TIDMSRP
RNS Number : 4908X
Serco Group PLC
22 February 2017
Serco Group plc - 2016 full year results
22 February 2017
Year ended 31 December 2016 2015(1)
================================================ =========== ===========
Revenue - continuing and discontinued
operations(2) GBP3,047.8m GBP3,514.6m
Reported Revenue (continuing operations
only) GBP3,011.0m GBP3,177.0m
------------------------------------------------ ----------- -----------
Underlying Trading Profit(3) GBP82.1m GBP95.9m
Reported Operating Profit/(Loss) (after
exceptional items; continuing operations
only)(3) GBP42.2m (GBP3.8m)
------------------------------------------------ ----------- -----------
Underlying EPS, basic(4) 4.13p 3.44p
Reported EPS, basic (after exceptional
items; continuing and discontinued operations) (0.11p) (15.47p)
Free Cash Flow(5) (GBP33.0m) (GBP35.5m)
------------------------------------------------ ----------- -----------
Net Debt (including that for assets and
liabilities held for sale) GBP109.3m GBP62.9m
------------------------------------------------ ----------- -----------
-- Revenue(2) , including discontinued operations, declined 13%
to GBP3,048m, comprising an 11% organic decline from net contract
attrition and an 8% reduction from disposals, partially offset by a
6% currency benefit.
-- Underlying Trading Profit(3) declined by GBP14m to GBP82m;
discontinued operations (the exit of private sector BPO) reduced
profits by GBP19m; net currency benefits were GBP9m; allowing for
these, the reduction was GBP4m.
-- Trading Profit(3) was GBP18m higher than Underlying Trading
Profit due principally to GBP14m net reduction in future
liabilities and losses on onerous contracts.
-- Underlying EPS(4) increased 20% to 4.13p, benefitting from
reduced finance costs and a lower effective tax rate.
-- Reported Operating Profit up GBP46m, and EPS up 15.36p;
operating exceptional charges on continuing operations were GBP56m
(2015: GBP110m); including discontinued operations, total
exceptional charges net of tax were GBP68m (2015: GBP217m).
-- Free Cash Flow(5) was negative GBP33m, similar to 2015 outflow of GBP36m.
-- Closing Net Debt increased by GBP46m to GBP109m; however, Net
Debt : EBITDA leverage of 0.7x, was similar to last year and below
our medium term target of 1-2x.
-- Continued progress reducing burden of loss-making contracts:
OCP utilisation of GBP84m in 2016, GBP30m lower than 2015.
-- Order intake increased by 40% with GBP2.5bn total value of
signed contracts; including Serco's share of the value of the AWE
updated contract, order intake was GBP3.2bn, an increase of some
80% on the prior year; 35 contract awards were worth more than
GBP10m each.
-- Pipeline of larger new bid opportunities ended the year at
GBP8.4bn, a year-on-year increase of GBP1.9bn or 30%.
-- Operating costs reduced by more than GBP450m, and in
proportion to the scale of revenue reduction; this includes
overheads and shared services savings of over GBP50m.
-- Guidance for 2017 unchanged - at current foreign exchange
rates, we anticipate Revenue of approximately GBP3.1bn and
Underlying Trading Profit of between GBP65m and GBP70m.
Rupert Soames, Serco Group Chief Executive, said: "These results
show that the execution of our five-year plan remains on track.
Trading in 2016 was better than we expected at the start of the
year, although this was in large part due to the resolution of a
number of commercial matters in the first half, which will not
recur; trading in the second half was in line with the guidance we
gave at the time of our half-year results.
"Operationally, we have had a busy year: across key contracts
our service delivery has improved; we have reduced operating costs
by some GBP450m whilst improving employee engagement; at year-end,
the value of our pipeline of new opportunities was up 30%,
notwithstanding a 40% increase in order intake; and we have cleanly
exited the private sector BPO business. These are the first fruits
of the "transformation" phase of our plan, which we are now about
half-way through.
"Our view of likely performance in 2017 remains unchanged from
previous guidance. The road back to prosperity was always going to
be long and winding, with many potholes and boulders, but we are
making good progress."
For further information please contact Serco:
Stuart Ford, Head of Investor Relations T +44 (0) 1256 386
227
Marcus De Ville, Head of Media Relations T +44 (0) 1256 386
226
Presentation:
A presentation for institutional investors and analysts will be
held today at JPMorgan, 60 Victoria Embankment, London EC4Y 0JP,
starting at 9.00am. The presentation will be webcast live on
www.serco.com and subsequently available on demand. A dial-in
facility is also available on +44(0)20 3427 0503 (USA: +1 646 254
3364) with participant pin code 5478230.
Notes to summary table of financial results:
(1) The results for year ended 31 December 2015 have been
restated for a change in accounting policy related to foreign
exchange movements on investment and financing arrangements. This
provides more relevant information about the impact of underlying
transactions and, within net debt, now takes account of the
currency hedging in place. This is particularly relevant at a time
when we have had significant currency volatility, and, helpfully,
more closely aligns our reported net debt with our debt covenant
definitions. This change in accounting policy has the following
effects: reduces Trading and Operating Profit measures by GBP0.1m,
with an equal and opposite impact recognised within Net Finance
Costs; reduces Free Cash Flow (FCF) by GBP19.3m, with an equal and
opposite impact recognised below FCF; and reduces closing net debt
at 31 December 2015 by GBP14.6m, to reflect the hedging effect of
derivative financial instruments designed to mitigate the effect of
foreign exchange movements on our net debt. Further detail on the
restatement is included in the Finance Review on page 17.
(2) Revenue is as defined under IFRS, which excludes Serco's
share of revenue of its joint ventures and associates. Revenue
including that from discontinued operations is shown for
consistency with previous guidance. Reported Revenue excludes
revenue from discontinued operations of GBP36.8m (2015: GBP337.6m).
Organic revenue growth is the change at constant currency in
Revenue after adjusting to exclude the impact of acquisitions or
disposals. Change at constant currency is calculated by translating
non-Sterling values for the year to 31 December 2016 into Sterling
at the average exchange rate for the year ended 31 December
2015.
(3) Trading Profit is defined as IFRS Operating Profit adjusted
for (i) amortisation and impairment of intangibles arising on
acquisition and (ii) exceptional items; it includes the impact of
discontinued operations. Consistent with IFRS, it includes Serco's
share of profit after interest and tax of its joint ventures and
associates. Underlying Trading Profit additionally excludes
Contract and Balance Sheet Review adjustments (principally Onerous
Contract Provision (OCP) releases or charges), as well as the
beneficial treatment of depreciation and amortisation of assets
held for sale, and other material one-time items such as the
pension scheme settlement in the first half of 2016 and the profit
on early exit from a UK local authority contract that occurred in
the second half of 2015. A reconciliation of Underlying Trading
Profit to Reported Operating Profit is as follows:
Year ended 31 December
GBPm 2016 2015
============================================= ====== =======
Underlying Trading Profit 82.1 95.9
Include: non-underlying items
Onerous contract and Balance Sheet
Review adjustments 14.2 20.9
Benefit from non-depreciation and
non-amortisation of assets held for
sale 0.5 11.7
Other one-time items 3.5 9.0
------ -------
Trading Profit 100.3 137.5
Amortisation and impairment of intangibles
arising on acquisition (5.1) (4.9)
------ -------
Operating Profit Before Exceptional
Items (continuing and discontinued
operations) 95.2 132.6
Exclude: Operating Loss/(Profit) Before
Exceptional Items from discontinued
operations 3.3 (26.5)
------ -------
Reported Operating Profit Before Exceptional
Items (continuing operations only) 98.5 106.1
Operating Exceptional Items (continuing
operations only) (56.3) (109.9)
------ -------
Reported Operating Profit (after exceptional
items; continuing operations only) 42.2 (3.8)
--------------------------------------------- ------ -------
(4) Underlying EPS reflects the Underlying Trading Profit
measure after deducting pre-exceptional net finance costs
(including those for discontinued operations) and related tax
effects.
(5) Free Cash Flow is the net cash flow from operating
activities before exceptional items as shown on the face of the
Group's Consolidated Cash Flow Statement, adding dividends we
receive from joint ventures and associates, and deducting net
interest paid and net capital expenditure on tangible and
intangible asset purchases.
Reconciliations and further detail of financial performance are
included in the Finance Review on pages 17 to 36. This includes
full definitions and explanations of the purpose and usefulness of
each non-IFRS Alternative Performance Measure (APM) used by the
Group. The consolidated financial statements and accompanying notes
are on pages 37 to 65.
Forward looking statements:
This announcement contains statements which are, or may be
deemed to be, "forward looking statements" which are prospective in
nature. All statements other than statements of historical fact are
forward looking statements. Generally, words such as "expect",
"anticipate", "may", "should", "will", "aspire", "aim", "plan",
"target", "goal", "ambition" and similar expressions identify
forward looking statements. By their nature, these forward looking
statements are subject to a number of known and unknown risks,
uncertainties and contingencies, and actual results and events
could differ materially from those currently being anticipated as
reflected in such statements. Factors which may cause future
outcomes to differ from those foreseen or implied in forward
looking statements include, but are not limited to: general
economic conditions and business conditions in Serco's markets;
contracts awarded to Serco; customers' acceptance of Serco's
products and services; operational problems; the actions of
competitors, trading partners, creditors, rating agencies and
others; the success or otherwise of partnering; changes in laws and
governmental regulations; regulatory or legal actions, including
the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or
regulatory approvals; exchange rate fluctuations; the development
and use of new technology; changes in public expectations and other
changes to business conditions; wars and acts of terrorism; and
cyber-attacks. Many of these factors are beyond Serco's control or
influence. These forward looking statements speak only as of the
date of this announcement and have not been audited or otherwise
independently verified. Past performance should not be taken as an
indication or guarantee of future results and no representation or
warranty, express or implied, is made regarding future performance.
Except as required by any applicable law or regulation, Serco
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward looking statements
contained in this announcement to reflect any change in Serco's
expectations or any change in events, conditions or circumstances
on which any such statement is based after the date of this
announcement, or to keep current any other information contained in
this announcement. Accordingly, undue reliance should not be placed
on the forward looking statements.
Chief Executive's Review
Summary of financial performance
Revenue and Trading Profit
Reported Revenue was GBP3,011m (2015: GBP3,177m); this measure
excludes Serco's share of revenue from joint ventures and
associates of GBP481m (2015: GBP737m) and from discontinued
operations (our private sector BPO division) of GBP37m (2015:
GBP338m). Revenue including discontinued operations was GBP3,048m
(2015: GBP3,515m). Net currency movements provided a GBP189m
benefit. At constant currency and adjusting for disposals, the
organic revenue decline was 11%, driven by the phased transfer of
contracts such as that for the Defence Science and Technology
Laboratory (DSTL), and the end of contracts for Suffolk Community
Healthcare, the National Citizen Service, Thurrock Council BPO
services, US National Benefits Centre and the Virginia Department
of Transportation (VDOT). There was limited growth elsewhere to
offset these declines.
Trading Profit was GBP100.3m (2015: GBP137.5m) and Underlying
Trading Profit was GBP82.1m (2015: GBP95.9m), resulting in an
Underlying Trading Profit margin of 2.7% (2015: 2.7%). The GBP18.2m
difference between Trading Profit and Underlying Trading Profit is
accounted for by three items. First, we have excluded from
Underlying Trading Profit the net release of GBP14.2m (2015:
GBP20.9m) of future cost provisions identified in our regular
review of Onerous Contract Provisions (OCPs) and other Contract and
Balance Sheet Review items. This reflects the net effect of
numerous charges and releases against individual contracts and
provisions; the only significant individual movements were an
increased charge on the Ontario Driver Examination Services
contract and a net release on the COMPASS contract for UK asylum
seeker support services. While the net GBP14.2m release is excluded
from our underlying measures, it reflects continued good progress
in reducing future liabilities, with a net GBP9.6m related to OCPs
and a net GBP4.6m related to other Contract and Balance Sheet
Review items. The second item of difference is that we have
excluded from Underlying Trading Profit the benefit of a one-time
pension settlement of GBP3.5m negotiated as part of the early exit
from the Thurrock contract. Third, and in accordance with the
statutory accounting treatment of assets held for sale,
depreciation and amortisation charges related to assets held for
sale are excluded from the Group accounts; the positive impact of
this accounting treatment of GBP0.5m (2015: GBP11.7m) has therefore
been excluded from our measure of Underlying Trading Profit.
As with the comparable year, Underlying Trading Profit benefited
from the utilisation of OCPs, which have the effect of neutralising
losses on previously identified onerous contracts; the GBP84m
utilised in the year was slightly lower than our expectations of
around GBP90m at the start of the year, and was materially lower
than the GBP114m utilised in 2015; again, this reflects progress at
an operational level in reducing the level of losses on onerous
contracts. The closing balance of OCPs now stands at GBP220m,
versus the initial GBP447m charge two years ago.
The GBP14m reduction in Underlying Trading Profit reflects the
GBP19m reduction in profits related to the exit of our private
sector BPO operations, partially offset by a favourable GBP9m
currency movement. Allowing for these items, Underlying Trading
Profit was similar to the prior year, decreasing by approximately
GBP4m. The profit performance was stronger than we initially
anticipated, in large part due to the successful resolution of a
number of commercial matters in the first half of the year that
will not repeat.
Reported Operating Profit, including discontinued operations,
and before exceptional items, was GBP95.2m (2015: GBP132.6m), which
reflects Trading Profit as described above, after additionally
charging amortisation and impairment of intangibles arising on
acquisition of GBP5.1m (2015: GBP4.9m).
Finance, tax and exceptional costs
Pre-exceptional net finance costs, including discontinued
operations, were GBP12.6m (2015: GBP31.9m). The reduction in cost
arises from average net debt being some GBP300m lower in 2016 than
in 2015, as a result of the Rights Issue in April 2015 and the BPO
disposal proceeds received at the end of December 2015. As a
consequence of these two fund-raising activities, we were able to
redeem early GBP225m of US Private Placement debt in 2015 and a
further GBP117m in February 2016. Cash net interest paid was
GBP19.0m (2015: GBP32.7m).
Within net finance costs is a net credit of GBP4.7m (2015:
GBP4.9m) related to the strong funding position of Serco's pension
schemes; the pension scheme net balance sheet asset, before tax,
increased to GBP133m (2015: GBP116m); on an estimated actuarial
basis, the main Group scheme has a deficit of GBP34m (2015:
GBP28m).
Pre-exceptional tax costs, including discontinued operations,
were materially lower in the year at GBP15.9m (2015: GBP36.6m).
Excluding the tax credit on non-underlying items of GBP8.5m (2015:
cost of GBP6.1m), the underlying effective tax cost was GBP24.4m
(2015: GBP30.5m) implying an underlying effective rate of 35%
(2015: 48%) based upon GBP69.5m of Underlying Trading Profit less
pre-exceptional net finance costs. The rate reflects the tax
charges at locally prevailing rates in the international divisions
(which tend to be higher than the UK's rate), while in the UK there
was no deferred tax credit taken against losses made in the year;
the resulting effective rate was significantly lower than
expectations at the start of the year given the increased
proportion of Serco's profit before tax generated by consolidating
our share of joint venture and associate earnings which have
already been taxed. Net cash tax paid was GBP5.6m (2015:
GBP2.7m).
Whilst we expect our cash tax rate to be reasonably predictable
in future periods, our underlying effective tax rate is likely to
be volatile until we are able to show sufficient profitability in
our UK business to be able to recognise on our balance sheet the
very significant UK tax asset arising from losses in 2014 and 2015
principally as a result of the Contract and Balance Sheet Review.
For 2017, an underlying effective tax rate potentially reverting to
approximately 50% is anticipated, reflecting predominantly the
smaller proportion of joint venture and associate earnings and
relatively higher UK losses. We expect future years' effective tax
rate will be high until UK tax losses can be recognised.
Including discontinued operations, the Group incurred operating
exceptional costs of GBP70.5m, exceptional finance costs of GBP0.4m
and tax credits on exceptional items of GBP3.1m; in aggregate, net
exceptional costs were therefore GBP67.8m (2015: GBP217.2m). The
principal exceptional items were goodwill impairment of GBP17.8m
reflecting the liabilities taken on with the purchase of a
subcontractor to the COMPASS operations, a GBP13.9m impairment to
the carrying value of a joint venture investment, restructuring
costs of GBP18.3m and a charge of GBP10.7m related to the transfer
of employees from the Serco defined pension scheme back to the
Principal Civil Service Pension Scheme (PCSPS). The balance of
operating exceptional costs reflected losses on disposals, together
with the movement in the carrying value of assets held for sale and
for indemnities provided on prior business disposals. The GBP217.2m
of charges in 2015 included GBP168.3m impairment of goodwill and
other assets, and GBP32.8m of exceptional finance costs relating to
the Rights Issue and debt refinancing.
Reported Loss for the year
The Reported Loss for the year, as presented at the bottom of
the Group's Consolidated Income Statement on page 37, was GBP1.1m
(2015: loss of GBP153.1m). This reflects the measures described
above: Reported Operating Profit, including discontinued
operations, and before exceptional items, of GBP95.2m (2015:
GBP132.6m); pre-exceptional net finance costs, including
discontinued operations, of GBP12.6m (2015: GBP31.9m);
pre-exceptional tax costs, including discontinued operations, of
GBP15.9m (2015: GBP36.6m); and exceptional costs, net of tax, of
GBP67.8m (2015: GBP217.2m).
Earnings Per Share (EPS)
Underlying EPS, which reflects the Underlying Trading Profit
measure after deducting pre-exceptional finance costs (including
those for discontinued operations) and related tax effects, was
4.13p (2015: 3.44p). The increase reflects the reduction in
Underlying Trading Profit being more than offset by the lower
finance costs and tax charge. There is a partial offset to these
factors from the movement in the weighted average number of shares
in issue which increased to 1,088.3m shares (2015: 986.5m shares)
as a consequence of the 2015 Rights Issue. EPS before exceptional
items, including those for discontinued operations, were 6.12p
(2015: 6.55p); including the impact of exceptional items, Reported
EPS was loss per share of 0.11p (2015: loss per share of
15.47p).
Cash Flow and Net Debt
Free Cash Flow was negative GBP33.0m (2015: negative GBP35.5m).
Cash generated from Underlying Trading Profit was largely offset by
the outflows related to loss-making contracts subject to Onerous
Contract Provisions. These cash outflows lessened year-on-year, as
reflected in the lower rate of OCP utilisation. There was a working
capital outflow of GBP24m, largely due to a GBP22m reduction in the
utilisation of the Group's receivables financing facility; at the
end of 2015 the GBP30m facility was fully utilised, compared to
GBP8m utilisation at the end of 2016. Capital expenditure was
substantially lower at GBP32m (2015: GBP73m), reflecting the
benefit of the disposal of the private sector BPO business, which
was a substantial consumer of capital investment.
Closing net debt at 31 December 2016 increased to GBP109.3m,
having been GBP62.9m at the start of the year; the increase
includes the Free Cash outflow, together with a GBP40m cash outflow
related to exceptional items, partially offset by GBP19m of net
receipts from disposals. There was an adverse gross currency
translation effect on net debt of GBP42m, predominantly reflecting
the Group's US Private Placement debt, however this was offset by a
GBP47m favourable movement on hedging instruments. The closing net
debt of GBP109m compares to a daily average of GBP119m (2015:
GBP444m) and a peak net debt of GBP183m (2015: GBP859m).
At the closing balance sheet date, our leverage for covenant
purposes was 0.7x EBITDA, which compares with the requirement in
our debt covenants to be less than 3.5x. Excluding from EBITDA
non-underlying items, predominantly the benefit of the net movement
on OCPs and other Contract and Balance Sheet Review items, the
underlying leverage ratio was 0.8x EBITDA. This is below our medium
term target range of 1-2x, but at this stage in our strategy
implementation, we are content for it to be so.
Dividends
The Board is not recommending the payment of a dividend in
respect of the 2016 financial year. The Board's appraisal of the
appropriateness of dividend payments takes into account the Group's
underlying earnings, cash flows and financial leverage, together
with the requirement to maintain an appropriate level of dividend
cover and the prevailing market outlook. Although the Board is
committed to resuming dividend payments as soon as it believes it
prudent to do so, in assessing whether we should resume dividend
payments in respect of 2016, we have been mindful of the fact that
our forecasts for 2017 anticipate a reduction in earnings, a free
cash outflow and an increase in net debt; furthermore, we are only
part-way through our recovery. In these circumstances, the Board
believes that it would not be prudent to resume dividend payments
in respect of 2016.
The Revenue and Trading Profit performances are described
further in the Divisional Reviews. More detailed analysis of
earnings, cash flow, financing and related matters are described
further in the Finance Review.
Summary of operating performance and strategy implementation
The better than anticipated financial performance in 2016 has
been accompanied by improving operational delivery and good
progress on implementing our strategy and transformation.
With over 500 contracts worldwide, there are always going to be
some with operational issues; however, there are many fewer now
than there were two years ago, and relationships with customers,
particularly in the UK, have strengthened notably. Good progress
has been made on our loss-making contracts, with improved
operational delivery and reduced losses on several important
contracts, reflected both in lower in-year OCP utilisation (GBP30m
lower in 2016 than in 2015) and a net reduction in anticipated
future losses of GBP9.6m. We regard our OCPs as a portfolio of
exposures, and at each period end each contract and provision is
carefully assessed; some contracts need additional provisions,
others see releases if our assessment of future losses reduces. In
2016 there were a number of movements, both positive and negative,
across the contract base. No new contracts have been judged to be
materially onerous. The only two significant movements on
pre-existing OCPs were on COMPASS (UK asylum seeker support
services) and DES (Driver Examination Services, Ontario Canada); on
COMPASS, a GBP33.9m OCP release resulted from the latest estimates
of efficiencies, forecasts and contract terms, although this was
partially offset by a GBP14.0m OCP recognised on acquisition of a
subcontractor; on DES, there was a GBP29.5m increase in estimates
of the future costs associated with the IT system implementation
and ongoing management of this contract. Our contract supporting
Lincolnshire County Council is running broadly in line with our
expectations set when we took a large additional provision in 2015,
and the major elements of this IT implementation are now in
service. Within the other smaller movements, although the in-year
losses of the Prisoner Escort and Custody Services (PECS) contract
in the UK were reduced, we have changed our view of the likely
contract duration, and the future-years OCP balance has been
increased; OCPs with an improved view of future losses include the
Armidale Class Patrol Boats (ACPB) contract in Australia, and the
contracts for HMP Ashfield and the Future Provision of Marine
Services (FPMS) in the UK.
Our joint venture with Abellio as operator of Northern Rail
ended smoothly with the transfer of the franchise to a new provider
on 31 March 2016, and the winding up of the joint venture produced
a favourable financial outcome. There were also several contracts
that we had expected to end early in the year but ran on longer;
these included the VDOT and US Army transition assistance
contracts.
We were delighted to announce that the UK Government's review of
the arrangements for operating the Atomic Weapons Establishment
(AWE) concluded successfully during the year, and led to an updated
contract being agreed with the Ministry of Defence. The stronger
performance outcome for the contract year to 31 March 2016 and
later-than-expected timing of the change in joint venture
shareholding arrangements also improved the profit contribution
received by Serco in the year.
We achieved our target for cost savings of over GBP50m in 2016
from central support functions and other overheads. The programme
delivered savings from reducing the number of management layers,
implementing better procurement and driving greater efficiency in
the operation of shared services. Within our guidance for 2017 is
the expectation that we can deliver around GBP20m of additional
savings from the next set of transformation actions.
Following the various disposals and transfers related to Serco's
exit of the private sector BPO market, there were losses and
stranded costs related to the residual UK onshore private sector
BPO contracts. As a result of good work to mitigate the financial
impact of these exits, the loss from discontinued operations at
GBP4.6m was approximately half our original expectations, and we
anticipate no material residual effect in 2017.
