asset - 132.7 132.7
Deferred tax liabilities - (17.6) (17.6)
------------------------------------ --------- ------------ ---------
Net retirement benefit asset (after
tax) - 115.1 115.1
------------------------------------ --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 92%
of total liabilities and 94% of total assets of the defined benefit
pension scheme in which the Group participates. The significant
actuarial assumptions with regards to the determination of the
defined benefit obligation are set out below.
The average duration of the benefit obligation at the end of the
reporting period is 17.9 years (2016: 17.7 years).
2017 2016
Main assumptions % %
----------------------------- --------------- ---------------
Rate of salary increases 2.70 2.80
Rate of increase in pensions 2.30 (CPI) 2.30 (CPI)
in payment and 3.00 (RPI) and 3.30 (RPI)
Rate of increase in deferred 2.30 (CPI) 2.30 (CPI)
pensions and 3.00 (RPI) and 3.30 (RPI)
Inflation assumption 2.20 (CPI) 2.30 (CPI)
and 3.20 (RPI) and 3.30 (RPI)
Discount rate 2.50 2.70
----------------------------- --------------- ---------------
2017 2016
Post retirement mortality years years
--------------------------- ------ ------
Current pensioners at 65 -
male 22.5 22.5
Current pensioners at 65 -
female 25.1 25.0
Future pensioners at 65 -
male 24.3 24.2
Future pensioners at 65 -
female 26.9 26.9
--------------------------- ------ ------
Sensitivity analysis is provided below, based on reasonably
possible changes of the assumptions occurring at the end of the
reporting period, assuming all other assumptions are held constant.
The sensitivities have been derived in the same manner as the
defined benefit obligation as at 31 December 2017 where the defined
benefit obligation is estimated using the Projected Unit Credit
method. Under this method each participant's benefits are
attributed to years of service, taking into consideration future
salary increases and the scheme's benefit allocation formula. Thus,
the estimated total pension to which each participant is expected
to become entitled at retirement is broken down into units, each
associated with a year of past or future credited service. The
defined benefit obligation as at 31 December 2017 is calculated on
the actuarial assumptions agreed as at that date. The sensitivities
are calculated by changing each assumption in turn following the
methodology above with all other things held constant. The change
in the defined benefit obligation from updating the single
assumption represents the impact of that assumption on the
calculation of the defined benefit obligation.
2017 2016
GBPm GBPm
-------------------------------- ------- -------
Discount rate - 0.5% increase (107.9) (116.5)
Discount rate - 0.5% decrease 122.0 132.5
Inflation - 0.5% increase 83.4 106.1
Inflation - 0.5% decrease (78.0) (87.6)
Rate of salary increase -
0.5% increase 3.6 7.8
Rate of salary increase -
0.5% decrease (3.5) (7.4)
Mortality - one year age rating 41.6 44.2
-------------------------------- ------- -------
19. Related party transactions
Transactions between the Company and its wholly owned
subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions
between the Group and its joint venture undertakings and associates
are disclosed below.
Transactions
During the year, Group companies entered into the following
transactions with joint ventures and associates:
Current Non current
outstanding outstanding
at 31 at 31
Transactions December December
2017 2017 2017
GBPm GBPm GBPm
------------------------------------ ------------ ------------ ------------
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 7.1 0.5 -
Other
Dividends received - joint ventures 11.1 - -
Dividends received - associates 17.1 - -
Receivable from consortium for tax
- joint ventures 2.4 5.3 -
Total 38.2 5.9 -
------------------------------------ ------------ ------------ ------------
Joint venture receivable and loan amounts outstanding have
arisen from transactions undertaken during the general course of
trading, are unsecured, and will be settled in cash. Interest
arising on loans is based on LIBOR, or its equivalent, with an
appropriate margin. No guarantee has been given or received. The
only loan amounts owed by joint ventures or associates related to a
single entity which have been provided for in full.
