TIDMSRP
RNS Number : 2932V
Serco Group PLC
06 August 2020
2020 half year results
6 August 2020
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Change Change
at reported at constant
Six months ended 30 June 2020 2019 currency currency
====================================== =========== =========== ============ ============
Revenue (1) GBP1,822.2m GBP1,475.5m +24% +24%
-------------------------------------- ----------- ----------- ------------ ------------
Underlying Trading Profit (UTP) (2) GBP77.6m GBP50.6m +53% +53%
Reported Operating Profit (i.e. after
exceptional items) (2) GBP89.1m GBP17.2m +418% +417%
-------------------------------------- ----------- ----------- ------------ ------------
Underlying Earnings Per Share (EPS),
diluted (3) 3.86p 2.62p +47% +46%
Reported EPS (i.e. after exceptional
items), diluted 5.66p (0.15p)
Free Cash Flow (4) GBP80.9m GBP0.4m
-------------------------------------- ----------- -----------
Adjusted Net Debt, 2019 pro-forma (5) GBP142.9m GBP200.6m
Reported Net Debt (6) GBP502.8m GBP206.7m
-------------------------------------- ----------- -----------
Very strong first half; guidance maintained for 2020.
Highlights
-- Revenue (1) : grew by 24% to GBP1.8bn, with organic growth of 15% and
a 9% uplift from the acquisition of the Naval Systems Business Unit of
Alion in North America (NSBU).
-- Underlying Trading Profit (2) : increased by 53% to GBP78m, with NSBU
adding 20%. Group margin increased from 3.4% to 4.3%.
-- Reported Operating Profit: increased by GBP72m to GBP89m as a result of
the strong increase in underlying profit and exceptional items.
-- Underlying EPS : increased by 47%, reflecting the growth in Underlying
Trading Profit, partially offset by higher interest and tax.
-- Free Cash Flow(4) : improved to GBP81m, or GBP32m excluding the deferral
of GBP49m of tax payments.
-- Adjusted Net Debt(5) : fell GBP58m to GBP143m. Underlying leverage stands
at 0.7x EBITDA or 0.9x excluding tax deferrals.
-- Order Intake: strong at GBP1.9bn; >100% book-to-bill. Approximately 60%
of the order intake related to existing contracts being rebid or extended
and 40% was new work.
-- Order Book: increased from GBP14.1bn at the end of 2019 to GBP14.5bn.
-- Pipeline: value of larger new bid opportunities has reduced from GBP4.9bn
to GBP4.1bn, reflecting recent contract wins.
-- Government support: subject to circumstances at the time our intention
is to pay taxes deferred by government by year end; we are not planning
to apply for UK government re-employment incentives.
Rupert Soames, Serco Group Chief Executive, said:
"Operationally, the first half has been dominated by the rapid
adjustments which have had to be made in the way we deliver our
services as a consequence of Covid-19. The response of colleagues
has been exemplary and they have worked throughout with the same
courage, dedication and commitment as their public-sector
co-workers on the front line in prisons, hospitals, trains,
ferries, defence establishments and immigration facilities. As a
result of the significant investments we have made in recent years,
our management teams, business processes and systems have shown
themselves to be capable of responding at great speed and
effectiveness to governments' needs. We commissioned the UK's first
drive-through test centre in two days; in Australia accommodation
was provided for more than 1,300 quarantined travellers on one
week's notice; and as part of the NHS Test & Trace programme we
mobilised 10,500 contact tracers in a four-week period. Worldwide,
we have mustered over 15,000 full and part-time people to help
governments respond to the crisis. We think that these and other
examples will reinforce in our customers' minds the value Serco can
bring and the need more generally of governments to have vibrant,
resilient and secure supply chains that can support public services
in good times and bad.
Financially, the performance in the first half has been
exceptionally strong, largely as a result of contract wins in 2019
and the acquisition of the Naval Systems Business Unit of Alion
last August; Covid-19 has had little effect on profits; although
there have been some dramatic impacts, positive and negative, on
individual contracts, in aggregate the "ups" on profits have
balanced the "downs". Revenues were up 24% and Underlying Trading
Profit increased by 53%; Reported Operating Profit increased from
GBP17m to GBP89m. Pleasingly, at a time when a number of tenders
have been delayed as a result of the crisis, our order intake was
once again ahead of our revenues giving us a positive book-to-bill
ratio. Free Cash Flow increased by GBP80m year-on-year, and
Adjusted Net Debt fell by GBP58m to GBP143m; cashflow benefitted
from tax payment deferrals of around GBP49m; excluding the
temporary benefit of these deferrals, our underlying leverage would
stand at 0.9x EBITDA, slightly below our target range of 1-2x.
Subject to trading in the second half, it would be our intention to
pay taxes deferred by the end of the year, even if not strictly
required to do so, and we do not intend to take advantage of the UK
government's GBP1,000 per person re-employment incentive as we do
not think it right that we should take money from the taxpayer to
employ people who will be delivering services paid for by the
taxpayer.
Serco's strategy of focusing on supporting governments around
the world in the delivery of public services is working well for
us. In the Outlook sections we describe some of our thinking on how
the current crisis will change our business in the years ahead as
governments grapple with conflicting needs: to help people get back
to work; to build quality and resilience into public services; to
tame ballooning deficits. In other words, how to deliver more, and
better, for less - an approach we have been promoting since
2014.
We re-instated guidance for 2020 in our trading update on 17(th)
June, saying that we expected revenue to be around GBP3.7bn (2019:
GBP3.2bn), and Underlying Trading Profit of GBP135-GBP150m (2019:
GBP120m). Nothing in recent weeks has changed our view, although,
as set out in our Outlook section, Covid-19 has introduced a
greater degree of risk around our guidance than would normally be
the case."
FY 2020 guidance as Movement to prior guidance
at 6(th) August 2020 as at 17(th) June 2020
Revenue GBP3.7bn Unchanged
Organic sales growth 9% Unchanged
Underlying Trading Profit GBP135m-GBP150m Unchanged
Net Finance Costs GBP27m Unchanged
Underlying effective tax rate 25% Unchanged
Free Cash Flow Broadly similar to 2019 Unchanged
at +GBP62m
Adjusted Net Debt GBP200m Unchanged
Notes: Cash flow and net debt guidance assume repayment of
deferred tax by the end of the year, where possible. The guidance
uses an average GBP:USD exchange rate of 1.28 in 2020 and GBP:AUD
of 1.88.
For further information please contact Serco:
Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718
195 074 or email: paul.checketts@serco.com
Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898
550 or email: marcus.deville@serco.com
Presentation:
A virtual presentation for institutional investors and analysts
will be held today starting at 09.30am. 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) 207 192 8338 (USA:
+1 646 741 3167) with participant pin code 5675917.
Notes to summary table of financial results:
(1) Revenue is as defined under IFRS, which excludes Serco's
share of revenue of its joint ventures and associates. 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 six months ended 30 June 2020 into sterling at the
average exchange rates for the six months ended 30 June 2019.
(2) Trading profit is defined as IFRS operating profit excluding
amortisation of intangibles arising on acquisition as well as
exceptional items. 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
historic Contract & Balance Sheet Review adjustments -
principally onerous contract provision (OCP) releases or charges -
and other material one-time items. A reconciliation of Underlying
Trading Profit to Trading Profit and Reported Operating Profit is
as follows:
Six months ended 30 June 2019
GBPm 2020
==================================================== ===== ======
Underlying Trading Profit 77.6 50.6
Include: non-underlying items
Contract & Balance Sheet Review adjustments 2.9 -
---------------------------------------------------- ----- ------
Trading Profit 80.5 50.6
Amortisation of intangibles arising on acquisition (5.0) (2.3)
---------------------------------------------------- ----- ------
Operating Profit Before Exceptional Items 75.5 48.3
Operating Exceptional Items 13.6 (31.1)
---------------------------------------------------- ----- ------
Reported Operating Profit (after exceptional items) 89.1 17.2
---------------------------------------------------- ----- ------
(3) Underlying EPS reflects the Underlying Trading Profit
measure after deducting 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, the capital element of lease payments
and net capital expenditure on tangible and intangible asset
purchases.
(5) Adjusted Net Debt is an additional non-IFRS Alternative
Performance Measure (APM) used by the Group. This measure more
closely aligns with the covenant measure for the Group's financing
facilities than Reported Net Debt because it excludes all lease
liabilities including those newly recognised under IFRS16. A pro
forma measure of Adjusted Net Debt is also presented for 30 June
2019; this removes the GBP138.7m of net proceeds of the Equity
Placing that were received in May that were subsequently used to
fund the NSBU acquisition.
(6) Reported Net Debt includes all lease liabilities including
those recognised under IFRS16. Reported Net Debt in June 2019 also
includes the GBP138.7m of net proceeds of the Equity Placing that
were received in May and subsequently used to fund the NSBU
acquisition. A reconciliation of Adjusted Net Debt to Reported Net
Debt is as follows:
As at 30 June 30 June 31 Dec
GBPm 2020 2019 2019
============================================= ======= ======= ======
Adjusted Net Debt, pro forma 142.9 200.6 214.5
Include: net proceeds from Equity Placing
received in May 2019 n/a (138.7) n/a
Adjusted Net Debt 142.9 61.9 214.5
Include: all lease liabilities accounted for
in accordance with IFRS16 359.9 144.8 369.9
Reported Net Debt 502.8 206.7 584.4
--------------------------------------------- ------- ------- ------
Reconciliations and further detail of financial performance are
included in the Finance Review on pages 14-31. 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 34-63.
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", "could", "should", "will", "aspire", "aim",
"plan", "target", "goal", "ambition", "intend" 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;
cyber-attacks; and pandemics, epidemics or natural disasters. 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
Our reported revenue increased by GBP347m, or 24%, to GBP1,822m
(2019: GBP1,476m), with the UK & Europe, Americas and Asia
Pacific all contributing to growth, underlining the importance of
our geographic diversification. Of the 24% growth,15% (GBP221m) was
organic; the acquisition of the Naval Systems Business Unit of
Alion in North America contributed 9% (GBP130m); currency movements
were a drag of less than 1% (-GBP7m). The high level of organic
growth was mainly due to large new contracts that started in the
second half of last year, including the Asylum Accommodation and
Support Services Contracts (AASC) in the UK and the Australian
Defence Force Health Services Contract (AHSC), as well as
additional work related to Covid-19 in the second quarter. Revenues
arising directly from Covid-19 amounted to about GBP130m across new
and existing contracts, which was partially offset by declines in
reported revenue of around GBP50m in areas such as leisure (UK),
rail (UK), air traffic control & airport services (Middle
East), and driver licence administration (Canada). The net impact
of Covid-19 on our reported revenue was growth of 5%. There were,
however, also revenue declines in our Merseyrail joint venture and
in Leisure Trusts, whose revenues are not included in our
accounts.
Underlying Trading Profit (UTP) increased by GBP27m or 53% to
GBP77.6m (2019: GBP51m), with negligible net impact from currency.
The Americas, ASPAC and the UK all increased their profits
substantially; the impact of Covid-19 on profits was similar to
revenues - increases in some areas were offset by losses in others.
In the Americas, the NSBU acquisition added around GBP10m to our
profit, in line with our expectations at the time of acquisition,
and our CMS contract benefitted as the temporary uplift in volume
related work we saw last year persisted for longer than expected.
The principal driver of profit growth in the UK was the AASC
asylum-seeker contract, as the significant losses incurred during
mobilisation of the new contract in the first half of 2019 turned
to profits in the first half of 2020. The Group's Underlying
Trading Profit margin increased from 3.4% to 4.3%, due to good
operational leverage on our overheads and improved contract
profitability. The utilisation of Onerous Contract Provisions
(OCPs) fell from GBP42.1m in the first half of last year to GBP1.7m
this year. We have very nearly completed our task of managing the
GBP447m of loss-making onerous contracts identified in 2014.
Trading Profit was GBP80.5m (2019: GBP50.6m), which comprises
UTP plus a net GBP2.9m credit in contract & balance sheet
review and one-time items (2019: GBPnil).
Reported Operating Profit and exceptional costs
Reported Operating Profit of GBP89.1m (2019: GBP17.2m) was
GBP8.6m higher than Trading Profit as GBP5.0m (2019: GBP2.3m) of
amortisation of intangibles arising on acquisition was more than
offset by a net credit of GBP13.6m from exceptional operating
items, the largest portion of which related to our exit from the
Viapath pathology services joint venture. There were no exceptional
restructuring costs (2019: GBP5.1m).
Finance costs
Net Finance Costs were GBP12.7m (2019: GBP10.5m), including
GBP4.8m (2019: GBP2.4m) of interest payable on leases. On a daily
average basis, adjusted net debt was GBP283m (2019: GBP219m).
Movements in net debt are commented on below. Cash net interest
paid was GBP12.6m (2019: GBP10.5m).
Pensions
Serco's pension schemes are in a strong funding position, and
show an accounting surplus, before tax, of GBP90m (31 December
2019: GBP54m) on scheme gross assets of GBP1.6bn and gross
liabilities of GBP1.5bn. The opening net asset position led to a
net credit within net finance costs of GBP0.6m (2019: GBP1.1m). For
the Group's main scheme, the Serco Pension and Life Assurance
Scheme (SPLAS), the purchase of a bulk annuity from an insurer,
which covers around half of all scheme members, has the effect of
fully removing longevity, investment and accounting risks for those
members; the gross liability remains recognised on our balance
sheet, but there is an equal and opposite insurance asset
reflecting the perfect hedge established by the annuity.
Tax
The underlying effective tax cost was GBP17.0m (2019: GBP9.8m),
representing an underlying effective rate of 26.2% (2019: 24.4%)
based upon GBP77.6m (2019: GBP40.1m) of Underlying Trading Profit
less net finance costs of GBP12.7m (2019 GBP10.5m). The rate is
higher than the UK statutory rate of corporation tax as the tax
rates in our international divisions tend to be higher than the
UK's rate. This is only 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 rate is higher than the comparable period primarily due to an
increase in the proportion of the Group's profits arising in the US
and subject to higher rates of tax. We expect the rate to continue
at around 25%, although this is sensitive to the geographic mix of
our profits.
The tax on non-underlying items was a credit of GBP11.3m (2019:
credit of GBP1.3m); total pre-exceptional tax costs were therefore
GBP5.7m (2019: GBP8.5m). Of the GBP11.3m credit, there was a tax
impact of amortisation of intangibles arising on acquisition of
GBP0.9m and GBP10.4m related to non-underlying items. The
non-underlying items element resulted from an GBP8.0m credit due to
movements in the pension fund and a GBP2.4m credit on revaluation
of the UK deferred tax asset to reflect the future corporate tax
rate increasing from a prospective 17% to 19%. Net cash tax paid
reduced to GBP12.0m (2019: GBP17.2m) due to deferred corporation
tax payments related to Covid-19 and earlier receipts in connection
with losses sold to joint ventures and associates.
Reported result for the period
The reported result for the period, as presented at the bottom
of the Group's Condensed Consolidated Income Statement on page 34,
was a profit of GBP70.3m (2019: loss of GBP1.4m). This reflects
Operating Profit of GBP89.1m (2019: GBP17.2m), Profit Before Tax of
GBP76.4m (2019: GBP6.7m) less tax of GBP6.1m (2019: GBP8.1m).
Earnings Per Share (EPS)
Diluted Underlying EPS, which reflects the Underlying Trading
Profit measure after deducting pre-exceptional net finance costs
and related tax effects, increased by 47% to 3.86p (2019: 2.62p).
The improvement reflects the 53% increase in Underlying Trading
Profit at reported currency partially offset by higher interest and
tax. Reported EPS, which includes the impact of the other
non-underlying items and exceptional costs, was 5.66p (2019: loss
per share of 0.15p). The weighted average number of shares in
issue, after the dilutive effect of share options, increased to
1,226.5m (2019: 1,146.3m) largely as a result of having a full six
months of the additional shares issued in the placing on 28 May
2019.
Cash flow and net debt
Free cash flow was GBP80.9m (2019: GBP0.4m). Cash flow has
benefitted from a significant reduction in loss-making contracts
subject to OCPs, which is reflected in the lower rate of OCP
utilisation for in-period losses of GBP1.7m (2019: GBP29.5m,
excluding GBP12m of IFRS16-related accelerated utilisation).
Working capital benefitted from a GBP45m benefit from deferred tax
payments, principally UK VAT, but this was partially offset by the
flows related to the significant increase in revenues; debtor and
creditor days were at comparable levels to those seen in 2019; 87%
of UK supplier invoices were paid in under 30 days (2019: 87%) and
96% were paid in under 60 days (2019: 96%). Other movements within
Free Cash Flow to note; cash tax paid was lower, largely due to
deferred corporation tax payments related to Covid-19, while
capital expenditure was higher, partly due to timing effects. The
Group has not utilised any working capital financing facilities in
this or the prior year.
Our measure of Adjusted Net Debt excludes all lease liabilities,
which now total GBP360m (31 December 2019: GBP370m) the majority
relating to the AASC contract, and aligns closely with the measure
used for covenant purposes of our financing facilities. Adjusted
Net Debt at 30 June 2020 decreased to GBP142.9m (31 December 2019:
GBP214.5m, 30 June 2019 pro forma: GBP200.6m). The year-on-year
decrease in Adjusted Net Debt of GBP72m includes the free cash
inflow of GBP81m and a GBP7m net inflow from the disposal and
acquisition of subsidiaries, offset partially by a GBP4m (2019:
GBP12m) cash outflow related to exceptional items and a net adverse
currency translation effect of GBP12m, predominantly reflecting the
Group's US$ Private Placement debt.
At the closing balance sheet date, our leverage for debt
covenant purposes was 0.7x EBITDA (2019: 1.37x on an underlying pro
forma basis excluding the proceeds of the equity placing, or 0.43x
on a reported basis). This compares with the covenant requirement
for net debt to be less than 3.5x EBITDA and our normal target
range of 1-2x.
There was an unusually large difference between peak (GBP356m),
average daily (GBP283m), and period end (GBP143m) Adjusted Net
Debt. This was the result of a number of factors: first, in
response to Covid-19 and government requests we mobilised and paid
for a large amount of additional resources from March onwards, and
it took until June for the contractual paperwork and the payments
to catch up, so we carried an unusually high amount of working
capital for much of the period; second, there were delays in
processing billings on our FEMA contract in the US in Q1, which
improved in Q2; third, in Q2 we had the benefit of government tax
deferrals and the completion of the Viapath disposal, which reduced
the period-end net-debt. We have not used any financing or efforts
out of the ordinary to reduce period end net debt.
Dividends
At the time of our full year 2019 results on 26 February, we
recommended paying a final dividend in respect of the 2019
financial year. This would have been the first time for five years
we had paid a dividend, and the recommendation was based on a
strong performance in 2019 and the prospect of further good
progress in 2020. However, on 2nd April, and in response to the
Covid-19 crisis, we withdrew our guidance for the year and
announced that the payment of management bonuses would be deferred
and the dividend would be withdrawn and consideration would be
given to reinstating it when appropriate. We had decided to take
advantage of government schemes to support companies' liquidity by
deferring tax payments, and took the view that it would be
inappropriate to use that cash for anything other than its intended
purpose of protecting the financial strength and resilience of our
business.
Since then, the business has continued to perform well, we have
reinstated guidance for the year, and levels of net debt within the
business have declined. However, as described in the Outlook
section significant uncertainty remains, there is a wide range of
possible outcomes for the year, and prudence would dictate that we
continue to take advantage of government liquidity support,
probably into the fourth quarter. If circumstances allow and we can
sensibly repay the deferred taxes towards the end of the year, the
Board believes that it will then be in a position to consider
whether it should distribute all or part of what would have been
paid as the final dividend in respect of 2019. Under the same
logic, it has also decided to defer a decision on whether we should
pay any interim dividend in respect of 2020 until the fourth
quarter as well.
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.
Contract awards, order book, rebids and pipeline
Contract awards
At GBP1.9bn, the Group's order intake has been strong in the
first half of 2020. This is slightly ahead of our revenue despite
the challenges posed by Covid-19. There were over 20 contract
awards worth more than GBP10m each and three with a total contract
value of more than GBP200m. Of the order intake, approximately 60%
was represented by the value of rebids and extensions of existing
work and 40% comprised new business. Around 55% of order intake
came from the UK, with around 25% from Asia Pacific and the
remaining 20% from customers of our Americas, Middle East and
continental European operations.
The largest award was our GBP450m contract to continue to
operate the Northern Isles Ferry Services. First announced in
September 2019, the contract was not included in our order intake
until a procurement challenge from the unsuccessful bidder was
resolved earlier this year. In Australia, we signed a six-year
A$730m (GBP370m) extension to our contract to deliver support
services at Fiona Stanley Hospital in Perth. The UK business won an
eight-year contract valued at just over GBP200m to manage the
Gatwick Immigration Removal Centres. We agreed and mobilised a
range of work related to helping governments tackle Covid-19. This
included contracts in the UK to support the NHS Test & Trace
programme, testing facilities in the UK, temporary hospitals in the
UK and the Middle East, and quarantine hotels in Western Australia.
In total, the Covid-19 work has a contracted value of approaching
GBP200m. Given the nature of this work, and the circumstances in
which it was awarded, these contracts will tend to generate
lower-than-average-margins. Other notable contract awards included
a nine-year GBP116m environmental services contract with three
councils in Norfolk, a new win worth GBP47m to provide deep space
surveillance support in the USA and a two-year extension to our
contract to provide contact centre services for the Australian Tax
Office, valued at GBP44m. We were also awarded a new contract to
deliver front line customer services at Dubai Airport. However, as
a result of the airport closing and subsequent lower passenger
volumes due to Covid-19, the contract is yet to start, so we have
not included it in our order intake in the period.