At the same time as we have been reducing operating costs, we
have been investing in building the capability of the business. As
previously reported, we are using Centres of Excellence (CoEs) to
develop Group-wide propositions and capabilities in our core
markets, with an initial launch of CoEs in the Health, Justice
& Immigration and Transport sectors which are improving the
sharing of skills, best practice and intellectual property across
our businesses. The teams working directly and as part of the CoE
virtual network are reporting good early progress, particularly in
strengthening our proposition development and bidding, and the
largest contract award during the year - Barts Health NHS Trust -
drew heavily on CoE capability and support.
We have continued to invest in IT systems enhancements and
improvements. During the year, we rolled out our Success Factors
recruitment system which delivers world-class recruitment
capability for the organisation; enhanced Finance management tools
to improve balance sheet reconciliations and Treasury management;
implemented new Cyber Security management systems to harden our IT
networks; launched a 'guided buying' system that delivers best
pricing through a standardised catalogue; and we introduced
internal collaboration tools which help our newly formed CoEs share
data and information globally. Our next developments include
further investments in IT security, payroll and workforce
management systems.
Serco employs 47,000 people, the vast majority delivering
services to customers. It is often said that the customer
experience will never exceed the employees' and attracting,
motivating and engaging employees will be central to our success.
We were therefore delighted to see the latest results of our global
employee engagement survey, managed independently by Aon Hewitt,
and which received over 30,000 responses. Engagement scores
increased for all categories - employees, managers and leaders -
and stood at the highest level since we started to measure it in
2011 and is dramatically improved from the low in 2014. It was
particularly pleasing to note that the engagement score of the
leadership population improved 17 percentage points year-on-year to
over 70%.
Contract awards, order book, rebids and pipeline
Contract awards
As anticipated, the market was relatively quiet with few major
bidding outcomes announced. Notwithstanding this, the Group signed
contracts with a total value of GBP2.5bn during the year, an
increase of 40% on 2015; as we do not consolidate our share of
joint venture and associate revenue, this excludes the estimated
GBP0.7bn value of Serco's share of the AWE updated contract for the
next three years. There were 35 contract awards worth more than
GBP10m each. The value of new business won was approximately 40% of
the total value signed, with the balance represented by securing
extensions or successfully rebidding existing work.
The largest new contract signed in 2016 was with Barts Health
NHS Trust for facilities management services to their hospitals.
Whilst the value over the maximum 10-year term is approximately
GBP600m, we have recognised within Serco's wins and order book
figures only the estimated GBP450m value of our initial seven-year
period. The second largest new contract was for the new
'icebreaker' Antarctic Supply and Research Vessel for the
Australian Department of the Environment, where Serco will project
manage the four-year design and build phase and then operate and
maintain the vessel for an initial ten-year period; within our
order book, and future revenues, we will not include the value of
the ship itself. The third largest new contract was to upgrade the
High Altitude Electromagnetic Pulse (HEMP) Protection of Ballistic
Missile Early Warnings Systems supporting the US Air Force at Thule
Air Base in Greenland. Of the other major new bids decided during
the year, we were unsuccessful in the tender to operate the Clyde
and Hebrides Ferry Services on behalf of Transport Scotland, in two
bids to operate UK local authority environmental services and to
provide processing services to two US Departments of State. Smaller
new bids won included two for the European Space Agency, transport
operations support for the State of Louisiana, numerous US Navy
ship and shore defence equipment modernisation task orders, and
contracts for airport facilities management and defence base
operational support in the Middle East.
Of rebids and extensions secured, the largest was for Acacia
prison in Western Australia for a further five years, and the
second largest was for two further years to continue providing
defence base support services at Goose Bay, Canada. Others
included: the COMPASS extension for an additional 21 months;
extending our support to the UK military satellite network, the
Anglia Support Partnership healthcare shared services and several
environmental services contracts; and in the Middle East for our
operations for Australian Defence Force logistics and base support,
healthcare facilities management in Saudi Arabia and Baghdad Air
Navigation Services.
Win rates by volume were over 50% for new bids and over 90% for
rebids and extensions. Win rates by value saw some modest
improvement to over 20% for new work given the balance of outcomes
on larger bids, and approximately 80% for securing existing
work.
Order book
The Group's order book, excluding the discontinued Global
Services division, now stands at an estimated GBP9.9bn, very
similar to the GBP10.0bn reported at the end of 2015. There is
GBP2.5bn of revenue in the order book for 2017, equivalent to over
80% visibility of our GBP3.1bn revenue guidance. The secured order
book is GBP1.7bn for 2018 and GBP1.3bn for 2019.
Rebids
Through to the end of 2019, across the Group there are around 50
contracts in our order book with annual revenue of over GBP5m where
an extension or rebid will be required, representing current annual
revenue of over GBP1.3bn in aggregate or around 40% of the Group's
forecast revenue for 2017 of GBP3.1bn. Contracts that could
potentially end at some point by the end of 2017 have aggregate
annual revenue of around GBP200m. In 2018, this increases to around
GBP400m, with the greater amount driven in particular by the US
Affordable Care Act contract becoming due for full rebid in that
year, and with the next largest being Northern Isles Ferries. In
2019, it is around GBP700m, with Australian immigration services,
COMPASS, PECS and the Dubai Metro also all expected to become due
for rebid or potential extension.
Pipeline
Our pipeline is defined as new bid opportunities with estimated
Annual Contract Value (ACV) of at least GBP10m or a Total Contract
Value (TCV) of at least GBP100m, and which we expect to bid and to
be adjudicated within a rolling 24-month timeframe. The TCV of
individual opportunities is capped at GBP1bn. The definition does
not include rebids and extension opportunities. It is therefore a
relatively small proportion of the total universe of opportunities,
many of which either have annual revenues less than GBP10m, or are
likely to be decided beyond the next 24 months, or are rebids and
extensions. It should also be remembered that in the Americas in
particular, we have numerous arrangements which are classed as
'IDIQ' - Indefinite Delivery / Indefinite Quantity - which are
essentially framework agreements under which the customer issues
task orders one at a time; whilst the ultimate value of such a
contract may be very large and run over many years, the value is
only recorded in our order book as individual task orders are
contracted, and few of them would appear in the pipeline as they
tend to be individually less than GBP10m and contracted on short
lead times.
Following several years of decline in the value of the bid
pipeline, in 2015 it began to grow again from its nadir of around
GBP5bn, increasing to GBP6.5bn at the end of 2015, and stood at
GBP8.4bn at the end of 2016. During 2016, GBP3bn came out of the
pipeline reflecting wins and losses during the year, but this has
been more than offset by adding new opportunities, particularly in
defence in the US and justice in Australia. There are now around 30
bids in the pipeline, with the ACV averaging approximately GBP30m
and a contract length averaging close to 10 years. Key
opportunities in the pipeline are described further in the
Divisional Reviews.
While our pipeline definition reflects bid decisions due over
the next 24 months, it is important to note that over 80% of the
current pipeline is expected to have bids adjudicated within the
next 12 months. This is an unusually high degree of "front
loading", and, if customers stick to their timescales, it is
unlikely that we will be able to replace the around GBP7bn of bids
that are likely to drop out of the pipeline during the year. We
therefore think it likely that the value of the reported pipeline
will drop in 2017; provided we win some of the bids that are to be
decided this year, this is not a matter of concern: progress on
growing our pipeline should not be expected to be a smooth
progression given the effects of individual timings and scales of
major bids.
Risks associated with the outcome of the UK's referendum on EU
membership
Serco reported a year ago on the potential risk to its business
if Britain left the EU. Following the outcome of the referendum we
have further considered the risks and opportunities presented by
Brexit.
First, we currently have contracts worth over GBP100m a year
with European public bodies such as the European Commission, the
European Space Agency and the European Central Bank; many of these
contracts are executed by our subsidiaries based in continental
Europe, and tenders are subject to strict European competition and
bidding rules which should give us protection against unfair
discrimination. So we think that these risks are likely to be
capable of mitigation.
Secondly, we must consider how Brexit might affect our business
with the British Central Government, which accounts for about a
quarter of our revenue. Here, the picture is hard to discern. The
senior Civil Service were, even before the Brexit vote, facing a
major challenge implementing an agenda of reform designed to
deliver the future efficiencies required to achieve the
Government's plans to balance expenditure with income by the end of
the decade. In addition to these tasks, the Civil Service is facing
what is probably the most significant and wide-ranging changes in
policy and delivery that it has seen since the post-war Atlee
government, which created the NHS and nationalised swathes of UK
industry. At the moment, the focus is on supporting the Government
in its Brexit negotiations, but very quickly attention will have to
turn to designing and then implementing new policy across swathes
of British administration: Immigration, Customs, Agriculture,
Fisheries, Food, Research, Education, Energy, Environment, to name
a few. In addition, equivalent European regulatory bodies will have
to be created and staffed in the UK. This is going to be a huge
test for the Civil Service, and it is currently unclear how it will
be delivered, or how much support they will want from the private
sector in this task.
The third area of possible impact would be in terms of our
labour costs. Only 3% of our employees in the UK are Continental EU
nationals, so the direct impact should be minimal. However, if
there are severe restrictions on EU citizens working in the UK,
this may have a wider impact on labour availability and cost.
Overall, we think that Brexit offers both risks and
opportunities for Serco. However, the picture is unlikely to become
clear in the short term. In the meantime, our long-term contracts
and our role in providing critical public services should give us
some protection from short-term vicissitudes. Most importantly, our
strong presence in North America, the Middle East and Australia
diversify our risk and give us choices as to where we invest our
resources.
Guidance and outlook
In 2016, better trading performance and currency movements in
the first half of the year led us to increase full-year guidance in
both our May and August updates. This reflected primarily the
successful resolution of a number of commercial matters and other
factors not expected to repeat in subsequent periods, together with
the benefit of foreign exchange movements. In December 2016, having
completed our budget review process, we updated that our
expectations for 2017 were unchanged on an underlying basis from
those previously described, though an adjustment was required for
the potential benefit of foreign exchange movements.
At current foreign exchange rates, our 2017 budget implies
revenue of approximately GBP3.1bn and Underlying Trading Profit of
between GBP65m and GBP70m, and with a weighting to the second half.
Given that the first half of 2016 benefitted from a number of
non-recurring items, Underlying Trading Profit in the first half of
2017 is expected to be significantly lower than the comparator
period.
In regard to our budget and guidance, we reiterate that the
range of potential outcomes for 2017 is significantly wider, both
to the upside and downside, given Serco's low margins and the
sensitivity of our profits to even small changes in revenues or
costs. Furthermore, and as described in more detail in the
Divisional Reviews, the outcome of major bids in our pipeline, and
the timing and nature of arrangements made for the replacement of
the Affordable Care Act in the US, could have a material impact on
our business both in the immediate and longer term.
The trading outlook for 2018 will clearly come more into focus
as we progress through 2017 in terms of bid activity and our other
transformation actions. Our guidance is for margins to reduce in
2017, but we would expect to show some modest improvement
year-on-year in 2018. Our path of margin improvement reflects the
lag effect of delivering the net benefit of transformation
efficiencies and the time it takes for new work to begin and
deliver operational leverage of the cost base.
Although our cash tax rates are reasonably predictable, our
accounting effective tax rates are likely to remain volatile; in
2015 the accounting underlying effective tax rate was 48%, in 2016
35%, and we expect it could revert back to around 50% in 2017. This
will depend on the precise mix of profits and losses we see by
jurisdiction. Any increase in our accounting tax rates will of
course have an amplifying effect on the reduction in EPS caused by
the lower Underlying Trading Profit expected in 2017.
Regarding cash flows for 2017, we expect our Underlying Trading
Profit forecast will be broadly offset by the cash outflow on
onerous contracts, given OCP utilisation budgeted of approximately
GBP80m. With cash outflows for interest and tax forecast to be
broadly similar to 2016, this would result in a Free Cash outflow
at similar levels to the GBP33m seen in 2016, assuming all other
cash effects are neutral such as the effect of joint ventures,
capital expenditure versus depreciation, and of course working
capital. The outcomes of new bids and rebids, and the associated
timing of any change in operations, would impact these assumptions,
particularly working capital. There will also continue to be a
level of cash outflow on exceptional costs, potentially at a
similar level to 2016, given further restructuring to support our
transformation. In all, we therefore estimate that closing net debt
at the end of 2017 could increase to between GBP150m and GBP200m,
equivalent to leverage for covenant purposes of between 1.2x and
1.7x EBITDA.
Concluding thoughts
We continue to make good progress implementing our strategy
through the three stages of our plan to 'Stabilise - Transform -
Grow' which we set out in detail in early 2015. Our overarching
objective is to make Serco a world-class international supplier of
services to Government in our chosen sectors of Defence, Justice
& Immigration, Transport, Health and Citizen Services. We
completed the stabilisation of the business in 2014 and 2015. Since
then, we have been transforming the business: reducing our
operating costs, investing in systems, processes and people,
building compelling service propositions and improving the quality
of our operational delivery to customers. We start 2017 with a very
healthy pipeline of new opportunities, but also with a lot of work
yet to be done to successfully complete the 'Transform' stage of
our plan. Armed with a strong balance sheet, skilled and committed
colleagues, and a good track record of delivery against our
objectives over the last two years, I remain confident that we are
heading in the right direction.
Rupert Soames
Group Chief Executive Officer
Serco - and proud of it.
Divisional Reviews
Serco's continuing operations are reported as five divisions: UK
Central Government (CG); UK & Europe Local & Regional
Government (LRG); the Asia Pacific region (AsPac); the Middle East;
and the Americas. The Global Services division consists of Serco's
residual private sector BPO operations, which for statutory
reporting purposes are classified as discontinued operations
following the previously announced strategic exit from this market
and the subsequent disposal in December 2015 of the Intelenet
business. Serco presents alternative measures to include the
Revenue and Trading Profit of these discontinued operations for
consistency with previous guidance. Reflecting statutory reporting,
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 Trading
Profit. As previously disclosed and for consistency with guidance,
Serco's Underlying Trading Profit measure excludes Contract and
Balance Sheet Review adjustments (principally OCP releases or
charges), the benefit from not depreciating and amortising assets
held for sale, and other one-time items such as those related to
the early exit from the Thurrock contract.
Year ended 31 December CG Sub-total
2016 Middle Corporate continuing Global
GBPm LRG AsPac East Americas costs Services Total
Revenue including
discontinued operations 678.6 696.5 619.7 324.8 691.4 - 3,011.0 36.8 3,047.8
Change (9%) (23%) +14% +11% 0% - (5%) (89%) (13%)
Change at constant
currency (9%) (25%) +2% (1%) (11%) - (11%) (89%) (19%)
Organic change at
constant currency (9%) (25%) +4% (1%) (11%) - (11%) n/a n/a
Discontinued operations
adjustment* - - - - - - - (36.8) (36.8)
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
Revenue 678.6 696.5 619.7 324.8 691.4 - 3,011.0 - 3,011.0
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
Underlying Trading
Profit/(Loss) 52.2 (6.5) 24.9 16.6 43.0 (43.5) 86.7 (4.6) 82.1
Change (2%) n/a +110% (12%) (3%) (15%) +6% n/a (14%)
Change at constant
currency (2%) n/a +85% (20%) (13%) (15%) (4%) n/a (23%)
Margin 7.7% (0.9%) 4.0% 5.1% 6.2% n/a 2.9% (12.5%) 2.7%
Contract and Balance
Sheet Review adjustments 42.7 (7.4) 9.3 2.2 (36.6) 3.2 13.4 0.8 14.2
Benefit from not
depreciating and
amortising assets
held for sale - - - - - - - 0.5 0.5
Other one-time items - 3.5 - - - - 3.5 - 3.5
Trading Profit/(Loss) 94.9 (10.4) 34.2 18.8 6.4 (40.3) 103.6 (3.3) 100.3
Amortisation of intangibles
arising on acquisition (0.3) - (2.0) - (2.8) - (5.1) - (5.1)
Discontinued operations
adjustment* - - - - - - - 3.3 3.3
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
Operating profit/(loss)
before exceptionals 94.6 (10.4) 32.2 18.8 3.6 (40.3) 98.5 - 98.5
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
* Statutory reporting only includes the post-tax result of
discontinued operations as a single line in the Consolidated Income
Statement.
Year ended 31 December CG Sub-total
2015 Middle Corporate continuing Global
GBPm LRG AsPac East Americas costs Services Total
Revenue including
discontinued operations 742.1 905.8 544.7 291.4 693.0 - 3,177.0 337.6 3,514.6
Discontinued operations
adjustment* - - - - - - - (337.6) (337.6)
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
Revenue 742.1 905.8 544.7 291.4 693.0 - 3,177.0 - 3,177.0
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
Underlying Trading
Profit/(Loss) 53.1 4.7 11.9 18.9 44.3 (51.3) 81.6 14.3 95.9
Margin 7.2% 0.5% 2.2% 6.5% 6.4% n/a 2.6% 4.2% 2.7%
Contract and Balance
Sheet Review adjustments 7.1 (28.2) 46.9 8.5 (17.3) 3.3 20.3 0.6 20.9
Benefit from not
depreciating and
amortising assets
held for sale - - - - - - - 11.7 11.7
Other one-time items - 9.0 - - - - 9.0 - 9.0
Trading Profit/(Loss) 60.2 (14.5) 58.8 27.4 27.0 (48.0) 110.9 26.6 137.5
Amortisation of intangibles
arising on acquisition - (1.1) (1.2) - (2.5) - (4.8) (0.1) (4.9)
Discontinued operations
adjustment* - - - - - - - (26.5) (26.5)
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
Operating profit/(loss)
before exceptionals 60.2 (15.6) 57.6 27.4 24.5 (48.0) 106.1 - 106.1
---------------------------- ----- ------ ----- ------ -------- --------- ----------- --------- -------
* Statutory reporting only includes the post-tax result of
discontinued operations as a single line in the Consolidated Income
Statement.
The trading performances and outlook are described for each
division on the following pages. Reconciliations and further detail
of financial performance are included in the Finance Review on
pages 17 to 36. This includes full definitions and explanations of
the purpose of each non-IFRS Alternative Performance Measure (APM)
used by the Group. The consolidated financial statements and
accompanying notes are on pages 37 to 65.
UK Central Government
The UK Central Government division includes our UK operations in
Defence, Justice & Immigration and Transport.
Revenue for 2016 was GBP678.6m (2015: GBP742.1m), a decline of
9%; reported revenue excludes that from our joint venture and
associate holdings at AWE, Merseyrail and previously Northern Rail,
with these representing the vast majority of the Group's activity
in joint ventures and associates. The principal driver of the
revenue reduction was the phased transfer back of services that
Serco had previously been providing to the Defence Science and
Technology Laboratory (DSTL), together with the end of the Defence
Business Services arrangement, the loss of two small defence
support contracts, and the ending of transitional support provided
in 2015 regarding the supply of Electronic Monitoring equipment.
There was limited growth elsewhere to offset contract attrition,
with the largest being higher revenue on the COMPASS programme
relating to increased numbers of asylum seekers under our care and
the full-year impact of the Caledonian Sleeper contract which Serco
began operating on 31 March 2015.
Underlying Trading Profit was GBP52.2m (2015: GBP53.1m),
representing an implied margin of 7.7% (2015: 7.2%). Trading Profit
includes the profit contribution (from which tax and interest have
already been deducted) of joint ventures and associates; if the
GBP439m proportional share of revenue from joint ventures and
associates was also included and if the GBP7.3m share of interest
and tax cost was excluded, the overall divisional margin would have
been 5.3% (2015: 4.1%). The joint venture and associate profit
contribution of GBP31.3m was GBP2.5m lower than 2015, reflecting
the end of the Northern Rail franchise in March 2016 and the lower
shareholding of AWE from the second half of the year. Outside of
joint ventures and associates, Underlying Trading Profit increased
by 8% to GBP20.9m, with the profit impact from contract attrition
more than offset by increased profitability on continuing contracts
and reductions in overheads. Within Underlying Trading Profit there
was GBP37m of OCP utilisation (2015: GBP57m), which served to
offset the Division's loss-making contracts principally COMPASS,
Caledonian Sleeper and PECS. The reduced level of OCP utilisation
reflects improving operational and financial performance on each of
these loss-making contracts.
Contract and Balance Sheet Review adjustments resulted in a
GBP42.7m net release, arising from reductions in our estimates of
future liabilities. This was driven by a release of GBP34m for
COMPASS, reflecting updated forecasts and the terms of the contract
extension; this was partially offset by the OCP arising on the
acquisition of sub-contractor operations. Other releases included
those related to further improvements on the FPMS contract, the
transfer of the secure escorting services contract for the Youth
Justice Board which removed future losses, and the outcome of the
re--pricing of the HMP Ashfield contract. Partially offsetting
these was a charge to increase the PECS OCP to reflect an updated
assumption that the customer will exercise one of three extension
years, and some increased cost assumptions on the Caledonian
Sleeper contract. After the Contract and Balance Sheet Review
adjustments, Trading Profit was GBP94.9m (2015: GBP60.2m).
UK Central Government represented around GBP300m of the Group's
aggregate total value of signed contracts during the year, which
was driven by rebids and extensions including the 21-month COMPASS
extension, the successful rebid to continue operating the London
Cycle Hire scheme for at least a further five years, and smaller
awards such as the Skynet 5 secure military satellite
communications network contract and our testing support for the
German Air Force fleet of Eurofighters. The only major new bid
pipeline decision during the year was the tender to operate the
Clyde and Hebrides Ferries Services; Serco was unsuccessful in this
competition, with the operations remaining with the incumbent
CalMac Ferries Limited.
An updated contract was also agreed in March 2016 between the
Ministry of Defence and the joint venture partners of AWE
Management Limited (AWE ML), setting out a framework through to
2025 and the programme of activity and pricing through to 2019.
This followed the conclusion of the UK Government's review of the
efficiency, effectiveness and value for money of the operations and
contracting model for AWE. As part of the arrangements, the joint
venture partners agreed that Lockheed Martin would take a majority
shareholding in the joint venture, and the shareholdings of both
Jacobs and Serco reduced accordingly from 33.3% to 24.5% from the
beginning of September 2016. If Serco's new share of associate
revenue were consolidated, the agreement for the next three year's
pricing would be equivalent to an additional signed contract value
for Serco of approximately GBP700m.
For 2017, we expect a low-to-mid single digit revenue decline
based upon the net effect of known contract wins and losses and
other assumed revenue movements. There will be a significantly
greater reduction in profitability, reflecting the end of the
Northern Rail joint venture and the commercial settlement benefits
that arose from this in 2016, and the reduction in the
contributions from AWE.
Of existing work where an extension or rebid will be required at
some point before the end of 2019, there are ten contracts with
annual revenue of over GBP5m within the UK Central Government
division; in aggregate, these represent approximately 30% of the
current level of annual revenue for the division. The largest of
these are the Northern Isles Ferries operations that would become
due for potential extension or rebid in 2018, PECS which is now
assumed to be rebid in 2019 if further extension options are not
exercised by the customer, and COMPASS also in 2019.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes the Defence Fire & Risk
Management Organisation, the operation of an immigration removal
centre, immigration escorting for the Home Office, and the Hades
Programme to provide various support services to the Ministry of
Defence. Over the longer term, we continue to expect reform and
improvement to the prison system, and for further opportunities in
Defence and other areas to emerge as the UK Government continues
its efforts to save cost and improve public services.
UK & Europe Local & Regional Government
The UK & Europe Local & Regional Government division
(LRG) includes our UK Health and UK and European Citizen Services
sectors. The Health business provides primarily non-clinical
support services to hospitals; the Citizen Services business
provides environmental and leisure services, as well as a wide
range of other front, middle and back-office services to Local
Authorities, and IT services to European institutions.