Current Non current
outstanding outstanding
at 31 at 31
Transactions December December
2016 2016 2016
GBPm GBPm GBPm
------------------------------------ -------------- ------------ ------------
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 6.2 0.5 -
Other
Dividends received - joint ventures 20.4 - -
Dividends received - associates 19.6 - -
Receivable from consortium for tax
- joint ventures 3.2 7.7 -
------------------------------------ -------------- ------------ ------------
Total 49.9 8.3 -
------------------------------------ -------------- ------------ ------------
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions
with the Group during the year other than service contracts and
Directors' liability insurance.
The remuneration of the key management personnel of the Group is
set out below in aggregate for each of the categories specified in
IAS24 Related Party Disclosures:
2017 2016
GBPm GBPm
----------------------------- ----- -----
Short-term employee benefits 12.5 11.9
Share based payment expense 6.2 4.7
----------------------------- ----- -----
18.7 16.6
----------------------------- ----- -----
The key management personnel comprise the Executive Directors,
Non-Executive Directors and members of the Executive Committee
(2017: 23 individuals, 2016: 20 individuals).
Aggregate directors' remuneration
The total amounts for directors' remuneration in accordance with
Schedule 5 to the Accounting Regulations were as follows:
2017 2016
GBPm GBPm
--------------------------------------------- ----- -----
Salaries, fees, bonuses and benefits in
kind 5.5 5.6
Amounts receivable under long-term incentive
schemes 6.3 5.6
Gains on exercise of share options 0.1 -
--------------------------------------------- ----- -----
11.9 11.2
--------------------------------------------- ----- -----
None of the directors are members of the company's defined
benefit pension scheme.
One director is a member of the money purchase scheme.
20. Notes to the Condensed Consolidated Cash Flow Statement
2017 2016
Before 2017 Before 2016
exceptional Exceptional 2017 exceptional Exceptional 2016
items items Total items items Total
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------------ ------------ ------ ------------ ------------ -------
Operating profit for
the year - continuing
operations 49.6 (19.6) 30.0 98.5 (56.3) 42.2
Operating loss for the
year - discontinued
operations - - - (3.3) (14.2) (17.5)
Operating profit for
the year 49.6 (19.6) 30.0 95.2 (70.5) 24.7
Adjustments for:
Share of profits in
joint ventures and associates (27.3) - (27.3) (33.4) - (33.4)
Share based payment
expense 11.4 - 11.4 9.7 - 9.7
Exceptional impairment
of goodwill - - - - 17.8 17.8
Exceptional impairment
of property, plant and
equipment - - - - (0.8) (0.8)
Exceptional impairment
of intangible assets - 8.9 8.9 - 0.3 0.3
Impairment and write
down of intangible assets (0.1) - (0.1) 0.7 - 0.7
Impairment of property,
plant and equipment - - - 0.7 - 0.7
Depreciation of property,
plant and equipment 24.3 - 24.3 24.8 - 24.8
Amortisation of intangible
assets 25.8 - 25.8 26.2 - 26.2
Exceptional profit on
disposal of subsidiaries
and operations - (0.3) (0.3) - (0.1) (0.1)
Loss on disposal of
property, plant and
equipment 0.3 - 0.3 0.4 - 0.4
Loss on disposal of
intangible assets 0.3 - 0.3 0.8 - 0.8
Non cash R&D expenditure
offset against intangible
assets (0.7) - (0.7) 0.2 - 0.2
Decrease in provisions (46.4) (9.6) (56.0) (118.4) (1.1) (119.5)
Other non cash movements 0.1 - 0.1 0.4 - 0.4
Total non cash items (12.3) (1.0) (13.3) (87.9) 16.1 (71.8)
------------------------------- ------------ ------------ ------ ------------ ------------ -------
Operating cash inflow
/ (outflow) before movements
in working capital 37.3 (20.6) 16.7 7.3 (54.4) (47.1)
Decrease in inventories 3.7 - 3.7 1.3 - 1.3
Decrease in receivables 8.1 4.5 12.6 59.0 13.9 72.9
Decrease in payables (20.8) (16.4) (37.2) (84.0) 0.6 (83.4)
------------------------------- ------------ ------------ ------ ------------ ------------ -------
Movements in working
capital (9.0) (11.9) (20.9) (23.7) 14.5 (9.2)
------------------------------- ------------ ------------ ------ ------------ ------------ -------
Cash generated by operations 28.3 (32.5) (4.2) (16.4) (39.9) (56.3)
Tax paid (11.4) - (11.4) (5.6) - (5.6)
Non cash R&D expenditure (0.2) - (0.2) (0.4) - (0.4)
------------------------------- ------------ ------------ ------ ------------ ------------ -------
Net cash (outflow) /
inflow from operating
activities 16.7 (32.5) (15.8) (22.4) (39.9) (62.3)
------------------------------- ------------ ------------ ------ ------------ ------------ -------
Additions to property, plant and equipment during the year
amounting to GBP4.7m (2016: GBP0.5m) were financed by new finance
leases.