Bids for new work that were unsuccessful in the period included
Air Traffic Controller training for the Federal Aviation
Administration in North America and support services for Kowloon
West Cluster Hospital Authority in Hong Kong. The win rate by value
for new work, which has averaged slightly less than 30% over the
last five years, was unusually high at 43%. Conversely, the win
rate by value for securing existing work was 60%, which is
considerably lower than the 80-90% we typically see, as a result of
the Viapath joint venture, in which we had a 33% interest, not
being selected as the preferred bidder for pathology services in
London. We have subsequently sold down our interest in the joint
venture. In our wholly-owned operations, the win rate by value for
existing work was over 90%. Win rates by number of tenders were
nearly 60% for new bids and over 90% for rebids and extensions.
Order book
The Group's order book is now an estimated GBP14.5bn, up by
GBP0.4bn versus GBP14.1bn at the start of the year. Our order book
definition gives our assessment of the future revenue expected to
be recognised from the remaining performance obligations on
existing contractual arrangements. It is worth noting that this
excludes unsigned extension periods; the GBP14.5bn would be
GBP15.6bn if option periods in our US business were included. As
option periods have always tended to be exercised in our US
business, we do include these in our assessment of order intake, as
noted in the above section on contract award. Furthermore, the
order book definition excludes our share of expected revenue from
contractual arrangements of our joint ventures and associates which
would add a further GBP1.2bn if included within our order book,
driven by the current pricing period of the AWE operations and the
Merseyrail franchise. There is now GBP3.6bn of revenue already
delivered or secured in the order book for 2020, equivalent to over
90% visibility of our GBP3.7bn revenue guidance.
Rebids
As we look ahead to the end of 2022, 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 around GBP1.5bn in aggregate or 40% of the Group's 2020
revenue guidance. The proportion of revenue that requires securing
at some point over the next three years is normal given our average
contract length of around seven years. At the start of 2018 the
three year forward rebid value was GBP1.4bn and at the start of
2019 it was GBP1.2bn. Contracts that could potentially end at some
point before the end of 2020 have aggregate annual revenue of
around GBP300m, which is higher than normal as a result of work
related to the Covid-19 response, which is expected to be
short-term in nature. In 2021, the aggregate annual value of
contracts due for extension or recompete is currently around
GBP600m, with this including our operations for the Dubai Metro,
which accounts for approximately for 3% of Group revenue. In 2022,
the aggregate annual revenue due for extension or recompete at some
point in that year is around GBP600m. This includes the Australian
immigration services contract due to end in December 2021 unless
the option for a further extension is exercised or a rebid is won,
and which currently accounts for over 5% of Group revenue.
Pipeline
Our measure of pipeline is probably more narrowly defined than
is common in our industry; it was originally designed as an
indicator of future growth and focuses on bids for new business
only. As a consequence, on average over the last five years, less
than half of our achieved order intake has come from the reported
pipeline. It measures only opportunities for new business that have
an estimated annual contract value (ACV) of at least GBP10m and
which we expect to bid and to be awarded within a rolling 24-month
timeframe. We cap the total contract value (TCV) of individual
opportunities at GBP1bn, to attenuate the impact of single large
opportunities. The definition does not include rebids and extension
opportunities, and in the case of framework, or call-off, contracts
such as 'ID/IQ' (Indefinite Delivery / Indefinite Quantity
contracts, which are common in the US) we only take the individual
task orders into our pipeline as the opportunities arise. It is
thus a relatively small proportion of the total universe of
opportunities, many of which have annual revenues less than GBP10m,
are likely to be decided beyond the next 24 months or are rebids
and extensions.
On this definition our pipeline stood at GBP4.9bn at the
beginning of 2020. This year has been particularly unusual with
Covid-19 leading to changing timings on expected work in the
pipeline plus new work helping governments respond to the pandemic.
We have also had our usual flow of wins and losses, as well as
changes from opportunities no longer meeting our definition and new
opportunities maturing to the stage where they meet our pipeline
definition. The pipeline currently stands at GBP4.1bn, which
consists of just over 20 bids that have an ACV averaging
approximately GBP30m and a contract length averaging around six
years.
The pipeline of opportunities for new business that have an
estimated ACV of less than GBP10m has increased from GBP1.6bn at
the beginning of the year to GBP1.8bn. The pipeline including both
large and smaller opportunities has reduced from GBP6.5bn to
GBP5.9bn.
As we have noted before, 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.
Covid-19
The Covid-19 pandemic has had a small net financial impact on
our business so far, but this does not reflect the effect it has
had on us operationally. It has caused large fluctuations in demand
for some of our services, placed huge pressure on our employees,
especially those working on the front-line, and introduced new
complexity into both how we manage our supply chain and deliver our
services. The business has shown remarkable agility and
effectiveness in response to this intense pressure. Much of this
has been made possible by the significant investments we have made
in people and systems in the last few years. While working hard on
navigating these immediate challenges we are also planning for the
longer term implications for our business, both in terms of
operational delivery and customer demand.
Short-term outlook
We are maintaining our guidance for 2020 as re-instated in our
trading update on 17th June, namely: we expect Revenue to be around
GBP3.7bn (2019: GBP3.2bn), and Underlying Trading Profit of
GBP135-GBP150m (2019: GBP120m); other elements of guidance are
shown on page 2 of the statement. The relatively wide range of UTP
outcomes reflects the continuing uncertainty which we think is
likely to persist well into 2021 as the world grapples with
recurring outbreaks of infection. We are already seeing in
Australia and in North America that these secondary upsurges are
hard to contain and can have a disruptive impact on workplaces,
which in turn can affect both our revenue and profit. It is also
worth noting that our guidance for profits in 2020 has stayed at
levels similar to our pre-pandemic expectations mainly because of
our success in winning enough work from governments to support
their Covid-19 response to offset the significant negative impact
of the pandemic in other parts of our business. These contracts are
by their nature short-term, which means they are unlikely to
continue much into 2021. The variable nature of this work
introduces a greater degree of near-term risk in our planning.
Medium and long-term outlook
It is a truism that the global economic and human catastrophe
brought about by Covid-19 is likely to have a dramatic impact on
the way we all do everything; some say that no stone of our lives
will be left unturned, and nothing will ever be the same again. We
take a more nuanced view as far as our business is concerned and
are inclined to believe that in the long term more will stay the
same than will be different.
First, it is true that recent experience might make some
governments consider doing more in-house rather than outsourcing
service provision. We don't think that this will happen
meaningfully, in part because the private sector has responded
extremely well to governments' emergency requirements: thousands of
ventilators have been delivered, tens of millions of items of PPE
have been manufactured, massive additional hospital bed capacity
built, vaccine development accelerated. For our part, we have stood
up drive-through test facilities in two days; recruited 10,500
tracers in four weeks, provided accommodation for more than 1,300
quarantined travellers in five days, found accommodation for 2,700
asylum seekers. These successes in delivering critical public
services will, hopefully, remind governments of the value of
resilient, robust supply chains who can support them in both
ordinary and extra-ordinary times.
Second, for many people reading this report, the most memorable
thing about the impact of the crisis on our work life has been the
discovery that, thanks to the wonders of modern IT, we can work
quite effectively from home and don't need to spend hours every day
commuting; this will surely drive fundamental changes in
office-based work. But in Serco, around 90% of our colleagues work
on the front line in prisons, call centres, hospitals, defence
establishments, trains or ferries. From your kitchen table you
cannot make a patient's bed, or unlock a wing, or tow an aircraft
carrier into port, and we don't see demand for these services, in
aggregate, diminishing. We therefore do not see a lot of change in
our basic business model of offering public services delivered by
people supported by good systems and processes.
What of our customers? As far as governments themselves are
concerned, the only things we know for sure are, first, that they
will be massively more indebted than they were before the crisis,
and that, secondly, citizens will be more conscious of the
contribution that public services make to their quality of life.
The chorus of the "Four Forces", which we have previously described
as driving demand for our services will, we think, have been
amplified by the crisis: increasing and changing demand for public
services; heightened expectations around the quality and resilience
of public services; increased fiscal deficits; the dire political
consequences of increasing taxes. These will continue to drive
governments to want to deliver more public services, of higher
quality, for less money. We believe that this imperative to provide
more, and better, for less will become even more urgent in the
years ahead, and to deliver those objectives governments will need
the skills, resources, innovation and nimbleness of the private
sector.
Other things that will not change: most of our contracts have
low margins, but make a respectable return on capital because they
have very little capital employed and risk should not be extreme;
demand, in aggregate, is unlikely to diminish for years ahead;
there will always be some customers who are unreasonable or who
want to transfer unmanageable risk, but we have the choice to say
no; government policy can sometimes seem fickle and perverse, but
our international footprint enables us to shift our investment in
bidding to focus on the best opportunities; bidding costs are high,
but the resulting contracts are both large and long term; we carry
large forward order-books.
In summary, we are not complacent. We are thinking very
carefully about the future, and so far our conclusion is that
whilst the pandemic will bring significant short term disruption
and risk, in the long term whilst the crisis will bring much
change, more will stay the same than will change. As the writer
Jean-Baptiste Karr said
a year after the 1848 French Revolution: Plus ça change, plus c'est la même chose.
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. 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 (UTP). As previously disclosed and for
consistency with guidance, Serco's UTP measure excludes contract
& balance sheet review adjustments (principally OCP releases or
charges).
Six months ended 30 June 2020 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
------------------------------------ ------ -------- ------ ------ --------- --------
Revenue 783.6 542.1 332.0 164.5 - 1,822.2
Change +19% +46% +19% (1%) +24%
Change at constant currency +19% +43% +25% (2%) +24%
Organic change at constant currency +19% +8% +25% (2%) +15%
UTP 26.5 53.4 13.3 7.0 (22.6) 77.6
Margin 3.4% 9.9% 4.0% 4.3% n/a 4.3%
Contract & Balance Sheet Review
adjustments 2.9 - - - - 2.9
Trading Profit/(Loss) 29.4 53.4 13.3 7.0 (22.6) 80.5
Amortisation of intangibles
arising on acquisition (1.5) (3.5) (0.0) - - (5.0)
Operating profit/(loss) before
exceptionals 27.9 49.9 13.3 7.0 (22.6) 75.5
------------------------------------ ------ -------- ------ ------ --------- --------
Six months ended 30 June 2019 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
-------------------------------- ----- -------- ----- ------ --------- -------
Revenue 657.9 372.3 279.7 165.6 - 1,475.5
UTP 15.2 37.7 11.8 7.4 (21.5) 50.6
Margin 2.3% 10.1% 4.2% 4.5% n/a 3.4%
Contract & Balance Sheet Review
adjustments (2.7) 2.7 - - - -
Trading Profit/(Loss) 12.5 40.4 11.8 7.4 (21.5) 50.6
Amortisation of intangibles
arising on acquisition (0.6) (1.6) (0.1) - - (2.3)
Operating profit/(loss) before
exceptionals 11.9 38.8 11.7 7.4 (21.5) 48.3
-------------------------------- ----- -------- ----- ------ --------- -------
Year ended 31 December 2019 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
-------------------------------- -------- -------- ------ ------ --------- --------
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
UTP 38.4 82.1 31.3 13.9 (45.5) 120.2
Margin 2.8% 9.0% 5.0% 4.0% n/a 3.7%
Contract & Balance Sheet Review
adjustments 0.3 9.5 - - (6.2) 3.6
Other one-time items 9.6 - - - - 9.6
Trading Profit/(Loss) 48.3 91.6 31.3 13.9 (51.7) 133.4
Amortisation of intangibles
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Operating profit/(loss) before
exceptionals 47.1 85.4 31.2 13.9 (51.7) 125.9
-------------------------------- -------- -------- ------ ------ --------- --------
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 14-31. 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 34-63.
UK & Europe
Serco's UK & Europe division supports public service
delivery across all five of the Group's chosen sectors: our Justice
& Immigration business provides a wide range of services to
support the safeguarding of society, the reduction of reoffending,
and the effective management of the UK's immigration system, and
includes prison management as well as the provision of housing and
welfare services for asylum seekers; in Defence, we are trusted to
deliver critical support services and operate highly sensitive
facilities of national strategic importance; we operate complex
public Transport systems and services; our Health business provides
primarily non-clinical support services to hospitals; and our
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
and European institutions, including the European Commission and
European Space Agency. Serco's operations in the UK represent
approximately 40% of the Group's reported revenue, and those across
the rest of Europe approximately 3%.
Revenue for the first half of 2020 was GBP783.7m (2019:
GBP657.9m), an increase of 19%. Reported revenue excludes that from
our joint venture and associate holdings which largely comprise the
operations of AWE and Merseyrail. At constant currency, the growth
in revenue was also 19%, or GBP126m, all of which was organic. The
high organic growth resulted from a combination of our Asylum
Accommodation and Support Services Contracts (AASC) contracts and
additional work related to Covid-19. Work supporting our customers
response to Covid-19 included the NHS Test & Trace programme,
drive-through and mobile testing facilities, and increased customer
service work, including NHS 111. There was a reduction in revenue
in our Healthcare operations due to the end of our contract at
Plymouth Hospital. Covid-19 caused an abrupt reduction in demand in
our Leisure business and on our contract to operate the Northern
Isles Ferries. Although the Caledonian Sleepers contract saw a
reduction in passenger volumes, it entered an Emergency Measures
Arrangement, which was agreed with the customer part way through
the period. The EMA comes to an end in September 2020 and we have
commenced discussions with the customer about the future trading
arrangement, including the possibility of an extension or a second
EMA.
Underlying Trading Profit was GBP26.5m (2019: GBP15.2m),
representing a margin of 3.4% (2019: 2.3%) and growth of 74% at
constant currency and organically. Trading profit includes the
profit contribution of joint ventures and associates, from which
interest and tax have already been deducted; if the GBP188m (2019:
GBP193m) proportional share of revenue from joint ventures and
associates was also included and if the GBP1.6m (2019: GBP3.0m)
share of interest and tax cost was excluded, the overall divisional
margin would have been 2.9% (2019: 2.1%). The joint venture and
associate profit contribution was lower at GBP7.6m (2019:
GBP13.5m), as a result of the negative impact on Merseyrail of
Covid-19 and lower pricing at AWE. The increase in our profit was
driven by our AASC contracts moving from losing money in the first
half of 2019, as mobilisation costs were incurred, to
profitability, and, to a lesser extent, by our additional Covid-19
work. Given the exceptional circumstances, we have agreed to
perform the Covid-19 related work on an open-book basis and at
margins below our normal expectations. There was a GBP2m
non-recurring benefit to UTP as we exited our Viapath joint
venture.
Within Underlying Trading Profit, the rate of OCP utilisation
declined significantly to GBP2m (2019: GBP23m), as we draw towards
the end of our efforts over the last six years to reduce these
large loss-making contracts. Contract & Balance Sheet Review
and other one-time items totalled a credit of GBP2.9m (2019:
GBP2.7m net charge) to Trading Profit, resulting from the release
of OCPs on the prisoner escorting contract, so Trading Profit was
above Underlying Trading Profit at GBP29.4m (2019: GBP12.5m).
The UK & Europe division's order intake was around GBP1bn,
or around 55% of that for the whole Group. The largest award was
our GBP450m contract to continue to operate the Northern Isles
Ferry Services. First announced in September 2019, the contract was
not included in our order intake until a procurement challenge from
the unsuccessful bidder was resolved earlier this year. The second
largest contract award in the period was a new agreement to manage
the Gatwick Immigration Centres, valued at approximately GBP200m.
We also agreed various contracts with the government to provide
services in response to Covid-19.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are less than 20 contracts
with annual revenue of over GBP5m within the division. In
aggregate, these represent around 25% of the current level of
annual revenue for the division. The largest is the NHS Test &
Trace contract, which, due to its nature, we don't expect to
continue, at least at its current level. The larger contracts to
rebid include, in 2021, our strategic partnership contract
supporting Hertfordshire County Council and, in 2022, our Royal
Navy fleet support contract known as Future Provision of Marine
Services (FPMS) and our UK MOD Skynet satellite support
operations.
Opportunities in the new bid Pipeline include several defence
support opportunities, justice tenders including the new build
prison manage and operate contracts, and environmental services
work in Citizen Services. Following a string of important contract
wins in the last two years, replenishing the UK & Europe
pipeline across each of our five sectors of operation remains a key
focus of the business.
Americas
Our Americas division accounts for 30% of Serco's reported
revenue, and provides professional, technology and management
services focused on Defence, Transport, and Citizen Services. The
US federal government is our largest customer, including the
military, civilian agencies and the national intelligence
community. We also provide services to the Canadian government and
to some US state and municipal governments.
Revenue for the first half of 2020 was GBP542.1m (2019:
GBP372.3m), an increase of GBP170m or 46% in reported currency. In
US dollars, the main currency for operations of the division,
revenue for the period was equivalent to $691m (2019: $484m). The
strengthening of local currencies against sterling increased
revenue by GBP11m or 3%, with growth of GBP159m, or 43% at constant
currency. The acquisition in August 2019 of the Naval Systems
Business Unit of Alion added GBP130m, or 35%, to revenue and there
was organic growth of GBP29m, or 8%. The organic growth resulted
from a mixture of new wins and additional work on existing
contracts. The US Federal Emergency Management Agency (FEMA)
contract framework and the US Pension Benefit Guaranty Corporation
(PBGC), both of which started in the first half of 2019,
contributed positively. Our health insurance eligibility support
contract for the US Department of Health and Human Services, Center
for Medicare & Medicaid Services (CMS) benefitted as the
temporary uplift in volume related work we saw last year persisted
for longer than expected. We experienced lower activity, however,
on the Consolidated Afloat Networks Enterprise Services (CANES)
indefinite delivery, indefinite quantity (ID/IQ) multiple-award
contract. The first half of 2019 had seen particularly strong
demand and new task order wins.
Underlying Trading Profit was GBP53.4m (2019: GBP37.7m),
representing a margin of 9.9% (2019: 10.1%) and growth of GBP16m,
or 42%. Excluding the favourable currency movement of GBP1.0m,
growth at constant currency was GBP15m, or 40%. The NSBU Naval
business, acquired in Q3 2019, is performing in line with our
expectations and contributed around GBP10m of the growth in UTP,
including the effect of efficiencies in indirect overheads. On the
CMS contract, we saw higher than expected volumes and stable
margins. The circumstances that led to the extra work have now been
resolved. We now expect a step down in volumes and margins.
Within Underlying Trading Profit there was no OCP utilisation
(2019: GBP4m), as the Ontario Driver Examination Services (DES)
contract is no longer an onerous contract. There were no Contract
& Balance Sheet Review adjustments (2019: GBP2.7m net credit),
so Trading Profit was GBP53.4m (2019: GBP40.4m), the same as
Underlying Trading Profit.
Americas represented around GBP0.3bn ($0.3bn) or 15% of the
Group's order intake. The largest award for new work was from the
U.S. Space Force to manage, operate and maintain the Ground-Based
Electro-Optical Deep Space Surveillance (GEODSS) system. The
contract has an eight-month base period and six one-year option
years with a total value of $57m.
Within awards that were rebid or extended were those for parking
enforcement in West Hollywood and our contract to support the US
Army's civilian readiness training and talent management efforts.
We resecured places on the ID/IQ frameworks for both ship and
shore-based C4ISR systems modernisation services over the next ten
years that replace the previous GIC frameworks.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 25 contracts
with annual revenue of over GBP5m within the Americas division; in
aggregate, these represent around 40% of the current level of
annual revenue for the division. Those coming up for rebid or
extension in 2021 include the Federal Aviation Administration's
(FAA) Contract Tower (FCT) Program, the Anti-Terrorism/Force
Protection (ATFP) framework contract for the US Naval Facilities
Command and our support services at the 5 Wing Canadian Forces Base
in Goose Bay; and in 2022, resecuring a position on the successor
framework for CANES. The NSBU business has a number of contract
option periods, extensions or rebids to secure, including in 2020
its support to the US Navy Surface Warfare Directorate and in 2021
to the Shipbuilding Command for surface ships.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes a broad spread of defence
support functions, including those added with the NSBU acquisition,
as well as others such as air traffic control support within our
Transport business. Our Citizen Services business unit has also had
a number of wins during the year, and building further the pipeline
in this area remains a target.
Asia Pacific
Serco operates in Australia, New Zealand and Hong Kong in the
Asia Pacific region, providing services in the Justice,
Immigration, Defence, Health, Transport and Citizen Services
sectors. The Asia Pacific division accounts for 18% of the reported
revenue for the Group.
Revenue for the first half of 2020 was GBP332m (2019: GBP280m),
an increase of 19% in reported currency. In Australian dollars, the
main currency for operations of the division, revenue for the
period was equivalent to approximately A$641m (2019: A$512m). The
weakening of local currencies against sterling reduced revenue by
GBP18m or 6%. Organically, the business grew by 25%, or GBP70m. We
saw strong growth in our Citizen Services and Justice &
Immigration sectors. New work contributed significantly to our step
up in revenue, including the AHSC defence garrison healthcare
services contract in Australia, Adelaide Remand Centre, both of
which started in the second half of last year, and Clarence
Correctional Centre. Growth was also supported by extra work with
Services Australia (formerly the Department of Human Services) and
the Australian Taxation Office.
Underlying Trading Profit was GBP13.3m (2019: GBP11.8m),
representing a margin of 4.0% (2019: 4.2%). This was 13% higher
year-on-year on a reported basis and 19% at constant currency. The
new wins and expanded work mentioned above materially increased our
profits, with the AHSC being the largest contributor as it moved
from losing money in the first half of 2019 as mobilisation costs
were incurred, to profitability in the first six months of
2020.
There was OCP utilisation of GBP0.2m (2019: GBP2m) within
Underlying Trading Profit and no Contract & Balance Sheet
Review adjustments (2019: GBPnil). Trading profit was therefore
GBP13.3m (2019: GBP11.8m), the same as Underlying Trading
Profit.