Revenue for 2016 was GBP696.5m (2015: GBP905.8m), a decline of
23%. At constant currency, the organic decline was 25%. The
principal drivers of the revenue reduction were: the end of the
Suffolk Community Healthcare and National Citizen Services
contracts which had previously been heavily loss-making and were
not rebid; changes to two health procurement contracts which are
continuing but where we no longer recognise as revenue the cost of
goods purchased on behalf of our customers; the full-year impact of
the early exit from the Thurrock BPO services contract; the ending
of certain infrastructure support services to private sector
customers; and the reducing scale of the Child Maintenance Group
operations. There was limited in-year revenue growth elsewhere to
offset the effect of these planned contract ends and
reductions.
There was an Underlying Trading Loss of GBP6.5m (2015: profit of
GBP4.7m), representing a margin of -0.9% (2015: +0.5%). There was a
reduction in profit contribution from contract attrition, and
certain areas of cost investment to deliver longer term
efficiencies more than offset other contract profitability
improvements and cost savings during the year. In addition, there
were GBP3m of impairments and write-downs on a European agency
contract. Within Underlying Trading Profit there was GBP23m of OCP
utilisation (2015: GBP11m non-exceptional), with the increase
reflecting the losses on the Lincolnshire County Council operations
as costs peaked with the implementation of the new ERP system; the
contract is running broadly in line with expectations and the major
elements of the IT implementation are now in service.
Contract and Balance Sheet Review adjustments resulted in a
GBP7.4m net charge, reflecting a number of small adjustments in
assumptions on OCP contracts. Separately, there was a one-time
profit of GBP3.5m arising from a pension scheme settlement relating
to the early exit from the Thurrock Council services in the
previous year. After these adjustments and one-time profit, the
Trading Loss was GBP10.4m (2015: Trading Loss of GBP14.5m).
LRG represented around GBP750m of the Group's aggregate total
value of signed contracts during the year. The largest award
reflects the initial seven-year value, estimated at GBP450m, for
new services to Barts Health NHS Trust to deliver facilities
management services across their hospitals. Of other major new bid
pipeline decisions during the year, Serco was unsuccessful on a
smaller health facilities management opportunity and two bids for
environmental services. Other new but smaller wins included contact
centre services for the Department of Work & Pensions.
Successful rebids or extensions included: the Anglia Support
Partnership healthcare shared services operations; environmental
services for Woking Borough, Charnwood Borough and Canterbury City
councils; regional employment support services for the Skills
Funding Agency; contact centre and digital services support for
Public Health England; and our support to institutions such as the
European Space Agency and CERN.
For 2017, we expect a low-to-mid single digit revenue decline
based upon the net effect of known contract wins and losses and
other revenue movements including the change to the two health
procurement contracts. Growth from the start of the major new
contract for Barts is expected to be offset by other reductions. We
expect that the division should though make progress on its
profitability in 2017, as we see more benefits start to come
through from actions to secure sustainable longer term improvements
in efficiencies.
Of existing work where an extension or rebid will be required at
some point before the end of 2019, there are 12 contracts with
annual revenue of over GBP5m within the LRG division; in aggregate,
these represent approximately 20% of the current level of annual
revenue for the division; this excludes Glasgow ACCESS which is an
assumed expiry in March 2018.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes further tenders for
environmental services and hospital facilities management bids. We
continue to evaluate developments in the other sectors of operation
within LRG, including other Citizen Services work and to expand our
European business providing various operational support to
government agencies.
AsPac
Operations in the Asia Pacific division include Justice,
Immigration, Defence, Health, Transport and Citizen Services in
Australia, New Zealand and Hong Kong. Serco's operations in
Australia are by far the largest element of the division; the
country represents approximately 20% of total Revenue for the
Group.
Revenue for 2016 was GBP619.7m (2015: GBP544.7m), an increase of
14%. In Australian dollars, the main currency for operations of the
division, revenue for the year was equivalent to approximately
A$1,140m (2015: A$1,106m). The movements in local currencies
against Sterling increased revenue by GBP64m or 12%, while the
impact of disposals (the Great Southern Rail business disposed in
May 2015) reduced revenue by GBP10m or 2%; the organic growth at
constant currency was therefore 4%. There were some increases in
revenue in relation to the renegotiation of the Armidale Class
Patrol Boat (ACPB) contract as well as scope increases to existing
services such as Citizen Services contact centre operations and the
expansion of Acacia prison. Revenue from Australian immigration
services was broadly flat.
Underlying Trading Profit was GBP24.9m (2015: GBP11.9m),
representing a margin of 4.0% (2015: 2.2%). The improvement in
profitability included: a favourable currency movement of GBP3m; a
loss on the Mount Eden Correctional Facility contract in 2015 that
was offset in 2016 by the subsequent OCP; and progress on cost
efficiencies that more than offset other cost and margin pressures.
Within Underlying Trading Profit there was GBP12m of OCP
utilisation (2015: GBP20m), with significantly lower losses on the
ACPB contract partially offset by increased utilisation on the
Mount Eden contract.
Contract and Balance Sheet Review adjustments resulted in a
GBP9.3m net release, driven by revised assumptions on the residual
period of operation of the ACPB contract, which concludes in 2017.
After these adjustments, Trading Profit was GBP34.2m (2015:
GBP58.8m).
AsPac represented around GBP600m of the Group's aggregate total
value of signed contracts during the year. The largest new order,
valued at approximately GBP160m, was to project manage the design
and build phase, and subsequently operate, the new 'icebreaker'
Antarctic Supply and Research Vessel for the Australian Department
of the Environment. There was also the extension of two corrections
contracts with the Queensland and Western Australian governments,
valued in total at approximately GBP200m, and the successful rebid
of hospital facilities management services in Hong Kong.
For 2017, our expectations are an approximate 10% revenue
decline on an organic basis, based upon the net effect of known
contract wins and losses and other assumed revenue movements. This
is driven by the loss of the ACPB, Mount Eden and Western Australia
Court Security and Custodial Services contracts. The estimated
currency benefit based on current exchange rates would largely
offset the forecast organic decline.
Of existing work where an extension or rebid will be required at
some point before the end of 2019, there are seven contracts with
annual revenue of over GBP5m within the AsPac division; in
aggregate, these represent approximately 50% of the current level
of annual revenue for the division; this high proportion reflects
that the Australia onshore immigration services contract requires
rebid or extension at the end of 2019, with this accounting for
over 30% of current divisional revenue.
Our pipeline of major new bid opportunities due for decision
within the next 24 months now includes three prison bids and
additional opportunities in case management and defence support
services. Looking beyond, further potential opportunities in
Justice, Citizen Services, Defence, Transport and non-clinical
health services are expected to be developed over time.
Middle East
Operations in the Middle East division include Transport,
Defence, Health and Citizen Services.
Revenue for 2016 was GBP324.8m (2015: GBP291.4m), an increase of
11%. The strengthening of local currencies against Sterling
provided growth of GBP36m or 12%; the organic decline at constant
currency was 1%. There was revenue growth from increased volumes on
a defence logistics contract, expanded healthcare support services
and at the Dubai Metro; these were broadly offset by reduced
revenue on the Dubai Air Navigation Services contract and a small
number of other operations reducing in scope or ending.
Underlying Trading Profit was GBP16.6m (2015: GBP18.9m),
representing a margin of 5.1% (2015: 6.5%). There was some
improvement in profitability from higher defence logistics volumes
and the GBP1.4m favourable currency movement; these were more than
offset by the impact of other contract scope reductions and
attrition, together with significant investment in business
development and bidding the major rail opportunities in the region.
Within Underlying Trading Profit, OCP utilisation was
immaterial.
Contract and Balance Sheet Review adjustments resulted in a
GBP2.2m net release. After these adjustments, Trading Profit was
GBP18.8m (2015: GBP27.4m).
The Middle East represented over GBP200m of the Group's
aggregate total value of signed contracts during the year. Although
no major new bid pipeline decisions were due, smaller awards
included a new contract to maintain and support a large part of
Dubai Airport buildings and infrastructure, and further contracts
for defence base support and healthcare facilities management in
the region. Amongst rebids and extensions secured were further
extensions for Middle East Logistics and Base Support (MELABS) to
the Australian Defence Force in the region, healthcare facilities
management in Saudi Arabia and Abu Dhabi, and Baghdad Air
Navigation Services.
For 2017, there is a relatively modest net effect expected from
already known contract wins and losses. However, progress on
retaining existing work, and particularly the cost to progress and
the outcomes of the major new bid opportunities in the region, will
ultimately determine financial performance in the coming year.
Of existing work where an extension or rebid will be required at
some point before the end of 2019, there are ten contracts with
annual revenue of over GBP5m within the Middle East division; in
aggregate, these represent more than half of the current level of
annual revenue for the division. There is a high proportion of work
to secure in 2019, when the Dubai Metro, MELABS and Cleveland
Clinic Abu Dhabi contracts each require extending or rebidding.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes three major light rail and tram
operations in the region; in aggregate, these represent
approximately 30% of the value of the Group's pipeline. There are
other smaller opportunities in defence training and support
services and in non-clinical health facilities management support
in the current pipeline, and the Transport, Defence, Health and
other Citizen Services including integrated facilities management
continue to be potentially high growth markets in the region.
Americas
Our Americas division provides professional, technology and
management services focused on Defence, Transport, and Citizen
Services. The US federal government, including the military,
civilian agencies and the national intelligence community, are our
largest customers. We also provide services to the Canadian
Government and to some US state and municipal governments.
Revenue for 2016 at GBP691.4m was broadly flat (2015:
GBP693.0m). In US dollars, the main currency for operations of the
division, revenue for the year was equivalent to approximately
US$944m (2015: US$1,061m). The strengthening of local currencies
against Sterling increased revenue by GBP74m or 11%, with the
organic decline at constant currency also being 11%. The principal
drivers of the revenue reduction were the loss of the rebid for
record processing at the National Benefits Centre and the
transition back to the customer of the VDOT operations, together
with a number of other smaller contract ends, or reductions in the
volume of workload or task orders. There was limited growth
elsewhere to offset these reductions.
Underlying Trading Profit was GBP43.0m (2015: GBP44.3m),
representing a margin of 6.2% (2015: 6.4%). The decline was driven
by contract attrition and areas of cost investment, which was only
partially offset by a GBP4.6m favourable currency movement and
other cost efficiencies. Within Underlying Trading Profit there was
GBP9m (2015: GBP10m) of OCP utilisation on the completed VDOT
contract and the Ontario Driver Examination Services contract.
Contract and Balance Sheet Review adjustments resulted in a
GBP36.6m net charge. This was driven by the GBP29.5m revision to
estimates of future costs and foreign exchange impacts associated
with the existing OCP for the IT systems implementation and ongoing
management of the Ontario Driver Examination Services contract; in
addition to the increase in the OCP there was an GBP8.8m charge
reflecting a reduction in the accrued revenue balance for the
contract. After the Contract and Balance Sheet Review adjustments,
Trading Profit was GBP6.4m (2015: GBP27.0m).
Americas represented over GBP600m of the Group's aggregate total
value of signed contracts during the year. Awards for new work
included a US Air Force High Altitude Electromagnetic Pulse (HEMP)
Protection of Ballistic Missile Early Warnings Systems radar
facility upgrade contract at Thule Air Base in Greenland, and a
support contract for the US State of Louisiana Department of
Transportation (LADOT) Motorist Assistance Program. Defence task
orders awarded during the year, driven by our ship and shore/base
modernisation services, totalled over US$260m, which includes
expanding our recently awarded support services to the US Naval
Facilities Engineering Command (NAVFAC). Our bids to support
passport processing for the Department of State and data reporting
for the Department of Health and Human Services were unsuccessful.
Amongst rebids, Serco secured its operations to continue providing
site support services at the 5 Wing Canadian Forces Base in Goose
Bay, Canada, valued at C$115m for the initial two-year period.
For 2017, our expectations are low-to-mid single digit revenue
growth on an organic basis, based upon the net effect of known
contract wins and losses and other assumed revenue movements. The
estimated currency benefit based on current exchange rates would
increase this to potentially 10-15% growth. The outcome for 2017
could however materially change depending on developments affecting
our contract supporting the US Affordable Care Act (ACA); these
operations accounted for approaching 30% of divisional revenue in
2016, and we currently forecast them to be broadly flat in 2017;
whilst margins on this contract are lower than the average for the
Division, the contract recovers a material amount of overhead costs
and large reductions in chargeable direct labour could create
challenges to reduce overheads in line with revenues. At the time
of reporting, apart from knowing that under the new Administration
changes will be made, there is no consensus in either Congress or
the Administration as to what form these changes will take, and
what provision will be made for the more than 24 million people who
have received health insurance coverage through the ACA.
Of existing work where an extension or rebid will be required at
some point before the end of 2019, there are eight contracts with
annual revenue of over GBP5m within the Americas division; in
aggregate, these represent around 50% of the current level of
annual revenue for the division; this high proportion reflects that
our contract supporting the ACA requires the final option year to
be exercised though to 30 June 2018 and then would be required to
be rebid; the Global Installation Contract covering areas of our
defence ship modernisation work also requires securing in 2019.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes important opportunities to
provide various support functions to the US Navy, as well as other
bids in transport operational support, Citizen Services processing
and immigration services that have been added over the year. Whilst
particular uncertainty exists with regard to the future of the ACA
potentially in 2017 and more so beyond, under the new US
administration other areas of public service support may generate
further improvement in market conditions over time.
Dan Allen, Chief Executive Officer of the Americas division, has
informed the business of his intention to retire from work in
mid-2017. Dan joined Serco in 2013 and we thank him for the
successful leadership and direction he has provided, and wish him
well for the future.
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 in 2016, before Contract and Balance Sheet
Review adjustments, were GBP43.5m (2015: GBP51.3m), with the 15%
reduction including the benefit of actions taken to deliver savings
and improve the efficiency of our overall operating model.
Contract and Balance Sheet Review adjustments resulted in a
GBP3.2m net release. After these adjustments, Corporate Costs
within Trading Profit were GBP40.3m (2015: GBP48.0m).
Global Services (discontinued operations)
The Global Services division consists of Serco's private sector
BPO business, performing middle and back office functions across
customer contact, transaction and financial processing. As part of
Serco's previously announced strategy to exit non-core markets and
to focus on the provision of public services, Serco has been
exiting these operations. On 31 December 2015, the transaction to
dispose of the majority of the offshore private sector BPO
operations was completed; the businesses sold contributed over
GBP300m of revenue and GBP23m of Underlying Trading Profit in 2015,
and were sold for a gross consideration of approximately GBP250m.
There were two smaller associated transactions relating to
operations in the Middle East, both of which were completed in
2016. The remaining private sector operations, which are
predominantly UK onshore operations, are being exited either by
further disposals, transfers, early termination or running-off the
contracts over their remaining contractual period.
For statutory reporting purposes, the Global Services division
is classified as discontinued operations, therefore only the
post-tax result of these operations is included as a single line in
the reporting of the Group's Income Statement. However, for
consistency with previous guidance, Serco's underlying measures
include the Revenue and Trading Profit of these discontinued
operations.
Revenue was GBP36.8m (2015: GBP337.6m), with the decline
reflecting the disposals and exits in 2015 and 2016.
The Underlying Trading Loss for 2016 was GBP4.6m (2015:
Underlying Trading Profit of GBP14.3m). The loss in 2016 reflects
the residual contract losses up to the point of exit together with
the effect of 'stranded' shared service centre costs and other
overheads previously absorbed by the Global Services division.
Within Underlying Trading Profit, there was GBP3m of OCP
utilisation.
Contract and Balance Sheet Review adjustments resulted in a
GBP0.8m net release. As the division included assets designated as
held for sale, there is a benefit of not charging depreciation and
amortisation of GBP0.5m. After these Contract and Balance Sheet
Review adjustments and held for sale benefits, the Trading Loss was
GBP3.3m.
Over the course of 2016, we ran ahead of our plans to mitigate
the losses and stranded costs, which were initially anticipated to
be approximately GBP10m in 2016. The Freeman Grattan Holdings and
BrightHouse contracts together with the associated Sheffield
facilities were transferred to a new provider during the first half
of the year; the Aegon contract together the associated Lytham St
Annes facilities were transferred in the second half. Our only
remaining contract is that for direct home shopping company JD
Williams. For 2017, no material residual financial effect is
therefore forecast.
Finance Review
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
------------------------------------------ -------------- --------------
Revenue from continuing and discontinued
operations 3,047.8 3,514.6
Exclude revenue from discontinued
operations (36.8) (337.6)
------------------------------------------ -------------- --------------
Reported Revenue (continuing activities
only) 3,011.0 3,177.0
------------------------------------------ -------------- --------------
Underlying Trading Profit* 82.1 95.9
Onerous contract and Balance Sheet
Review adjustments 14.2 20.9
Benefit from non-depreciation and
non-amortisation of assets held
for sale 0.5 11.7
Other one-time items 3.5 9.0
------------------------------------------ -------------- --------------
Trading Profit on continuing and
discontinued operations* 100.3 137.5
Other expenses - amortisation and
impairment of intangibles arising
on acquisition (5.1) (4.9)
------------------------------------------ -------------- --------------
Operating profit before exceptional
items on continuing and discontinued
operations* 95.2 132.6
Exclude operating loss / (profit)
before exceptional items arising
on discontinued operations 3.3 (26.5)
------------------------------------------ -------------- --------------
Operating profit before exceptional
items* 98.5 106.1
------------------------------------------ -------------- --------------
Exceptional profit / (loss) on
disposal of subsidiaries and operations 2.9 (2.6)
Other exceptional operating items (59.2) (107.3)
------------------------------------------ -------------- --------------
Exceptional operating items (56.3) (109.9)
------------------------------------------ -------------- --------------
Reported operating profit / (loss)* 42.2 (3.8)
------------------------------------------ -------------- --------------
Investment revenue 9.3 6.1
Finance costs* (21.9) (38.9)
Exceptional finance costs - (32.8)
------------------------------------------ -------------- --------------
Total net finance costs* (12.6) (65.6)
------------------------------------------ -------------- --------------
Profit / (loss) before tax 29.6 (69.4)
------------------------------------------ -------------- --------------
Tax on profit before exceptional
items (15.8) (17.9)
Tax on exceptional items 3.1 0.4
------------------------------------------ -------------- --------------
Tax charge (12.7) (17.5)
------------------------------------------ -------------- --------------
Profit / (loss) for the year from
continuing operations 16.9 (86.9)
Loss for the year from discontinued
operations (18.0) (66.2)
------------------------------------------ -------------- --------------
Loss for the year (1.1) (153.1)
------------------------------------------ -------------- --------------
* As explained below, profit measures down to reported operating
profit have been restated following the change in accounting policy
to exclude foreign exchange movements on investment and financing
arrangements, including them instead in net finance costs.
For the year ended 31 December 2016 2015
----------------------------------------- -------------- ---------------
Underlying trading margin from
continuing and discontinued operations 2.7% 2.7%
Underlying earnings per share from
continuing and discontinued operations 4.13p 3.44p
Earnings per share before exceptional
items from continuing and discontinued
operations 6.12p 6.55p
Loss per share from continuing
and discontinued operations (0.11p) (15.47p)
----------------------------------------- -------------- ---------------
Change in accounting policy for foreign exchange movements on
investment and financing activities
In order to provide more relevant information about the impact
of the underlying transactions of trading operations, the
accounting policy regarding the classification of foreign exchange
movements on investment and financing arrangements has been
changed. These movements are now excluded from Trading Profit and
included instead within net finance costs. As a result of this
change in accounting policy, the prior year income statement and
cash flow statement have been restated, together with the
definition of Net Debt which now includes derivatives relating to
Net Debt components. The impact of this restatement has been to
decrease Trading Profit in the year by GBP1.2m (2015: decrease by
GBP0.1m), with an equal and opposite impact recognised within net
finance costs, decrease Free Cash Flow by GBP47.0m (2015: decrease
by GBP19.3m), with an equal and opposite impact recognised below
Free Cash Flow, and decrease Net Debt by GBP18.1m (2015: decrease
by GBP14.6m).
Alternative Performance Measures (APMs) and other related
definitions
APMs used by the Group are reviewed below to provide a
definition and reconciliation from each non-IFRS APM to its IFRS
equivalent, and to explain the purpose and usefulness of each
APM.
In general, APMs are presented externally to meet investors'
requirements for further clarity and transparency of the Group's
financial performance. The APMs are also used internally in the
management of our business performance, budgeting and forecasting,
and for determining Directors' remuneration and that of other
management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being
included in an APM, this reflects revenues presented elsewhere
within the reported financial information, except where amounts are
recalculated to reflect constant currency. Where items of profits
or costs are being excluded in an APM, these are included elsewhere
in our reported financial information as they represent actual
profits or costs of the Group. As a result, APMs allow investors
and other readers to review different kinds of revenue, profits and
costs and should not be used in isolation. Other commentary within
the preliminary announcement, including the other sections of this
Finance Review, as well as the Condensed Consolidated Financial
Statements and 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
during the year for any measure, but the APMs do reflect the impact
of the prior year restatement.
Reported Revenue at constant currency
Reported Revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 37, reflects revenue translated at the
average exchange rates. In order to provide a comparable movement
on the previous year's results, Reported Revenue is recalculated by
translating non-Sterling values for the year to 31 December 2016
into Sterling at the average exchange rate for the year ended 31
December 2015.
2016
For the year ended 31 December GBPm
--------------------------------------- --------------
Reported Revenue at constant currency
(continuing activities only) 2,823.0
Foreign exchange differences 188.0
--------------------------------------- --------------
Reported Revenue at reported currency
(continuing activities only) 3,011.0
--------------------------------------- --------------
Organic Revenue at constant currency
Reported Revenue may include revenue generated by businesses
acquired during a particular year and/or generated by businesses
sold during a particular year up to the date of disposal. In order
to provide a comparable movement which ignores the effect of both
acquisitions and disposals on the previous year's results, Reported
Revenue is recalculated by excluding the impact of any acquisitions
or disposals. For 2016, no adjustment is required as no
acquisitions generated third party revenues and all disposals are
included in discontinued operations. Therefore organic revenue
growth is calculated by comparing Reported Revenue at constant
currency with Prior Year Organic Revenue at reported currency.
Prior Year Organic Revenue at reported currency is calculated as
follows:
2015
For the year ended 31 December GBPm
----------------------------------------- --------------
Organic Revenue at reported currency 3,166.6
Impact of any acquisitions or disposals
on reported revenue at reported
currency 10.4
----------------------------------------- --------------
Reported Revenue at reported currency
(continuing activities only) 3,177.0
----------------------------------------- --------------
Revenue from continuing and discontinued operations
Reported Revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 37, reflects only that from continuing
operations, with the post tax result of discontinued operations
consolidated as a single line at the bottom of the Condensed
Consolidated Income Statement. Discontinued operations reflect the
former Global Services division which consisted of our private
sector BPO operations. The alternative measure includes
discontinued operations for the benefit of consistency with
previously reported results and to reflect the overall change in
scale of the Group's operations. The alternative measure allows the
performance of the discontinued operations themselves, and their
impact on the Group as a whole, to be evaluated on measures other
than just the post tax result.
2016 2015
For the year ended 31 December GBPm GBPm
------------------------------------------ -------------- --------------
Revenue from continuing and discontinued
operations 3,047.8 3,514.6
Exclude revenue from discontinued
operations (36.8) (337.6)
------------------------------------------ -------------- --------------
Reported Revenue (continuing activities
only) 3,011.0 3,177.0
------------------------------------------ -------------- --------------
Revenue from continuing operations, including share of joint
ventures and associates
Reported Revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 37, 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.
2016 2015
For the year ended 31 December GBPm GBPm
----------------------------------------- -------------- --------------
Revenue from continuing operations,
including share of joint ventures
and associates 3,491.8 3,914.2
Exclude share of revenue from joint
ventures and associates (480.8) (737.2)
----------------------------------------- -------------- --------------
Reported Revenue (continuing activities
only) 3,011.0 3,177.0
----------------------------------------- -------------- --------------
Trading Profit
The Group uses Trading Profit as an alternative measure to
Reported Operating Profit, as shown on the Group's Condensed
Consolidated Income Statement on page 37, by making three
adjustments. Trading Profit is a metric used to determine the
performance and remuneration of the Executive Directors.