21. Post balance sheet events
On 26 January 2018, the Group acquired 100% of the issued share
capital of BTP Systems, LLC (BTP), for consideration of US Dollar
$20.5m / GBP14.5m in cash. BTP provides satellite communications
(SATCOM), radar modernization, operations and maintenance and
sustainment services that enable customers to extend the lives of
existing systems and achieve phased upgrades with new technology to
enhance operational capability. BTP specializes in areas including
obsolescence engineering, systems engineering services, test
equipment and design, and field engineering services, and maintains
a near-field and compact antenna test range at their Ludlow, MA
headquarters. BTP's expertise spans shipboard and submarine SATCOM
antenna systems, MILSTAR command post antennas and radar antennas.
No acquisition related costs were incurred. The acquisition is
expected to increase the Group's market share. The financial
results and impact of this transaction have not been recognised in
these Condensed Consolidated Financial Statements, the operating
results, assets and liabilities will be recognised with effect from
26 January 2018.
Provisional
fair value Provisional
US Dollar fair value
$m GBPm
------------------------------- ----------- -----------
Goodwill 13.6 9.6
Acquisition related intangible
assets 4.4 3.1
Property, plant and equipment 0.4 0.3
Inventories 0.5 0.4
Trade and other receivables 2.3 1.6
Cash and cash equivalents 1.7 1.2
Trade and other payables (2.4) (1.7)
Acquisition date fair value of
consideration transferred 20.5 14.5
-------------------------------- ----------- -----------
The Group signed a revised Business Purchase Agreement (BPA) on
13 February 2018 with the Special Managers and Provisional
Liquidators acting on behalf of the relevant Carillion plc
subsidiaries to acquire a portfolio of selected UK health
facilities management contracts. The portfolio has annual revenues
of approximately GBP90m and a weighted average remaining term of 14
years. Upon the receipt by the Special Managers and Provisional
Liquidators of the requisite third party consents, each individual
contract will be transferred to Serco on a cash-free, debt-free
basis, with the consideration to be paid in instalments and to be
satisfied using Serco's existing financing facilities. If all the
contracts are transferred to Serco under the revised BPA process,
the total consideration payable would be GBP29.7m. The
consideration payable is lower than the amount of GBP47.7m
announced on 13 December 2017 in respect of substantially the same
contracts that were subject to the initial BPA signed with
Carillion plc at that date. The change in consideration reflects
the Group's re-evaluation of potential liabilities, indemnities,
warranties and the additional working capital investment required
as a result of Carillion's liquidation. The financial effects of
this transaction have not been recognised at 31 December 2017. As
consents are required for each individual contract to be
transferred and therefore acquired, at the time the financial
statements were authorised for issue, no legal transfer or control
of assets had taken place and so no disclosures have been made in
respect of the assets and liabilities being acquired. The fair
values of the assets and liabilities will be determined at the date
when contracts are acquired. It is also not yet possible to provide
detailed information about each class of acquired receivables and
any contingent liabilities in respect of the acquired
contracts.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GMGZZMMZGRZZ
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February 22, 2018 02:01 ET (07:01 GMT)
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