AsPac represented around GBP0.5bn or 25% of the Group's order
intake. Having had significant success in winning in recent years,
it was a relatively quiet period for new work. We did however agree
work with the government for services in response to Covid-19,
including to provide accommodation for more than 1,300 quarantined
travellers in Western Australia and additional contact centre work.
An important extension was secured as we signed a six-year contract
with the government of Western Australia to continue delivering
support services at Fiona Stanley Hospital in Perth. The contract
extension has an estimated value of approximately $730m (GBP370m)
over its six-year term, including indexation. We also extended our
contract to provide contact centre services to the Australian Tax
Office.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 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
further extension or rebid again at the end of 2021, with this
accounting for around 25% of current divisional revenue. Others
that will require extending or rebidding include, in 2020, the
Services Australia framework contract, and, in 2021, Acacia Prison,
South Queensland Correctional Centre and the Tax Office framework
contract.
In October 2019, AsPac responded to the tender for the Royal
Australian Navy contracts to replace the existing Fleet Marine
Services contracts, to be known as the Defence Marine Support
Services (DMSS) contracts. The DMSS contacts awards had been
anticipated to be announced in the first half of 2020 but is now
expected in the second half. Serco's current Fleet Marine Services
contract will continue to operate until 30 September 2021.
The largest opportunity in our pipeline of new bid opportunities
is to provide primary health services to all prisons in the state
of Victoria. Rebuilding the pipeline across the Justice &
Immigration, Defence, Citizen Services, Transport and Health
sectors remains a target.
Middle East
Operations in the Middle East division include Transport,
Defence, Health and Citizen Services, with the region accounting
for approximately 9% of the Group's reported revenue.
Revenue for the first half of 2020 was GBP164.5m (2019:
GBP165.6m), a decrease of 1% in reported currency. The
strengthening of local currency against sterling increased revenue
by GBP2.4m or 1%; the organic change at constant currency was
therefore a decline of 2%. The Middle East segment has faced the
largest negative impact from Covid-19 as there has been a sudden
reduction in activity in parts of the transport portfolio and,
unlike in the UK, limited Covid-19 response work to act as a
counterbalance. There was growth in revenue from expanded services
in our Dubai Metro and Zayed University contracts. These were
outweighed by Covid-19 leading to reduced revenue on various
contracts including Baghdad Air Traffic Control, health FM in Saudi
Arabia, Dubai Air Navigation Systems and Dubai Airport facilities
management.
Underlying Trading Profit was GBP7.0m (2019: GBP7.4m), a decline
of 5%, representing a margin of 4.3% (2019: 4.5%). The decline at
constant currency was 4%. This decline was driven by the reduction
in revenue on our air traffic control work and health FM contracts
in Saudi Arabia. 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 latest or comparable period. Trading Profit was therefore
GBP7.0m (2019: GBP7.4m).
The Middle East represented GBP0.1bn, or 4%, of the Group's
order intake, not helped by disruption from Covid-19. We were
awarded a new contract to deliver front line hospitality customer
services at Dubai Airport. However, as a result of the airport
closing and subsequent lower passenger volumes due to Covid-19, the
contract is yet to start. As a result, we have not included it in
our order intake in the period. We did, however, secure an
extension on our Dubai Airports facilities management contract.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 10 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. The high proportion reflects
that the Dubai Metro contract becomes due for rebid in September
2021, with this accounting for around 35% of current divisional
revenue. Further extensions or rebids will also be required for
each of the Dubai and Baghdad ANS contracts, together with the
MELABS and Saudi rail operations.
Our pipeline of major new bid opportunities in the Middle East
includes work in the Health, Citizen Services and Transport
sectors. The pipeline remains significantly lower than in prior
years, and effort is ongoing to rebuild it across all Serco's
sectors of operation in the region. We still believe that the
dynamism and ambition of governments in the GCC offers the
opportunity to deliver truly innovative and world-leading services.
Therefore, we have established a new ExperienceLab, building on
what we have in the UK, for user-centred design to deliver exciting
improvements to existing and new customers.
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.
Corporate costs increased by GBP1.1m to GBP22.6m (2019:
GBP21.5m).
Risk management and Covid-19 impacts
Our risk management processes have operated throughout the
pandemic at a Group and divisional level to assess the Covid-19
impact and associated emerging risks. We have reviewed the impact
on the controls of each of our Principal Risks and completed an
assessment of the coverage of our assurance mechanisms across the
three lines of defence, adjusting the focus of our controls and
compliance assurance plans where necessary.
The impact of Covid-19 is being monitored across all risks but,
in particular, we are focused on any disruption to our supply
chain, including the operations of strategic partners, as well as
the complex and fluid legal landscape in relation to Health and
Safety and Covid-19 safe practices across each division.
We consider Covid-19 to have increased our risk profile.
However, we are confident in our control environment and do not see
this increase as being replicated more broadly in our residual
risk.
We have made one significant amendment to our risk profile,
separating Health, Safety and Well-being as a standalone new
Principal risk to clearly articulate our focus and ongoing
commitment to the health and wellbeing of our workforce and service
users.
Finance Review
Amortisation
and
impairment
of
intangibles
Non arising Statutory
For the six underlying on pre Exceptional
months ended Underlying items Trading acquisition exceptional items Statutory
30 June 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Revenue 1,822.2 - 1,822.2 - 1,822.2 - 1,822.2
Cost of sales (1,645.9) 2.9 (1,643.0) - (1,643.0) - (1,643.0)
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Gross profit 176.3 2.9 179.2 - 179.2 - 179.2
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Administrative
expenses (105.7) - (105.7) (5.0) (110.7) 2.6 (108.1)
Exceptional
profit on
disposal of
subsidiaries
and operations - - - - - 11.0 11.0
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Total
administrative
expenses (105.7) - (105.7) (5.0) (110.7) 13.6 (97.1)
Share of
profits in
joint
ventures and
associates,
net of
interest and
tax 7.0 - 7.0 - 7.0 - 7.0
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Profit before
interest
and tax 77.6 2.9 80.5 (5.0) 75.5 13.6 89.1
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Margin 4.3% 4.4% 4.1% 4.9%
Net finance
costs (12.7) - (12.7) - (12.7) - (12.7)
Profit before
tax 64.9 2.9 67.8 (5.0) 62.8 13.6 76.4
Tax charge (17.0) 10.4 (6.6) 0.9 (5.7) (0.4) (6.1)
Effective tax
rate 26.2% 9.7% 9.1% 8.0%
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Profit/(loss)
for the
period 47.9 13.3 61.2 (4.1) 57.1 13.2 70.3
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Non controlling
interest (0.1) (0.1) (0.1) (0.1)
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Earnings per
share -
basic (pence) 3.91 5.00 4.66 5.74
Earnings per
share -
diluted
(pence) 3.86 4.92 4.60 5.66
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Amortisation
and
impairment
of
intangibles
Non arising Statutory
For the six underlying on pre Exceptional
months ended Underlying items Trading acquisition exceptional items Statutory
30 June 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Revenue 1,475.5 - 1,475.5 - 1,475.5 - 1,475.5
Cost of sales (1,336.9) - (1,336.9) - (1,336.9) - (1,336.9)
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Gross profit 138.6 - 138.6 - 138.6 - 138.6
Administrative
expenses (101.5) - (101.5) (2.3) (103.8) (31.1) (134.9)
Share of profits
in joint
ventures and
associates,
net of interest
and tax 13.5 - 13.5 - 13.5 13.5
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Profit before
interest
and tax 50.6 - 50.6 (2.3) 48.3 (31.1) 17.2
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Margin 3.4% 3.4% 3.3% 1.2%
Net finance
costs (10.5) - (10.5) - (10.5) - (10.5)
Profit before
tax 40.1 - 40.1 (2.3) 37.8 (31.1) 6.7
Tax charge (9.8) 0.9 (8.9) 0.4 (8.5) 0.4 (8.1)
Effective tax
rate 24.4% 22.2% 22.5% 120.9%
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Profit/(loss)
for the
period 30.3 0.9 31.2 (1.9) 29.3 (30.7) (1.4)
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Non controlling
interest 0.3 0.3 0.3 0.3
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Earnings/(loss)
per share
- basic (pence) 2.67 2.75 2.58 (0.15)
Earnings/(loss)
per share
- diluted
(pence) 2.62 2.70 2.53 (0.15)
----------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------- ----------------
Amortisation
and
impairment
of
intangibles
For the year Non arising Statutory
ended underlying on pre Exceptional
31 December Underlying items Trading acquisition exceptional items Statutory
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Revenue 3,248.4 - 3,248.4 - 3,248.4 - 3,248.4
Cost of sales (2,941.5) 13.2 (2,928.3) - (2,928.3) - (2,928.3)
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Gross profit 306.9 13.2 320.1 - 320.1 - 320.1
Administrative
expenses (214.2) - (214.2) (7.5) (221.7) (23.4) (245.1)
Share of
profits in
joint
ventures and
associates,
net of
interest and
tax 27.5 - 27.5 - 27.5 - 27.5
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Profit before
interest
and tax 120.2 13.2 133.4 (7.5) 125.9 (23.4) 102.5
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Margin 3.7% 4.1% 3.9% 3.2%
Net finance
costs (21.8) - (21.8) - (21.8) - (21.8)
Profit before
tax 98.4 13.2 111.6 (7.5) 104.1 (23.4) 80.7
Tax charge (24.4) (4.5) (28.9) 1.5 (27.4) (2.7) (30.1)
Effective tax
rate 24.8% 25.9% 26.3% 37.3%
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Profit/(loss)
for the
period 74.0 8.7 82.7 (6.0) 76.7 (26.1) 50.6
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Non controlling
interest 0.2 0.2 0.2 0.2
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Earnings per
share -
basic (pence) 6.31 7.05 6.54 4.31
Earnings per
share -
diluted
(pence) 6.16 6.89 6.39 4.21
---------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
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 Executive 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 this announcement, including the other sections
of this Finance Review, as well as the Condensed Consolidated
Financial Statements and their 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
since 31 December 2019.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 34, reflects revenue translated at the
average exchange rates for the period. In order to provide a
comparable movement on the previous period's results, reported
revenue is recalculated by translating non-Sterling values for the
six months ended 30 June 2020 into Sterling at the average exchange
rate for the six months ended 30 June 2019.
2020
For the six months ended 30 June GBPm
--------------------------------------------- --------------
Reported revenue at constant currency 1,826.6
Foreign exchange differences (4.4)
--------------------------------------------- --------------
Reported revenue at reported currency 1,822.2
--------------------------------------------- --------------
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses
acquired during a particular period from the date of acquisition
and/or generated by businesses sold during a particular period up
to the date of disposal. In order to provide a comparable movement
which ignores the effect of both acquisitions and disposals,
Organic Revenue at constant currency is recalculated by excluding
the impact of any relevant acquisitions or disposals.
There is one acquisition excluded for the calculation of Organic
Revenue in the period to 30 June 2020, which is the acquisition of
the Naval Systems Business Unit (NSBU) from Alion Science and
Technology Corporation on 1 August 2019.
The Group also disposed of its interest in its Viapath joint
venture on 31 May 2020, however no adjustment is required to
Organic Revenue since the joint venture results were accounted for
on an equity accounting basis and therefore had no impact on Group
revenue.
Organic Revenue growth is calculated by comparing the current
year Organic Revenue at constant currency exchange rates with the
prior period Organic Revenue at reported currency exchange rates.
This results in Organic Revenue growth on a constant currency basis
in the 6 months to 30 June 2020 of 15.0%.
2020
For the six months ended 30 June GBPm
---------------------------------------------------- --------------
Organic Revenue at constant currency 1,696.9
Foreign exchange differences (7.0)
---------------------------------------------------- --------------
Organic Revenue at reported currency 1,689.9
Impact of relevant acquisitions or disposals 132.3
---------------------------------------------------- --------------
Reported revenue at reported currency 1,822.2
---------------------------------------------------- --------------
2019
For the six months ended 30 June GBPm
------------------------------------------------------- --------------
Comparable Organic Revenue at reported currency 1,475.5
Impact of relevant acquisitions or disposals -
------------------------------------------------------- --------------
Reported revenue at reported currency 1,475.5
------------------------------------------------------- --------------
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 34, 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.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
-------------------------------------------- -------------- -------------- --------------
Revenue plus share of joint ventures
and associates 2,010.1 1,668.4 3,643.0
Exclude share of revenue from joint
ventures and associates (187.9) (192.9) (394.6)
-------------------------------------------- -------------- -------------- --------------
Reported revenue 1,822.2 1,475.5 3,248.4
-------------------------------------------- -------------- -------------- --------------
Alternative profit measures
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
-------------------------------------------------- ------------ ------------- -------------
Underlying Trading Profit 77.6 50.6 120.2
Non-underlying items:
OCP charges and releases 2.9 - 0.8
Other Contract & Balance Sheet Review
adjustments and one-time items - - 12.4
-------------------------------------------------- ------------ ------------- -------------
Total non-underlying items 2.9 - 13.2
-------------------------------------------------- ------------ ------------- -------------
Trading Profit 80.5 50.6 133.4
Operating exceptional items 13.6 (31.1) (23.4)
Amortisation and impairment of intangibles
arising on acquisition (5.0) (2.3) (7.5)
Operating profit 89.1 17.2 102.5
-------------------------------------------------- ------------ ------------- -------------
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur and to
remove the impact of historical issues. UTP therefore provides a
measure of the underlying performance of the business in the
current year.
Charges and releases on all Onerous Contract Provisions (OCPs)
that arose during the 2014 Contract and Balance Sheet Review are
excluded from UTP in the current and prior periods. Charges
associated with the creation of new OCPs identified are included
within UTP to the extent that they are not considered sufficiently
material to require separate disclosure on an individual basis.
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 period. It should be noted that,
as for operating profit, UTP benefits from OCP utilisation of
GBP1.7m in 2020 (2019: GBP42.1m). The utilisation, which
neutralises the in period losses on previously identified onerous
contracts, does not include any accelerated utilisation associated
with the impairment of right of use assets on onerous contracts
created during the 6 months to 30 June 2020 (2019: utilisation of
GBP12.6m), however includes GBP1.7m (2019: GBP29.5m) against
trading losses.
Revisions to accounting estimates and judgements which arose
during the 2014 Contract & Balance Sheet Review and other
one-time items are separately reported where the impact of an
individual item is material. The GBP12.4m recognised during the
year ended 31 December 2019 included the impairment of assets
created in accordance with IFRS16 Leases on the Caledonian Sleepers
contract for which the provision had been fully utilised, the
receipt of an insurance claim for costs previously reported outside
of UTP recognised in the 2014 Contract & Balance Sheet Review
and monies in respect of the Defence Fire and Rescue Project
settlement amounting to GBP9.6m. No such items have occurred in the
six months to 30 June 2020.
Both OCP adjustments and other Contract & Balance Sheet
Review and one-time items 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.
Underlying trading margin is calculated as UTP divided by
revenue.
The non-underlying column in the summary income statement on
page 14 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 34, by making two adjustments.
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.
UTP at constant currency
UTP disclosed above has been translated at the average foreign
exchange rates for the period. In order to provide a comparable
movement on the previous period's results, UTP is recalculated by
translating non-Sterling values for the six months to 30 June 2020
into Sterling at the average exchange rate for the six months ended
30 June 2019.
2020
For the six months ended 30 June GBPm
--------------------------------------------- -----------
Underlying Trading Profit at constant
currency 77.4
Foreign exchange differences 0.2
--------------------------------------------- -----------
Underlying Trading Profit at reported
currency 77.6
--------------------------------------------- -----------
Alternative Earnings or Loss Per Share (EPS) measures
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
pence pence pence
--------------------------------------------------- ----------- ------------- -------------
Underlying EPS, basic 3.91 2.67 6.31
Net impact of non-underlying items and
amortisation and impairment of intangibles
arising on acquisition 0.75 (0.09) 0.23
--------------------------------------------------- ----------- ------------- -------------
EPS before exceptional items, basic 4.66 2.58 6.54
Impact of exceptional items 1.08 (2.73) (2.23)
--------------------------------------------------- ----------- ------------- -------------
Reported EPS, basic 5.74 (0.15) 4.31
--------------------------------------------------- ----------- ------------- -------------
Six months Six months
ended ended Year 31
30 June 30 June December
2020 2019 2019
Pence pence pence
--------------------------------------------------- ----------- ------------- -------------
Underlying EPS, diluted 3.86 2.62 6.16
Net impact of non-underlying items and
amortisation and impairment of intangibles
arising on acquisition 0.74 (0.09) 0.23
--------------------------------------------------- ----------- ------------- -------------
EPS before exceptional items, diluted 4.60 2.53 6.39
Impact of exceptional items 1.06 (2.68) (2.18)
Reported EPS, diluted 5.66 (0.15) 4.21
--------------------------------------------------- ----------- ------------- -------------
EPS before exceptional items
EPS, as shown on the Group's Condensed Consolidated Income
Statement on page 34, includes exceptional items charged or
credited to the income statement. EPS before exceptional items aids
consistency with historical operating performance.
Underlying EPS
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 is provided
in the summary income statements on page 14.
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 38. This IFRS measure is adjusted to include
dividends we receive from joint ventures and associates and
deducting net interest paid, the capital element of lease payments
and net capital expenditure on tangible and intangible asset
purchases.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
--------------------------------------------------- ------------- ------------- -------------
Free Cash Flow 80.9 0.4 62.0
Exclude dividends from joint ventures
and associates (12.4) (13.4) (25.4)
Exclude net interest paid 12.6 9.6 21.0
Exclude capitalised finance costs paid - 0.9 1.2
Exclude capital element of lease repayments 52.8 22.3 70.2
Exclude proceeds received from exercise
of share options (0.1) (0.1) (0.2)
Exclude purchase of intangible and tangible
assets net of proceeds from disposal 20.6 11.7 23.3
--------------------------------------------------- ------------- ------------- -------------
Cash flow from operating activities before
exceptional items 154.4 31.4 152.1
Exceptional operating cash flows (4.2) (12.1) (49.2)
--------------------------------------------------- ------------- ------------- -------------
Cash flow from operating activities 150.2 19.3 102.9
--------------------------------------------------- ------------- ------------- -------------
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.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
------------------------------------------------- ------------ ----------- -------------
Free Cash Flow 80.9 0.4 62.0
Add back:
Tax paid 12.0 17.2 31.2
Non-cash R&D expenditure - - 0.1
Net interest paid 12.6 9.6 21.0
Capitalised finance costs paid - 0.9 1.2
------------------------------------------------- ------------ ----------- -------------
Trading Cash Flow 105.5 28.1 115.5
------------------------------------------------- ------------ ----------- -------------
Underlying Trading Profit 77.6 50.6 120.2
------------------------------------------------- ------------ ----------- -------------
Underlying Trading Profit cash conversion 136% 56% 96%
------------------------------------------------- ------------ ----------- -------------
Net Debt and Adjusted 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 37 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. Net Debt includes all lease
liabilities recognised under IFRS16 Leases and therefore the Group
also presents the alternative measure of Adjusted Net Debt which
excludes all lease liabilities recognised under IFRS16.
The Adjusted Net Debt measure is disclosed because it more
closely aligns to the Consolidated Total Net Borrowings measure
used for the Group's debt covenants, which is prepared under
accounting standards applicable prior to the adoption of IFRS16
Leases. Principally as a result of the Asylum Accommodation and
Support Services Contract (AASC), the Group has entered into a
significant number of leases which contain a termination option.
The use of Adjusted Net Debt removes the volatility that would
result from estimations of lease periods and the recognition of
liabilities associated with such leases where the Group has the
right to cancel the lease and hence the corresponding obligation.
Though the intention is not to exercise the options to cancel the
leases, it is available unlike other debt obligations.
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
---------------------------------------- -------------- -------------- --------------
Cash and cash equivalents 244.9 173.4 89.5
Loans payable (390.4) (240.6) (305.0)
Lease liabilities (359.9) (144.8) (369.9)
Derivatives relating to Net Debt 2.6 5.3 1.0
---------------------------------------- -------------- -------------- --------------
Net Debt (502.8) (206.7) (584.4)
Add back: Lease liabilities 359.9 144.8 369.9
---------------------------------------- -------------- -------------- --------------
Adjusted Net Debt (142.9) (61.9) (214.5)
---------------------------------------- -------------- -------------- --------------
At 30 June 2019, Adjusted Net Debt included the proceeds from
the share issue in May 2019 of GBP138.7m. Excluding this amount,
the pro-forma Adjusted Net Debt, referred to in the prior year, was
GBP200.6m.
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 income statement for the period
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.
Invested Capital excludes right of use assets recognised under
IFRS16 Leases. This is because the Invested Capital of the company
are those items within which resources are, or have been,
committed, which is not the case for many leases which would have
been classed as operating leases under IAS17 Leases where
termination options exist and commitments for expenditure are in
future years.