Firstly, Trading Profit excludes exceptional items, being those
considered material, non-recurring 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
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.
Thirdly, the Trading Profit of discontinued operations is
included, since as with our alternative measure of revenue, this
benefits from consistency with previously reported results,
reflects the overall change in scale of the Group's operations and
takes account of the performance of the discontinued operations
themselves. This allows their impact on the Group as a whole to be
evaluated on measures other than just the post tax result.
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
---------------------------------------- ------------- --------------
Underlying Trading Profit* 82.1 95.9
Include OCP charges and releases 9.6 (3.0)
Include Contract and Balance Sheet
Review adjustments 4.6 23.9
Include benefit from non-depreciation
and amortisation of assets held
for sale 0.5 11.7
Include other one-time items 3.5 9.0
---------------------------------------- ------------- --------------
Trading Profit* 100.3 137.5
Include operating exceptional items
(continuing operations only) (56.3) (109.9)
Include amortisation and impairment
of intangibles arising on acquisition (5.1) (4.9)
Exclude Trading Loss / (Profit)
from discontinued operations 3.3 (26.5)
---------------------------------------- ------------- --------------
Reported Operating Profit / (Loss)
(continuing activities only)* 42.2 (3.8)
---------------------------------------- ------------- --------------
* Profit measures down to Reported Operating Profit have been
restated following the change in accounting policy to exclude
foreign exchange movements on investment and financing
arrangements, including them instead in net finance costs.
Underlying Trading Profit (UTP)
The Group uses a further alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur within
Trading Profit and remove the impact of historical issues. UTP
therefore provides a measure of the underlying performance of the
business in the current year. For 2016 and 2015 there were four
items excluded from UTP.
Firstly, the releases and charges on all OCPs are excluded. OCP
charges and releases reflect the future multiple year cost of
delivering onerous contracts and do not relate to the current year
cost of operating the contract. It should be noted that, as for
Reported Operating Profit, UTP benefits from OCP utilisation (of
GBP84.2m in 2016 and GBP114.1m in 2015) which neutralises the
in-year losses on previously identified onerous contracts,
therefore it is only the initial or subsequent charges or releases
of OCPs that are adjusted for.
Secondly, those items relating to Contract and Balance Sheet
Review are excluded as they arise from changing estimates on the
outcome of historical issues which were originally identified
during the 2014 review. Both OCP adjustments and Contract and
Balance Sheet Review adjustments are identified and separated from
the APM in order to give clarity of the underlying performance of
the Group and to separately disclose the progress made on these
items. Contract and Balance Sheet Review adjustments are expected
to be insignificant in future periods and will no longer be
reported separately in 2017 and beyond unless they are individually
material.
Thirdly, the benefit of depreciation and amortisation charges
not being taken in the Group accounts in relation to assets held
for sale are excluded. Such charges are still being taken in the
subsidiary accounts to reflect the reduction in value of the
underlying assets, and we consider it relevant to show the effect
this would have on the Group performance measure.
Finally, any other significant items that have a one-time
financial impact are excluded, which for the periods under review
are the benefit of a profit on early exit of a UK local authority
contract in 2015 and the associated one-time pension settlement in
2016. These one-time items are distinct from exceptional items in
that they have arisen from normal contract exit conditions.
However, consistent with the treatment of the gain from early
contract exit recorded in 2015, these items are adjusted through
UTP to provide a comparable measure.
Underling trading margin is calculated as UTP divided by revenue
from continuing and discontinued operations.
UTP at constant currency
UTP disclosed above has been translated at the in-year average
foreign exchange rates. In order to provide a comparable movement
on the previous year's results, UTP is recalculated by translating
non-Sterling values for the year to 31 December 2016 into Sterling
at the average exchange rate for the year ended 31 December
2015.
2016
For the year ended 31 December GBPm
--------------------------------------- -----------
Underlying Trading Profit at constant
currency 73.4
Foreign exchange differences 8.7
--------------------------------------- -----------
Underlying Trading Profit at reported
currency 82.1
--------------------------------------- -----------
Earnings Per Share (EPS) from continuing and discontinued
operations before exceptional items
EPS from continuing and discontinued operations, as shown on the
Group's Condensed Consolidated Income Statement on page 37,
includes exceptional items charged or credited to the income
statement in the year. EPS before exceptional items aids
consistency with historical results and is a metric used in
assessing the performance and remuneration of the Executive
Directors.
2016 2015
For the year ended 31 December pence pence
-------------------------------------- ------------- --------------
EPS from continuing and discontinued
operations before exceptional items 6.12 6.55
Impact of exceptional items (6.23) (22.02)
-------------------------------------- ------------- --------------
Reported EPS from continuing and
discontinued operations, basic (0.11) (15.47)
-------------------------------------- ------------- --------------
Underlying EPS from continuing and discontinued operations
Reflecting the same adjustments made to Reported Operating
Profit to calculate UTP as described above, and including the
related tax effects of each adjustment, an alternative measure of
EPS is presented below. This aids consistency with historical
results, and enables performance to be evaluated before the unusual
or one-time effects described above.
2016 2015
earnings earnings 2015
For the year ended GBPm 2016 (restated*) per share
31 December per share GBPm (restated*)
------------------------------- ------------- -------------- -------------- ---------------
Underlying Trading
Profit* 82.1 7.54p 95.9 9.72p
Investment revenue,
continuing and discontinued
operations 9.3 0.85p 8.2 0.83p
Finance costs, continuing
and discontinued operations* (21.9) (2.01p) (40.1) (4.07p)
Tax on underlying
profit after finance
costs (24.4) (2.24p) (30.5) (3.09p)
Non-controlling interests (0.1) (0.01p) 0.5 0.05p
------------------------------- ------------- -------------- -------------- ---------------
Underlying EPS, basic 45.0 4.13p 34.0 3.44p
Include OCP charges
and releases 9.6 0.88p (3.0) (0.30p)
Include Contract and
Balance Sheet Review
adjustments 4.6 0.42p 23.9 2.42p
Include benefit from
non-depreciation and
amortisation of assets
held for sale 0.5 0.05p 11.7 1.19p
Include other one-time
items 3.5 0.32p 9.0 0.92p
Include amortisation
and impairment of
intangibles arising
on acquisition (5.1) (0.47p) (4.9) (0.50p)
Include tax impact
of non-underlying
items 8.5 0.78p (6.1) (0.62p)
Remove impact of exceptional
items, net of tax (67.8) (6.23p) (217.2) (22.02p)
------------------------------- ------------- -------------- -------------- ---------------
Reported loss per
share from continuing
and discontinued operations,
basic (1.2) (0.11p) (152.6) (15.47p)
------------------------------- ------------- -------------- -------------- ---------------
* Profit measures down to Reported Operating Profit have been
restated following the change in accounting policy to exclude
foreign exchange movements on investment and financing
arrangements, including them instead in net finance costs.
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 41, but adjusting this IFRS measure to include
dividends we receive from joint ventures and associates and
deducting net interest paid and net capital expenditure on tangible
and intangible asset purchases. FCF is considered relevant to
reflect the cash performance of business operations after meeting
usual obligations of financing and tax. It is therefore a measure
that is before all other remaining cash flows, being those related
to exceptional items, acquisitions and disposals, other
equity-related and debt-related funding movements, and foreign
exchange impacts on financing and investing activities. FCF is
therefore a measure to assess the cash flow generated by the
business and aids consistency for comparison to historical results.
FCF is a metric used to determine the performance and remuneration
of the Executive Directors.
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
--------------------------------------- ------------- -------------
Free Cash Flow* (33.0) (35.5)
Exclude dividends from joint ventures
and associates (40.0) (32.5)
Exclude net interest paid 18.7 31.3
Exclude capitalised finance costs
paid 0.3 1.4
Exclude purchase of intangible
and tangible assets net of proceeds
from disposal 31.6 72.5
--------------------------------------- ------------- -------------
Cash flow from operating activities
before exceptional items* (22.4) 37.2
Exceptional operating cash flows (39.9) (56.6)
--------------------------------------- ------------- -------------
Cash flow from operating activities* (62.3) (19.4)
--------------------------------------- ------------- -------------
* Free Cash Flow has been restated following the change in
accounting policy to exclude foreign exchange movements on
investment and financing arrangements.
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 the 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.
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
-------------------------------- ------------- -------------
Free Cash Flow* (33.0) (35.5)
Add back:
Tax paid 5.6 2.7
Non-cash R&D expenditure 0.4 0.7
Interest received (1.4) (3.4)
Interest paid 20.1 34.7
Capitalised finance costs paid 0.3 1.4
-------------------------------- ------------- -------------
Trading Cash Flow* (8.0) 0.6
-------------------------------- ------------- -------------
Underlying Trading Profit* 82.1 95.9
-------------------------------- ------------- -------------
Underlying Trading Profit cash
conversion* ** N/A 0.6%
-------------------------------- ------------- -------------
* As explained above, FCF and UTP have been restated, resulting
in a restatement of Trading Cash Flow and the Underlying Trading
Profit cash conversion.
** No Underlying Trading Profit cash conversion is given in 2016
as a negative Trading Cash Flow has arisen.
Net Debt including assets held for sale
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 40 and the accompanying notes
regarding loans receivable and funding sources within assets held
for sale. 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.
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
------------------------------------- -------------- --------------
Cash and cash equivalents 177.8 323.6
Loans receivable 22.9 19.9
Loans payable (299.9) (381.9)
Obligations under finance leases (28.2) (43.8)
Derivatives relating to Net Debt 18.1 14.6
------------------------------------- -------------- --------------
Net Debt (excluding assets and
liabilities held for sale)* (109.3) (67.6)
Net Debt balances within assets
held for sale - 4.7
------------------------------------- -------------- --------------
Net Debt (including that for assets
and liabilities held for sale)* (109.3) (62.9)
------------------------------------- -------------- --------------
* Net Debt has been restated to include derivative financial
instruments that relate to other components of Net Debt.
Pre-tax Return on Invested Capital (ROIC)
ROIC for the year ended 31 December 2016 is a measure used 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 year and a two point
average of the opening and closing balance sheets. The composition
of Invested Capital and calculation of ROIC are summarised in the
table below.
2015
2016 (restated*) 2014
For the year ended 31 December GBPm GBPm GBPm
------------------------------------ ---------------------- -------------- --------------
Non-current assets
Goodwill 577.9 509.9 541.5
Other intangible assets 83.6 89.8 118.8
Property, plant and equipment 69.3 73.2 38.4
Interest in joint ventures
and associates 14.4 13.8 1.6
Trade and other receivables 44.4 50.2 38.1
Current assets
Inventory 22.4 26.4 31.2
Trade and other receivables 543.5 519.7 498.8
Assets classified as held
for sale - 39.8 564.7
------------------------------------ ---------------------- -------------- --------------
Total invested capital assets 1,355.5 1,322.8 1,833.1
------------------------------------ ---------------------- -------------- --------------
Current liabilities
Trade and other payables (524.5) (548.8) (581.9)
Assets classified as held
for sale - (32.5) (219.9)
Non-current liabilities
Trade and other payables (16.8) (18.3) (29.7)
------------------------------------ ---------------------- -------------- --------------
Total invested capital liabilities (541.3) (599.6) (831.5)
------------------------------------ ---------------------- -------------- --------------
Invested capital 814.2 723.2 1,001.6
------------------------------------ ---------------------- -------------- --------------
Two point average of opening
and closing invested capital 768.7 862.4
------------------------------------ ---------------------- -------------- --------------
Trading Profit* 100.3 137.5
------------------------------------ ---------------------- --------------
ROIC%* 13.0% 15.9%
------------------------------------ ---------------------- --------------
Underlying Trading Profit* 82.1 95.9
------------------------------------ ---------------------- --------------
Underlying ROIC%* 10.7% 11.1%
------------------------------------ ---------------------- --------------
* Profit measures have been restated following the change in
accounting policy to include foreign exchange movements on
investment and financing arrangements in net finance costs. As a
result, TP, ROIC, UTP and Underlying ROIC have been restated.
Overview of financial performance
Revenue
Reported Revenue declined by 5% in the year to GBP3,011.0m
(2015: GBP3,177.0m), an 11% reduction in constant currency.
Revenue including that arising from operations classified as
discontinued declined by 13% in the year to GBP3,047.8m (2015:
GBP3,514.6m). Commentary on the revenue performance of the Group is
provided in the Chief Executive's Review and the Divisional Reviews
sections.
Trading Profit
Trading Profit for the year was GBP100.3m (2015 restated:
GBP137.5m), a 27% reduction year-on-year which includes the Trading
Loss arising on discontinued operations of GBP3.3m (2015: profit of
GBP26.6m). 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 GBP82.1m (2015 restated: GBP95.9m), down 14%. At
constant currency UTP was GBP22.5m lower than 2015 at GBP73.4m,
with a movement of GBP18.9m relating to the results of discontinued
operations. Commentary on the underlying performance of the Group
is provided in the Chief Executive's Review and the Divisional
Reviews sections.
Excluded from UTP were net releases from OCPs of GBP9.6m (2015:
net charges of GBP3.0m) following the annual reassessment
undertaken as part of the budgeting process. Also excluded from UTP
were net releases of GBP4.6m (2015: net releases of GBP23.9m)
relating to other provisions and accruals for items identified
during the 2014 Contract and Balance Sheet Review. UTP also
excludes the benefit arising from the non-depreciation of assets
classified as held for sale. In 2016, depreciation and amortisation
of GBP0.4m and GBP0.1m respectively (2015: GBP10.0m and GBP1.7m)
was not charged to Reported Operating Profit on assets held for
sale.
Other one-time items excluded from UTP relate to the early exit
of a UK Local Authority contract in 2015 in lieu of anticipated
profits in future years, net of direct costs, impairments and other
charges. During 2016 the other one-time profit recorded relates to
a pension scheme settlement in respect of the same contract that
was agreed in the year.
Discontinued operations
The Global Services division, representing private sector BPO
operations, was classified as a discontinued operation in 2015. The
completion of the sale of the majority of the offshore private
sector BPO business occurred in December 2015. Disposal of one of
the two remaining elements of the offshore business was completed
in March 2016 and the final element completed in December 2016. The
residual UK onshore private sector BPO operations have been sold,
or have been exited early with the exception of one business where
completion is expected within the next twelve months.
The results of discontinued operations were as follows:
2016 2015
For the year ended 31 December GBPm GBPm
------------------------------------------- ------------- -------------
Revenue 36.8 337.6
------------------------------------------- ------------- -------------
Underlying Trading (Loss) / Profit (4.6) 14.3
Onerous contract and Balance Sheet
Review adjustments 0.8 0.6
Benefit from non-depreciation and
non-amortisation of assets held
for sale 0.5 11.7
------------------------------------------- ------------- -------------
Trading (Loss) / Profit (3.3) 26.6
Amortisation and impairment of
intangibles arising on acquisition - (0.1)
------------------------------------------- ------------- -------------
Operating (loss) / profit before
exceptional items (3.3) 26.5
------------------------------------------- ------------- -------------
Exceptional (loss) / gain on disposal
of subsidiaries and operations (2.8) 5.4
Other exceptional operating items (11.4) (83.0)
------------------------------------------- ------------- -------------
Exceptional operating items (14.2) (77.6)
------------------------------------------- ------------- -------------
Operating loss (17.5) (51.1)
------------------------------------------- ------------- -------------
Investment revenue - 2.1
Finance costs - (1.2)
Exceptional finance costs (0.4) -
------------------------------------------- ------------- -------------
Total net finance costs (0.4) 0.9
------------------------------------------- ------------- -------------
Loss before tax (17.9) (50.2)
------------------------------------------- ------------- -------------
Tax on (loss) / profit before exceptional
items (0.1) (18.7)
Tax on exceptional items - 2.7
------------------------------------------- ------------- -------------
Tax charge (0.1) (16.0)
------------------------------------------- ------------- -------------
Net loss on discontinued operations
(attributable to equity owners
of the Company) as presented in
the income statement (18.0) (66.2)
------------------------------------------- ------------- -------------
Joint ventures and associates - share of results
In 2016 the most significant joint ventures and associates in
terms of scale of operations were AWE Management Limited,
Merseyrail Services Holding Company Limited and Northern Rail
Holdings Limited, with dividends of GBP19.6m (2015: GBP17.8m),
GBP7.3m (2015: GBP7.2m) and GBP10.0m (2015: GBP5.9m) respectively
received from these companies. Total revenues generated by these
three businesses were GBP968.1m (2015: GBP978.3m), GBP150.3m (2015:
GBP155.1m) and GBP132.7m (2015: GBP585.3m) respectively. The
Northern Rail franchise ended on 31 March 2016. From September 2016
there was a change in the AWE Management Limited shareholding
structure, with the Group's shareholding reducing from 33.3% to
24.5% by way of a return of shares, for which the Group was paid an
amount equal to the reduction in the net investment held of GBP1.6m
and therefore no profit or loss on disposal was made.
While the revenues and individual line items are not
consolidated in the Group's Condensed Consolidated Income
Statement, summary financial performance measures for our
proportion of the aggregate of all joint ventures and associates
are set out below for information purposes.
2016 2015
For the year ended 31 December GBPm GBPm
---------------------------------------- ------------ ------------
Revenue 480.8 737.2
---------------------------------------- ------------ ------------
Operating profit 40.7 42.6
Net investment finance costs (0.6) (0.4)
Income tax expense (6.7) (5.2)
---------------------------------------- ------------ ------------
Profit after tax 33.4 37.0
---------------------------------------- ------------ ------------
Dividends received from joint ventures
and associates 40.0 32.5
---------------------------------------- ------------ ------------
Exceptional items
Exceptional items are non-recurring 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. A number of small items also arose in
2016 following changes in estimates to items historically treated
as exceptional.
Exceptional items have arisen on both the continuing and
discontinued operations of the Group. Exceptional items arising on
discontinued operations are disclosed on the face of the Condensed
Consolidated Income Statement within the profit or loss
attributable to discontinued operations. Those arising on
continuing operations are disclosed on the face of the Condensed
Consolidated Income Statement within exceptional operating
items.
2016 2015
For the year ended 31 December GBPm GBPm
------------------------------------------- ------------- --------------
Exceptional items arising on continuing
operations
Exceptional profit / (loss) on
disposal of subsidiaries and operations 2.9 (2.6)
Other exceptional operating items
on continuing operations
Impairment of goodwill (17.8) (87.5)
Restructuring costs (17.2) (19.7)
Aborted transaction costs (0.1) (1.7)
Costs associated with UK Government
review (0.1) (1.2)
Release of UK frontline clinical
health contract provisions 0.6 2.8
Settlement of defined benefit pension (10.7) -
obligations
Impairment of interest in joint (13.9) -
venture and related loan balances
------------------------------------------- ------------- --------------
Other exceptional operating items (59.2) (107.3)
------------------------------------------- ------------- --------------
Exceptional operating items arising
on continuing operations (56.3) (109.9)
------------------------------------------- ------------- --------------
Exceptional items arising on discontinued
operations
Exceptional (loss) / gain on disposal
of subsidiaries and operations (2.8) 5.4
Other exceptional operating items
on discontinued operations
Restructuring costs (1.1) (2.2)
Impairment of goodwill - (65.9)
Movements in indemnities provided (13.7) -
on business disposals
Movement in the fair value of assets
transferred to held for sale 3.4 (14.9)
------------------------------------------- ------------- --------------
Other exceptional operating items (11.4) (83.0)
------------------------------------------- ------------- --------------
Exceptional operating items arising
on discontinued operations (14.2) (77.6)
------------------------------------------- ------------- --------------
Exceptional operating items arising
on continuing and discontinued
operations (70.5) (187.5)
------------------------------------------- ------------- --------------
Exceptional finance costs - continuing - (32.8)
Exceptional finance costs - discontinued (0.4) -
------------------------------------------- ------------- --------------
Total exceptional finance costs
in continuing and discontinued
operations (0.4) (32.8)
------------------------------------------- ------------- --------------
Tax credit of exceptional items
- continuing 3.1 0.4
Tax credit on exceptional items
- discontinued - 2.7
------------------------------------------- ------------- --------------
Total tax impact of exceptional
items in continuing and discontinued
operations 3.1 3.1
------------------------------------------- ------------- --------------
Total operating and financing exceptional
items in continuing and discontinued
operations (67.8) (217.2)
------------------------------------------- ------------- --------------
Exceptional loss on disposals of continuing operations
There were no material disposals of continuing operations in the
year. The profit on disposal of GBP2.9m mainly relates to a net
credit of GBP2.5m on transactions completed in prior years, which
includes cash of GBP4.5m as a result of deferred consideration
payments received which had previously been provided for.
Other exceptional operating items arising on continuing
operations
In 2016, goodwill of GBP17.8m arose following the acquisition of
Orchard & Shipman (Glasgow) Limited, the Group's subcontractor
on the COMPASS contract, providing accommodation to asylum seekers
in Scotland and Northern Ireland on behalf of the Home Office. This
goodwill was then immediately impaired as the CGU is forecast to be
loss making and therefore the asset cannot be supported. The annual
impairment testing of CGUs has identified no other impairment of
goodwill. In 2015, the Americas CGU was impaired by GBP87.5m, due
primarily to a higher level of contract attrition than previously
forecast and the associated impact on future cash flows. Given the
significant size of the impairment charge and that it is not part
of the normal trading performance of the business it was considered
appropriate to treat as exceptional in the year.
In 2016, a charge of GBP17.2m (2015: GBP19.7m) arose in relation
to the restructuring programme resulting from the Strategy Review.
This included redundancy payments, provisions, external advisory
fees and other incremental costs. Due to the nature and scale of
the impact of the transformation stage of our Strategy Review, the
incremental costs associated with this programme were considered to
be exceptional in the prior year and have been treated consistently
in 2016. Non-exceptional restructuring charges are incurred by the
business as part of normal operational activity, which in the year
totalled GBP6.7m (2015: GBP13.8m).
The disposal of the Environmental and Leisure businesses was
aborted in 2015 and during 2016 costs related to the aborted
transaction were finalised, resulting in a charge of GBP0.1m (2015:
GBP1.7m).
In 2016 there were exceptional costs totalling GBP0.1m (2015:
GBP1.2m) associated with the UK Government reviews and the
programme of Corporate Renewal, reflecting the related external
costs. These costs were treated as exceptional when the matter
first arose and consistent treatment is applied in the current
year.
In 2016 there were releases of provisions of GBP0.6m (2015:
GBP2.8m) which were previously charged through exceptional items in
relation to the exit of the UK Frontline Clinical Health
contracts.
Following the finalisation of the Revised Fair Deal, a number of
employees are being transferred from the Serco Pension and Life
Assurance Scheme (SPLAS) back to the Principal Civil Service
Pension Scheme. This transfer was finalised in December 2016 at
which point all obligations of SPLAS to pay retirement benefits for
these individuals were eliminated and as a result a settlement
charge of GBP10.7m arose. This has been treated as an exceptional
item in the year as a result of the transaction being material in
size and nature and being outside of the normal course of business.
The charge of GBP10.7m is an accounting charge only, the cash
impact of the settlement which will be paid in future periods, is
estimated at GBP3.0m and is offset by future savings in
contributions resulting from the transfer.
A review of a joint venture's cash flow projections has led to
the impairment of certain equity interests and associated
receivables balances, totalling GBP13.9m. The impairment is outside
of the normal course of business and of a significant value, and is
therefore considered to be an exceptional item.
Exceptional profit or loss on disposal of discontinued
operations
The loss on disposal of discontinued operations of GBP2.8m
(2015: profit of GBP5.4m) relates to the sale of offshore and UK
onshore private sector BPO operations. The majority of the offshore
BPO operations were sold in 2015 with the separate disposal of
operations in the Middle East completing in 2016. The UK onshore
business has been sold or transferred to various different
purchasers with a final element remaining at the year end which is
expected to be sold in 2017.