30 June 30 June 31 December
2020 2019 2019 **
For the 12 months ended GBPm GBPm GBPm
---------------------------------------------------- -------------- -------------- --------------
ROIC excluding right of use assets
Non current assets
Goodwill 710.3 581.4 674.2
Other intangible assets 91.3 58.5 96.5
Property, plant and equipment 58.6 40.4 47.3
Interest in joint ventures and associates 19.6 21.1 23.6
Trade and other receivables 25.1 30.9 26.5
Current assets
Inventory 20.3 18.9 18.3
Contract assets, trade and other receivables 677.8 592.4 607.4
Total invested capital assets 1,603.0 1,343.6 1,493.8
---------------------------------------------------- -------------- -------------- --------------
Current liabilities
Contract liabilities, trade and other
payables (635.0) (522.4) (557.0)
Non current liabilities
Contract liabilities, trade and other
payables (66.3) (95.7) (72.7)
---------------------------------------------------- -------------- -------------- --------------
Total invested capital liabilities (701.3) (618.1) (629.7)
---------------------------------------------------- -------------- -------------- --------------
Invested Capital 901.7 725.5 864.1
---------------------------------------------------- -------------- -------------- --------------
Two point average of opening and closing
Invested Capital 813.6 730.0 782.7
---------------------------------------------------- -------------- -------------- --------------
Trading Profit, 12 months ended * 163.3 121.9 133.4
---------------------------------------------------- -------------- -------------- --------------
ROIC% 20.1% 16.7% 17.0%
---------------------------------------------------- -------------- -------------- --------------
Underlying Trading Profit, 12 months
ended * 147.2 106.1 120.2
---------------------------------------------------- -------------- -------------- --------------
Underlying ROIC% 18.1% 14.5% 15.4%
---------------------------------------------------- -------------- -------------- --------------
* Trading Profit and Underlying Trading Profit are both measured
here on a rolling twelve-month basis. For the twelve months to 30
June 2019, the first six months are in accordance with IAS17
Leases, whilst the remaining six months are in accordance with its
successor IFRS16 Leases.
** During the six months ended 30 June 2020, the Group finalised
fair value adjustments associated with the acquisition of NSBU
which was effective 1 August 2019. As a result, goodwill has been
remeasured and the fair value of acquired assets and liabilities
have been adjusted, resulting in an amendment to their carrying
value as at 31 December 2019. Further information on the fair value
adjustments can be found in Note 5 to the Condensed Consolidated
Financial Statements.
Overview of financial performance
Revenue
Reported revenue increased by 23.5% to GBP1,822.2m when compared
with the same six-month period in the prior year (2019:
GBP1,475.5m), a 23.8% increase in constant currency.
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 in the six months was GBP80.5m (2019:
GBP50.6m).
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 GBP77.6m ( 2019: GBP50.6m), up 53.4%. At constant
currency, UTP was GBP77.4m, up 53.0%.
Commentary on the underlying performance of the Group is
provided in the Chief Executive's Review and the Divisional Reviews
sections.
In the six months to 30 June 2020 there was a net release of
GBP2.9m from OCPs created as a result of the 2014 Contract &
Balance Sheet Review excluded from UTP (2019: GBPnil) following the
detailed reassessment undertaken during the period.
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 and Balance Sheet Review is within 2% of
the total charge to Trading Profit arising from the review.
The tax impact of items in UTP and other non-underlying tax
items is discussed in the tax section below.
Joint ventures and associates - share of results
In 2020, 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 GBP9.1m (2019: GBP10.0m) and GBP1.5m (2019: GBP3.4m)
respectively. Total revenues generated by these businesses were
GBP539.0m (2019: GBP524.7m) and GBP75.7m (2019: GBP84.2m)
respectively.
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.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
---------------------------------------------- ------------ ------------ --------------
Revenue 187.9 192.9 394.6
---------------------------------------------- ------------ ------------ --------------
Operating profit 8.6 16.5 33.8
Net investment revenue 0.1 0.1 0.3
Income tax expense (1.7) (3.1) (6.6)
---------------------------------------------- ------------ ------------ --------------
Profit after tax 7.0 13.5 27.5
---------------------------------------------- ------------ ------------ --------------
Dividends received from joint ventures
and associates 12.4 13.4 25.4
---------------------------------------------- ------------ ------------ --------------
The change in revenue and profits on the prior year is due to
changes in the underlying operating performance of the Group's
material joint ventures particularly with respect to the impact of
Covid-19 on Merseyrail, as well as the disposal, on 31 May 2020, of
the Group's interest in Viapath. The dividends received from joint
ventures in the period to 30 June 2020 are in respect of prior
period reserves and activity before the impact of Covid-19. Future
dividends received from the joint ventures are likely to take into
consideration operating performance as a result of the pandemic and
to maintain an appropriate level of cash resources within the
entity given the impact of Covid-19, most notably in respect of the
Merseyrail joint venture.
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.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
------------------------------------------------------ ------------ ------------- --------------
Exceptional items arising
Exceptional profit on disposal of subsidiaries 11.0 - -
and operations
Other exceptional operating items
Reversal of impairment of interest in 2.5 - -
joint venture and related loan balances
Restructuring costs 0.1 (5.4) (12.8)
Costs related to UK Government review
and SFO investigation (1.2) (24.0) (25.2)
Release of other provisions and other
items 2.6 - 19.3
Costs associated with the acquisition
of Naval Systems Business Unit (1.4) (1.7) (4.7)
Other exceptional operating items 2.6 (31.1) (23.4)
------------------------------------------------------ ------------ ------------- --------------
Exceptional operating items 13.6 (31.1) (23.4)
------------------------------------------------------ ------------ ------------- --------------
Exceptional tax (0.4) 0.4 (2.7)
------------------------------------------------------ ------------ ------------- --------------
Total exceptional items net of tax 13.2 (30.7) (26.1)
------------------------------------------------------ ------------ ------------- --------------
Exceptional items arising
The Group disposed of its interest in Viapath with effect from
31 May 2020. The Group had historically impaired its investment in
Viapath as it was not receiving any returns from this joint venture
due to the level of investment being made back into the business,
therefore the carrying value of the Group's investment in Viapath
was nil. Following the announcement during the first half of 2020
that Viapath had been unsuccessful in the tender process to provide
pathology services to five South East London hospitals as well as
associated GP surgeries, the Group exited the joint venture,
selling its stake to the remaining two investors. In May 2020, the
proceeds received by the Group in exchange for its holding in the
joint venture represents the profit on disposal of GBP11.0m.
Other exceptional operating items
At the same time as disposing of the Group's interest in
Viapath, certain historical balances were recovered which had
previously been impaired. Since the impairments associated with
those balances were historically treated as exceptional items, the
reversals of these impairments have been treated consistently. The
exceptional credit of GBP2.5m consists of the recovery of a loan
from the Group into the joint venture of GBP1.2m and the recovery
of profit share which was previously considered to be
irrecoverable.
The Group recognised the final costs associated with the
Strategy Review during 2019 and, on review, certain costs which had
not been incurred were released back to exceptional operating items
resulting in a credit to exceptional items of GBP0.1m during the
six months ended 30 June 2020 (2019: exceptional restructuring
costs of GBP5.4m). Non-exceptional restructuring charges are
incurred by the business as part of normal operational activity,
which in the period totalled GBP3.4m (2019: GBP2.2m) and were
included within operating profit before exceptional items.
There were exceptional costs totalling GBP1.2m (2019: GBP24.0m)
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 2020. The cost
in the first half of 2019 included GBP22.9m for the fine which
resulted from the SFO's investigation into Serco companies.
During 2019, the Group reached a legal settlement in relation to
a commercial dispute which resulted in the release of a provision
which accounted for the majority of the GBP19.3m exceptional
credit. The treatment of the release as exceptional was consistent
with the recognition of the charge associated with the same legal
matter in 2014. During the six months ended 30 June 2020, the Group
reached an agreement with its insurer for the reimbursement of
GBP2.6m of legal fees associated with the matter and, consistent
with the treatment of other associated amounts, this has been
treated as an exceptional credit.
The Group completed the acquisition of the Naval Systems
Business Unit (NSBU) from Alion Science and Technology in 2019. The
transaction and implementation costs incurred during the six months
ended 30 June 2020 of GBP1.4m have been treated as exceptional
costs in line with the Group's accounting policy and the treatment
of similar costs incurred during the year ended 31 December
2019.
Exceptional Tax
Exceptional tax for the period was a tax charge of GBP0.4m
(2019: GBP0.4m credit) which arises on exceptional items within
operating profit.
The net exceptional gain only gave rise to a charge of GBP0.4m,
as the majority of these items were incurred in the UK where they
only impact our unrecognised deferred tax in relation to
losses.
Finance costs and investment revenue
Investment revenue of GBP0.7m (2019: GBP1.5m) consists primarily
of interest accruing on net retirement benefit assets of GBP0.6m
(2019: GBP1.1m). The finance costs of GBP13.4m (2019: GBP12.0m)
include interest incurred on the USPP loans and the Revolving
Credit Facility of GBP7.4m (2019: GBP6.7m) and lease interest
payable of GBP4.8m (2019: GBP2.4m) as well as other financing
related costs including the impact of foreign exchange on financing
activities.
Of the increase in lease interest paid, GBP2.3m relates to the
Group's AASC contract. The lease costs on the COMPASS contract (the
predecessor contract to AASC) in 2019 were recorded as operating
lease costs due to the short-term transitional arrangement under
IFRS16 Leases and any interest costs for longer term leases being
offset by OCP utilisation as COMPASS was an onerous contract.
Tax
Tax charge
Underlying Tax
An underlying tax charge of GBP17.0m is recognised on Underlying
Trading Profit after net finance costs. The effective tax rate
(26.2%) is slightly higher than in 2019 (24.4%). This is due
primarily to a change in the mix of where profits and losses have
been made including a notable increase in profits in the Americas,
together with the impact of movements in provisions as part of our
regular reassessment of tax exposures across the Group.
Pre-exceptional tax
A tax charge of GBP5.7m (2019: GBP8.5m) has been recognised on
pre-exceptional profits which includes underlying tax of GBP17.0m,
the tax impact of amortisation of intangibles arising on
acquisition of GBP0.9m and a GBP10.4m credit on non-underlying
items. Of the credit related to non-underlying items, GBP8.0m
relates to the pension scheme. Generally, 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 they 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 maximum level supported by
future profit forecasts, the increase in the deferred tax liability
associated with the pension scheme (with the cost reported in the
SOCI) leads to a corresponding increase in the deferred tax asset
to match the future profit forecasts. Such an increase in the
deferred tax asset therefore leads to a credit 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. The
remaining credit on non-underlying items of GBP2.4m relates to a
revaluation of the UK deferred tax asset to reflect that the
expected future UK corporate tax rate will now remain at 19%.
The tax rate on profits before exceptional items at 9.1% is
lower than the UK standard corporation tax rate of 19%. This is
mainly due to the impact of non-underlying credits discussed above
together with the use of unrecognised deferred tax assets brought
forward to offset current year profits and the impact of our joint
ventures whose post-tax results are included in our pre-tax profit
reducing the rate. This is partially offset by higher rates of tax
on profits arising on our international operations.
Exceptional tax
An analysis of exceptional tax is provided in relation to
exceptional items above.
Deferred tax assets
At 30 June 2020 there is a net deferred tax asset of GBP37.4m
(December 2019: GBP37.2). This consists of a deferred tax asset of
GBP68.5m (December 2019: GBP63.9m) and a deferred tax liability of
GBP31.1m (December 2019: GBP26.7m).
A GBP23.5m UK tax asset has been recognised at 30 June 2020
(December 2019: GBP21.1m) on the basis of forecast utilisation
against future taxable profits. The increase in the asset during
the period is due to a change in expected future UK tax rate from
17% to 19%.
At June 2020, the Group has an estimated unrecognised deferred
tax asset in relation to UK losses of GBP144m which is contingent
on future improvements in the UK profit forecast.
Taxes paid
Net corporate income tax of GBP12.0m was paid during the period,
relating primarily to our operations in AsPac (GBP11.3m), North
America (GBP1.9m), Europe (GBP0.7m) and Middle East (GBP0.3m). 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
GBP2.2m.
The amount of tax paid (GBP12.0m) differs from the tax charge in
the period (GBP6.1m) mainly due to corporate tax deferral schemes
which have allowed the deferral of GBP3.9m of tax payments globally
as well as timing differences between tax credits arising and the
corresponding reduction in cash tax. In addition, taxes
paid/received from Tax Authorities can arise in later periods to
the associated tax charge/credit and also there is a time lag on
receipts of cash from joint ventures and associates for losses
transferred to them resulting in a net tax inflow.
Dividends
At the time of our full year 2019 results on 26 February 2020,
the Group recommended paying a final dividend in respect of the
2019 financial year. This would have been the first time for five
years the Group had paid a dividend, and the recommendation was
based on a strong performance in 2019 and the prospect of further
good progress in increasing underlying earnings, reducing financial
leverage and lower outflows of cash related to onerous contracts.
However, on 2 April 2020, and in response to the Covid-19 crisis,
guidance was withdrawn for the year and it was announced that the
payment of management bonuses would be deferred, the dividend would
be withdrawn and consideration would be given to reinstating it
when appropriate. The Group had decided to take advantage of
government schemes to support companies' liquidity by deferring tax
payments, and took the view that it would be inappropriate to use
that cash for anything other than its intended purpose of
protecting the financial strength and resilience of our
business.
Since then, the business has continued to perform well, guidance
for the year has been reinstated, and levels of net debt within the
business have declined. However, significant uncertainty remains,
there is a wide range of possible outcomes for the year, and we
think that prudence would dictate that we continue to take
advantage of Government liquidity support, probably into the fourth
quarter. If circumstances allow, and the Group can sensibly repay
the deferred taxes towards the end of the year, the Board believes
that it will then be in a position to consider whether it should
distribute all or part of what would have been paid as the final
dividend in respect of 2019. Under the same logic, it has also
decided to defer a decision on whether the Group should pay any
interim dividend in respect of 2020 until the fourth quarter as
well.
Share count and EPS
The weighted average number of shares for EPS purposes was
1,226.5m for the six months ended 30 June 2020 (2019: 1,122.0m) and
diluted weighted average number of shares was 1,244.7m (2019:
1,146.3m).
In March 2020, 10,000,000 shares were issued to the Employee
Share Ownership Trust to satisfy awards under the Group's share
award schemes (March 2019: 13,600,000 shares). In May 2019, the
company completed a placement of 111,216,400 new ordinary shares of
2p each raising net proceeds of GBP138.7m.
Basic EPS before exceptional items was 4.66p per share (2019:
2.58p); including the impact of exceptional items, Basic EPS was
5.74p (2019: loss of 0.15p). Basic Underlying EPS was 3.91p (2019:
2.67p).
Diluted EPS before exceptional items was 4.60p (2019: 2.53p);
including the impact of exceptional items, Diluted EPS was 5.66p
(2019: loss of 0.15). Diluted Underlying EPS was 3.86p (2019:
2.62p).
Cash flows
The UTP of GBP77.6m (2019: GBP50.6m) converts into a trading
cash inflow of GBP105.5m (2019: GBP28.1m). The improvement in 2020
cash conversion reflects the increase in profitability from revenue
growth, albeit tempered by the increase in associated working
capital requirements. Working capital movements in total have
resulted in a net inflow of GBP19.2m, however this includes the
benefit from tax deferrals of GBP45.1m as governments across a
number of the Group's operating locations provide deferral schemes
for direct or indirect taxes, or both. Excluding this, the working
capital requirements associated with growth have led to an outflow
of GBP25.9m (2019: GBP7.5m). As the Group's OCPs reduce,
utilisation has also reduced to the extent that OCP utilisation in
the period reduced by GBP40.4m to GBP1.7m (2019: GBP42.1m). In
2019, GBP12.6m of the utilisation was not a cash item but rather
was related to the impairment of right of use assets created on
adoption of IFRS16 Leases within onerous contracts. There has been
no such impairment in 2020.
The table below shows the operating profit and FCF reconciled to
movements in Net Debt. FCF for the period was an inflow of GBP80.9m
compared to an inflow of GBP0.4m in 2019. The improvement in FCF is
largely as a result of improved trading cash inflows as discussed
above. The improvement in trading cash flows, as shown above, is
further improved through a reduction in taxes paid but offset
partially by an increase in interest paid. Taxes paid benefit from
the deferral schemes described above, whilst interest has increased
due to an increase in the value of lease liabilities outstanding
throughout the period.
Adjusted Net Debt decreased by GBP71.6m in 2020, a
reconciliation of which is provided at the bottom of the following
table.
The net cash inflow on acquisition and disposal of subsidiaries
of GBP7.4m (2019: outflow of GBP9.3m) includes GBP11.0m of
consideration received by the Group for its share of the Viapath
joint venture. Offsetting this are costs associated with the
acquisition of NSBU including deferred consideration and working
capital adjustments.
Exceptional cash outflows of GBP4.2m as shown below differ to
the net exceptional credit to the income statement of GBP13.2m due
to the cash associated with the disposal of Viapath being shown as
a net cash inflow on disposal of subsidiaries and operations and
the presence of cash outflows associated with costs provided for
during the prior year.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
---------------------------------------------------- -------------- -------------- --------------
Operating profit 89.1 17.2 102.5
Remove exceptional items (13.6) 31.1 23.4
---------------------------------------------------- -------------- -------------- --------------
Operating profit before exceptional items 75.5 48.3 125.9
Less: profit from joint ventures and
associates (7.0) (13.5) (27.5)
Movement in provisions 5.6 (35.4) (43.1)
Depreciation, amortisation and impairment
of leased property, plant and equipment
and intangible assets 46.4 32.5 75.6
Depreciation, amortisation and impairment
of owned property, plant and equipment
and intangible assets 20.3 18.6 43.3
Other non-cash movements 6.4 5.6 9.3
---------------------------------------------------- -------------- -------------- --------------
Operating cash inflow before movements
in working capital, exceptional items
and tax 147.2 56.1 183.5
Working capital movements 19.2 (7.5) (0.1)
Tax paid (12.0) (17.2) (31.2)
Non-cash R&D expenditure - - (0.1)
---------------------------------------------------- -------------- -------------- --------------
Cash flow from operating activities before
exceptional items 154.4 31.4 152.1
Dividends from joint ventures and associates 12.4 13.4 25.4
Interest received 0.1 0.1 0.4
Interest paid (12.7) (9.7) (21.4)
Capital element of lease repayments (52.8) (22.3) (70.2)
Capitalised finance costs paid - (0.9) (1.2)
Purchase of intangible and tangible assets
net of proceeds from disposals (20.6) (11.7) (23.3)
Proceeds received from exercise of share
options 0.1 0.1 0.2
---------------------------------------------------- -------------- -------------- --------------
Free Cash Flow 80.9 0.4 62.0
Net cash inflow/(outflow) on acquisition
and disposal of subsidiaries and operations 7.4 (9.3) (193.2)
Issue of share capital - 138.7 138.7
Other movements on investment balances 1.2 (0.1) 0.2
Capitalisation and amortisation of loan
costs (0.6) 0.4 0.1
Exceptional items (4.2) (12.1) (49.2)
Cash movements on hedging instruments (0.9) (7.0) (2.0)
Foreign exchange (loss)/gain on Adjusted
Net Debt (12.2) 0.3 2.1
---------------------------------------------------- -------------- -------------- --------------
Movement in Adjusted Net Debt 71.6 111.3 (41.3)
Opening Adjusted Net Debt (214.5) (173.2) (173.2)
---------------------------------------------------- -------------- -------------- --------------
Closing Adjusted Net Debt (142.9) (61.9) (214.5)
Lease Liabilities (359.9) (144.8) (369.9)
---------------------------------------------------- -------------- -------------- --------------
Closing Net Debt (502.8) (206.7) (584.4)
---------------------------------------------------- -------------- -------------- --------------
Net Debt
As at As at As at
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
---------------------------------------- -------------- -------------- --------------
Cash and cash equivalents 244.9 173.4 89.5
Loans payable (390.4) (240.6) (305.0)
Lease liabilities (359.9) (144.8) (369.9)
Derivatives relating to Net Debt 2.6 5.3 1.0
---------------------------------------- -------------- -------------- --------------
Net Debt (502.8) (206.7) (584.4)
Exclude Lease liabilities 359.9 144.8 369.9
---------------------------------------- -------------- -------------- --------------
Adjusted Net Debt (142.9) (61.9) (214.5)
---------------------------------------- -------------- -------------- --------------
Average Adjusted Net Debt as calculated on a daily basis for the
six months ended 30 June 2020 was GBP283m (2019: GBP219m excluding
the GBP138.7m net inflow from the placement of shares in May 2019).
Peak Adjusted Net Debt was GBP356m (2019: GBP279m). The difference
between the average Adjusted Net Debt throughout the period and the
Adjusted Net Debt as at 30 June 2020 reflects working capital
improvements in the Americas division, particularly in relation to
new contracts which saw a significant improvement toward the end of
the period, as improved billing processes began to deliver
benefits, as well as the deferral of tax payments from March 2020,
the most significant of which were towards the end of the
period.
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 30 June 2020, the Group had committed funding of GBP518m
(at 31 December 2019: GBP508m), comprising GBP223m of private
placement notes, a GBP45m acquisition loan facility which was fully
drawn and a GBP250m revolving credit facility (RCF), of which
GBP125m was undrawn.
The Group's RCF provides GBP250m of committed funding for five
years from the arrangement date in December 2018. The private
placement notes are repayable in bullet payments between 2021 and
2024.
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 Adjusted Net Debt and
for this proportion to increase as the ratio of EBITDA to interest
expense falls. As at 30 June 2020, 100% (31 December 2019: 99%) of
the Group's Adjusted Net Debt was at fixed rates.
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. The
Group's customer base is predominantly Government or
Government-backed and as a result the Group's expected credit loss
at a given point in time across the entirety of the customer base
is immaterial.
Debt covenants
The principal financial covenant ratios are consistent across
the private placement loan notes 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.
Following the refinancing in December 2018, the debt covenants
have been amended to include the impact of IFRS15 Revenue from
Contracts with Customers. The covenants continue to exclude the
impact of IFRS16 Leases on the Group's results.