Other exceptional operating items arising on discontinued
operations
In 2016 a charge of GBP1.1m (2015: GBP2.2m) has arisen in
discontinued operations in relation to the restructuring programme
resulting from the Strategy Review. This includes redundancy
payments, provisions and other charges relating to the exit of the
UK private sector BPO business, external advisory fees and other
incremental costs.
During 2015, an impairment test of the Global Services business
was conducted based on the fair value measurement, with reference
to offers received less costs of disposal. The impairment testing
identified a non-cash exceptional impairment of goodwill relating
to discontinued operations of GBP65.9m.
A charge of GBP13.7m has arisen in 2016 in relation to the
movement in the value of indemnities provided on business disposals
made in previous years. This relates to changes in exchange rates
where indemnities were provided in foreign currencies, and
increases to provisions for interest and penalties on any
indemnities. The original disposal of the business was treated as
exceptional and these revisions have been treated on a consistent
basis.
The value of assets held for sale increased by GBP3.4m in 2016,
reflecting the changing estimate of the likely proceeds and
movements of the assets held for sale since the prior balance sheet
date. In 2015 the held for sale assets were impaired by GBP14.9m
through exceptional items.
Exceptional finance costs
A charge of GBP0.4m was incurred as a result of early payments
to the US Private Placement (USPP) Noteholders following the
disposal of the offshore private sector BPO business. These charges
are treated as exceptional finance costs as they are directly
linked to the restructuring resulting from the Strategy Review.
Similar charges arose in 2015 which, together with the costs
related to the preservation of the Group's existing finance
facilities, totalled GBP32.8m.
Tax impact of exceptional items
The tax impact of exceptional items in continuing and
discontinued operations was a tax credit of GBP3.1m (2015:
GBP3.1m).
Pre exceptional finance costs and investment revenue on
continuing and discontinued operations
Investment revenue of GBP9.3m (2015: GBP8.2m) includes interest
accruing on net retirement benefit assets of GBP4.7m (2015:
GBP4.9m), interest earned on deposits and other receivables of
GBP3.6m (2015: GBP3.2m) and the movement in discounting of other
receivables of GBP1.0m (2015: GBP0.1m).
Finance costs of GBP21.9m (2015 restated: GBP40.1m) includes
interest incurred on the USPP loans and the Revolving Credit
Facility of GBP15.6m (2015: GBP24.7m), facility fees and other
charges of GBP3.5m (2015: GBP7.2m), interest payable on finance
leases of GBP1.6m (2015: GBP2.5m), the movement in discount on
provisions of GBP2.4m (2015: GBP5.6m) and a credit for foreign
exchange on financing activities of GBP1.2m (2015: GBP0.1m). The
last of these items was previously included in Reported Operating
Profit and therefore represents a restatement on the previously
reported results.
Tax charge
In 2016, we recognised a total tax charge of GBP12.8m (2015:
GBP33.5m), being GBP12.7m (2015: GBP17.5m) on continuing operations
profit of GBP29.6m (2015: loss of GBP69.4m) and GBP0.1m (2015:
GBP16.0m) on discontinued operations losses of GBP17.9m (2015:
GBP50.2m). Of this amount, a GBP3.1m credit (2015: GBP0.4m credit)
arises on exceptional items on continuing operations.
In respect of the results of our continuing operations, the
profit on pre-exceptional items of GBP98.5m (2015: GBP106.1m) less
pre-exceptional finance costs of GBP12.6m (2015: GBP32.8m) is
GBP85.9m (2015: GBP73.3m), which suffers a tax charged of GBP15.8m
(2015: GBP17.9m), giving a tax rate of 18.4% (2015: 24.4%).
The principal reasons why the tax rate on profit before
exceptional items and tax from continuing operations at 18.4% is
lower than the UK standard corporation tax rate of 20% are due to
higher rates of tax on profits arising on our international
operations, together with the absence of any deferred tax credit
for losses incurred in the UK (which includes the result of UK
divisions and the majority of corporate costs) offset by the impact
of our joint ventures whose post-tax results are included in our
pre-tax profit.
The tax charge on discontinued operations' losses and the tax
credit on exceptional losses of GBP70.8m have only attracted small
amounts of tax because these costs and losses are largely generated
in the UK, where deferred tax assets are not being recognised due
to insufficient UK taxable profits in the foreseeable future.
Pre
Pre exceptional exceptional
2016 2015
For the year ended 31 December GBPm GBPm
----------------------------------------- ---------------- -------------
Underlying Trading Profit 82.1 95.9
Net finance costs from continuing
operations (12.6) (32.8)
Net finance costs from discontinued
operations - 0.9
----------------------------------------- ---------------- -------------
Total net finance costs from continuing
and discontinued operations (12.6) (31.9)
----------------------------------------- ---------------- -------------
Underlying Trading Profit less
net finance costs from continuing
and discontinued operations 69.5 64.0
----------------------------------------- ---------------- -------------
Tax charge on Underlying Trading
Profit less net finance costs from
continuing and discontinued operations (24.4) (30.5)
----------------------------------------- ---------------- -------------
Underlying effective tax rate 35.2% 47.7%
----------------------------------------- ---------------- -------------
The tax charge on an underlying basis, reflecting Underlying
Trading Profit of GBP82.1m net of finance costs of GBP12.6m, was
GBP24.4m, representing an underlying effective tax rate of 35.2%
(2015: 47.7%).
The effective tax rate in 2016 (35.2%) is lower than 2015
(47.7%) at an Underlying Trading Profit less finance costs level.
This is primarily due to reduced UK finance expenses during this
period which have not given rise to a tax credit as no UK deferred
tax asset was recognised on them.
Our tax charge in future years will continue to be materially
impacted by our accounting for UK deferred taxes. To the extent
that future UK tax losses are incurred and are not recognised, our
effective tax rate will be higher than prevailing standard
corporation tax rates as we will not be able to recognise the
associated tax benefits arising. When our UK business returns to
sustainable profitability our existing UK tax losses will be
recognised or utilised, and the effective rate will be reduced.
Contingent tax assets
At 31 December 2016, the Group has gross estimated unrecognised
deferred tax assets of GBP1.04bn (GBP187m net), which are
potentially available to offset against future taxable profits.
These principally relate to tax losses of GBP824m. Of these tax
losses, GBP697m have arisen in the UK business (net GBP118m).
A GBP10.0m UK tax asset has been recognised at 31 December 2016
(2015: GBP10.5m) on the basis of forecast utilisation against
future taxable profits.
Taxes paid
Net corporate income tax of GBP10.5m was paid during the year,
relating primarily to our operations in AsPac (GBP5.8m), Europe
(GBP2.3m), Middle East (GBP1.5m) and Americas (GBP0.9m). The
Group's UK operations have transferred tax losses to its profitable
joint ventures and associates in return for cash payments from the
joint ventures and associates giving a cash tax inflow in the UK of
GBP4.8m. In addition there were small cash tax refunds where we
have overpaid tax in previous periods. This results in an overall
tax paid figure in our cash flow statement of GBP5.6m.
The amount of tax paid (GBP5.6m) differs from the tax charge in
the period (GBP12.8m) mainly due to the effect of future expected
cash tax outflows for which a charge has been taken in the current
period and the impact of the time lag on receipts of cash from
joint ventures and associates for losses transferred to them.
Further detail is shown below of taxes that have been paid
during the year.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax in the
countries in which we operate means that we pay a variety of taxes
across the globe. In order to increase the transparency of our tax
profile, we have shown below the cash taxes that we have paid
across our regional markets.
In total during 2016, Serco globally contributed GBP586.6m of
tax to governments in the jurisdictions in which we operate.
Taxes by category Taxes Taxes
For the year ended 31 December borne collected Total
2016 GBPm GBPm GBPm
--------------------------------- ------------ ------------ ------------
Total of corporate income
tax 10.5 0.1 10.6
Total of VAT and similar 8.1 161.7 169.8
Total of people taxes 109.6 294.6 404.2
Total other taxes 1.9 0.1 2.0
--------------------------------- ------------ ------------ ------------
Total 130.1 456.5 586.6
--------------------------------- ------------ ------------ ------------
Taxes by region Taxes Taxes
For the year ended 31 December borne collected Total
2016 GBPm GBPm GBPm
--------------------------------- ------------ ------------ ------------
UK & Europe 76.1 252.8 328.9
AsPac 24.2 122.2 146.4
North Americas 27.2 79.4 106.6
Middle East 2.6 2.1 4.7
--------------------------------- ------------ ------------ ------------
Total 130.1 456.5 586.6
--------------------------------- ------------ ------------ ------------
Corporation tax, which has historically been the only cost to be
separately disclosed in our Financial Statements, is only one
element of our tax contribution. For every GBP1 of corporate tax
paid directly by the group (tax borne), we bear GBP11.35 in other
business taxes. The largest proportion of these is in connection
with employing our people.
In addition, for every GBP1 of tax that we bear, we collect a
further GBP3.50 on behalf of national governments (taxes
collected). This amount is directly impacted by the people that we
employ and the sales that we make.
Dividends
The Board is not recommending the payment of a dividend in
respect of the 2016 financial year. The Board's appraisal of the
appropriateness of dividend payments takes into account the Group's
underlying earnings, cash flows and financial leverage, together
with the requirement to maintain an appropriate level of dividend
cover and the prevailing market outlook. Although the Board is
committed to resuming dividend payments as soon as it believes it
prudent to do so, in assessing whether we should resume dividend
payments in respect of 2016, we have been mindful of the fact that
our forecasts for 2017 anticipate a reduction in earnings, a free
cash outflow and an increase in net debt; furthermore, we are only
part-way through our recovery. In these circumstances, the Board
believes that it would not be prudent to resume dividend payments
in respect of 2016.
Share count and earnings per share
The weighted average number of shares for EPS purposes was
1,088.3m at 31 December 2016 (2015: 986.5m). EPS before exceptional
items from both continuing and discontinued operations was 6.12p
per share (2015: 6.55p), including the impact of exceptional items
EPS was a loss of 0.11p (2015: loss of 15.47p). Underlying EPS was
4.13p per share (2015: 3.44p).
Cash flows
The UTP of GBP82.1m (2015: GBP95.9m) converts into a trading
cash outflow of GBP8.0m (2015: inflow of GBP0.6m). UTP reduced by
GBP13.8m and led to an GBP8.6m reduction in Trading Cash Flows. The
low conversion was primarily due to the cash outflows arising on
the utilisation of contract provisions of GBP84.2m which is
excluded from UTP but included in Trading Cash Flows.
The table below shows the operating profit and FCF reconciled to
movements in Net Debt. FCF for the year was an outflow of GBP33.0m
compared to an outflow of GBP35.5m in 2015 (restated). Commentary
on the FCF performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
The movement in Net Debt including assets and liabilities held
for sale is an increase of GBP46.4m in 2016 compared to a decrease
of GBP608.6m for 2015, arising from three key areas:
-- The proceeds from the Rights Issue of GBP530.3m in 2015.
-- A reduction of the net cash inflows from acquisitions and
disposals of subsidiaries of GBP165.7m to GBP19.2m due to a
significant portion of the private sector business disposal
completing in 2015.
-- An offsetting reduction in the cash outflows on exceptional
items of GBP48.2m to GBP40.2m in 2016, due primarily to the payment
of exceptional finance costs of GBP31.8m in 2015. The majority of
the exceptional cash payments in 2016 relate to the break and exit
costs of the residual UK private sector BPO operations and
restructuring claims and costs arising on the implementation of the
outcome of the Strategy Review.
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
------------------------------------------ -------------- --------------
Operating profit / (loss) on continuing
operations* 42.2 (3.8)
Operating loss on discontinued
operations (17.5) (51.1)
Remove exceptional items 70.5 187.5
------------------------------------------ -------------- --------------
Operating profit before exceptional
items on continuing and discontinued
operations* 95.2 132.6
Less: profit from joint ventures
and associates (33.4) (37.0)
Movement in provisions (118.4) (116.0)
Other non-cash movements* 63.9 83.6
------------------------------------------ -------------- --------------
Operating cash inflow before movements
in working capital, exceptional
items and tax* 7.3 63.2
Working capital movements (23.7) (22.6)
Tax paid (5.6) (2.7)
Non-cash R&D expenditure (0.4) (0.7)
------------------------------------------ -------------- --------------
Cash flow from operating activities
before exceptional items* (22.4) 37.2
Dividends from joint ventures and
associates 40.0 32.5
Interest received 1.4 3.4
Interest paid (20.1) (34.7)
Capitalised finance costs paid (0.3) (1.4)
Purchase of intangible and tangible
assets net of proceeds from disposals (31.6) (72.5)
------------------------------------------ -------------- --------------
Free Cash Flow* (33.0) (35.5)
Net cash inflow on acquisition
and disposal of subsidiaries 19.2 184.9
Proceeds from Rights Issue - 530.3
Purchase of own shares net of share
option proceeds - 4.4
Other movements on investment balances 0.7 (1.3)
Capitalisation and amortisation
of loan costs (0.7) (0.6)
Unwind of discounting and capitalisation 2.9 -
of interest on loans receivable
Non-recourse loan disposals, repayments
and advances - 24.0
New, acquired and disposed finance
leases (0.5) 0.5
Exceptional items (40.2) (88.4)
Cash movements on hedging instruments* 47.0 19.3
Foreign exchange loss on Net Debt* (41.8) (29.0)
------------------------------------------ -------------- --------------
Movement in Net Debt including
assets and liabilities held for
sale* (46.4) 608.6
Assets held for sale movement in
Net Debt 4.7 (44.2)
Net Debt at 1 January* (67.6) (632.0)
------------------------------------------ -------------- --------------
Net Debt at 31 December* (109.3) (67.6)
------------------------------------------ -------------- --------------
Net Debt at 1 January including
assets and liabilities held for
sale* (62.9) (671.5)
------------------------------------------ -------------- --------------
Net Debt at 31 December including
assets and liabilities held for
sale* (109.3) (62.9)
------------------------------------------ -------------- --------------
* Operating profit, other non-cash movements, cash movements on
hedging instruments, foreign exchange loss on Net Debt and Net Debt
have been restated following the change in accounting policy
regarding foreign exchange movements on investment and financing
arrangements and the change in definition of Net Debt to include
derivative financial instruments that relate to other components of
Net Debt. The sub totals including Free Cash Flow have changed as a
result.
Net Debt
Including
Including assets
assets and liabilities
and liabilities held
held for sale
for sale (restated*)
2016 2015
As at 31 December GBPm GBPm
---------------------------------- ----------------- -----------------
Cash and cash equivalents 177.8 328.8
Loans receivable 22.9 19.9
Other loans (299.9) (381.9)
Obligations under finance leases (28.2) (44.3)
Derivatives relating to Net Debt
components* 18.1 14.6
---------------------------------- ----------------- -----------------
Net Debt (109.3) (62.9)
---------------------------------- ----------------- -----------------
* As explained above, Net Debt has been restated to include
derivative financial instruments that relate to other components of
Net Debt.
Average Net Debt as calculated on a daily basis for the year
ended 31 December 2016 was GBP119.4m (2015 restated: GBP444.1m, pre
Rights Issue impact), compared with the opening and closing
positions of GBP62.9m and GBP109.3m respectively. Peak Net Debt was
GBP182.9m (2015 restated: GBP858.6m, pre rights issue impact).
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 -
speculation is not permitted. A monthly report is provided to
senior management outlining performance against the treasury policy
and the treasury function is subject to periodic internal audit
review.
Liquidity and funding
As at 31 December 2016, the Group had committed funding of
GBP770m, comprising GBP290m of private placement notes and a
GBP480m revolving credit facility with a syndicate of banks which
was undrawn. In addition, the Group had a receivables financing
facility of GBP30.0m of which GBP7.7m was utilised at the year end
(2015: GBP30.0m).
Following the disposal of the majority of the private sector BPO
business, the Group was required to offer the net disposal proceeds
to the debt holders in prepayment. As a result of this process,
GBP117m ($167m) of private placement notes were repaid at par on 16
February 2016.
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 policies require us to maintain a minimum proportion
of fixed rate debt as a proportion of overall Net Debt and for this
proportion to increase as the ratio of EBITDA to interest expense
falls. As at 31 December 2016, more than 100% of the Group's Net
Debt was at fixed rates. Interest on the revolving credit facility
is at floating rate, however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to
Sterling of its net investments in overseas subsidiaries. The Group
manages this risk where appropriate by borrowing in the same
currency as those investments. Group borrowings are predominantly
denominated in Sterling and US Dollar. The Group manages its
currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward
contracts where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise
to credit risk on the amounts due from counterparties. The Group
manages this risk by adhering to counterparty exposure limits based
on external credit ratings of the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across
the private placement loan notes, receivables financing facility
and the Group's GBP480m 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.
2015
2016 (restated*)
For the year ended 31 December GBPm GBPm
---------------------------------------- ------------- -------------
Operating profit before exceptional
items on continuing and discontinued
operations* 95.2 132.6
Remove:
Joint venture and associate post-tax
profits (33.4) (37.0)
Foreign exchange credit on investing
and financing arrangements* 1.2 0.1
Add:
Dividends from joint ventures and
associates 40.0 32.5
Amortisation and impairment of
other intangible assets 26.9 40.5
Depreciation of property, plant
and equipment 24.8 28.9
Impairment of property, plant and
equipment 0.7 2.1
Share based payment expense 9.7 9.8
---------------------------------------- ------------- -------------
Covenant EBITDA 165.1 209.5
---------------------------------------- ------------- -------------
Net finance costs on continuing
and discontinued operations* 12.6 31.9
Add: Foreign exchange credit on
investing and financing arrangements* 1.2 0.1
Other adjustments 3.3 (0.6)
---------------------------------------- ------------- -------------
Covenant net finance costs 17.1 31.4
---------------------------------------- ------------- -------------
Recourse Net Debt (including assets
and liabilities held for sale)* 109.3 62.9
Loans receivable, foreign exchange
adjustments and other items 5.5 28.8
---------------------------------------- ------------- -------------
CTNB 114.8 91.7
---------------------------------------- ------------- -------------
CTNB / covenant EBITDA (not to
exceed 3.5x) 0.7x 0.4x
---------------------------------------- ------------- -------------
Covenant EBITDA / Covenant net
finance costs (at least 3.0x) 9.7x 6.7x
---------------------------------------- ------------- -------------
* As explained above, operating profit and net finance costs
have been restated following the change in accounting policy
regarding foreign exchange movements on investment and financing
arrangements. These adjustments have been reversed in order to
maintain the definition of EBITDA and net finance costs per the
covenant. CTNB is consistent with the new definition of Net Debt
and is unaffected by the change in accounting policy.
Net assets summary
2016 2015
GBPm GBPm
---------------- ---------------- ------------- ----------------
As reported* Including Adjustment As reported
assets for assets
held held
As at 31 December for sale for sale
--------------------------- ---------------- ---------------- ------------- ----------------
Non-current assets
Goodwill 577.9 517.7 (7.8) 509.9
Other intangible assets 83.6 90.2 (0.4) 89.8
Property, plant and
equipment 69.3 74.1 (0.9) 73.2
Other non-current
assets 73.0 72.0 (0.2) 71.8
Deferred tax assets 50.8 42.2 - 42.2
Retirement benefit
assets 150.4 127.1 - 127.1
--------------------------- ---------------- ---------------- ------------- ----------------
1,005.0 923.3 (9.3) 914.0
--------------------------- ---------------- ---------------- ------------- ----------------
Current assets
Inventories 22.4 26.4 - 26.4
Trade and other current
assets 548.4 549.7 (20.6) 529.1
Current tax 11.0 11.3 (4.7) 6.6
Cash and cash equivalents 177.8 328.8 (5.2) 323.6
--------------------------- ---------------- ---------------- ------------- ----------------
759.6 916.2 (30.5) 885.7
Assets classified
as held for sale - - 39.8 39.8
--------------------------- ---------------- ---------------- ------------- ----------------
Total current assets 759.6 916.2 9.3 925.5
--------------------------- ---------------- ---------------- ------------- ----------------
Total assets 1,764.6 1,839.5 - 1,839.5
--------------------------- ---------------- ---------------- ------------- ----------------
Current liabilities
Trade and other current
liabilities (525.1) (558.6) 7.4 (551.2)
Current tax liabilities (25.9) (14.3) 0.1 (14.2)
Provisions (172.3) (191.2) 22.6 (168.6)
Obligations under
finance leases (12.3) (16.3) 0.5 (15.8)
Loans (9.7) (132.2) - (132.2)
--------------------------- ---------------- ---------------- ------------- ----------------
(745.3) (912.6) 30.6 (882.0)
Amounts classified
as held for sale - - (32.5) (32.5)
--------------------------- ---------------- ---------------- ------------- ----------------
Total current liabilities (745.3) (912.6) (1.9) (914.5)
--------------------------- ---------------- ---------------- ------------- ----------------
Non-current liabilities
Other non-current
liabilities (16.8) (18.3) - (18.3)
Deferred tax liabilities (30.5) (22.3) - (22.3)
Provisions (249.4) (315.0) 1.9 (313.1)
Obligations under
finance leases (15.9) (28.0) - (28.0)
Loans (290.2) (249.7) - (249.7)
Retirement benefit
obligations (17.7) (11.5) - (11.5)
--------------------------- ---------------- ---------------- ------------- ----------------
(620.5) (644.8) 1.9 (642.9)
--------------------------- ---------------- ---------------- ------------- ----------------
Total liabilities (1,365.8) (1,557.4) - (1,557.4)
--------------------------- ---------------- ---------------- ------------- ----------------
Net assets 398.8 282.1 - 282.1
--------------------------- ---------------- ---------------- ------------- ----------------
* No amounts were included in held for sale as at 31 December 2016.
The breakdown of the Group's net assets is summarised above,
showing the impact of the assets and liabilities held for sale for
each line item in the prior year.
At 31 December 2016 the balance sheet had net assets of
GBP398.8m, a movement of GBP116.7m from the closing net asset
position of GBP282.1m as at 31 December 2015. The increase in net
assets is mainly due to the following movements:
-- An increase in goodwill by GBP68.0m caused by movements in
foreign exchange rates. Total goodwill of GBP401.2m relates to
non-UK cash generating units.
-- A decrease in provisions of GBP60.0m. Further details on the
provision balance is provided below.
-- An increase in trade and other current assets and liabilities
of GBP45.4m due in part to the unwinding of the forfeiting facility
of GBP22.3m and other working capital movements, including foreign
exchange movements in non-UK businesses.
-- An increase in Net Debt of GBP46.4m due to the working
capital movements noted above offset by cash generated from
operations.
-- An increase in the assets reflecting the Group's retirement
benefit obligations of GBP17.1m, due to the performance of
liability driven investments.
Provisions
The total of current and non-current provisions, excluding
provisions related to businesses held for sale, has decreased by
GBP60.0m since 31 December 2015. The movement is due to a decrease
in contract provisions of GBP81.9m offset by an increase in
non-contract provisions of GBP21.9m. The increase in non-contract
provisions is primarily due to the provision for the exceptional
defined benefit scheme settlement cost of GBP10.7m and an GBP8.7m
increase in employee provisions due to the ongoing Strategic Review
restructuring programme.
Movements in contract provisions, including those related to
businesses held for sale since the 31 December 2015 balance sheet
date, are as follows:
Total
contract
provisions
including Total
Onerous Other assets Held contract
Contract Contract held for sale provisions
Provisions Provisions for sale adjustment as reported
GBPm GBPm GBPm GBPm GBPm
------------------------ -------------- ------------- -------------- ------------ --------------
At 1 January
2016 (299.9) (13.2) (313.1) 11.0 (302.1)
Arising on acquisition (14.0) - (14.0) - (14.0)
Charged to income
statement -
trading (56.1) (0.5) (56.6) - (56.6)
Charged to income
statement -
exceptional (0.6) - (0.6) 0.6 -
Released to
income statement
- trading 65.7 7.6 73.3 (8.4) 64.9
Released to
income statement
- exceptional 0.6 - 0.6 - 0.6
Utilised during
the year 84.2 0.9 85.1 (3.1) 82.0
Unwinding of
discount (2.4) - (2.4) - (2.4)
FX (11.6) 0.3 (11.3) (0.1) (11.4)
Transfer to
trade payables 11.5 - 11.5 - 11.5
Reclassifications 2.4 4.9 7.3 - 7.3
------------------------ -------------- ------------- -------------- ------------ --------------
At 31 December
2016 (220.2) - (220.2) - (220.2)
------------------------ -------------- ------------- -------------- ------------ --------------
The balance of OCPs at 31 December 2016 was GBP220.2m (2015:
GBP299.9m). Our 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
overall net release of OCPs was GBP9.6m in 2016 and utilisation was
GBP84.2m.
In 2016, additional charges have been made in respect of future
losses on a number of onerous contracts totalling GBP56.7m. This
increase related to revisions to existing OCPs of GBP53.2m and new
provisions raised on two contracts totalling GBP3.5m, with the new
provisions relating to contracts which have been operating for a
number of years. Of the total charge, GBP0.6m relates to contracts
included in the held for sale businesses and are included within
exceptional items, consistent with previous treatment. No further
exceptional OCP charges or releases are expected in the future.
Included within additional charges made to existing OCPs was
GBP29.5m relating to our Ontario Driver Examination Services
contract. This contract is to provide multiple services, including
administering driver examinations and the implementation and roll
out of an IT system across multiple locations. The contract was
initially identified as onerous during the 2014 Contract and
Balance Sheet Review. In 2016 delays and cost overruns relating to
the IT system implementation have resulted in higher forecast
implementation costs. Furthermore, the future performance of the
system has also been reassessed and this has resulted in a
reduction to the expected future operational efficiencies and
savings forecast to be achieved following the system
implementation. These factors combined have increased the expected
total future losses of the contact, resulting in both the increase
to the OCP of GBP29.5m and an additional in year charge of GBP8.8m
arising from the cost overruns and programme delays experienced
during the year.
An additional GBP7.1m in respect of the Prisoner Escort and
Custody Services (PECS) contract has been charged. It was
previously anticipated that the contract, which has up to three
extension years, would not be extended in its current form but our
expectation now is that it will be extended for one of the
potential three extension years.
There was also an additional GBP6.8m charge in the year in
respect of updating the assumptions regarding the operational and
maintenance costs of running the Caledonian Sleepers contract.
In 2016, releases to the income statement from OCPs totalling
GBP66.3m were made, including GBP0.6m in respect of provisions
previously charged to exceptional items.
Included within the releases in the year was GBP33.9m in respect
of the COMPASS contract that reflected the updated forecast
assumptions around service user volumes and accommodation costs,
and the impact from the terms agreed with the customer as part of
the contract extension. We had previously included assumptions for
the impact of the extension in the COMPASS OCP and the updated view
of reduced losses on this contract reflect the improved terms under
which we will operate under the extension. On 1 December 2016 Serco
acquired Orchard & Shipman (Glasgow) Limited, a subcontractor
on the COMPASS contract that provided services to the Scotland and
Northern Ireland regions. On acquisition an OCP of GBP14.0m was
recognised as part of the opening balance sheet of Orchard &
Shipman, which following the acquisition is included in the
provision for future losses to be incurred by the Group.
In the year, a GBP11.9m release was recorded in respect of the
contract to operate and maintain the fleet of Armidale Class Patrol
Boats (ACPB) for the Royal Australian Navy. This release arose
following both better than forecast trading under the contract as
re-negotiated in November 2015, and the latest assessment of any
post contract costs after the operations are transferred to the new
contractor on 30 June 2017.
There were also a number of other smaller releases, notably in
respect of HMP Ashfield and the Future Provision of Marine Services
contract.
During the year a settlement was reached with the customer in
respect of HMAS Bundaberg, the vessel operating under the ACPB
contract which was destroyed by fire in 2014. The provision
relating to this claim was transferred to creditor and debtor
balances within working capital, given that the amounts owed to the
customer and the associated insurance receivable are more certain
and therefore did not meet the criteria to be included within the
provisions balance.
Contract and Balance Sheet Review items
There were adjustments arising in 2016 on items identified
during the Contract and Balance Sheet Review in 2014. These
adjustments relate to a number of items including:
-- The releases of other provisions and accruals of GBP13.4m
where liabilities have either been settled for less than the amount
provided or accrued, or have lapsed due to the passage of time.
-- A charge of GBP8.8m reflecting a reduction in the accrued
revenue for the Ontario Driver Examination Services contract
resulting from the impact of long term contract accounting.
The overall net improvement to Trading Profit from OCPs and
Contract and Balance Sheet Review adjustments was GBP14.2m in 2016.
The cumulative net improvement to Trading Profit from OCPs and
other Contract and Balance Sheet Review items from 2015 and 2016 is
GBP35.1m which represents 5% of the original total taken through
Trading Profit.
Angus Cockburn
Chief Financial Officer
22 February 2017
Financial Statements
Condensed consolidated income statement
For the year ended 31 December 2016
2015
2016 (restated*)
Continuing operations GBPm GBPm
------------------------------------------- --------- ------------
Revenue 3,011.0 3,177.0
Cost of sales (2,767.6) (2,849.1)
----------------------------------------------- --------- ------------
Gross profit 243.4 327.9
Administrative expenses
General and administrative expenses* (173.2) (254.0)
Exceptional profit / (loss) on disposal
of subsidiaries and operations 2.9 (2.6)
Other exceptional operating items (59.2) (107.3)
Other expenses - amortisation and
impairment of intangibles arising
on acquisition (5.1) (4.8)
----------------------------------------------- --------- ------------
Total administrative expenses (234.6) (368.7)
Share of profits in joint ventures
and associates, net of interest
and tax 33.4 37.0
----------------------------------------------- --------- ------------
Operating profit / (loss)* 42.2 (3.8)
----------------------------------------------- --------- ------------
Operating profit before exceptional
items* 98.5 106.1
----------------------------------------------- --------- ------------
Investment revenue 9.3 6.1
Finance costs* (21.9) (38.9)
Exceptional finance costs - (32.8)
----------------------------------------------- --------- ------------
Total net finance costs* (12.6) (65.6)
----------------------------------------------- --------- ------------
Profit / (loss) before tax 29.6 (69.4)
----------------------------------------------- --------- ------------
Tax on profit / (loss) before exceptional
items (15.8) (17.9)
Tax credit on exceptional items 3.1 0.4
----------------------------------------------- --------- ------------
Tax charge (12.7) (17.5)
----------------------------------------------- --------- ------------
Profit / (loss) for the year from
continuing operations 16.9 (86.9)
Loss for the year from discontinued
operations (18.0) (66.2)
----------------------------------------------- --------- ------------
Loss for the year (1.1) (153.1)
----------------------------------------------- --------- ------------
Attributable to:
Equity owners of the Company (1.2) (152.6)
Non controlling interests 0.1 (0.5)
----------------------------------------------- --------- ------------
Earnings per share (EPS)
Basic EPS from continuing operations 1.55p (8.78p)
Diluted EPS from continuing operations 1.50p (8.78p)
Basic EPS from discontinued operations (1.66p) (6.69p)
Diluted EPS from discontinued operations (1.66p) (6.69p)
Basic EPS from continuing and discontinued
operations (0.11p) (15.47p)
Diluted EPS from continuing and
discontinued operations (0.11p) (15.47p)
----------------------------------------------- --------- ------------
* General and administrative expenses and net finance costs have
been restated following the change in accounting policy regarding
foreign exchange movements on investment and financing
arrangements. See note 1.
Condensed consolidated statement of comprehensive
income
For the year ended 31 December 2016
2016 2015
GBPm GBPm
---------------------------------------------- ----- -------
Loss for the year (1.1) (153.1)
Other comprehensive income for
the year:
Items that will not be reclassified
subsequently to profit or loss:
Net actuarial gain / (loss) on
defined benefit pension schemes* 9.0 (15.8)
Actuarial gain / (loss) on reimbursable
rights* 2.9 (0.4)
Tax relating to items not reclassified* (1.7) 4.1
Share of other comprehensive income
in joint ventures and associates 14.8 5.0
Items that may be reclassified
subsequently to profit or loss:
Net exchange gain / (loss) on
translation of foreign operations** 80.3 (40.9)
Fair value gain on cash flow hedges
during the year** 2.3 2.2
Share of other comprehensive income
in joint ventures and associates 1.0 2.6
----------------------------------------------- ----- -------
Total other comprehensive income
/ (expense) for the year 108.6 (43.2)
Total comprehensive income / (expense)
for the year 107.5 (196.3)
----------------------------------------------- ----- -------
Attributable to:
Equity owners of the Company 107.1 (195.9)
Non controlling interest 0.4 (0.4)
----------------------------------------------- ----- -------
* Recorded in retirement benefit obligations reserve in the
Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the
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
2015 11.0 327.9 0.1 (306.0) (89.0) 71.4 (64.5) (18.9) (68.0) 1.8
Total
comprehensive
expense for
the
year - - - (145.0) (12.1) - - (38.8) (195.9) (0.4)
Issue of share
capital* 11.0 - - 519.3 - - - - 530.3 -
Shares
transferred
to option
holders
on exercise
of
share options - - - - - (0.3) 4.7 - 4.4 -
Transfer on
disposal - - - 0.2 (0.2) - - - - -
Expense in
relation
to share
based
payments - - - - - 9.8 - - 9.8 -
Change in non
controlling
interest - - - - - - - - - 0.1
At 31 December
2015 22.0 327.9 0.1 68.5 (101.3) 80.9 (59.8) (57.7) 280.6 1.5
Total
comprehensive
income for
the
year - - - 14.6 10.2 - - 82.3 107.1 0.4
Shares
transferred
to option
holders
on exercise
of
share options - - - - - (7.7) 7.7 - - -
Expense in
relation
to share
based
payments - - - - - 9.7 - - 9.7 -
Change in non
controlling
interest - - - - - - - - - (0.5)
At 31 December
2016 22.0 327.9 0.1 83.1 (91.1) 82.9 (52.1) 24.6 397.4 1.4
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- --------------
* During the prior year the Group raised GBP530.3m via a Rights
Issue. A cash box structure was used in such a way that merger
relief was available under Companies Act 2006, section 612 and thus
no share premium needed to be recorded. As the redemption of the
cash box entity's preference shares was in the form of cash, the
transaction was treated as qualifying consideration and the premium
is therefore considered to be a realised profit.
Condensed consolidated balance sheet
2016 2015
At 31 December GBPm GBPm
--------------------------------- --------- -----------
Non-current assets
Goodwill 577.9 509.9
Other intangible assets 83.6 89.8
Property, plant and equipment 69.3 73.2
Interests in joint ventures
and associates 14.4 13.8
Trade and other receivables 44.4 50.2
Derivative financial instruments 14.2 7.8
Deferred tax assets 50.8 42.2
Retirement benefit assets 150.4 127.1
---------------------------------- --------- -----------
1,005.0 914.0
--------------------------------- --------- -----------
Current assets
Inventories 22.4 26.4
Trade and other receivables 543.5 519.7
Current tax assets 11.0 6.6
Cash and cash equivalents 177.8 323.6
Derivative financial instruments 4.9 9.4
---------------------------------- --------- -----------
759.6 885.7
Assets classified as held for
sale - 39.8
---------------------------------- --------- -----------
759.6 925.5
--------------------------------- --------- -----------
Total assets 1,764.6 1,839.5
---------------------------------- --------- -----------
Current liabilities
Trade and other payables (524.5) (548.8)
Derivative financial instruments (0.6) (2.4)
Current tax liabilities (25.9) (14.2)
Provisions (172.3) (168.6)
Obligations under finance leases (12.3) (15.8)
Loans (9.7) (132.2)
---------------------------------- --------- -----------
(745.3) (882.0)
Liabilities directly associated
with assets classified as held
for sale - (32.5)
---------------------------------- --------- -----------
(745.3) (914.5)
--------------------------------- --------- -----------
Non-current liabilities
Trade and other payables (16.8) (18.3)
Deferred tax liabilities (30.5) (22.3)
Provisions (249.4) (313.1)
Obligations under finance leases (15.9) (28.0)
Loans (290.2) (249.7)
Retirement benefit obligations (17.7) (11.5)
---------------------------------- --------- -----------
(620.5) (642.9)
--------------------------------- --------- -----------
Total liabilities (1,365.8) (1,557.4)
---------------------------------- --------- -----------
Net assets 398.8 282.1
---------------------------------- --------- -----------
Equity
Share capital 22.0 22.0
Share premium account 327.9 327.9
Capital redemption reserve 0.1 0.1
Retained earnings 83.1 68.5
Retirement benefit obligations
reserve (91.1) (101.3)
Share based payment reserve 82.9 80.9
Own shares reserve (52.1) (59.8)
Hedging and translation reserve 24.6 (57.7)
---------------------------------- --------- -----------
Equity attributable to owners
of the Company 397.4 280.6
Non-controlling interest 1.4 1.5
---------------------------------- --------- -----------
Total equity 398.8 282.1
---------------------------------- --------- -----------
Condensed consolidated cash flow statement
For the year ended 31 December 2016
2015
2016 (restated*)
GBPm GBPm
-------------------------------------------------------- ------- ------------
Net cash (outflow) / inflow from operating activities
before exceptional items* (22.4) 37.2
Exceptional items (39.9) (56.6)
------------------------------------------------------------ ------- ------------
Net cash outflow from operating activities* (62.3) (19.4)
------------------------------------------------------------ ------- ------------
Investing activities
Interest received 1.4 3.4
(Decrease) / increase in security deposits (0.4) 0.3
Dividends received from joint ventures and associates 40.0 32.5
Proceeds from disposal of property, plant and equipment 0.6 0.8
Proceeds from disposal of intangible assets 0.1 0.9
Proceeds on disposal of subsidiaries and operations 19.4 165.6
Acquisition of subsidiaries, net of cash acquired (0.2) (0.2)
Purchase of other intangible assets (15.1) (37.5)
Purchase of property, plant and equipment (17.2) (36.7)
------------------------------------------------------------ ------- ------------
Net cash inflow from investing activities 28.6 129.1
------------------------------------------------------------ ------- ------------
Financing activities
Interest paid (20.1) (34.7)
Exceptional finance costs paid (0.3) (31.8)
Capitalised finance costs paid (0.3) (1.4)
Repayment of loans (135.5) (447.0)
Decrease / (increase) in loans to joint ventures
and associates 1.1 (1.6)
Capital element of finance lease repayments (17.0) (18.8)
Cash gains from hedging instruments* 47.0 19.3
Rights Issue net proceeds - 530.3
Proceeds from issue of other share capital and exercise
of share options - 4.4
------------------------------------------------------------ ------- ------------
Net cash (outflow) / inflow from financing activities* (125.1) 18.7
------------------------------------------------------------ ------- ------------
Net (decrease) / increase in cash and cash equivalents (158.8) 128.4
Cash and cash equivalents at beginning of year 323.6 180.1
Net exchange gain / (loss) 7.8 (2.1)
Cash reclassified to assets held for sale 5.2 17.2
------------------------------------------------------------ ------- ------------
Cash and cash equivalents at end of year 177.8 323.6
------------------------------------------------------------ ------- ------------
* Net cash outflow from operating activities and net cash
(outflow) / inflow from financing activities have been restated
following the change in accounting policy regarding foreign
exchange movements on investment and financing arrangements. See
note 1.
Notes to the Consolidated Financial Statements
1. General information, going concern and accounting
policies
The basis of preparation in this preliminary announcement is set
out below.
The financial information in this announcement does not
constitute the Company's statutory accounts as defined in section
434 of the Companies Act 2006 for the years ended 31 December 2016
or 2015, but is derived from these accounts. The auditors' report
on the 2015 and 2016 accounts contained no emphasis of matter and
did not contain statements under S498 (2) or (3) of the Companies
Act 2006 or equivalent preceding legislation.
The preliminary announcement has been prepared in accordance
with International Financial Reporting Standards adopted for use in
the European Union (IFRS). Whilst the financial information
included in this preliminary announcement has been computed in
accordance with IFRS, this announcement does not itself contain
sufficient information to comply with IFRS. The Company expects to
publish full Group and parent company only financial statements
that comply with IFRS and FRS101 respectively, in March 2017.
The financial statements have been prepared on the historical
cost basis, except for the revaluation of financial instruments.
Historical cost is generally based on the fair value of the
consideration given in exchange for goods and services. The
following principal accounting policies adopted have been applied
consistently in the current and preceding financial year except as
stated below.
Prior year restatement: Change in accounting policy
In order to provide more relevant information about the impact
of the underlying transactions of trading operations, the
accounting policy regarding the classification of foreign exchange
movements on investment and financing arrangements has been
changed. The new policy is to include foreign exchange movements on
investment and financing arrangements within investment revenue or
finance costs as relevant. Such transactions include foreign
exchange movements on non Sterling cash and financing arrangements,
related derivative financial instruments and any income or costs
associated with such balances. As a result of this change in
accounting policy, the prior year income statement and cash flow
statement have been restated, together with the Net Debt definition
which has been changed to include derivative financial instruments
that relate to other components of Net Debt. No restatement is
required to the balance sheet as a result of the change in
policy.
The impact on the relevant line items in the consolidated
financial statements and Net Debt for the year ended 31 December
2015 is as follows:
2015 2015
as previously as
stated Adjustment restated
Consolidated income statement GBPm GBPm GBPm
------------------------------------ -------------- ---------- ---------
General and administrative expenses (253.9) (0.1) (254.0)
Finance costs (39.0) 0.1 (38.9)
------------------------------------ -------------- ---------- ---------
2015 2015
as previously as
stated Adjustment restated
Consolidated cash flow statement GBPm GBPm GBPm
---------------------------------- -------------- ---------- ---------
Net cash outflow from operating
activities (0.1) (19.3) (19.4)
Net cash (outflow) / inflow from
financing activities (0.6) 19.3 18.7
---------------------------------- -------------- ---------- ---------
At 31
December At 31
2015 December
as previously 2015
stated Adjustment as restated
Analysis of Net Debt GBPm GBPm GBPm
--------------------------------- -------------- ---------- ------------
Cash and cash equivalents 323.6 - 323.6
Loan receivables 19.9 - 19.9
Loans payable (381.9) - (381.9)
Obligations under finance leases (43.8) - (43.8)
Derivatives relating to Net Debt - 14.6 14.6
--------------------------------- -------------- ---------- ------------
(82.2) 14.6 (67.6)
--------------------------------- -------------- ---------- ------------
Going concern
The Directors have a reasonable expectation that the Company and
the Group will be able to operate within the level of available
facilities and cash for the foreseeable future and accordingly
believe that it is appropriate to prepare the financial statements
on a going concern basis.
In assessing the basis of preparation of the financial
statements for the year ended 31 December 2016, the Directors have
considered the principles of the Financial Reporting Council's
'Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting, 2014'; namely assessing the
applicability of the going concern basis, the review period and
disclosures. The Directors have undertaken a rigorous assessment of
going concern and liquidity, taking into account financial
forecasts. In order to satisfy themselves that they have adequate
resources for the future, the Directors have reviewed the Group's
existing debt levels, the committed funding and liquidity positions
under our debt covenants, and our ability to generate cash from
trading activities. The Group's current principal debt facilities
at the year end comprised a GBP480m revolving credit facility, and
GBP290m of US private placement notes. As at 31 December 2016, the
Group had GBP770m of committed credit facilities and committed
headroom of GBP647m.
In undertaking this review the Directors have considered the
business plans which provide financial projections for the
foreseeable future. For the purposes of this review, we consider
that to be the period ending 30 June 2018.
Critical accounting judgements and key sources of estimation
uncertainty
In the process of applying the Group's accounting policies,
management has made the following judgements that have the most
significant effect on the amounts recognised in the financial
statements. As described below, many of these areas of judgement
also involve a high level of estimation uncertainty.
Prior year restatement: Change in accounting policy
The accounting policy regarding the classification of foreign
exchange movements in relation to investment and financing
arrangements was changed in the year. Judgement was applied in
reaching the conclusion that it provides more relevant financial
results to exclude these amounts from the underlying transactions
of trading operations.
Use of Alternative Performance Measures: Operating profit before
exceptional items
IAS 1 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, non-recurring and
outside of the normal operating practice of the company to be
suitable for separate presentation.
The segmental analysis of continuing operations in note 3
includes the additional performance measure of Trading Profit on
continuing operations which is reconciled to reported operating
profit in that note. The Group uses Trading Profit as an
alternative measure to reported operating profit by making several
adjustments. Firstly, Trading Profit excludes exceptional items,
being those we consider material, non-recurring and outside of the
normal operating practice of the company to be suitable of separate
presentation and detailed explanation. Secondly, amortisation and
impairment of intangibles arising on acquisitions are excluded,
because these charges are based on judgments about the value and
economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating
practice. The CODM reviews the segmental analysis for continuing
operations together with discontinued operations.
Provisions for onerous contracts
Determining whether provisions are required for loss making
contracts requires significant judgements to be made regarding the
ability of the company to maintain or improve operational
performance. Judgements can also be made regarding the outcome of
matters dependent on the behaviour of the customer in question or
other parties involved in delivering the contract.
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.
In the current year material revisions have been made to
historic provisions, which have led to a charge to contract
provisions of GBP56.6m and releases of GBP65.5m. All of these
revisions have resulted from triggering events in the current year,
either through changes in contractual positions or changes in
circumstances which could not have been reasonably foreseen at the
previous balance sheet date. To mitigate the level of uncertainty
in making these estimates Management regularly compares actual
performance of the contracts against previous forecasts and
considers whether there have been any changes to significant
judgements. A detailed bottom up review of the provisions is
performed as part of the Group's formal annual budgeting
process.
The individual provisions are discounted where the impact is
assessed to be material. Discount rates used are calculated based
on the estimated risk free rate of interest for the region in which
the provision is located and matched against the ageing profile of
the provision. Rates applied are in the range of 1.16% and
3.30%.
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. The total value of assets which are covered by this
assessment process (after previous impairments) is GBP1,340.9m,
which is the maximum exposure related to this judgement. We
mitigate the risk associated with this judgement by putting in
place processes and guidance for the finance community and internal
review procedures.
Determining whether assets with impairment indicators require an
actual impairment involves an estimation of the expected value in
use of the asset (or CGU to which the asset relates). The value in
use calculation involves an estimation of future cash flows and
also the selection of appropriate discount rates, both of which
involve considerable judgement. The future cash flows are derived
from approved forecasts, with the key assumptions being revenue
growth, margins and cash conversion rates. Discount rates are
calculated with reference to the specific risks associated with the
assets and are based on advice provided by external experts. Our
calculation of discount rates are performed based on a risk free
rate of interest appropriate to the geographic location of the cash
flows related to the asset being tested, which is subsequently
adjusted to factor in local market risks and risks specific to
Serco and the asset itself. Discount rates used for internal
purposes are post tax rates, however for the purpose of impairment
testing in accordance with IAS 36 Impairment of Assets we calculate
a pre tax rate based on post tax targets.
A key area of focus in recent years has been in the impairment
testing of goodwill as a result of the pressure on the results of
the Group. While no further impairment of pre existing goodwill was
noted in 2016, an impairment charge of GBP17.8m did arise following
the acquisition of a business in the year.
Deferred tax
Deferred tax assets are recognised for unused tax losses to the
extent that it is probable that taxable profit will be available
against which the losses can be utilised. Significant management
judgement is required to determine the amount of deferred tax
assets that can be recognised, based upon the likely timing and the
level of future taxable profits.
As at the balance sheet date, the Group has unused tax losses of
GBP893.5m (2015: GBP890.1m) available for offset against future
profits. A deferred tax asset has been recognised in respect of
GBP69.1m (2015: GBP59.9m) of such losses of which GBP58.8m (net
GBP10.0m) relates to losses incurred in the UK and GBP10.3m (net
GBP0.3m) which relates to other jurisdictions.