12 months 12 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 * 2019
GBPm GBPm GBPm
----------------------------------------------------- ------------- ------------- -------------
Operating profit before exceptional
items 153.1 117.2 125.9
Remove: Amortisation and impairment
of intangibles arising on acquisition 10.2 4.7 7.5
Trading Profit 163.3 121.9 133.4
Exclude: Share of joint venture post-tax
profits (21.0) (27.3) (27.5)
Include: Dividends from joint ventures 24.4 27.0 25.4
Add back: Net non-exceptional charges
to OCPs 6.6 - 7.2
Add back: Depreciation, amortisation
and impairment of owned property, plant
and equipment and non-acquisition intangible
assets 34.8 31.6 35.8
Add back: Depreciation, amortisation
and impairment of property, plant and
equipment and non-acquisition intangible
assets held under finance leases -
in accordance with IAS17 Leases 5.7 6.4 5.8
Add back: Foreign exchange credit on
investing and financing arrangements (0.1) (0.9) (0.8)
Add back: Share based payment expense 11.9 13.4 11.6
Other covenant adjustments to EBITDA (2.9) (1.6) 9.8
----------------------------------------------------- ------------- ------------- -------------
Covenant EBITDA 222.7 170.5 200.7
----------------------------------------------------- ------------- ------------- -------------
Net finance costs 24.0 18.1 21.8
Exclude: Net interest receivable on
retirement benefit obligations 1.6 1.5 2.1
Exclude: Movement in discount on other
debtors - 0.6 0.1
Exclude: Foreign exchange on investing
and financing arrangements (0.1) (0.9) (0.8)
Add back: Movement in discount on provisions (0.1) (1.3) (1.2)
Other covenant adjustments to net finance
costs resulting from IFRS16 Leases (9.1) (2.2) (6.6)
----------------------------------------------------- ------------- ------------- -------------
Covenant net finance costs 16.3 15.8 15.4
Adjusted Net Debt 142.9 61.9 214.5
Obligations under finance leases -
in accordance with IAS17 Leases 6.8 11.7 8.9
Recourse Net Debt 149.7 73.6 223.4
Exclude: Disposal vendor loan note,
encumbered cash and other adjustments 5.3 4.2 4.1
Covenant adjustment for average FX
rates (6.4) (4.4) 7.6
----------------------------------------------------- ------------- ------------- -------------
CTNB 148.6 73.4 235.1
----------------------------------------------------- ------------- ------------- -------------
CTNB/covenant EBITDA (not to exceed
3.5x) 0.67x 0.43x 1.17x
----------------------------------------------------- ------------- ------------- -------------
Covenant EBITDA/covenant net finance
costs (at least 3.0x) 13.7x 10.8x 13.0x
----------------------------------------------------- ------------- ------------- -------------
* Results for the 12 months ended 30 June 2019 have been
adjusted to apply consistent presentation of covenant adjustments
to EBITDA with the other reported periods. There is no overall
impact to covenant EBITDA.
Had the Group made tax payments of GBP49.0m during the six
months to 30 June 2020, rather than deferring them, the
Consolidated Total Net Borrowings would have been GBP49.0m higher
at GBP197.6m. The result would have been a multiple of 0.89x as
opposed to the multiple of 0.67x as shown above. The Group would
still have remained well within its covenant requirements which
require the ratio to stay below 3.5x.
Net assets summary
As at As at As at
30 June 30 June 31 December
2020 2019 2019 *
GBPm GBPm GBPm
-------------------------------------------- ---------------- ---------------- ----------------
Non current assets
Goodwill 710.3 581.4 674.2
Other intangible assets 91.3 58.5 96.5
Property, plant and equipment 399.3 161.3 392.6
Other non current assets 44.8 52.1 50.1
Deferred tax assets 68.5 69.9 63.9
Retirement benefit assets 125.1 95.2 78.3
1,18
-------------------------------------------- ---------------- ---------------- ----------------
Total non current assets 1,439.3 1,018.4 1,355.6
-------------------------------------------- ---------------- ---------------- ----------------
Current assets
Inventories 20.3 18.9 18.3
Contract assets, trade receivables
and other current assets 682.1 600.1 610.4
Current tax assets 5.5 7.0 6.8
Cash and cash equivalents 244.9 173.4 89.5
-------------------------------------------- ---------------- ---------------- ----------------
Total current assets 952.8 799.4 725.0
-------------------------------------------- ---------------- ---------------- ----------------
Total assets 2,392.1 1,817.8 2,080.6
-------------------------------------------- ---------------- ---------------- ----------------
Current liabilities
Contract liabilities, trade payables
and other current liabilities (636.5) (524.5) (558.9)
Current tax liabilities (20.5) (20.9) (18.7)
Provisions (56.9) (123.5) (58.4)
Lease obligations (86.8) (52.0) (84.6)
Loans (176.7) (28.4) (56.1)
-------------------------------------------- ---------------- ---------------- ----------------
Total current liabilities (977.4) (749.3) (776.7)
-------------------------------------------- ---------------- ---------------- ----------------
Non current liabilities
Contract liabilities, trade payables
and other non current liabilities (66.3) (95.7) (72.7)
Deferred tax liabilities (31.1) (25.0) (26.7)
Provisions (112.6) (91.2) (103.4)
Lease obligations (273.1) (92.8) (285.3)
Loans (213.7) (212.2) (248.9)
Retirement benefit obligations (34.7) (19.7) (24.0)
-------------------------------------------- ---------------- ---------------- ----------------
Total non current liabilities (731.5) (536.6) (761.0)
-------------------------------------------- ---------------- ---------------- ----------------
Total liabilities (1,708.9) (1,285.9) (1,537.7)
-------------------------------------------- ---------------- ---------------- ----------------
Net assets 683.2 531.9 542.9
-------------------------------------------- ---------------- ---------------- ----------------
* During the six months ended 30 June 2020, the Group finalised
fair value adjustments associated with the acquisition of NSBU
which was effective 1 August 2019. As a result, goodwill has been
remeasured and the fair value of acquired assets and liabilities
have been adjusted, resulting in an amendment to their carrying
value as at 31 December 2019. Further information on the fair value
adjustments can be found in Note 5 to the Condensed Consolidated
Financial Statements.
At 30 June 2020, the balance sheet had net assets of GBP683.2m,
a movement of GBP140.3m from the closing net asset position of
GBP542.9m as at 31 December 2019. The movement in net assets is
mainly due to the following movements:
-- An increase in goodwill of GBP36.1m due to the impact of foreign exchange.
-- An increase in the net retirement benefit asset of GBP36.1m due to the
return on assets held by the various pension schemes in which the Group
is involved exceeding the increase in the associated defined benefit liabilities
arising from changes in actuarial assumptions.
-- An increase in contract assets, trade receivables and other current assets
of GBP71.7m, which includes an increase in contract assets of GBP37.7m
and an increase in trade receivables of GBP32.7m which have arisen as a
result of increased operational activity and timing differences in receipts
from certain key customers between the 2019 year end and 30 June 2020.
-- Cash and cash equivalents have increased by GBP155.4m. Since the year end,
the Group has generated cash inflows of GBP154.4m from its operations,
including GBP19.2m from movements in working capital. Net spend on tangible
and intangible assets has been GBP20.6m and the capital element of lease
repayments during the six months was GBP52.8m. The Group has also benefitted
from GBP49.0m of tax deferrals of amounts that would typically have been
paid to governments during the six months ended 30 June 2020. The GBP45.1m
of liabilities associated with payroll tax, employment tax and indirect
tax deferrals are currently included in other current liabilities. In addition,
following the onset of the Covid-19 pandemic, the Group made the decision
to hold cash in hand to a level higher than has been seen over recent years
to ensure sufficient liquidity availability should it be required without
notice.
-- Net loan balances have increased by GBP85.4m following the decision to
hold increased cash in hand balances as well as adverse foreign exchange
movements in relation to the Group's US dollar denominated private placement
debt.
Provisions
The total of current and non-current provisions has increased by
GBP7.7m since 31 December 2019. The movement is predominantly due
to:
-- An increase in restructuring provisions of GBP6.4m which includes a net
charge of GBP4.9m within UTP and a foreign exchange impact of GBP1.5m as
a large proportion of the Group's restructuring provisions are held in
the AsPac and Americas divisions. The restructuring provisions relate to
ongoing corporate restructuring plans, typically aimed at improving operational
efficiency.
-- An increase of GBP5.2m across employee terminal gratuity and long service
award provisions where charges associated with ongoing services to the
Group of GBP5.4m are higher than amounts utilised during the year at GBP2.7m.
As these provisions are concentrated in the AsPac and Middle East divisions,
there has also been a currency impact of GBP2.5m which has increased the
provisions.
-- A decrease of GBP2.2m in onerous contract provisions as described below.
-- The balance of OCPs at 30 June 2020 was GBP14.3m (2019: GBP26.7m). 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 release to OCPs was GBP0.6m in 2020
(2019: GBPnil) and utilisation was GBP1.7m (2019: GBP42.1m).
In 2020, the release from OCPs is reflective of the Group's
ability to forecast the final years of contracts which are nearing
completion. Additional charges of GBP2.4m (2019: GBP3.9m) have been
made in respect of future losses on existing onerous contract
provisions to reflect the updated forecasts as settlements are
agreed and contracts near completion. The additional charges
represent certain operational issues and the associated risks which
are resulting in charges to existing onerous contract
provisions.
The Group does not expect to enter into new OCPs, however given
the nature of the Group's operations, there is an inherent risk
that a contract can become onerous. The Group operates a large
number of long-term contracts at different phases of their contract
life cycle. Within the Group's portfolio, there are a small number
of contracts where the balance of risks and opportunities indicates
that they might be onerous if transformation initiatives or
contract changes are not successful. The Group has concluded that
these contracts do not require an onerous contract provision on an
individual basis. Following the individual contract reviews, the
Group has also undertaken a top down assessment which assumes that,
whilst the contracts may not be onerous on an individual basis, as
a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to
avoid a contract loss, will not be fully successful, and it is more
likely than not that one or more of these contracts will be
onerous. Therefore, in considering the Group's overall onerous
contract provision, the Group has made a best estimate of the
provision required to take
into consideration this portfolio risk. As a result, the risk of
OCPs and the monitoring of individual contracts for indicators
remains a critical estimate for the Group. The amount recognised in
the period is GBP2.3m (2019: GBPnil) at the Underlying Trading
Profit level within the Corporate costs segment. The Trading Loss
for the Corporate segment after this charge is GBP22.6m (2019:
GBP21.5m). This increase is due to the risks associated with the
Group's UK leisure business which has been significantly impacted
by Covid-19. Negotiations continue with the Group's customers to
mitigate these losses and enable the leisure centres to open in the
safest way possible. However, due to the short term remaining on
some of these contracts the Directors believe that the risk of one
contract becoming onerous in this portfolio is more likely than
not.
Disposals
On 31 May 2020, the Group disposed of its 33% interest in
Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP
(together "Viapath").
The Group had historically impaired its investment in Viapath as
it was not receiving any returns from this joint venture due to the
level of investment being made back into the business, therefore
the carrying value of the Group's investment in Viapath was nil.
Following the announcement during the first half of 2020 that
Viapath had been unsuccessful in the tender process to provide
pathology services to five South East London hospitals as well as
associated GP surgeries, the Group exited the joint venture,
selling its stake to the remaining two investors. Total cash
receipts on the date of the disposal were GBP15.1m. Of the
GBP15.1m, GBP1.2m was in respect of a loan that had previously been
impaired through exceptional costs and so the reversal has been
recognised as an exceptional gain. An additional amount of GBP2.9m
was received as a profit share which, because the Group's
investment in Viapath was fully impaired, resulted in a profit
being recognised. Since GBP1.0m of the impairment was recorded
within exceptional items in prior years, the associated profit was
treated as exceptional with the remainder being recognised within
Underlying Trading Profit. The remaining GBP11.0m was received in
respect of the Group's interest in Viapath and so, with no carrying
value attributed to Viapath, this has been recognised as a gain on
disposal of the investment in the joint venture.
Covid-19
Coronavirus (Covid-19) was originally identified as a disease in
China late in 2019. Following global transmission of the disease
early in 2020, Europe and other continents began identifying cases
which continued to rise in number such that on 12 March 2020 the
World Health organisation characterised the outbreak of Covid-19 as
a global pandemic.
The net impact of Covid-19 on the profitability of Serco has
been limited as explained in the CEO review. Most of the Group's
contracts deliver critical services to governments and the delivery
requirements of these have not been impacted by Covid-19. However,
a small number of contracts within the Group have been impacted by;
lower volumes within its UK Transport business; higher levels of
absenteeism and increased service performance in its UK Health
contracts; closure of operations including leisure centres in the
UK and the Driver Examination Services contract in Canada; and
delays in project work such as the delivery of the Antarctic Supply
Research Vessel in Australia. The negative impact from these
contracts has been offset to some extent by additional services
being delivered to assist governments with their management and
recovery from the Covid-19 pandemic, and financial support from its
customers. It is evident that the most significant impact on the
Group's operations has been within the UK.
Prior to the extent of the impact of Covid-19 being known, the
Group took the following steps to strengthen its liquidity position
during the first half:
-- Deferred, and subsequently withdrew, proposed 2019 final dividend of 1p
per share with a cash saving of GBP12m;
-- Deferred payment of the bonuses of its Executive Directors until the earlier
of either a dividend being paid to shareholders or the end of 2020;
-- Deferred VAT payments in the UK to the value of GBP38m, with the intention
being that these are repaid during the second half of 2020, ahead of the
31 March 2021 deadline;
-- Benefitted from further tax deferrals in North America and Australia of
GBP10m which will be repaid to the extent possible in the second half of
2020; and
-- Received c.GBP5m of support from the Coronavirus Job Retention Scheme,
mainly in respect of employees within the UK Leisure business. The Group
does not intend on taking the GBP1,000 per person cash incentive available
from the UK Government for employees returning to work, most notably after
leisure centres in the UK reopened.
As a result of the steps taken and good operating performance,
the Group's liquidity has remained strong since the emergence of
Covid-19. As at 30 June 2020, the Group had GBP518m of committed
credit facilities and committed headroom of GBP366m.
Claim for losses in respect of the 2013 share price
reduction
The Group has received a claim seeking damages for alleged
losses following the reduction in Serco's share price in 2013. The
merit, likely outcome and potential impact on the Group of any such
litigation that either has been or might potentially be brought
against the Group is subject to a number of significant
uncertainties and, therefore, it is not possible to assess the
quantum of any such litigation as at the date of this
disclosure.
Angus Cockburn
Group Chief Financial Officer
5 August 2020
Statement of Directors' Responsibilities
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU;
-- the interim management report includes a fair review of the information required by:
o DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
o DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
By order of the Board:
Rupert Soames Angus Cockburn
Group Chief Executive Group Chief Financial Officer
INDEPENT REVIEW REPORT TO SERCO GROUP PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2020 which comprises the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement
of Comprehensive Income, the Condensed Consolidation Statement of
Changes in Equity, the Condensed Consolidated Balance Sheet, the
Condensed Consolidated Cash Flow Statement and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2020 is not prepared, in all material respects, in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU and
the Disclosure Guidance and Transparency Rules ("the DTR") of the
UK's Financial Conduct Authority ("the UKFCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
John Luke
for and on behalf of KPMG LLP
15 Canada Square
London
E14 5GL
5 August 2020
Financial Statements
Condensed Consolidated Income Statement
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------------------------------- ------------ ------------ ------------
Revenue 1,822.2 1,475.5 3,248.4
Cost of sales (1,643.0) (1,336.9) (2,928.3)
--------------------------------------------------- ------------ ------------ ------------
Gross profit 179.2 138.6 320.1
Administrative expenses
Administrative expenses (105.7) (101.5) (214.2)
Exceptional profit on disposal of subsidiaries
and operations 11.0 - -
Other exceptional operating items 2.6 (31.1) (23.4)
Other expenses - amortisation and impairment
of intangibles arising on acquisition (5.0) (2.3) (7.5)
--------------------------------------------------- ------------ ------------ ------------
Total administrative expenses (97.1) (134.9) (245.1)
Share of profits in joint ventures and associates,
net of interest and tax 7.0 13.5 27.5
--------------------------------------------------- ------------ ------------ ------------
Operating profit 89.1 17.2 102.5
--------------------------------------------------- ------------ ------------ ------------
Operating profit before exceptional items 75.5 48.3 125.9
--------------------------------------------------- ------------ ------------ ------------
Investment revenue 0.7 1.5 2.7
Finance costs (13.4) (12.0) (24.5)
Net finance costs (12.7) (10.5) (21.8)
--------------------------------------------------- ------------ ------------ ------------
Profit before tax 76.4 6.7 80.7
--------------------------------------------------- ------------ ------------ ------------
Profit before tax and exceptional items 62.8 37.8 104.1
--------------------------------------------------- ------------
Tax on profit before exceptional items (5.7) (8.5) (27.4)
Exceptional tax (0.4) 0.4 (2.7)
--------------------------------------------------- ------------ ------------ ------------
Tax charge (6.1) (8.1) (30.1)
--------------------------------------------------- ------------ ------------ ------------
Profit/(loss) for the period 70.3 (1.4) 50.6
--------------------------------------------------- ------------ ------------ ------------
Attributable to:
Equity owners of the Company 70.4 (1.7) 50.4
Non controlling interest (0.1) 0.3 0.2
--------------------------------------------------- ------------ ------------ ------------
Earnings/(loss) per share (EPS)
Basic EPS 5.74p (0.15)p 4.31p
Diluted EPS 5.66p (0.15)p 4.21p
--------------------------------------------------- ------------ ------------ ------------
Condensed Consolidated Statement of Comprehensive Income
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
------------------------------------------------- ------------ ------------ ------------
Profit/(loss) for the period 70.3 (1.4) 50.6
Other comprehensive income for the period:
Items that will not be reclassified subsequently
to profit or loss:
Net actuarial gain/(loss) on defined benefit
pension schemes* 29.4 1.9 (20.3)
Actuarial gain on reimbursable rights* 3.0 1.9 3.2
Tax relating to items not reclassified* (8.0) (0.9) 2.7
Share of other comprehensive income in joint
ventures and associates 1.4 0.7 1.3
Items that may be reclassified subsequently
to profit or loss:
Net exchange gain/(loss) on translation of
foreign operations** 37.9 (2.4) (33.3)
Fair value gain/(loss) on cash flow hedges** 0.3 (0.6) (0.1)
Total other comprehensive income/(loss) for
the period 64.0 0.6 (46.5)
Total comprehensive income/(loss) for the period 134.3 (0.8) 4.1
------------------------------------------------- ------------ ------------ ------------
Attributable to:
Equity owners of the Company 134.3 (1.1) 4.0
Non controlling interest - 0.3 0.1
------------------------------------------------- ------------ ------------ ------------
* 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
2019
(audited) 22.0 327.9 0.1 111.1 (137.4) 75.0 (18.7) 5.4 385.4 1.4
Opening
balance
adjustment -
IFRS16 - - - 3.0 - - - - 3.0 -
Total
comprehensive
income for
the
period - - - (1.0) 2.9 - - (3.0) (1.1) 0.3
Issue of share
capital 2.5 135.0 - - - - (0.3) - 137.2 -
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (9.3) 9.4 - 0.1 -
Expense in
relation
to share
based
payments - - - - - 5.6 - - 5.6 -
At 30 June
2019
(unaudited) 24.5 462.9 0.1 113.1 (134.5) 71.3 (9.6) 2.4 530.2 1.7
Total
comprehensive
income for
the
period - - - 52.8 (17.3) - - (30.4) 5.1 (0.2)
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (5.1) 5.2 - 0.1 -
Expense in
relation
to share
based
payments - - - - - 6.0 - - 6.0 -
At 31 December
2019
(audited) 24.5 462.9 0.1 165.9 (151.8) 72.2 (4.4) (28.0) 541.4 1.5
Total
comprehensive
income for
the
period - - - 71.7 24.4 - - 38.2 134.3 -
Issue of share
capital 0.2 (0.2) - -
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (2.1) 2.2 - 0.1 -
Expense in
relation
to share
based
payments - - - - - 5.9 - - 5.9 -
At 30 June
2020
(unaudited) 24.7 462.9 0.1 237.6 (127.4) 76.0 (2.4) 10.2 681.7 1.5
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
Condensed Consolidated Balance Sheet
As at As at As at
30 June 30 June 31 December
2020 2019 2019 *
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------------------------- ------------ ------------ -------------
Non current assets
Goodwill 710.3 581.4 674.2
Other intangible assets 91.3 58.5 96.5
Property, plant and equipment 399.3 161.3 392.6
Interests in joint ventures and associates 19.6 21.1 23.6
Trade and other receivables 25.1 30.9 26.5
Derivative financial instruments 0.1 0.1 -
Deferred tax assets 68.5 69.9 63.9
Retirement benefit assets 125.1 95.2 78.3
--------------------------------------------- ------------ ------------ -------------
1,439.3 1,018.4 1,355.6
--------------------------------------------- ------------ ------------ -------------
Current assets
Inventories 20.3 18.9 18.3
Contract assets 325.2 277.4 287.5
Trade and other receivables 352.6 315.0 319.9
Current tax assets 5.5 7.0 6.8
Cash and cash equivalents 244.9 173.4 89.5
Derivative financial instruments 4.3 7.7 3.0
--------------------------------------------- ------------ ------------ -------------
952.8 799.4 725.0
Total assets 2,392.1 1,817.8 2,080.6
--------------------------------------------- ------------ ------------ -------------
Current liabilities
Contract liabilities (62.3) (90.8) (66.8)
Trade and other payables (572.7) (431.6) (490.2)
Derivative financial instruments (1.5) (2.1) (1.9)
Current tax liabilities (20.5) (20.9) (18.7)
Provisions (56.9) (123.5) (58.4)
Lease obligations (86.8) (52.0) (84.6)
Loans (176.7) (28.4) (56.1)
--------------------------------------------- ------------ ------------ -------------
(977.4) (749.3) (776.7)
--------------------------------------------- ------------ ------------ -------------
Non current liabilities
Contract liabilities (51.4) (82.4) (58.2)
Trade and other payables (14.9) (13.3) (14.5)
Deferred tax liabilities (31.1) (25.0) (26.7)
Provisions (112.6) (91.2) (103.4)
Lease obligations (273.1) (92.8) (285.3)
Loans (213.7) (212.2) (248.9)
Retirement benefit obligations (34.7) (19.7) (24.0)
--------------------------------------------- ------------ ------------ -------------
(731.5) (536.6) (761.0)
--------------------------------------------- ------------ ------------ -------------
Total liabilities (1,708.9) (1,285.9) (1,537.7)
--------------------------------------------- ------------ ------------ -------------
Net assets 683.2 531.9 542.9
--------------------------------------------- ------------ ------------ -------------
Equity
Share capital 24.7 24.5 24.5
Share premium account 462.9 462.9 462.9
Capital redemption reserve 0.1 0.1 0.1
Retained earnings 237.6 113.1 165.9
Retirement benefit obligations reserve (127.4) (134.5) (151.8)
Share based payment reserve 76.0 71.3 72.2
Own shares reserve (2.4) (9.6) (4.4)
Hedging and translation reserve 10.2 2.4 (28.0)
--------------------------------------------- ------------ ------------ -------------
Equity attributable to owners of the Company 681.7 530.2 541.4
Non controlling interest 1.5 1.7 1.5
--------------------------------------------- ------------ ------------ -------------
Total equity 683.2 531.9 542.9
--------------------------------------------- ------------ ------------ -------------
* During the six months ended 30 June 2020, the Group finalised
fair value measurements for a number of contracts which had been
provisionally valued associated with the acquisition of NSBU which
was completed 1 August 2019. As a result, in accordance with IFRS3,
goodwill has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value revision can be found in Note 5.