Recognition has been based on forecast future taxable profits.
No deferred tax asset has been recognised in respect of the
remaining losses (net GBP147.0m) as it is not probable that there
will be future taxable profits available.
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 outflows, but on resolution, to the extent this
differs from the liability held, this will be reflected through the
tax charge/(credit) for that year. Each potential liability and
contingency is revisited on an annual basis and adjusted to reflect
any changes in positions taken by the company, local tax audits,
the expiry of the statute of limitations following the passage of
time and any change in the broader tax environment. The total
current tax liability at December 2016 was GBP25.9m (2015:
GBP14.2m).
On the basis of the currently available information, the Group
does not anticipate a material change to the estimated liability in
the coming year.
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 calculation of retirement benefit obligations is dependent
on material key assumptions including discount rates, mortality
rates, inflation rates and future contribution rates. The value of
net retirement benefit obligations at the balance sheet date is an
asset of GBP132.7m (2015: GBP115.6m).
In accounting for the defined benefit schemes, the Group has
applied the following principles:
-- Asset recognised for SPLAS is based on the assumption that
the full surplus will ultimately be available to the Group as a
future refund of surplus.
-- No foreign exchange item is shown in the disclosures as the
non UK liabilities are not material.
-- No pension assets are invested in the Group's own financial instruments or property.
2. Discontinued operations
The Global Services division, representing UK onshore and
offshore private sector BPO operations, was classified as a
discontinued operation in 2015. The completion of the sale of the
majority of the offshore private sector BPO business occurred on 31
December 2015. Disposal of one of the two remaining elements of the
offshore business was completed in March 2016 and the final element
completed in December 2016. The UK onshore private sector BPO
businesses have been sold, or have been exited early with the
exception of one business where the sale process is ongoing and
completion is expected within the next twelve months.
The results of the discontinued operations were as follows:
2016 2015
For the year ended 31 December GBPm GBPm
---------------------------------------------- ------ -------
Revenue 36.8 337.6
Expenses (40.1) (311.1)
---------------------------------------------- ------ -------
Operating (loss) / profit before exceptional
items (3.3) 26.5
Exceptional (loss) / profit on disposal
of subsidiaries and operations (2.8) 5.4
Other exceptional operating items (11.4) (83.0)
---------------------------------------------- ------ -------
Operating loss (17.5) (51.1)
Investment revenue - 2.1
Finance costs - (1.2)
Exceptional finance costs (0.4) -
---------------------------------------------- ------ -------
Loss before tax (17.9) (50.2)
Tax charge on loss before exceptional
items (0.1) (18.7)
Tax credit on exceptional items - 2.7
---------------------------------------------- ------ -------
Net loss attributable to discontinued
operations presented in the income statement (18.0) (66.2)
---------------------------------------------- ------ -------
Attributable to:
Equity owners of the Company (18.1) (66.0)
---------------------------------------------- ------ -------
Non controlling interests 0.1 (0.2)
---------------------------------------------- ------ -------
Included above are items classified as exceptional as they are
considered to be material, non recurring and outside of the normal
course of business. These are summarised as follows:
2016 2015
For the year ended 31 December GBPm GBPm
------------------------------------------ ------ ------
Exceptional items arising on discontinued
operations
Exceptional (loss) / profit on disposal (2.8) 5.4
Other exceptional operating items
Restructuring costs (1.1) (2.2)
Impairment of goodwill - (65.9)
Movements in indemnities provided on
business disposals (13.7) -
Movement in the fair value of assets
transferred to held for sale 3.4 (14.9)
Other exceptional operating items (11.4) (83.0)
------------------------------------------ ------ ------
Exceptional operating items arising
on discontinued operations (14.2) (77.6)
------------------------------------------ ------ ------
In 2016 a charge of GBP1.1m (2015: GBP2.2m) has arisen in
discontinued operations in relation to the restructuring programme
resulting from the Strategy Review. This includes redundancy
payments, provisions and other charges relating to the exit of the
UK private sector BPO business, external advisory fees and other
incremental costs.
During 2015, an impairment test of the Global Services business
was conducted based on a level 3 fair value measurement, with
reference to offers received less costs of disposal. The impairment
testing identified a non cash exceptional impairment of goodwill
relating to discontinued operations of GBP65.9m.
A charge of GBP13.7m has arisen in 2016 in relation to the
movement in the value of indemnities provided on business disposals
made in previous years. This relates to changes in exchange rates
where indemnities were provided in foreign currencies and increases
to provisions for interest and penalties on any indemnities.
The value of assets held for sale increased by GBP3.4m in 2016,
reflecting the changing estimate of the likely proceeds and
movements of the assets held for sale since the prior balance sheet
date. In 2015 the held for sale assets were impaired by
GBP14.9m.
A charge of GBP0.4m was incurred as a result of early payments
to the US Private Placement (USPP) Noteholders following the
disposal of the offshore private sector BPO business. These charges
are treated as exceptional finance costs as they are directly
linked to the restructuring resulting from the Strategy Review.
Similar charges arose in 2015 which, together with the costs
related to the preservation of the Group's existing finance
facilities, totalled GBP32.8m.
The net assets at the date of disposal of discontinued
operations were:
Offshore UK onshore
GBPm GBPm
------------------------------ -------- ----------
Goodwill 8.0 -
Property, plant and equipment 1.0 -
Trade and other receivables 3.8 2.5
Cash and cash equivalents 5.6 -
Trade and other payables (4.2) 1.2
Minority interest disposed (0.5) -
------------------------------ -------- ----------
Net assets disposed 13.7 3.7
------------------------------ -------- ----------
The loss on disposal of discontinued operations is calculated as
follows:
Offshore UK onshore Total
GBPm GBPm GBPm
--------------------------------------- -------- ---------- ------
Consideration 15.2 3.5 18.7
Less:
Net assets disposed (13.7) (3.7) (17.4)
Disposal related costs (0.5) (1.4) (1.9)
--------------------------------------- -------- ---------- ------
Loss on disposal of discontinued
operations prior to reserve recycling 1.0 (1.6) (0.6)
Recycling of gains on translation
of foreign operations (2.2) - (2.2)
Exceptional loss on disposal (1.2) (1.6) (2.8)
--------------------------------------- -------- ---------- ------
The net cash inflow arising on disposal of discontinued
operations and the impact on Net Debt is as follows:
Offshore UK onshore Total
GBPm GBPm GBPm
-------------------------------------- -------- ---------- -----
Cash consideration 15.2 2.0 17.2
-------------------------------------- -------- ---------- -----
Less:
Cash and cash equivalents disposed (5.6) - (5.6)
Disposal related costs (0.5) (1.4) (1.9)
-------------------------------------- -------- ---------- -----
Net cash flow on disposal and
movement in net debt 9.1 0.6 9.7
-------------------------------------- -------- ---------- -----
The net cash flows resulting from the discontinued operations
were as follows:
2016 2015
For the year ended 31 December GBPm GBPm
------------------------------------------- ------ ------
Net cash inflow from operating activities
before exceptional items 5.5 67.7
Exceptional items - (1.5)
------------------------------------------- ------ ------
Net cash inflow from operating activities 5.5 66.2
Net cash inflow from investing activities 12.5 93.5
Net cash outflow from financing activities (11.4) (26.5)
------------------------------------------- ------ ------
Net increase in cash and cash equivalents
attributable to discontinued operations 6.6 133.2
------------------------------------------- ------ ------
3. Segmental information
The Group's operating segments reflecting the information
reported to the Board in 2016 under IFRS 8 Operating Segments are
as set out below.
Reportable
segments Operating segments
----------------- ----------------------------------------------
UK Central Services for sectors including Defence,
Government Justice & Immigration and Transport delivered
to UK Government and devolved authorities;
----------------- ----------------------------------------------
UK & Europe Services for sectors including Health and
Local & Regional Citizen Services delivered to UK & European
Government public sector customers;
----------------- ----------------------------------------------
AsPac Services for sectors including Defence,
Justice & Immigration, Transport, Health
and Citizen Services in the Asia Pacific
region including Australia, New Zealand
and Hong Kong;
----------------- ----------------------------------------------
Middle East Services for sectors including Defence,
Transport and Health in the Middle East
region;
----------------- ----------------------------------------------
Americas Services for sectors including Defence,
Transport and Citizen Services delivered
to US federal and civilian agencies, selected
state and municipal governments and the
Canadian Government; and
----------------- ----------------------------------------------
Corporate Central and head office costs.
----------------- ----------------------------------------------
Each operating segment is focused on a narrow group of customers
in a specific geographic region and is run by a local management
team which report directly to the CODM on a regular basis. As a
result of this focus, the sectors in each region have similar
economic characteristics and are aggregated at the operating
segment level in these financial statements. The accounting
policies of the reportable segments are the same as the Group's
accounting policies.
Geographic information
Non current Non current
Revenue assets* Revenue assets*
2016 2016 2015 2015
Year ended 31 December GBPm GBPm GBPm GBPm
----------------------- ------- ----------- ------- -----------
United Kingdom 1,244.9 444.7 1,529.2 259.2
United States 632.9 309.1 632.0 347.7
Australia 593.1 146.0 514.7 125.5
Middle East 324.8 19.7 291.3 16.2
Other countries 215.3 20.4 209.8 34.0
----------------------- ------- ----------- ------- -----------
Total 3,011.0 939.9 3,177.0 782.6
----------------------- ------- ----------- ------- -----------
* Non current assets exclude financial instruments, deferred tax
assets and loans to joint ventures and associates and include held
for sale assets. There are no held for sale items in 2016. 2015
includes held for sale assets of GBP1.2m.
Revenues from external customers are attributed to individual
countries on the basis of the location of the customer.
Information about major customers
The Group has three major governmental customers which each
represent more than 10% of Group revenues. The customers' revenues
were GBP1,233.7m for the UK Government across the UK Central
Government and UK & Europe Local & Regional Government
segments, GBP623.1m for the US Government within the Americas
segment, and GBP581.4m for the Australian Government within the
AsPac segment.
In 2015 the Group had two major governmental customers which
each represented more than 10% of Group revenues. The customers'
revenues were GBP1,480.9m for the UK Government across the UK
Central Government and UK & Europe Local & Regional
Government segments, and GBP558.5m for the US Government within the
Americas segment.
The following is an analysis of the Group's revenue, results,
assets and liabilities by reportable segment:
Middle
Year ended 31 December CG LRG AsPac East Americas Corporate Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ ------ ----- ------ -------- --------- -------
Revenue 678.6 696.5 619.7 324.8 691.4 - 3,011.0
----------------------------- ------ ------ ----- ------ -------- --------- -------
Result
----------------------------- ------ ------ ----- ------ -------- --------- -------
Trading profit / (loss)
from continuing operations 94.9 (10.4) 34.2 18.8 6.4 (40.3) 103.6
Amortisation and impairment
of intangibles arising
on acquisition (0.3) - (2.0) - (2.8) - (5.1)
----------------------------- ------ ------ ----- ------ -------- --------- -------
Operating profit / (loss)
before exceptional items 94.6 (10.4) 32.2 18.8 3.6 (40.3) 98.5
Exceptional profit /
(loss) on disposal of
subsidiaries and operations (0.1) 4.5 0.4 - - (1.9) 2.9
Other exceptional operating
items (11.1) (14.8) (0.9) - - (32.4) (59.2)
----------------------------- ------ ------ ----- ------ -------- --------- -------
Operating profit / (loss) 83.4 (20.7) 31.7 18.8 3.6 (74.6) 42.2
Investment revenue 9.3
Finance costs (21.9)
----------------------------- ------ ------ ----- ------ -------- --------- -------
Profit before tax 29.6
Tax charge (15.8)
Tax on exceptional items 3.1
----------------------------- ------ ------ ----- ------ -------- --------- -------
Profit for the year from
continuing operations 16.9
----------------------------- ------ ------ ----- ------ -------- --------- -------
Supplementary information
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Share of profits in joint
ventures and associates,
net of interest and tax 31.3 - 2.0 - - 0.1 33.4
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Depreciation of plant,
property and equipment (2.1) (12.9) (4.5) (0.9) (3.1) (1.3) (24.8)
Impairment of plant,
property and equipment (0.3) - (0.4) - - - (0.7)
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Total depreciation and
impairment of plant,
property and equipment (2.4) (12.9) (4.9) (0.9) (3.1) (1.3) (25.5)
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Amortisation of intangible
assets arising on acquisition (0.3) - (1.3) - (2.8) - (4.4)
Impairment and write
down of intangible assets
arising on acquisition - - (0.7) - - - (0.7)
Amortisation of other
intangible assets (0.1) (0.5) (3.3) (0.7) (1.5) (15.7) (21.8)
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Total amortisation and
impairment of intangible
assets (0.4) (0.5) (5.3) (0.7) (4.3) (15.7) (26.9)
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Segment assets
Interests in joint ventures
and associates 12.3 - 1.7 0.4 - - 14.4
Other segment assets 168.7 298.3 252.1 108.7 428.8 228.6 1,485.2
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Total segment assets 181.0 298.3 253.8 109.1 428.8 228.6 1,499.6
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Unallocated assets 265.0
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Consolidated total assets 1,764.6
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Segment liabilities
Segment liabilities (279.1) (163.8) (182.8) (79.3) (140.7) (139.7) (985.4)
Unallocated liabilities (380.4)
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Consolidated total liabilities (1,365.8)
------------------------------- ------- ------- ------- ------ ------- ------- ---------
Middle
Year ended 31 December CG LRG AsPac East Americas Corporate Total
2015 (restated*) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ----- ------ ----- ------ -------- --------- -------
Revenue 742.1 905.8 544.7 291.4 693.0 - 3,177.0
----------------------------- ----- ------ ----- ------ -------- --------- -------
Result
----------------------------- ----- ------ ----- ------ -------- --------- -------
Trading profit / (loss)
from continuing operations*
** 60.2 (14.5) 58.8 27.4 27.0 (48.0) 110.9
Amortisation and impairment
of intangibles arising
on acquisition - (1.1) (1.2) - (2.5) - (4.8)
----------------------------- ----- ------ ----- ------ -------- --------- -------
Operating profit / (loss)
before exceptional items* 60.2 (15.6) 57.6 27.4 24.5 (48.0) 106.1
Exceptional profit /
(loss) on disposal of
subsidiaries and operations 0.5 0.3 (2.6) - - (0.8) (2.6)
Other exceptional operating
items (0.2) (1.7) (1.3) (1.8) (87.5) (14.8) (107.3)
----------------------------- ----- ------ ----- ------ -------- --------- -------
Operating profit / (loss)* 60.5 (17.0) 53.7 25.6 (63.0) (63.6) (3.8)
Investment revenue 6.1
Finance costs* (71.7)
----------------------------- ----- ------ ----- ------ -------- --------- -------
Loss before tax (69.4)
Tax charge (17.9)
Tax on exceptional items 0.4
----------------------------- ----- ------ ----- ------ -------- --------- -------
Loss for the year from
continuing operations (86.9)
----------------------------- ----- ------ ----- ------ -------- --------- -------
* Administrative expenses included within Trading Profit and
operating profit has been restated following the change in
accounting policy regarding foreign exchange movements on
investment and financing arrangements which has also resulted in a
restatement of finance costs. See note 1.
** Trading profit / (loss) is defined as operating (loss) /
profit before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
Supplementary information
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Share of profits in joint
ventures and associates,
net of interest and tax 33.8 1.5 0.8 - 0.1 0.8 37.0
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Depreciation of plant,
property and equipment (1.9) (13.3) (5.4) (1.1) (3.0) (1.4) (26.1)
Impairment of plant,
property and equipment (1.6) - - - (0.4) - (2.0)
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Total depreciation and
impairment of plant,
property and equipment (3.5) (13.3) (5.4) (1.1) (3.4) (1.4) (28.1)
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Amortisation of intangible
assets arising on acquisition - (1.1) (1.2) - (2.5) - (4.8)
Amortisation of other
intangible assets (0.4) (2.0) (1.5) (0.7) (1.1) (18.0) (23.7)
Impairment and write
down of other intangible
assets - (9.0) - - - - (9.0)
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Total amortisation and
impairment of intangible
assets (0.4) (12.1) (2.7) (0.7) (3.6) (18.0) (37.5)
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Segment assets
Interests in joint ventures
and associates 4.4 6.5 2.3 0.4 0.2 - 13.8
Other segment assets 173.5 306.1 379.3 232.5 100.3 196.6 1,388.3
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Total segment assets 177.9 312.6 381.6 232.9 100.5 196.6 1,402.1
Unallocated assets, including
assets held for sale 437.4
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Consolidated total assets 1,839.5
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Segment liabilities
Segment liabilities (340.0) (188.9) (108.6) (194.1) (74.7) (154.0) (1,060.3)
Unallocated liabilities,
including liabilities
held for sale (497.1)
------------------------------- ------- ------- ------- ------- ------ ------- ---------
Consolidated total liabilities (1,557.4)
------------------------------- ------- ------- ------- ------- ------ ------- ---------
4. Joint ventures and associates
The Group has certain arrangements where control is shared
equally with one or more parties and accounts for these
arrangements as joint ventures. AWE Management Limited (AWEML) was
formerly a joint venture but in August 2016 there was a change in
the AWEML shareholding structure, with the Group's shareholding
reducing from 33.3% to 24.5% by way of a return of shares and
Lockheed Martin taking a majority holding. The Group was
compensated for the reduction in share ownership of 8.8% through
receipt of a dividend of the same amount which existed at the date
of reduction. Subsequent to the change in share ownership AWEML has
been accounted for as an associate as we continue to have
significant influence, and therefore continue to account for the
investment through equity accounting. The remainder of the
arrangements are each a separate legal entity and legal ownership
and control are equal with all other parties, there are no
significant judgements required.
AWEML, Merseyrail Services Holding Company Limited (MSHCL) and
Northern Rail Holdings Limited (NRHL) were the only equity
accounted entities which were material to the Group during the
year. Dividends of GBP19.6m (2015: GBP17.8m), GBP7.2m (2015:
GBP7.2m) and GBP10.0m (2015: GBP5.9m) respectively were received
from these companies in the year. The Northern Rail franchise ended
on 31 March 2016.
Summarised financial information of AWEML, MSHCL, NRHL and an
aggregation of the other equity accounted entities in which the
Group has an interest is as follows:
31 December 2016
Group
portion
of other
Group portion joint
AWEML MSHCL NRHL of material venture
(100% (100% of (100% joint ventures arrangements
Summarised financial of results) results) of results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Revenue 968.1 150.3 132.7 437.5 43.3 480.8
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Operating profit 72.9 18.9 13.2 37.4 3.3 40.7
Net investment revenue
/ (finance costs) 0.2 (1.3) 0.1 (0.5) (0.1) (0.6)
Income tax (charge)
/ credit (11.3) (3.7) (3.4) (6.8) 0.1 (6.7)
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Profit from continuing
operations 61.8 13.9 9.9 30.1 3.3 33.4
Other comprehensive
income - 34.0 0.8 17.4 (1.6) 15.8
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Total comprehensive
income 61.8 47.9 10.7 47.5 1.7 49.2
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Non-current assets 1,097.0 12.5 - 275.1 3.2 278.3
Current assets 149.3 32.8 14.2 60.1 16.0 76.1
Current liabilities (133.9) (31.9) (10.7) (54.2) (14.0) (68.2)
Non-current liabilities (1,095.2) (0.9) - (268.7) (3.1) (271.8)
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Net assets 17.2 12.5 3.5 12.3 2.1 14.4
Proportion of group 33% /
ownership 24.5% 50% 50% - - -
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Carrying amount
of investment 4.2 6.3 1.8 12.3 2.1 14.4
------------------------ ------------ --------- ------------ ---------------- ---------------- -------
Group
portion
of other
Group portion joint
AWEML MSHCL NRHL of material venture
(100% of (100% of (100% joint ventures arrangements
results) results) of results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- --------- ------------ ---------------- ---------------- -----
Cash and cash equivalents 72.4 10.5 14.5 35.4 4.7 40.1
Current financial
liabilities excluding
trade and other
payables and provisions (7.0) (2.3) (0.5) (3.1) (0.9) (4.0)
Non current financial
liabilities excluding
trade and other
payables and provisions - (0.6) - (0.3) (3.0) (3.3)
Depreciation and
amortisation - (2.3) (1.7) (2.1) (1.0) (3.1)
Interest income 0.2 - 0.1 0.2 - 0.2
Interest expense - (1.3) - (0.6) (0.1) (0.7)
-------------------------- --------- --------- ------------ ---------------- ---------------- -----
* Total results of the joint ventures and associates multiplied
by the respective proportion of Group ownership.
The financial statements of MSHCL are for a period which is
different from that of the Group, being for the 52 week period
ended 7 January 2017. The 52 week period reflects the joint
venture's internal reporting structure and is sufficiently close so
as to not require adjustment to match that of the Group. The
results of NRHL reflect the period of trading to the end of the
franchise on 31 March 2016, together with the results from the
ongoing post contract negotiations.
Excluded from the amounts disclosed in this note is an
exceptional impairment of GBP13.9m of the equity interest and
associated receivables balances of a joint venture.
Certain employees of the groups headed by AWEML and MSHCL are
members of sponsored defined benefit pension schemes. Given the
significance of the schemes to understanding the position of the
entities the following key disclosures are made:
AWEML MSHCL
Main assumptions: 2016 GBPm GBPm
----------------------------------------- ----- -----
Rate of salary increases (%) 2.3% 2.3%
Inflation assumption (CPI %) 2.3% 2.3%
Discount rate (%) 2.7% 2.7%
Post-retirement mortality:
Current male industrial pensioners at 22.8 N/A
65 (years)
Future male industrial pensioners at 24.9 N/A
65 (years)
----------------------------------------- ----- -----
Retirement benefit funding position
(100% of results) GBPm GBPm
-------------------------------------- --------- -------
Present value of scheme liabilities (2,556.0) (275.7)
Fair value of scheme assets 1,460.9 171.1
-------------------------------------- --------- -------
Net amount recognised (1,095.1) (104.6)
Members' share of deficit - 62.8
Franchise adjustment* - 41.8
Related asset, right to reimbursement 1,095.1 -
-------------------------------------- --------- -------
Net retirement benefit obligation - -
-------------------------------------- --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
31 December 2015
Group
portion
of other
Group portion joint
AWEML NRHL of material venture
(100% of (100% of joint ventures arrangements
Summarised financial results) results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm
------------------------ --------- --------- ---------------- ---------------- -------
Revenue 978.3 585.3 618.7 118.5 737.2
------------------------- --------- --------- ---------------- ---------------- -------
Operating profit 61.2 19.4 30.1 12.5 42.6
Net investment revenue
/ (finance costs) 0.4 0.4 0.3 (0.7) (0.4)
Income tax expense (5.9) (3.5) (3.7) (1.5) (5.2)
------------------------- --------- --------- ---------------- ---------------- -------
Profit from continuing
operations 55.7 16.3 26.7 10.3 37.0
Other comprehensive
income - 11.9 5.9 1.7 7.6
------------------------- --------- --------- ---------------- ---------------- -------
Total comprehensive
income 55.7 28.2 32.6 12.0 44.6
------------------------- --------- --------- ---------------- ---------------- -------
Non current assets 464.2 10.3 159.9 17.3 177.2
Current assets 358.8 97.2 168.2 35.7 203.9
Current liabilities (342.6) (93.4) (160.9) (32.7) (193.6)
Non current liabilities (461.7) (3.8) (155.8) (17.9) (173.7)
------------------------- --------- --------- ---------------- ---------------- -------
Net assets 18.7 10.3 11.4 2.4 13.8
Proportion of group
ownership 33% 50% - - -
------------------------- --------- --------- ---------------- ---------------- -------
Carrying amount
of investment 6.2 5.2 11.4 2.4 13.8
------------------------- --------- --------- ---------------- ---------------- -------
Group
portion
of other
Group portion joint
AWEML NRHL of material venture
(100% of (100% of joint ventures arrangements
results) results) and associates* and associates* Total
Supplementary material GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- --------- ---------------- ---------------- -----
Cash and cash equivalents 111.4 44.9 59.6 21.1 80.7
Current financial
liabilities excluding
trade and other
payables and provisions (5.6) (4.3) (4.0) (2.2) (6.2)
Non current financial
liabilities excluding
trade and other
payables and provisions (0.1) (1.3) (0.7) (3.3) (4.0)
Depreciation and
amortisation - (4.6) (2.2) (2.3) (4.5)
Interest income 0.4 0.5 0.4 0.1 0.5
Interest expense - (0.1) (0.1) (0.8) (0.9)
--------------------------- --------- --------- ---------------- ---------------- -----
* Total results of the joint ventures and associates multiplied
by the respective proportion of Group ownership.