Condensed Consolidated Cash Flow Statement
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
---------------------------------------------------- ------------ ------------ ------------
Net cash inflow from operating activities before
exceptional items 154.4 31.4 152.1
Exceptional items (4.2) (12.1) (49.2)
---------------------------------------------------- ------------ ------------ ------------
Net cash inflow from operating activities 150.2 19.3 102.9
---------------------------------------------------- ------------ ------------ ------------
Investing activities
Interest received 0.1 0.1 0.4
(Decrease)/increase in security deposits - (0.1) 0.2
Dividends received from joint ventures and
associates 12.4 13.4 25.4
Proceeds from disposal of property, plant and
equipment 0.1 - 1.0
Net cash inflow on disposal of subsidiaries
and operations 11.0 - -
Acquisition of subsidiaries, net of cash acquired (3.6) (9.3) (193.2)
Proceeds from loans receivable 1.2 - -
Purchase of other intangible assets (3.7) (2.8) (6.8)
Purchase of property, plant and equipment (17.0) (8.9) (17.5)
---------------------------------------------------- ------------ ------------ ------------
Net cash inflow/(outflow) from investing activities 0.5 (7.6) (190.5)
---------------------------------------------------- ------------ ------------ ------------
Financing activities
Interest paid (12.7) (9.7) (21.4)
Capitalised finance costs paid - (0.9) (1.2)
Advances of loans 68.5 - 72.3
Capital element of lease repayments (52.8) (22.3) (70.2)
Cash movements on hedging instruments (0.9) (7.0) (2.0)
Issue of share capital - 138.7 138.7
Proceeds received from exercise of share options 0.1 0.1 0.2
Net cash inflow from financing activities 2.2 98.9 116.4
---------------------------------------------------- ------------ ------------ ------------
Net increase in cash and cash equivalents 152.9 110.6 28.8
Opening cash and cash equivalents 89.5 62.5 62.5
Net exchange gain/(loss) 2.5 0.3 (1.8)
---------------------------------------------------- ------------ ------------ ------------
Closing cash and cash equivalents 244.9 173.4 89.5
---------------------------------------------------- ------------ ------------ ------------
Notes to the Condensed Consolidated Financial Statements
1. General information, accounting policies and going
concern
The financial information herein for the year ended 31 December
2019 does not constitute the Company's statutory accounts as
defined in section 434 of the Companies Act 2006 , but is derived
from those accounts. The auditors' report on the 2019 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 annual financial statements of Serco Group plc are prepared
in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union (EU). The condensed set of
financial statements included in this half yearly financial report
has been prepared in accordance with International Accounting
Standard (IAS) 34 Interim Financial Reporting, as adopted by the
EU. 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.
In the six months ended 30 June 2020, the same accounting
policies, presentation and methods of computation are followed in
the condensed set of financial statements as applied in the Group's
latest annual audited financial statements. The significant
judgements made by management in applying the Group's accounting
policies and the key sources of estimation uncertainty were the
same as those that applied to the consolidated financial statements
as at and for the year ended 31 December 2019.
Government grants
Government grants are recognised where there is reasonable
assurance that the grant will be received. Grants that compensate
the Group for expenses incurred are recognised in the income
statement as a reduction to the corresponding expense on a
systematic basis in the periods in which the expenses are
recognised.
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 six months ended 30 June 2020, 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'; particularly in 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, key
uncertainties and sensitivities, including the potential impact of
Covid-19 on the future performance of the Group.
Most of the Group's contracts deliver critical services to
Governments and the delivery requirements of these have not been
impacted by Covid-19. However, a small number of contracts within
the Group have been impacted by; lower volumes within its UK
transport business; higher levels of absenteeism and increased
service requirements in its UK Health contracts; closure of
operations including leisure centres in the UK and the Driver
Examination Services contract in Canada; and delays in project work
such as the delivery of the Antarctic Supply Research Vessel in
Australia. The negative impact from these contracts has been offset
to some extent by additional services being delivered to assist
Governments with their management and recovery from the Covid-19
pandemic, and financial support from its customers. It is evident
that the most significant impact on the Group's operations has been
within the UK.
In order to model severe but plausible scenarios to stress test
the potential impact of Covid-19 on the Group's forecast, the
Directors have considered, amongst other scenarios, lower passenger
volumes on the Group's train operating contracts, higher costs
within the Health portfolio and slower recovery in usage of leisure
centres in the UK through to the end of 2021, without mitigations
such as the Coronavirus Job Retention Scheme and Emergency Measures
Agreements within the rail contracts being in place. The Directors
have reviewed the impact on overseas operations and considered the
impact of a second wave in Australia which may impact the ability
to deliver operations within contact centres, or drive higher
absenteeism in the delivery of its larger operations such as the
Fiona Stanley Hospital or Department of Immigration and Border
Protection contracts. In an extreme case, the Directors have
modelled the negative financial impact of Covid-19 estimated in
April 2020, without the mitigations outlined above, to the end of
2020, which indicates that the Group has sufficient liquidity to
withstand a potential second wave of the virus if the impact is
consistent with that experienced during the first wave.
After considering these severe but plausible scenarios, the
forecasts 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 its debt covenants,
and its ability to generate cash from trading activities and
working capital requirements. In order to reverse stress test the
headroom available on the Group's debt covenants and liquidity
available, the Directors have considered the impact of reductions
to expected win rates and lower margins in the period of assessment
and concluded that, given the headroom available these do not
present a material risk in its ability to continue as a Going
Concern.
In making the Going Concern assessment, the Directors have
assumed that the US private placement loans of $124m due to mature
in 2021 are repaid, however it is the Group's intention for these
to be refinanced providing additional liquidity into the
assessment.
The Group's current principal debt facilities as at 30 June 2020
comprised a GBP250m revolving credit facility, a 3 year term
acquisition facility of GBP45m and GBP223m of US private placement
notes. As at 30 June 2020, the Group had GBP518m of committed
credit facilities and committed headroom of GBP366m. 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
31 December 2021.
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.
Key sources of estimation uncertainty
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 reporting period which includes the recognition of
onerous contract provisions for contracts which the Directors have
assessed do not require a provision as at 30 June 2020.
In the current period no material revisions have been made to
onerous contract provisions.
Major sources of uncertainty which could result in a material
adjustment within the next financial reporting period 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 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.
-- The longer term impact of Covid-19 on contract performance such as the
performance and usage of leisure centres or passenger volumes in the UK
and the risk that this may be impacted by any second wave of the virus
which requires a subsequent lock down period, in the absence of any customer
support.
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
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 reporting period, which includes
the recognition of onerous contract provisions not currently
recorded. 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 Group does not expect to enter into new OCPs, however given
the nature of the Group's operations, there is an inherent risk
that a contract can become onerous. The Group operates a large
number of long-term contracts at different phases of their contract
life cycle. Within the Group's portfolio, there are a small number
of contracts where the balance of risks and opportunities indicates
that they might be onerous if transformation initiatives or
contract changes are not successful. The Group has concluded that
these contracts do not require an onerous contract provision on an
individual basis. Following the individual contract reviews, the
Group has also undertaken a top down assessment which assumes that,
whilst the contracts may not be onerous on an individual basis, as
a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to
avoid a contract loss, will not be fully successful, and it is more
likely than not that one or more of these contracts will be
onerous. Therefore, in considering the Group's overall onerous
contract provision, the Group has made a best estimate of the
provision required to take into consideration this portfolio risk.
As a result, the risk of OCPs and the monitoring of individual
contracts for indicators remains a critical estimate for the Group.
The amount recognised in the period is GBP2.3m (2019: GBPnil) at
the Underlying Trading Profit level within the Corporate costs
segment. The Trading Loss for the Corporate segment after this
charge is GBP22.6m (2019: GBP21.5m). This increase is principally
due to the risks associated with the Group's UK leisure business
which has been significantly impacted by Covid-19. Negotiations
continue with the Group's customers to mitigate these losses and
enable the leisure centres to open in the safest way possible.
However, due to the short term remaining on some of these contracts
the Directors believe that the risk of at least one contract
becoming onerous in this portfolio is more likely than not.
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 latest 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 is 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 derived from post tax measures.
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. There have been no indicators of impairment since the
full impairment test undertaken for the 2019 year end. Following
the designation of the global Covid-19 pandemic ("the pandemic") by
the World Health Organisation during March 2020, specific
consideration has been given to whether there are any indicators of
impairment across the Group's cash generating units (CGUs) relating
to the impact of the pandemic. The pandemic itself is not an
impairment indicator, however economic shocks resulting from the
pandemic could be considered to be indicators which otherwise would
not have existed. In assessing for potential indicators of
impairment, the Group has gathered information at both macro and
micro levels, globally and on the basis of the individual
geographies in which the Group operates.
The Group has not been impacted in a manner which would indicate
the existence of impairment indicators and will prepare a full
goodwill assessment at the end of the year. When considering the
potential existence of both internal and external impairment
indicators, the Group assessed certain key measures and other
sources of available information which included, but were not
limited to, in particular the absence of:
-- Any obsolescence indicators within the Group's physical assets;
-- Any plans to dispose of CGUs;
-- Indicators of worse than expected performance to an extent that would have
caused an impairment had they been known at the time of the latest full
impairment review;
-- Net operating cash outflows or operating losses at a CGU level;
-- A significant decline in market value of the Group; or
-- Carrying amounts of net assets in excess of market capitalisation of the
Group.
The existence of a possible impairment indicator does not
immediately lead to the requirement to perform an impairment test.
As a result, it was considered whether the increase in market
interest rates globally, which impact on the Group's discount rates
and reduce the present value of future cash flows, was significant
enough to trigger the need for an impairment test. Whilst modest
increases have been seen across the UK, Europe, Americas and AsPac,
a more notable rise was seen in the Middle East. The rise in market
interest rates, offset only partially by a fall in risk premiums,
meant a potential rise in post-tax discount rates of 1.9%. When
combined with the fact that at 31 December 2019, the lowest
headroom was identified in relation to the Middle East CGU on an
absolute basis, further analysis was performed to assess whether
the combination of evidence implied an impairment indicator was
present.
Additional sensitivities have been applied to the impairment
model used at 31 December 2019 in respect of the Middle East to
allow for above expected increase in discount rates and the
estimated adverse impact of Covid-19 on cash flows, and still no
indicators of impairment have been identified.
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 and adjusted to reflect any changes in
positions taken by the Company, progress towards concluding local
tax audits, including communications with tax authorities, the
expiry of the statute of limitations following the passage of time
and any change in the broader tax environment.
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 17.
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 directors' assessment 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.
Critical accounting judgements
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. There is a level of judgement required in
determining which items are exceptional on a consistent basis and
require separate disclosure. Further details can be seen in note
7.
The segmental analysis in note 3 includes the additional
performance measure of Trading Profit on 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 Group's Chief
Operating Decision Maker (CODM) reviews the segmental analysis for
operations.
Claim for losses in respect of the 2013 share price
reduction
The Group has received a claim seeking damages for alleged
losses following the reduction in Serco's share price in 2013. The
merit, likely outcome and potential impact on the Group of any such
litigation that either has been or might potentially be brought
against the Group is subject to a number of significant
uncertainties and, therefore, it is not possible to assess the
quantum of any such liability as at the date of this
disclosure.
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 should 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 10.
3. Segmental information
The Group's operating segments reflecting the information
reported to the Board in the six months ended 30 June 2020 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 Citizen Services, Defence
and Transport delivered to US federal and civilian agencies,
selected state and municipal governments and the Canadian
Government
------------------- -------------------------------------------------------------
AsPac Services for sectors including Citizen Services, Defence,
Health, Justice & Immigration and Transport in the Asia
Pacific region including Australia, New Zealand and
Hong Kong
------------------- -------------------------------------------------------------
Middle East Services for sectors including Citizen Services, Defence,
Health and Transport in the Middle East region
------------------- -------------------------------------------------------------
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.
Revenue disaggregation
An analysis of the Group's revenue from its key market sectors
is as follows:
Middle
UK&E Americas AsPac East Total
Six months ended 30 June 2020 GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- -------- ----- ------ -------
Key sectors
Defence 100.8 363.8 64.2 13.4 542.2
Justice & Immigration 179.3 - 140.9 - 320.2
Transport 71.9 42.2 3.8 100.4 218.3
Health 121.5 - 50.0 5.5 177.0
Citizen Services 310.1 136.1 73.1 45.2 564.5
------------------------------- ----- -------- ----- ------ -------
783.6 542.1 332.0 164.5 1,822.2
------------------------------ ----- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Six months ended 30 June 2019 GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- -------- ----- ------ -------
Key sectors
Defence 109.0 202.3 23.5 13.6 348.4
Justice & Immigration 136.1 - 134.2 - 270.3
Transport 67.8 50.3 10.0 105.0 233.1
Health 131.9 - 47.7 15.4 195.0
Citizen Services 213.1 119.7 64.3 31.6 428.7
------------------------------- ----- -------- ----- ------ -------
657.9 372.3 279.7 165.6 1,475.5
------------------------------ ----- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- -------- ----- ------ -------
Key sectors
Defence 215.9 575.5 89.5 28.1 909.0
Justice & Immigration 311.9 - 279.6 - 591.5
Transport 143.5 99.7 19.7 215.3 478.2
Health 259.9 - 94.8 30.2 384.9
Citizen Services 430.5 240.5 137.8 76.0 884.8
----------------------------- ------- -------- ----- ------ -------
1,361.7 915.7 621.4 349.6 3,248.4
---------------------------- ------- -------- ----- ------ -------
Information about major customers
The Group has four major governmental customers which each
represent more than 5% of Group revenues. The customers' revenues
were GBP654.1m (2019: GBP509.5m) for the UK Government within the
UK & Europe segment, GBP470.5m (2019: GBP338.8m) for the US
Government within the Americas segment, GBP326.3m (2019: GBP265.6m)
for the Australian Government within the AsPac segment and
GBP118.6m (2019: GBP121.2m) for the Government of the United Arab
Emirates within the Middle East 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
Six months ended 30 June 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----- -------- ----- ------ --------- -------
Revenue 783.6 542.1 332.0 164.5 - 1,822.2
------------------------------------------- ----- -------- ----- ------ --------- -------
Result
------------------------------------------- ----- -------- ----- ------ --------- -------
Trading profit/(loss) from operations* 29.4 53.4 13.3 7.0 (22.6) 80.5
Amortisation and impairment of intangibles
arising on acquisition (1.5) (3.5) - - - (5.0)
------------------------------------------- ----- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 27.9 49.9 13.3 7.0 (22.6) 75.5
Exceptional profit on disposal of
subsidiaries and operations 11.0 - - - - 11.0
Other exceptional operating items** 1.0 1.6 - - - 2.6
Operating profit/(loss) 39.9 51.5 13.3 7.0 (22.6) 89.1
Investment revenue 0.7
Finance costs (13.4)
Profit before tax 76.4
Tax charge (5.7)
Tax on exceptional items (0.4)
------------------------------------------- ----- -------- ----- ------ --------- -------
Profit for the period 70.3
------------------------------------------- ----- -------- ----- ------ --------- -------
* 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.
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 7.0 - - - - 7.0
------------------------------------------- ------- -------- ------- ------ --------- -----------
Depreciation of plant, property and
equipment (30.0) (11.5) (4.4) (4.0) (4.1) (54.0)
Impairment of plant, property and
equipment (0.2) - - - - (0.2)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Total depreciation and impairment
of plant, property and equipment (30.2) (11.5) (4.4) (4.0) (4.1) (54.2)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Amortisation of intangible assets
arising on acquisition (1.5) (3.5) - - - (5.0)
Amortisation of other intangible
assets (0.2) (0.3) (1.4) (0.2) (5.4) (7.5)
Total amortisation and impairment
of intangible assets (1.7) (3.8) (1.4) (0.2) (5.4) (12.5)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Segment assets
Interests in joint ventures and associates 19.1 - 0.1 0.4 - 19.6
Other segment assets*** 680.5 796.4 267.7 131.3 173.3 2,049.2
------------------------------------------- ------- -------- ------- ------ --------- -----------
Total segment assets 699.6 796.4 267.8 131.7 173.3 2,068.8
Unallocated assets 323.3
------------------------------------------- ------- -------- ------- ------ --------- -----------
Consolidated total assets 2,392.1
------------------------------------------- ------- -------- ------- ------ --------- -----------
Segment liabilities
Segment liabilities*** (558.6) (224.1) (189.2) (95.7) (197.8) (1,265.4)
Unallocated liabilities (443.5)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Consolidated total liabilities (1,708.9)
------------------------------------------- ------- -------- ------- ------ --------- -----------
*** 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
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------ -------- ----- ------ --------- -------
Revenue 657.9 372.3 279.7 165.6 - 1,475.5
------------------------------------------- ------ -------- ----- ------ --------- -------
Result
------------------------------------------- ------ -------- ----- ------ --------- -------
Trading profit/(loss) from operations* 12.5 40.4 11.8 7.4 (21.5) 50.6
Amortisation and impairment of intangibles
arising on acquisition (0.6) (1.6) (0.1) - - (2.3)
------------------------------------------- ------ -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 11.9 38.8 11.7 7.4 (21.5) 48.3
Other exceptional operating items** (23.2) (1.1) (1.2) - (5.6) (31.1)
-------------------------------------------
Operating profit/(loss) (11.3) 37.7 10.5 7.4 (27.1) 17.2
Investment revenue 1.5
Finance costs (12.0)
------------------------------------------- ------ -------- ----- ------ ---------
Profit before tax 6.7
Tax charge (8.5)
Tax on exceptional items 0.4
-------
Loss for the period (1.4)
------------------------------------------- ------ -------- ----- ------ --------- -------
* 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.
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 13.5 - - - - 13.5
------------------------------------------- ------- -------- ------- ------ --------- ---------
Depreciation of plant, property and
equipment (11.3) (7.1) (4.1) (1.6) (2.7) (26.8)
Impairment of plant, property and
equipment (12.6) - - - - (12.6)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total depreciation and impairment
of plant, property and equipment (23.9) (7.1) (4.1) (1.6) (2.7) (39.4)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Amortisation of intangible assets
arising on acquisition (0.6) (1.6) (0.1) - - (2.3)
Amortisation of other intangible
assets (0.1) (0.9) (2.5) (0.2) (5.7) (9.4)
Total amortisation and impairment
of intangible assets (0.7) (2.5) (2.6) (0.2) (5.7) (11.7)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment assets
Interests in joint ventures and associates 20.0 - 0.7 0.4 - 21.1
Other segment assets*** 499.9 488.5 257.5 142.7 150.0 1,538.6
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total segment assets 519.9 488.5 258.2 143.1 150.0 1,559.7
Unallocated assets 258.1
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total assets 1,817.8
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment liabilities
Segment liabilities*** (391.9) (189.6) (172.0) (92.6) (151.2) (997.3)
Unallocated liabilities (288.6)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total liabilities (1,285.9)
------------------------------------------- ------- -------- ------- ------ --------- ---------
*** 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
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
------------------------------------------- ------- -------- ----- ------ --------- -------
Result
------------------------------------------- ------- -------- ----- ------ --------- -------
Trading profit/(loss) from operations* 48.2 91.7 31.2 13.9 (51.6) 133.4
Amortisation and impairment of intangibles
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 47.0 85.5 31.1 13.9 (51.6) 125.9
Other exceptional operating items** (24.8) 15.3 (3.0) - (10.9) (23.4)
Operating profit/(loss) 22.2 100.8 28.1 13.9 (62.5) 102.5
Investment revenue 2.7
Finance costs (24.5)
Profit before tax 80.7
Tax charge (27.4)
Tax on exceptional items (2.7)
------------------------------------------- ------- -------- ----- ------ --------- -------
Profit for the year 50.6
------------------------------------------- ------- -------- ----- ------ --------- -------
* 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.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------- --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 27.3 - 0.2 - - 27.5
------------------------------------------- ------- -------- ------- ------- --------- ---------
Depreciation of plant, property and
equipment (37.3) (17.4) (9.0) (4.7) (6.0) (74.4)
Impairment of plant, property and
equipment (18.9) - - - - (18.9)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Total depreciation and impairment
of plant, property and equipment (56.2) (17.4) (9.0) (4.7) (6.0) (93.3)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Amortisation of intangible assets
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Amortisation of other intangible
assets (0.3) (1.2) (4.8) (0.4) (11.4) (18.1)
Total amortisation and impairment
of intangible assets (1.5) (7.4) (4.9) (0.4) (11.4) (25.6)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Segment assets****
Interests in joint ventures and associates 22.4 - 0.8 0.4 - 23.6
Other segment assets*** 645.4 757.5 227.3 132.0 131.6 1,893.8
------------------------------------------- ------- -------- ------- ------- --------- ---------
Total segment assets 667.8 757.5 228.1 132.4 131.6 1,917.4
Unallocated assets 163.2
------------------------------------------- ------- -------- ------- ------- --------- ---------
Consolidated total assets 2,080.6
------------------------------------------- ------- -------- ------- ------- --------- ---------
Segment liabilities****
Segment liabilities*** (536.3) (234.0) (151.8) (103.0) (160.3) (1,185.4)
Unallocated liabilities (352.3)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Consolidated total liabilities (1,537.7)
------------------------------------------- ------- -------- ------- ------- --------- ---------
*** 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.
**** During the six months ended 30 June 2020, the Group
finalised fair value adjustments associated with the acquisition of
NSBU which was effective 1 August 2019. As a result, goodwill has
been remeasured and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as at 31 December 2019. Further information on the
fair value adjustments can be found in Note 5.
4. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding
Company Limited (MSHCL) were the only equity accounted entities
which were material to the Group during the six months ended 30
June 2020 or comparative periods. Dividends of GBP9.1m (2019:
GBP10.0m) and GBP1.5m (2019: GBP3.4m) respectively were received
from these companies in the period.
Summarised financial information of AWEML and MSHCL and an
aggregation of the other equity accounted entities in which the
Group has an interest is as follows:
30 June 2020
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ---------------- ---------------- -------
Revenue 539.0 75.7 169.9 18.0 187.9
--------------------------------- ------------ --------- ---------------- ---------------- -------
Operating profit/(loss) 37.4 (0.8) 8.8 (0.2) 8.6
Net investment revenue 0.3 - 0.1 - 0.1
Income tax charge (7.1) 0.3 (1.6) (0.1) (1.7)
--------------------------------- ------------ --------- ---------------- ---------------- -------
Profit/(loss) from operations 30.6 (0.5) 7.3 (0.3) 7.0
Other comprehensive income - 2.9 1.4 - 1.4
--------------------------------- ------------ --------- ---------------- ---------------- -------
Total comprehensive income 30.6 2.4 8.7 (0.3) 8.4
--------------------------------- ------------ --------- ---------------- ---------------- -------
Non current assets 489.5 21.9 130.9 0.2 131.1
Current assets 188.8 51.8 72.1 3.6 75.7
Current liabilities (171.2) (37.1) (60.5) (1.4) (61.9)
Non current liabilities (488.7) (11.2) (125.3) - (125.3)
--------------------------------- ------------ --------- ---------------- ---------------- -------
Net assets 18.4 25.4 17.2 2.4 19.6
Proportion of Group ownership 24.5% 50.0% - - -
--------------------------------- ------------ --------- ---------------- ---------------- -------
Carrying amount of investment 4.5 12.7 17.2 2.4 19.6
--------------------------------- ------------ --------- ---------------- ---------------- -------
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ---------------- ---------------- -------
Supplementary information
Cash and cash equivalents 77.3 36.7 37.3 1.9 39.2
Current financial liabilities
excluding trade and other
payables and provisions (0.7) (5.4) (2.9) (0.5) (3.4)
Non current financial
liabilities excluding
trade and other payables
and provisions - (10.3) (5.2) - (5.2)
Depreciation and amortisation - (3.0) (1.5) (0.4) (1.9)
Interest income 0.3 0.1 0.1 - 0.1
Interest expense - (0.1) (0.1) - (0.1)
--------------------------------- ------------ --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective
proportion of Group ownership.
The Group's share of liabilities with joint ventures and
associates is GBP187.2m (31 December 2019: GBP212.2m). Of this,
GBP120.0m (31 December 2019: GBP124.8m) relates to a defined
benefit pension obligation, against which Serco is fully
indemnified, GBP7.6m is lease obligations (31 December 2019:
GBP9.0m) and the remainder is trade and other payables which arise
as part of the day to day operations carried out by those entities.
The Group has no material exposure to third party debt or other
financing arrangements within any of its joint ventures and
associates.
30 June 2019
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ---------------- ---------------- -------
Revenue 524.7 84.2 170.7 22.2 192.9
--------------------------------- ------------ --------- ---------------- ---------------- -------
Operating profit 47.4 8.9 16.0 0.5 16.5
Net investment revenue 0.4 0.1 0.1 - 0.1
Income tax charge (9.3) (1.7) (3.1) - (3.1)
--------------------------------- ------------ --------- ---------------- ---------------- -------
Profit from operations 38.5 7.3 13.0 0.5 13.5
Other comprehensive income - 1.5 0.7 - 0.7
--------------------------------- ------------ --------- ---------------- ---------------- -------
Total comprehensive income 38.5 8.8 13.7 0.5 14.2
--------------------------------- ------------ --------- ---------------- ---------------- -------
Non current assets 434.8 8.7 110.9 2.4 113.3
Current assets 228.5 53.1 82.5 16.8 99.3
Current liabilities (211.3) (43.2) (73.4) (13.5) (86.9)
Non current liabilities (433.9) 7.6 (102.5) (2.1) (104.6)
--------------------------------- ------------ --------- ---------------- ---------------- -------
Net assets 18.1 26.2 17.5 3.6 21.1
Proportion of Group ownership 24.5% 50.0% - - -
--------------------------------- ------------ --------- ---------------- ---------------- -------
Carrying amount of investment 4.4 13.1 17.5 3.6 21.1
--------------------------------- ------------ --------- ---------------- ---------------- -------
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ---------------- ---------------- -------
Supplementary information
Cash and cash equivalents 115.3 39.4 48.0 4.6 52.6
Current financial liabilities
excluding trade and other
payables and provisions (6.7) (1.8) (2.6) (0.2) (2.8)
Non current financial
liabilities excluding
trade and other payables
and provisions (0.1) (1.4) (0.7) (2.3) (3.0)
Depreciation and amortisation - (0.7) (0.4) (0.5) (0.9)
Interest income 0.4 0.1 0.1 - 0.1
--------------------------------- ------------ --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective
proportion of Group ownership.
31 December 2019
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ---------------- ---------------- -------
Revenue 1,065.4 177.9 350.0 44.6 394.6
--------------------------------- ------------ --------- ---------------- ---------------- -------
Operating profit 95.4 18.9 32.7 1.1 33.8
Net investment revenue 0.8 0.2 0.3 - 0.3
Income tax charge (18.8) (3.8) (6.4) (0.2) (6.6)
--------------------------------- ------------ --------- ---------------- ---------------- -------
Profit from operations 77.4 15.3 26.6 0.9 27.5
--------------------------------- ------------ --------- ---------------- ---------------- -------
Other comprehensive income - 2.5 1.3 - 1.3
--------------------------------- ------------ --------- ---------------- ---------------- -------
Total comprehensive income 77.4 17.8 27.9 0.9 28.8
--------------------------------- ------------ --------- ---------------- ---------------- -------
Non current assets 510.0 23.2 136.6 2.4 139.0
Current assets 186.8 64.6 78.1 18.7 96.8
Current liabilities (163.0) (48.4) (64.1) (14.7) (78.8)
Non current liabilities (509.3) (12.7) (131.2) (2.2) (133.4)
--------------------------------- ------------ --------- ---------------- ---------------- -------
Net assets 24.5 26.7 19.4 4.2 23.6
Proportion of Group ownership 24.5% 50.0% - - -
--------------------------------- ------------ --------- ---------------- ---------------- -------
Carrying amount of investment* 6.0 13.4 19.4 4.2 23.6
--------------------------------- ------------ --------- ---------------- ---------------- -------
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
Supplementary information
Cash and cash equivalents 101.3 39.9 44.8 7.4 52.2
Current financial liabilities
excluding trade and other
payables and provisions (7.6) (7.3) (5.6) (0.2) (5.8)
Non current financial
liabilities excluding
trade and other payables
and provisions (0.1) (12.5) (6.3) (2.3) (8.6)
Depreciation and amortisation - (1.6) (0.8) (0.9) (1.7)
Interest income 0.8 0.2 0.3 - 0.3
--------------------------------- ------------ --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective
proportion of Group ownership.
5. Acquisitions
The Group made no acquisitions during the period.
During the period the Group finalised the integration of NSBU,
completed the analysis of balances acquired as part of the
transaction and made closing net working capital settlements with
the vendor. Two main activities were undertaken that resulted in
adjustments to the fair value of acquired assets and liabilities.
Firstly, the Group finalised its review of provisional working
capital balances which resulted in fair value changes to both
receivables and payables. Secondly, one of the acquired fixed price
contracts required a revision to the provisional estimate of the
costs required to complete the contract. The estimated cost of
completion was increased as a result of a technical defect relating
to machine parts that had been in place at the acquisition date and
which became known through initial testing that completed during
the first six months of 2020. As a result of these activities, the
Group revised the fair values of the acquired assets and
liabilities as at the transaction date as follows:
Fair value Fair value
as originally adjustment Revised
stated GBPm fair value
GBPm GBPm
--------------------------------------------- -------------- ----------- -----------
Goodwill 115.3 3.0 118.3
Acquisition related intangible assets 52.6 - 52.6
Property, plant and equipment 3.6 - 3.6
Trade and other receivables 46.6 (1.8) 44.8
Cash and cash equivalents 0.4 - 0.4
Deferred tax asset 0.9 - 0.9
Trade and other payables (30.7) (0.5) (31.2)
Deferred tax liability (2.4) - (2.4)
--------------------------------------------- -------------- ----------- -----------
Acquisition date fair value of consideration
transferred 186.3 0.7 187.0
--------------------------------------------- -------------- ----------- -----------
Satisfied by:
Cash 184.3 - 184.3
Deferred consideration 2.0 0.7 2.7
--------------------------------------------- -------------- ----------- -----------
Total consideration 186.3 0.7 187.0
--------------------------------------------- -------------- ----------- -----------
The total impact of acquisitions made in previous periods to the
Group's cash flow position during the current period was as
follows:
GBPm
Deferred consideration paid in respect of historic
acquisition:
Carillion health contracts 0.9
NSBU 2.7
--------------------------------------------------- ----
Net cash outflow in relation to acquisitions 3.6
Exceptional acquisition related costs - NSBU 1.0
--------------------------------------------------- ----
Net cash impact in the period on acquisitions 4.6
--------------------------------------------------- ----
Costs associated with the acquisition of NSBU which were not
directly related to the issue of shares or arrangement of the
acquisition facility are shown as exceptional costs in the
Condensed Consolidated Income Statement for the period. The total
acquisition related costs recognised in exceptional items for the
six-month period ended 30 June 2020 was GBP1.4m.
6. Disposals
On 31 May 2020, the Group disposed of its 33% interest in
Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP
(together "Viapath"). As part of the transaction, the Group
received an amount of GBP11.0m for its share in the net assets of
the joint venture. A summary of the disposal is as follows:
Viapath
GBPm
---------------------------------------------- -------
Consideration 11.0
Less: Investment in joint venture disposed of -
Profit on disposal 11.0
---------------------------------------------- -------
The net cash inflow arising on disposal and the impact on both
Net Debt and Adjusted Net Debt is:
Viapath
GBPm
----------------------------------------- -------
Consideration 11.0
Less: Costs associated with the disposal -
Net cash flow on disposal 11.0
----------------------------------------- -------
As well as consideration for its share of the net assets of
Viapath, the Group also received GBP2.9m for the Group's share of
profits and GBP1.2m for loans due from Viapath.
7. 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.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
------------------------------------------------ ------------ ------------- -------------
Exceptional items arising
Exceptional profit on disposal of subsidiaries 11.0 - -
and operations
Other exceptional operating items
Reversal of impairment of interest in 2.5 - -
joint venture and related loan balances
Restructuring costs 0.1 (5.4) (12.8)
Costs related to UK Government review
and SFO investigation (1.2) (24.0) (25.2)
Release of other provisions and other
items 2.6 - 19.3
Costs associated with the acquisition
of Naval Systems Business Unit (1.4) (1.7) (4.7)
Other exceptional operating items 2.6 (31.1) (23.4)
------------------------------------------------ ------------ ------------- -------------
Exceptional operating items 13.6 (31.1) (23.4)
------------------------------------------------ ------------ ------------- -------------
Exceptional tax (0.4) 0.4 (2.7)
------------------------------------------------ ------------ ------------- -------------
Total exceptional items net of tax 13.2 (30.7) (26.1)
------------------------------------------------ ------------ ------------- -------------
As explained in note 6, the Group disposed of its interest in
Viapath with effect from 31 May 2020. The Group had historically
impaired its investment in Viapath as it was not receiving any
returns from this joint venture due to the level of investment
being made back into the business, therefore the carrying value of
the Group's investment in Viapath was nil. Following the
announcement during the first half of 2020 that Viapath had been
unsuccessful in the tender process to provide pathology services to
five South East London hospitals as well as associated GP
surgeries, the Group exited the joint venture, selling its stake to
the remaining two investors. In May 2020, the proceeds received by
the Group in exchange for its holding in the joint venture
represents the profit on disposal of GBP11.0m.
At the same time as disposing of the Group's interest in
Viapath, certain historical balances were recovered which had
previously been impaired. Since the impairments associated with
those balances were historically treated as exceptional items, the
reversals of these impairments have been treated consistently. The
exceptional credit of GBP2.5m consists of the recovery of a loan
from the Group into the joint venture of GBP1.2m and the recovery
of profit share which was previously considered to be
irrecoverable.
The Group recognised the final costs associated with the
Strategy Review during 2019, and on review, certain costs which had
not been incurred were released back to exceptional operating items
resulting in a credit to exceptional items of GBP0.1m during the
six months ended 30 June 2020 (2019: exceptional restructuring
costs of GBP5.4m). Non-exceptional restructuring charges are
incurred by the business as part of normal operational activity,
which in the period totalled GBP3.4m (2019: GBP2.2m) and were
included within operating profit before exceptional items.
There were exceptional costs totalling GBP1.2m (2019: GBP24.0m)
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 2020. The cost
in the first half of 2019 included GBP22.9m for the fine which
resulted from the SFO's investigation into Serco companies.
During 2019, the Group reached a legal settlement in relation to
a commercial dispute which resulted in the release of a provision
which accounted for the majority of the GBP19.3m exceptional
credit. The treatment of the release as exceptional was consistent
with the recognition of the charge associated with the same legal
matter in 2014. During the six months ended 30 June 2020, the Group
reached an agreement with its insurer for the reimbursement of
GBP2.6m of legal fees associated with the matter, and consistent
with the treatment of other associated amounts, this has been
treated as an exceptional credit.
The Group completed the acquisition of the Naval Systems
Business Unit (NSBU) from Alion Science and Technology in 2019. The
transaction and implementation costs incurred during the six months
ended 30 June 2020 of GBP1.4m have been treated as exceptional
costs in line with the Group's accounting policy and the treatment
of similar costs during the year ended 31 December 2019.
Exceptional tax for the period was a tax charge of GBP0.4m
(2019: GBP0.4m credit) which arises on exceptional items within
operating profit. The net exceptional gain only gave rise to a
charge of GBP0.4m, as the majority of these items were incurred in
the UK where they only impact our unrecognised deferred tax in
relation to losses.
8. Investment revenue
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
------------------------------------------------ ---------- ---------- ------------
Interest receivable on other loans and deposits 0.1 0.1 0.5
Net interest receivable on retirement benefit
obligations (note 17) 0.6 1.1 2.1
Interest arising on customer contracts - 0.2 -
Movement in discount on other debtors - 0.1 0.1
------------------------------------------------ ---------- ---------- ------------
0.7 1.5 2.7
------------------------------------------------ ---------- ---------- ------------
9. Finance costs
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
----------------------------------------- ---------- ---------- ------------
Interest payable on lease liabilities 4.8 2.4 6.9
Interest payable on other loans 7.4 6.7 13.9
Facility fees and other charges 1.0 0.9 1.7
Movement in discount on provisions - 1.1 1.2
----------------------------------------- ---------- ---------- ------------
Total interest and other finance charges 13.2 11.1 23.7
Foreign exchange on financing activities 0.2 0.9 0.8
----------------------------------------- ---------- ---------- ------------
13.4 12.0 24.5
----------------------------------------- ---------- ---------- ------------
10. Tax
A tax charge of GBP5.7m (2019: GBP8.5m) on pre-exceptional
profits has been recognised which includes underlying tax of
GBP17.0m, the tax impact of amortisation of intangibles arising on
acquisition of GBP0.9m and a GBP10.4m credit on non-underlying
items. Tax balances have been calculated using the estimated full
year effective tax rate.
The GBP10.4m credit relates to GBP8.0m tax impact of movements
in the valuation of the Group's defined benefit pension scheme
which 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 pension scheme
valuations rather than a trading activity, these are excluded from
the calculation of tax on underling profit and the underling
effective tax rate. In addition, there is a GBP2.4m credit
associated with the revaluation of the deferred tax asset held in
connection with the UK. This follows the UK Government announcement
that the expected fall in tax rate in April 2020 from 19% to 17%
would not take place.
The tax rate on profits before exceptional items of 9.1% (2019:
22.5%) is lower than the UK standard corporate tax rate of 19%.
This is mainly due to the impact of non-underlying credits
discussed above together with the use of unrecognised deferred tax
assets brought forward to offset current year profits and the
impact of our joint ventures whose post-tax results are included in
our pre-tax profit reducing the rate. This is partially offset by
higher rates of tax on profits arising on our international
operations.
11. 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:
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Number of shares millions millions millions
---------------------------------------------- ---------- ---------- ------------
Weighted average number of ordinary shares
for the purpose of basic EPS 1,226.5 1,122.0 1,171.4
Effect of dilutive potential ordinary shares:
Shares under award 18.2 24.3 27.6
---------------------------------------------- ---------- ---------- ------------
Weighted average number of ordinary shares
for the purpose of diluted EPS 1,244.7 1,146.3 1,199.0
---------------------------------------------- ---------- ---------- ------------
Per share Per share Per share
Earnings amount Earnings amount Earnings amount
30 June 30 June 30 June 30 June 31 December 31 December
2020 2020 2019 2019 2019 2019
Basic EPS GBPm pence GBPm pence GBPm pence
-------------------------------- -------- --------- -------- --------- ------------ ------------
Earnings for the purpose of
basic EPS 70.4 5.74 (1.7) (0.15) 50.4 4.31
Effect of dilutive potential
ordinary shares (0.08) - (0.10)
-------------------------------- -------- --------- -------- --------- ------------ ------------
Diluted EPS 70.4 5.66 (1.7) (0.15) 50.4 4.21
-------------------------------- -------- --------- -------- --------- ------------ ------------
Basic EPS excluding exceptional
items
-------------------------------- -------- --------- -------- --------- ------------ ------------
Earnings for the purpose of
basic EPS 70.4 5.74 (1.7) (0.15) 50.4 4.31
Add back exceptional items (13.6) (1.11) 31.1 2.77 23.4 2.00
Add back tax on exceptional
items 0.4 0.03 (0.4) (0.04) 2.7 0.23
-------------------------------- -------- --------- -------- --------- ------------ ------------
Earnings excluding exceptional
items for the basis of basic
EPS 57.2 4.66 29.0 2.58 76.5 6.54
Effect of dilutive potential
ordinary shares (0.06) (0.05) (0.15)
-------------------------------- -------- --------- -------- --------- ------------ ------------
Excluding exceptional items,
diluted 57.2 4.60 29.0 2.53 76.5 6.39
-------------------------------- -------- --------- -------- --------- ------------ ------------
12. Goodwill
Goodwill is stated at cost less any provision for impairment and
is compared against the associated recoverable amount at least
annually. The value of each CGU is based on value in use
calculations derived from forecast cash flows based on past
experience, adjusted to reflect market trends, economic conditions
and key risks. These forecasts include an estimate of new business
wins and an assumption that the final year forecast continues on
into perpetuity at a CGU specific growth rate.
Goodwill is required to be tested for impairment at least once
every financial year, irrespective of whether there is any
indication of impairment. The annual impairment review typically
takes place in the final quarter of the year. However, if there are
indicators of impairment, an earlier review is also required.
There have been no indicators of impairment since the full
impairment test undertaken for the 2019 year end. Following the
designation of the global Covid-19 pandemic ("the pandemic") by the
World Health Organisation during March 2020, specific consideration
has been given to whether there are any indicators of impairment
across the Group's cash generating units (CGUs) relating to the
impact of the pandemic. The pandemic itself is not an impairment
indicator, however economic shocks resulting from the pandemic
could be considered to be indicators which otherwise would not have
existed. In assessing for potential indicators of impairment, the
Group has gathered information at both macro and micro levels,
globally and on the basis of the individual geographies in which
the Group operates.
The Group has not been impacted in a manner which would indicate
the existence of impairment indicators and will prepare a full
goodwill assessment at the end of the year. When considering the
potential existence of both internal and external impairment
indicators, the Group assessed certain key measures and other
sources of available information which included, but were not
limited to, in particular the absence of:
-- Any obsolescence indicators within the Group's physical assets;
-- Any plans to dispose of CGUs;
-- Indicators of worse than expected performance to an extent that would have
caused an impairment had they been known at the time of the latest full
impairment review;
-- Net operating cash outflows or operating losses;
-- A significant decline in market value; or
-- Carrying amounts of net assets in excess of market capitalisation.
The potential indicator with the largest possible impact was the
increase in market interest rates globally which impact on the
Group's discount rates and reduce the present value of future cash
flows. Whilst modest increases have been seen across the UK,
Europe, Americas and AsPac, a more notable rise was seen in the
Middle East. The rise in market interest rates, offset only
partially by a fall in risk premiums, meant a potential rise in
post-tax discount rates of 1.9%. When combined with the fact that
at 31 December 2019, the lowest headroom was identified in relation
to the Middle East CGU on an absolute basis, further analysis was
performed to assess whether the combination of evidence implied an
impairment indicator was present.
Additional sensitivities have been applied to the impairment
model used at 31 December 2019 in respect of the Middle East to
allow for above expected increase in discount rates and the
estimated adverse impact of Covid-19 on cash flows, and still no
indicators of impairment have been identified.
13. Analysis of Net Debt
30 June 2020
As at As at
1 January Cash Exchange Non-cash 30 June
2020 flow Acquisitions* differences movements 2020
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ------ ------------- ------------ ----------- --------
Loans payable (305.0) (68.5) - (16.3) (0.6) (390.4)
Lease obligations (369.9) 52.8 - (6.9) (35.9) (359.9)
--------------------------- ---------- ------ ------------- ------------ ----------- --------
Liabilities arising
from financing activities (674.9) (15.7) - (23.2) (36.5) (750.3)
Cash and cash equivalents 89.5 152.9 - 2.5 - 244.9
Derivatives relating
to Net Debt 1.0 - - 1.6 - 2.6
--------------------------- ---------- ------ ------------- ------------ ----------- --------
Net Debt (584.4) 137.2 - (19.1) (36.5) (502.8)
--------------------------- ---------- ------ ------------- ------------ ----------- --------
30 June 2019
As at Opening As at
1 January adjustment Cash Exchange Non-cash 30 June
2019 - IFRS16 flow Acquisitions* differences movements 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ----------- ----- ------------- ------------ ----------- --------
Loans payable (239.5) - - - (1.5) 0.4 (240.6)
Lease obligations (14.8) (129.1) 22.3 - (0.7) (22.5) (144.8)
--------------------------- ---------- ----------- ----- ------------- ------------ ----------- --------
Liabilities arising
from financing activities (254.3) (129.1) 22.3 - (2.2) (22.1) (385.4)
Cash and cash equivalents 62.5 - 110.6 - 0.3 - 173.4
Derivatives relating
to Net Debt 3.8 - - - 1.5 - 5.3
--------------------------- ---------- ----------- ----- ------------- ------------ ----------- --------
Net Debt (188.0) (129.1) 132.9 - (0.4) (22.1) (206.7)
--------------------------- ---------- ----------- ----- ------------- ------------ ----------- --------
31 December 2019
As at Opening As at
1 January adjustment Cash Exchange Non-cash 31 December
2019 - IFRS16 flow Acquisitions* differences movements 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ----------- ------ ------------- ------------ ----------- ------------
Loans payable (239.5) - (72.3) - 6.7 0.1 (305.0)
Lease obligations (14.8) (129.1) 70.2 - 4.7 (300.9) (369.9)
--------------------------- ---------- ----------- ------ ------------- ------------ ----------- ------------
Liabilities arising
from financing activities (254.3) (129.1) (2.1) - 11.4 (300.8) (674.9)
Cash and cash equivalents 62.5 - 28.4 0.4 (1.8) - 89.5
Derivatives relating
to Net Debt 3.8 - - - (2.8) - 1.0
--------------------------- ---------- ----------- ------ ------------- ------------ ----------- ------------
Net Debt (188.0) (129.1) 26.3 0.4 6.8 (300.8) (584.4)
--------------------------- ---------- ----------- ------ ------------- ------------ ----------- ------------
* Acquisitions represent the net cash/(debt) acquired on acquisition
14. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- -------- --------- --------- ------ ------
As at 1 January 2020 62.1 13.3 16.5 69.9 161.8
Charged to income statement
- exceptional 0.1 - - 1.0 1.1
Charged to income statement
- other 10.7 2.5 2.4 2.6 18.2
Released to income statement
- exceptional (0.1) - - - (0.1)
Released to income statement
- other (0.1) (1.9) (3.0) (1.9) (6.9)
Included in the valuation
of right of use asset - 0.8 - - 0.8
Utilised during the period (3.0) (0.8) (1.7) (4.5) (10.0)
Exchange differences 4.0 0.2 0.1 0.3 4.6
----------------------------- -------- --------- --------- ------ ------
As at 30 June 2020 73.7 14.1 14.3 67.4 169.5
----------------------------- -------- --------- --------- ------ ------
Analysed as:
Current 12.0 6.5 13.7 24.7 56.9
Non-current 61.7 7.6 0.6 42.7 112.6
----------------------------- -------- --------- --------- ------ ------
73.7 14.1 14.3 67.4 169.5
----------------------------- -------- --------- --------- ------ ------
Employee related provisions are for long-term service awards and
terminal gratuity liabilities which have been accrued and are based
on contractual entitlement, together with an estimate of the
probabilities that employees will stay until rewards fall due and
receive all relevant amounts. There are also amounts included in
relation to restructuring. The provisions will be utilised over
various periods driven by local legal or regulatory requirements,
the timing of which is not certain.
The majority of property provisions relate to leased properties
and are associated with the requirement to return properties to
either their original condition, or to enact specific improvement
activities in advance of exiting the lease. Dilapidations
associated with leased properties are held as a provision until
such time as they fall due, with the longest running lease ending
in April 2039.
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.
Individual provisions are only discounted where the impact is
assessed to be significant. Currently, no contract provisions are
discounted. 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.
Other provisions are held for indemnities given on disposed
businesses, legal and other costs that the Group expects to incur
over an extended period, in respect of past events. These costs are
based on past experience of similar items and other known factors
and represent management's best estimate of the likely outcome and
will be utilised with reference to the specific facts and
circumstances. The timing of utilisation is dependent on future
events which could occur within the next 12 months or over a longer
period with the majority expected to be settled by 30 June
2023.
15. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and
bonding facilities of its joint ventures and associates up to a
maximum value of GBP3.8m (31 December 2019: GBP4.3m). The actual
commitment outstanding at 30 June 2020 was GBP3.8m (31 December
2019: GBP4.3m).
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 30 June 2020 was
GBP244.5m (31 December 2019: GBP257.5m).
The Group has received a claim seeking damages for alleged
losses following the reduction in Serco's share price in 2013. The
merit, likely outcome and potential impact on the Group of any such
litigation that either has been or might potentially be brought
against the Group is subject to a number of significant
uncertainties and, therefore, it is not possible to assess the
quantum of any such liability as at the date of this
disclosure.
In addition, the Group is also aware that other contingent
liabilities may exist where there are other commercial claims and
potential claims which involve or may involve legal proceedings
from a range of parties in respect of contracts, employment, health
and safety and other laws and regulations, and regulatory and
compliance matters that arise in the normal course of business. The
timing of resolution of these claims remains uncertain. 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.
16. Financial risk management
The vast majority of financial instruments are held at amortised
cost. The classification of the fair value measurement falls into
three levels, based on the degree to which the fair value is
observable. The levels are as follows:
Level 1: Inputs derived from unadjusted quoted prices in active
markets for identical assets or liabilities.
Level 2: Inputs are inputs, other than quoted prices included
within Level 1, that are observable for the asset or liability,
either directly or indirectly.
Level 3: Inputs are unobservable inputs for the asset or
liability.
Based on the above, the derivative financial instruments held by
the Group at 30 June 2020 and the comparison fair values for loans
and leases, are all considered to fall into Level 2. There are no
Level 3 items. As at 30 June 2020, the Group held Level 2
derivative instruments in designated hedge relationships and
designated as fair value through the P&L made up of financial
assets of GBP4.4m (31 December 2019: GBP3.0m) and financial
liabilities of GBP1.5m (31 December 2019: GBP1.9m).
There have been no transfers between levels in the six months to
30 June 2020.
17. Defined benefit schemes
Characteristics
Among our non-contract specific schemes, the largest is the
Serco Pension and Life Assurance Scheme (SPLAS). The most recent
full actuarial valuation of SPLAS was undertaken as at 5 April 2018
and completed in June 2019. The actuarially assessed deficit for
funding purposes at 5 April 2018 was of GBP26.0m. A summary
valuation was also undertaken as at 30 June 2020 when the estimated
actuarial deficit of SPLAS was GBP36.0m on the funding basis,
whereas the accounting valuation at 30 June 2020 resulted in an
asset of GBP125. 1m. 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
2019, with 30.8% of pensionable salaries due to be paid from 1
November 2019, changing to 30.3% from 1 November 2020. The schedule
of contributions also determined that additional shortfall
contributions were required - a total of GBP5.2m of these have
already been made, with further amounts of GBP4m due in both March
2020 and March 2021 then GBP1.7m for the years 2022 to 2028. With
the agreement of the Trustees the GBP4.0m payment due before 1
April 2020 was rescheduled over 8 months to preserve cashflow as
the extent of Covid-19 was unknown at the time. To the end of May
2020, GBP1.5m of the GBP4.0m had been paid into the scheme.
Following a further review of the Group's liquidity position it was
determined that the final payment of the remaining GBP2.5m could be
made. Payment of the GBP2.5m was made during June 2020.
Values recognised in total comprehensive income
The total amounts recognised in the financial statements in
respect of all schemes are analysed as follows:
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- ---------- ---------- ------------
Current service cost - employer 2.4 2.1 4.3
Past service cost - 1.1 1.4
Administrative expenses and taxes 0.6 0.7 2.0
----------------------------------------------- ---------- ---------- ------------
Recognised in arriving at operating profit
after exceptionals 3.0 3.9 7.7
----------------------------------------------- ---------- ---------- ------------
Interest income on scheme assets - employer (14.6) (19.0) (37.9)
Interest on franchise adjustment (0.1) (0.1) (0.1)
Interest cost on scheme liabilities - employer 14.1 18.0 35.9
----------------------------------------------- ---------- ---------- ------------
Finance income (0.6) (1.1) (2.1)
----------------------------------------------- ---------- ---------- ------------
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Included within the SOCI GBPm GBPm GBPm
--------------------------------------------- ---------- ---------- ------------
Actual return on scheme assets 152.9 99.9 128.1
Less: interest income on scheme assets (14.7) (19.0) (38.1)
--------------------------------------------- ---------- ---------- ------------
138.2 80.9 90.0
Effect of changes in demographic assumptions - 41.7 39.9
Effect of changes in financial assumptions (114.0) (119.1) (148.6)
Effect of experience adjustments 5.2 (1.6) (1.6)
--------------------------------------------- ---------- ---------- ------------
Remeasurements 29.4 1.9 (20.3)
--------------------------------------------- ---------- ---------- ------------
Change in franchise adjustment 1.9 1.2 2.0
Change in members' share 1.1 0.7 1.2
--------------------------------------------- ---------- ---------- ------------
Actuarial profit on reimbursable rights 3.0 1.9 3.2
--------------------------------------------- ---------- ---------- ------------
Total pension gain/(loss) recognised in the
SOCI 32.4 3.8 (17.1)
--------------------------------------------- ---------- ---------- ------------
Balance sheet values
The total assets and liabilities of all schemes are:
30 June 30 June 31 December
2020 2019 2019
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- --------- -----------
Equities 52.1 52.6 54.7
Bonds except LDIs 349.0 198.8 264.1
LDIs 425.8 488.8 447.4
Pooled investment vehicles 61.8 18.8 38.1
Property 1.8 1.6 1.7
Cash and other 8.8 56.7 9.2
Annuity policies 663.6 611.1 614.0
----------------------------------------- --------- --------- -----------
Fair value of scheme assets 1,562.9 1,428.4 1,429.2
Present value of scheme liabilities (1,485.3) (1,361.1) (1,384.5)
----------------------------------------- --------- --------- -----------
Net amount recognised 77.6 67.3 44.7
Franchise adjustment* 7.7 4.9 5.8
Members' share of deficit 5.1 3.3 3.8
----------------------------------------- --------- --------- -----------
Net retirement benefit asset 90.4 75.5 54.3
----------------------------------------- --------- --------- -----------
Net pension liability (34.7) (19.7) (24.0)
Net pension asset 125.1 95.2 78.3
----------------------------------------- --------- --------- -----------
Net retirement benefit asset 90.4 75.5 54.3
Deferred tax liabilities (17.0) (10.8) (9.2)
----------------------------------------- --------- --------- -----------
Net retirement benefit asset (after tax) 73.4 64.7 45.1
----------------------------------------- --------- --------- -----------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
The SPLAS Trust Deed gives the Group an unconditional right to a
refund of surplus assets, assuming the full settlement of plan
liabilities in the event of a plan wind-up. Pension assets are
deemed to be recoverable and there are no adjustments in respect of
minimum funding requirements as economic benefits are available to
the Group either in the form of future refunds or, for plans still
open to benefit accrual, in the form of possible reductions in
future contributions.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which represents
91% of total liabilities and 94% of total assets of the defined
benefit pension schemes in which the Group participates. The
significant actuarial assumptions with regards to the determination
of the defined benefit obligation are set out below.
The Group has continued to update its approach to setting RPI
and CPI inflation assumptions in light of the RPI reform proposals
published on the 4th September 2019 by the UK Chancellor and UK
Statistics Authority.
The Group continued to set RPI inflation in line with the market
break-even expectations less an inflation risk premium. The
inflation risk premium has been reduced from 0.4% at 31 December
2019 to 0.3% at 30 June 2020, reflecting the assumption that the
market has largely priced in forthcoming changes to RPI. For CPI,
the Group retained the assumed difference between the RPI and CPI
by of an average of 0.6% per annum.
The estimated impact of the change in the methodology is
approximately a GBP10m increase in the defined benefit obligation
in respect of the SPLAS scheme.
30 June 30 June 31 December
2020 2019 2019
Main assumptions % % %
------------------------- ----------------------------- -------------- --------------
Rate of salary increases 2.40 2.70 2.70
Rate of increase in 2.35 (CPI) and 2.25 (CPI) and 2.20 (CPI) and
pensions in payment 2.70 (RPI) 3.05 (RPI) 3.00 (RPI)
Rate of increase in 1.90 (CPI) and 2.20 (CPI) and 2.30 (CPI) and
deferred pensions 2.80 (RPI) 3.20 (RPI) 3.30 (RPI)
Inflation assumption 1.90 (CPI - pre-retirement), 2.20 (CPI) and 2.20 (CPI) and
2.40 (CPI - post-retirement) 3.20 (RPI) 3.20 (RPI)
and 2.80 (RPI)
Discount rate 1.60 2.30 2.10
------------------------- ----------------------------- -------------- --------------
30 June 30 June 31 December
2020 2019 2019
Post retirement mortality years years years
-------------------------- ------- ------- -----------
Current pensioners
at 65 - male 21.6 21.6 21.6
Current pensioners
at 65 - female 24.2 24.1 24.1
Future pensioners at
65 - male 23.8 23.8 23.8
Future pensioners at
65 - female 26.2 26.2 26.2
-------------------------- ------- ------- -----------
Sensitivity analysis
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 30 June 2020 where the Group's
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
Group's defined benefit obligation as at 30 June 2020 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 Group's defined benefit
obligation.
30 June 30 June 31 December
Pension assumption 2020 2019 2019
sensitivities GBPm GBPm GBPm
-------------------------- ------- ------- -----------
Discount rate - 0.5%
increase (119.9) (109.0) (108.5)
Discount rate - 0.5%
decrease 136.1 118.9 122.9
Inflation - 0.5% increase 103.3 72.0 88.9
Inflation - 0.5% decrease (91.6) (69.4) (83.3)
Rate of salary increase
- 0.5% increase 3.6 2.7 3.2
Rate of salary increase
- 0.5% decrease (3.4) (2.6) (3.1)
Mortality - one-year
age rating 55.6 41.9 48.6
-------------------------- ------- ------- -----------
18. 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. The Group also
enters into transactions with the Directors, however disclosure of
such transactions is only made annually. Transactions between the
Group and its joint venture undertakings and associates are
disclosed below.
Transactions
During the period, Group companies entered into the following
transactions with joint ventures and associates:
Transactions
for the
six months Current Non current
ended 30 Outstanding Outstanding
June at 30 June at 30 June
2020 2020 2020
GBPm GBPm GBPm
------------------------------------------- ------------ ------------ ------------
Sale of goods and services
Joint ventures 0.1 - -
Associates 1.2 0.1 -
Other
Dividends received - joint ventures 2.3 - -
Profit share received - joint ventures 2.9 - -
Dividends received - associates 9.1 - -
Receivable from consortium for tax - joint
ventures - - 2.2
------------------------------------------- ------------ ------------ ------------
Total 15.6 0.1 2.2
------------------------------------------- ------------ ------------ ------------
Joint venture receivable amounts outstanding have arisen from
transactions undertaken during the general course of trading, are
unsecured, and will be settled in cash. No guarantees have been
given or received.
Transactions
for the
six months
ended 30 Outstanding
June at 30 June
2019 2019*
GBPm GBPm
---------------------------------------------------- ------------ -----------
Sale of goods and services
Joint ventures 0.8 0.1
Associates 3.9 2.0
Other
Dividends received - joint ventures 3.4 -
Dividends received - associates 10.0 -
Receivable from consortium for tax - joint ventures (0.9) 5.7
---------------------------------------------------- ------------ -----------
Total 17.2 7.8
---------------------------------------------------- ------------ -----------
* All amounts outstanding as at 30 June 2019 are due within 12 months of the balance sheet date.
Transactions
for the
year ended Outstanding
31 December at 31 December
2019 2019*
GBPm GBPm
---------------------------------------------------- ------------ ---------------
Sale of goods and services
Joint ventures 1.3 0.1
Associates 8.4 0.5
Other
Dividends received - joint ventures 7.8 -
Dividends received - associates 17.6 -
Receivable from consortium for tax - joint ventures 4.4 4.8
---------------------------------------------------- ------------ ---------------
Total 39.5 5.4
---------------------------------------------------- ------------ ---------------
* All amounts outstanding as at 31 December 2019 are due within
12 months of the balance sheet date.
On 31 May 2020, the Group disposed of its 33% interest in
Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP
(together "Viapath"). As part of the transaction, the Group
received an amount of GBP11.0m for its share in the net assets of
the joint venture. At the same time as disposing of the Group's
interest in Viapath, the Group recovered a loan into the joint
venture of GBP1.2m and GBP2.9m of profit share which was previously
considered to be irrecoverable.
19. Notes to the Condensed Consolidated Cash Flow Statement
2020 2019
Before Before
exceptional 2020 Exceptional 2020 exceptional 2019 Exceptional 2019
items items Total items items Total
Six months ended 30 June GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Operating profit for the period 75.5 13.6 89.1 48.3 (31.1) 17.2
Adjustments for:
Share of profits in joint ventures
and associates (7.0) - (7.0) (13.5) - (13.5)
Share based payment expense 5.9 - 5.9 5.6 - 5.6
Impairment of property, plant
and equipment 0.2 - 0.2 12.6 - 12.6
Depreciation of property, plant
and equipment 54.0 - 54.0 26.8 - 26.8
Amortisation of intangible assets 12.5 - 12.5 11.7 - 11.7
Exceptional profit on disposal
of subsidiaries and operations - (11.0) (11.0) - - -
Reversal of impairment on loans
to JVs - (1.2) (1.2) - - -
Loss on early termination of
leases 0.1 - 0.1 - - -
Loss on disposal of property,
plant and equipment - - - 0.1 - 0.1
Loss on disposal of intangible
assets 0.3 - 0.3 - - -
Exceptional transaction costs - - - - 1.7 1.7
Increase/(decrease) in provisions 5.6 (3.4) 2.2 (35.4) 21.7 (13.7)
Other non cash movements 0.1 - 0.1 (0.1) - (0.1)
Total non cash items 71.7 (15.6) 56.1 7.8 23.4 31.2
-----------------------------------
Operating cash inflow/(outflow)
before movements in working
capital 147.2 (2.0) 145.2 56.1 (7.7) 48.4
(Increase)/decrease in inventories (1.2) - (1.2) 4.1 - 4.1
Decrease/(increase) in receivables 7.5 - 7.5 (44.6) - (44.6)
Increase/(decrease) in payables 12.9 (2.2) 10.7 33.0 (4.4) 28.6
Movements in working capital 19.2 (2.2) 17.0 (7.5) (4.4) (11.9)
Cash generated by operations 166.4 (4.2) 162.2 48.6 (12.1) 36.5
Tax paid (12.0) - (12.0) (17.2) - (17.2)
Net cash inflow/(outflow) from
operating activities 154.4 (4.2) 150.2 31.4 (12.1) 19.3
-----------------------------------
2019 2019
Before exceptional Exceptional 2019
items items Total
Year ended 31 December GBPm GBPm GBPm
Operating profit for the year 125.9 (23.4) 102.5
Adjustments for:
Share of profits in joint ventures and
associates (27.5) - (27.5)
Share based payment expense 11.6 - 11.6
Impairment of property, plant and equipment 18.9 - 18.9
Depreciation of property, plant and equipment 74.4 - 74.4
Amortisation of intangible assets 25.6 - 25.6
Profit on early termination of leases (0.9) - (0.9)
Profit on disposal of property, plant
and equipment (0.6) - (0.6)
Loss on disposal of intangible assets 0.4 - 0.4
Decrease in provisions (43.1) (20.5) (63.6)
Other non cash movements (1.2) - (1.2)
Total non cash items 57.6 (20.5) 37.1
Operating cash inflow/(outflow) before
movements in working capital 183.5 (43.9) 139.6
Decrease in inventories 4.4 - 4.4
Increase in receivables (36.7) - (36.7)
Increase/(decrease) in payables 32.2 (5.3) 26.9
------
Movements in working capital (0.1) (5.3) (5.4)
------
Cash generated by operations 183.4 (49.2) 134.2
Tax paid (31.2) - (31.2)
Non cash R&D expenditure (0.1) - (0.1)
------
Net cash inflow/(outflow) from operating
activities 152.1 (49.2) 102.9
------
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END
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