The financial statements of NRHL are for the 52 week period
ended 9 January 2016.
Key disclosures with respect of the defined benefit pension
schemes of material joint ventures and associates:
Main assumptions: 2015 AWEML NRHL
---------------------------------------- ----- ----
Rate of salary increases (%) 2.2% 3.0%
Inflation assumption (CPI %) 2.2% 2.1%
Discount rate (%) 4.0% 3.9%
Post-retirement mortality:
Current male industrial pensioners 22.7 N/a
at 65 (years)
Future male industrial pensioners at 25.4 N/a
65 (years)
---------------------------------------- ----- ----
Retirement benefit funding position AWEML NRHL
(100% of results) GBPm GBPm
-------------------------------------- --------- -------
Present value of scheme liabilities (1,649.6) (918.3)
Fair value of scheme assets 1,188.0 682.6
-------------------------------------- --------- -------
Net amount recognised (461.6) (235.7)
Members' share of deficit - 94.3
Franchise adjustments* - 141.3
Related asset, right to reimbursement 461.6 -
-------------------------------------- --------- -------
Net retirement benefit obligation - (0.1)
-------------------------------------- --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
The Northern Rail defined benefit pension scheme used a
mortality rate multiplier of 98% based on the S1 normal males
(heavy) table, adjusted for the geographic location of members.
5. Acquisitions
On 1 December 2016 the Group acquired 100% of the issued share
capital of Orchard & Shipman (Glasgow) Limited for GBP1,
obtaining full control. Orchard & Shipman (Glasgow) Limited was
a financially distressed subcontractor on our COMPASS contract and
the business was acquired with the sole purpose of ensuring the
continued delivery of this essential service to asylum seekers in
Scotland and Northern Ireland.
The amounts recognised in respect of the identifiable assets
acquired and the liabilities assumed are as set out in the table
below:
Book Fair value Provisional
value adjustments fair value
GBPm GBPm GBPm
------------------------------- ------ ------------ -----------
Property, plant and equipment 0.2 (0.2) -
Trade and other receivables 0.8 - 0.8
Cash and cash equivalents 0.1 - 0.1
Trade and other payables (4.2) - (4.2)
Onerous contract provisions (1.4) (12.6) (14.0)
Property provisions (0.5) - (0.5)
------------------------------- ------ ------------ -----------
Total identifiable assets (5.0) (12.8) (17.8)
Goodwill 17.8
------------------------------- ------ ------------ -----------
Acquisition date fair value of -
consideration transferred
------------------------------- ------ ------------ -----------
Goodwill represents the premium associated with preventing a
disruption to our service users and the financial impact of
penalties associated with that disruption, taking into account the
pre-existing onerous contract held by O&S for services provided
to Serco, which will now be performed by Serco up to the expected
contract end date. All of the service users in the region are
housed in properties leased by Orchard & Shipman (Glasgow)
Limited and the only way of guaranteeing control of those leases
was by means of the acquisition of the legal entity. As the
contract is loss making no value is ascribed to these lease
arrangements and all goodwill arising on acquisition is immediately
impaired. The onerous contract provision (OCP) of GBP14.0m included
in the fair value of the acquisition net assets represents the best
estimate of Orchard & Shipman (Glasgow) Limited's contractual
obligations up to the expected contract end date. An element of
this provision was previously included in the Group's existing OCP
and an amount of GBP3.6m is included in amounts released in the
year.
No acquisition related costs were incurred.
Orchard & Shipman (Glasgow) Limited contributed no external
income to the Group's revenue for the year between the date of
acquisition and the balance sheet date as the prime contract with
the customer exists in another Group company, and therefore Group
revenue would have been no higher if the acquisition had been
completed on the first day of the financial year. As the business
relates entirely to a loss making contract, the existence of the
onerous contract provision results in no profit or loss in the
period since acquisition and no profit or loss would have arisen
had the acquisition taken place on 1 January 2016.
6. Exceptional items
Exceptional items are non recurring items of financial
performance that are outside normal operations and are material to
the results of the Group either by virtue of size or nature. As
such, the items set out below require separate disclosure on the
face of the income statement to assist in the understanding of the
underlying performance of the Group.
In the year exceptional items have arisen on both the continuing
and discontinued operations of the Group. Exceptional items arising
on discontinued operations are disclosed on the face of the income
statement within the loss attributable to discontinued operations,
those arising on continuing operations are disclosed on the face of
the income statement within exceptional operating items. Further
information regarding the exceptional items arising on discontinued
operations can be seen in note 2.
Exceptional gain / (loss) on disposal of subsidiaries and
operations
There were no material disposals of continuing operations in the
year. Disposals relating to discontinued operations are included in
note 2.
During the year the Group surrendered 8.8% of the share capital
of AWEML, resulting in a reduction in interests in joint ventures
and associates of GBP1.6m in return for equal consideration.
The profit on disposal of GBP2.9m arose from a profit of GBP0.4m
on the disposal of a 10% investment sold as it was no longer
required to be held under the terms of the relevant contract, and a
profit of GBP2.5m relating to transactions completing in prior
years, including cash of GBP4.5m as a result of deferred
consideration payments received which had previously been
impaired.
Other exceptional operating items arising on continuing
operations
2016 2015
For the year ended 31 December GBPm GBPm
------------------------------------------- ------ -------
Impairment of goodwill (17.8) (87.5)
Restructuring costs (17.2) (19.7)
Aborted transaction costs (0.1) (1.7)
Costs associated with UK Government
review (0.1) (1.2)
Release of UK frontline clinical health
contract provisions 0.6 2.8
Settlement of defined benefit pension
obligations (10.7) -
Impairment of interest in joint ventures
and associates, and related loan balances (13.9) -
Other exceptional operating items (59.2) (107.3)
------------------------------------------- ------ -------
Goodwill is tested for impairment annually or more frequently if
there are indications that there is a risk that it could be
impaired. The recoverable amount of each cash generating unit (CGU)
is based on value in use calculations derived from forecast cash
flows based on past experience, adjusted to reflect market trends,
economic conditions, the Group's strategy and key risks. These
forecasts include an estimated level of new business wins and
contract attrition and an assumption that the final year forecast
continues into perpetuity at a CGU specific terminal growth rate.
The terminal growth rates are provided by external sources and are
based on the long-term inflation rates of the geographic market in
which the CGUs operate and therefore do not exceed the average
long-term growth rates forecast for the individual markets.
In 2016, goodwill of GBP17.8m arose following the acquisition of
Orchard & Shipman (Glasgow) Limited, the Group's subcontractor
on the COMPASS contract providing accommodation to asylum seekers
in Scotland and Northern Ireland on behalf of the Home Office. This
goodwill was immediately impaired as the CGU is forecast to be loss
making and therefore the asset cannot be supported. The annual
impairment testing of CGUs has identified no other impairment of
goodwill. In 2015 the Americas CGU was impaired by GBP87.5m, due
primarily to a higher level of contract attrition than previously
forecast and the associated impact on future cash flows. Given the
significant size of the impairment charge and that it is not part
of the normal trading performance of the business it was considered
appropriate to treat as exceptional in the year.
In 2016, a charge of GBP17.2m (2015: GBP19.7m) arose in relation
to the restructuring programme resulting from the Strategy Review.
This included redundancy payments, provisions, external advisory
fees and other incremental costs. Due to the nature and scale of
the impact of the transformation phase of the Strategy Review the
incremental costs associated with this programme were considered to
be exceptional in the prior year and have been treated consistently
in 2016. Non exceptional restructuring charges are incurred by the
business as part of normal operational activity totalled GBP6.7m in
the year (2015: GBP13.8m).
The disposal of the Environmental and Leisure businesses was
aborted in December 2015 and during the current period costs
related to the aborted transaction were finalised, resulting in a
charge of GBP0.1m (2015: GBP1.7m).
In 2016 there were exceptional costs totalling GBP0.1m (2015:
GBP1.2m) associated with the UK Government review and the programme
of Corporate Renewal, reflecting the related external costs. This
reflected external costs related to this review and the Corporate
Renewal Programme, which were treated as exceptional when the
matter first arose and consistent treatment has been applied in the
current year.
In 2016 there were releases of provisions of GBP0.6m (2015:
GBP2.8m) which were previously charged through exceptional items in
relation to the exit of the UK Frontline Clinical Health
contracts.
Following the finalisation of the Revised Fair Deal, a number of
employees are being transferred from SPLAS back to the Principal
Civil Service Pension Scheme. This transfer was finalised in
December 2016 at which point all obligations of SPLAS to pay
retirement benefits for these individuals were eliminated and as a
result a settlement charge of GBP10.7m arose. This has been treated
as an exceptional item in the year as a result of the transaction
being material in size and nature and being outside of the normal
course of business. The charge of GBP10.7m is an accounting charge
only, the cash impact of the settlement which will be paid in
future periods, is estimated as GBP3.0m and is offset by future
savings in contributions resulting from the transfer.
A review of a joint venture's cash flow projections has led to
the impairment of GBP13.9m of the equity interest and associated
receivables balances. The impairment is outside of the normal
course of business and of a significant value, and is therefore
considered to be an exceptional item.
The exceptional finance costs charged in 2015 of GBP32.8m arose
as a result of costs being incurred in 2015 to preserve the
existing finance facilities, after an agreement was reached in
December 2014 for the Group to defer its December 2014 covenant
test until May 2015. In addition, payments were made to the US
Private Placement (USPP) Noteholders as a result of early
settlement following the Group refinancing. Total charges of
GBP32.8m had been treated as exceptional items as they were outside
of the normal financing arrangement of the Group and were
significant in size.
The tax impact of these exceptional items was a tax credit of
GBP3.1m (2015: GBP0.4m).
7. Investment revenue
2016 2015
Year ended 31 December GBPm GBPm
-------------------------------------- ----- -----
Interest receivable on other loans
and deposits 3.6 1.1
Net interest receivable on retirement
benefit obligations 4.7 4.9
Movement in discount on other debtors 1.0 0.1
-------------------------------------- ----- -----
9.3 6.1
-------------------------------------- ----- -----
8. Finance costs
2015
2016 (restated*)
Year ended 31 December GBPm GBPm
------------------------------------------ ------ ------------
Interest payable on obligations under
finance leases 1.6 2.5
Interest payable on other loans 15.6 24.7
Facility fees and other charges 3.5 6.2
Movement in discount on provisions 2.4 5.6
------------------------------------------ ------ ------------
23.1 39.0
Foreign exchange on financing activities* (1.2) (0.1)
21.9 38.9
------------------------------------------ ------ ------------
* Finance costs have been restated as a result of the change in
treatment of foreign exchange items on investing and financing
items as explained in note 1.
9. Tax
In 2016, we recognised a total tax charge of GBP12.8m (2015:
GBP33.5m), being GBP12.7m (2015: GBP17.5m) on continuing operations
profit of GBP29.6m (2015: loss of GBP69.4m) and GBP0.1m (2015:
GBP16.0m) on discontinued operations losses of GBP17.9m (2015:
GBP50.2m). Of this amount, a GBP3.1m credit (2015: GBP0.4m credit)
arises on exceptional items on continuing operations.
In respect of the results of our continuing operations, the
profit on pre-exceptional items of GBP98.5m (2015: GBP106.1m) less
pre-exceptional finance costs of GBP12.6m (2015: GBP32.8m) is
GBP85.9m (2015: GBP73.3m), which suffers a tax charged of GBP15.8m
(2015: GBP17.9m), giving a tax rate of 18.4% (2015: 24.4%).
The principal reasons why the tax rate on profit before
exceptional items and tax from continuing operations at 18.4% is
lower than the UK standard corporation tax rate of 20% are due to
higher rates of tax on profits arising on our international
operations, together with the absence of any deferred tax credit
for losses incurred in the UK (which includes the result of UK
divisions and the majority of corporate costs) offset by the impact
of our joint ventures whose post-tax results are included in our
pre-tax profit.
The tax charge on discontinued operations' losses and the tax
credit on exceptional losses of GBP70.8m have only attracted small
amounts of tax because these costs and losses are largely generated
in the UK, where deferred tax assets are not being recognised due
to insufficient UK taxable profits in the foreseeable future.
At 31 December 2016, the Group has gross estimated unrecognised
deferred tax assets of GBP1.04bn (GBP187m net), which are
potentially available to offset against future taxable profits.
These principally relate to tax losses of GBP824m. Of these tax
losses, GBP697m have arisen in the UK business (net GBP118m).
A GBP10.0m UK tax asset has been recognised at 31 December 2016
(2015: GBP10.5m) on the basis of forecast utilisation against
future taxable profits.
10. Earnings per share
Basic and diluted EPS have been calculated in accordance with
IAS 33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the
following data:
2016 2015
Number of shares millions millions
--------------------------------------- --------- ---------
Weighted average number of ordinary
shares for the purpose of basic EPS 1,088.3 986.5
Effect of dilutive potential ordinary
shares: Share options 37.3 -
--------------------------------------- --------- ---------
Weighted average number of ordinary
shares for the purpose of diluted EPS 1,125.6 986.5
--------------------------------------- --------- ---------
At 31 December 2016 options over 246,818 (2015: 560,060) shares
were excluded from the weighted average number of shares used for
calculating diluted earnings per share because their exercise price
was above the average share price for the year and they were,
therefore, anti-dilutive.
The dilutive shares of 37.3m (2015: 26.5m) are applied in the
continuing only EPS calculation. Due to the loss making position of
continuing and discontinued combined, and discontinued only, the
dilutive impact has not been calculated in 2016 and 2015, nor for
2015 continuing.
Earnings per share continuing and discontinued
Per
Per share share
Earnings amount Earnings amount
2016 2016 2015 2015
Basic EPS GBPm pence GBPm pence
-------------------------------------- -------- ------------- -------- -------
Earnings for the purpose of basic
EPS (1.2) (0.11) (152.6) (15.47)
Effect of dilutive potential ordinary - - - -
shares
-------------------------------------- -------- ------------- -------- -------
Diluted EPS (1.2) (0.11) (152.6) (15.47)
-------------------------------------- -------- ------------- -------- -------
Basic EPS excluding exceptional
items
-------------------------------------- -------- ------------- -------- -------
Earnings for the purpose of basic
EPS (1.2) (0.11) (152.6) (15.47)
Add back exceptional items 70.9 6.51 220.3 22.33
Add back tax on exceptional items (3.1) (0.28) (3.1) (0.31)
-------------------------------------- -------- ------------- -------- -------
Earnings excluding exceptional
operating items for the purpose
of basic EPS 66.6 6.12 64.6 6.55
-------------------------------------- -------- ------------- -------- -------
Earnings per share continuing
Per
Per share share
Earnings amount Earnings amount
2016 2016 2015 2015
Basic EPS GBPm pence GBPm pence
-------------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS 16.9 1.55 (86.6) (8.78)
Effect of dilutive potential ordinary
shares - (0.05) - -
-------------------------------------- -------- --------- -------- -------
Diluted EPS 16.9 1.50 (86.6) (8.78)
-------------------------------------- -------- --------- -------- -------
Basic EPS excluding exceptional
items
-------------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS 16.9 1.55 (86.6) (8.78)
Add back exceptional items 56.3 5.17 142.7 14.47
Add back tax on exceptional items (3.1) (0.28) (0.4) (0.04)
-------------------------------------- -------- --------- -------- -------
Earnings excluding exceptional
operating items for the purpose
of basic EPS 70.1 6.44 55.7 5.65
-------------------------------------- -------- --------- -------- -------
Earnings per share discontinued
Per
Per share share
Earnings amount Earnings amount
2016 2016 2015 2015
Basic EPS GBPm pence GBPm pence
--------------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS (18.1) (1.66) (66.0) (6.69)
Effect of dilutive potential ordinary - - - -
shares
---------------------------------------- -------- --------- -------- -------
Diluted EPS (18.1) (1.66) (66.0) (6.69)
---------------------------------------- -------- --------- -------- -------
Basic EPS excluding exceptional
items
--------------------------------------- -------- --------- -------- -------
Earnings for the purpose of basic
EPS (18.1) (1.66) (66.0) (6.69)
Add back exceptional items 14.6 1.34 77.6 7.87
Add back tax on exceptional items - - (2.7) (0.28)
--------------------------------------- -------- --------- -------- -------
Earnings excluding exceptional
operating items for the purpose
of basic EPS (3.5) (0.32) 8.9 0.90
--------------------------------------- -------- --------- -------- -------
11. Goodwill
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 a review is also required.
Sensitivity analysis has been performed for each key assumption,
a 1% movement in discount rates and a 1% movement in terminal
growth rates are considered to be reasonably possible. The only CGU
impacted by a reasonably possible change in a key assumption is
Health. The breakeven point of Health goodwill impairment is a 0.2%
increase in discount rate or a 0.3% decrease in terminal growth
rate.
Serco operates a contract supporting the US Affordable Care Act
(ACA) with eligibility processing services to those seeking health
insurance. These operations accounted for nearly 30% of the
Americas divisional revenue in 2016, and we currently forecast them
to be broadly flat in 2017. The contract requires the final option
year to be exercised in H1 of 2017 in order to extend through to 30
June 2018 at which point we would be required to rebid the
contract. Particular uncertainty exists with regard to the future
of the ACA. At the time of reporting, apart from knowing that under
the new US President's Administration changes will be made to the
ACA, there is no consensus in neither Congress nor the
Administration as to what form these changes will take, and what
provision will be made for the more than 24 million people who have
received their health insurance coverage through the ACA. Whilst
margins on this contract are lower than the average for the
Americas division, the contract recovers a material amount of
overhead costs and large reductions in chargeable direct labour
could create challenges to reduce overheads in line with revenues.
The timing and nature of arrangements made for the replacement of
the Affordable Care Act in the US could therefore have a material
impact on the business both in the immediate and longer term.
However, at present, the impact on future revenues and
profitability cannot be reliably estimated.
12. Analysis of Net Debt
At Reclassified Non At 31
1 January Cash as held Exchange cash December
2016 flow for sale Acquisitions** Disposals differences movements 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------- ------- ------------ -------------- --------- ------------ ----------- ---------
Cash and cash
equivalents 323.6 (153.7) - 0.1 - 7.8 - 177.8
Loan receivables 19.9 - - - - 0.1 2.9 22.9
Loans payable (381.9) 135.8 - - - (52.8) (1.0) (299.9)
Obligations under
finance leases (43.8) 16.7 (0.2) - - (0.4) (0.5) (28.2)
Derivatives
relating
to Net Debt 14.6 - - - - 3.5 - 18.1
------------------ ---------- ------- ------------ -------------- --------- ------------ ----------- ---------
(67.6) (1.2) (0.2) 0.1 - (41.8) 1.4 (109.3)
------------------ ---------- ------- ------------ -------------- --------- ------------ ----------- ---------
At At 31
1 January December
2015 Cash 2015
Reclassified Non
as held Exchange cash
(restated*) flow for sale Acquisitions** Disposals differences movements (restated*)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------------ ------ ------------ -------------- --------- ------------ ----------- ------------
Cash and cash
equivalents 180.1 128.8 17.2 - (0.4) (2.1) - 323.6
Loan
receivables 1.0 (0.6) - - - - 19.5 19.9
Loans payable (797.3) 449.0 (0.8) - - (30.8) (2.0) (381.9)
Obligations
under
finance
leases (26.5) 9.3 (26.7) - - - 0.1 (43.8)
Derivatives
relating
to Net Debt* 10.7 - - - - 3.9 - 14.6
-------------- ------------ ------ ------------ -------------- --------- ------------ ----------- ------------
(632.0) 586.5 (10.3) - (0.4) (29.0) 17.6 (67.6)
-------------- ------------ ------ ------------ -------------- --------- ------------ ----------- ------------
* Net Debt has been restated to include derivative financial
instruments that relate to other components of Net Debt. See note
1.
** Acquisitions represent the net cash / (debt) acquired on acquisition.
Total net debt held amounts to GBP109.3m (2015: GBP62.9m) of
which GBP109.3m (2015: GBP67.6m) is shown above and GBPnil (2015:
GBP4.7m (asset)) is included within amounts held for sale on the
balance sheet.
13. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- -------- --------- --------- ------ -------
At 1 January 2016 36.4 18.3 302.1 124.9 481.7
Acquisitions - 0.6 14.0 - 14.6
Reclassified to trade
and other payables - - (11.5) (8.3) (19.8)
Charged to income statement
- exceptional 0.4 - - 22.7 23.1
Charged to income statement
- other 25.6 4.4 56.6 23.7 110.3
Released to income
statement - exceptional (0.2) - (0.6) - (0.8)
Released to income
statement - other (5.3) (0.3) (64.9) (17.2) (87.7)
Utilised during the
year (17.5) (6.2) (82.0) (17.7) (123.4)
Reclassification - (2.9) (7.3) 4.9 (5.3)
Transfer from assets
held for sale - - - 3.3 3.3
Eliminated on disposal
of subsidiary - - - (1.7) (1.7)
Unwinding of discount - 0.1 2.4 - 2.5
Exchange differences 5.7 1.2 11.4 6.6 24.9
---------------------------- -------- --------- --------- ------ -------
At 31 December 2016 45.1 15.2 220.2 141.2 421.7
---------------------------- -------- --------- --------- ------ -------
Analysed as:
---------------------------- -------- --------- --------- ------ -------
Current 13.7 4.3 79.2 75.1 172.3
---------------------------- -------- --------- --------- ------ -------
Non current 31.4 10.9 141.0 66.1 249.4
---------------------------- -------- --------- --------- ------ -------
Total provisions held by the Group at 31 December 2016 amount to
GBP421.7m (2015: GBP506.2m) and include GBP421.7m (2015: GBP481.7m)
shown above and GBPnil (2015: GBP24.5m) included within amounts
held for sale on the balance sheet.
Contract provisions relate to onerous contracts which will be
utilised over the life of each individual contract, up to a maximum
of 8 1/4 years from the balance sheet date. The present value of
the estimated future cash outflows required to settle the contract
obligations as they fall due over the respective contracts has been
used in determining the provision. The individual provisions are
discounted where the impact is assessed to be material. Discount
rates used are calculated based on the estimated risk free rate of
interest for the region in which the provision is located and
matched against the ageing profile of the provision. Rates applied
are in the range of 1.16% and 3.30%. A full analysis is performed
at least annually of the future profitability of all contracts with
marginal performances and of the balance sheet items directly
linked to these contracts.
Due to the significant size of the balance and the inherent
level of uncertainty over the amount and timing of the related cash
flows upon which onerous contract provisions are based, if the
expected operational performance varies from the best estimates
made at the year end, a material change in estimate may be
required. The key drivers behind operational performance is the
level of activity required to be serviced, which is often directed
by the actions of the UK Government, and the efficiency of Group
employees and resources.
Employee related provisions are for long-term service awards and
terminal gratuities liabilities which have been accrued and are
based on contractual entitlement, together with an estimate of the
probabilities that employees will stay until retirement 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.
Property provisions relate to leased properties which are either
underutilised or vacant and where the unavoidable costs associated
with the lease exceed the economic benefits expected to be
generated in the future. The provision has been calculated based on
the discounted cash outflows required to settle the lease
obligations as they fall due, with the longest running lease ending
in April 2039.
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, with the majority expecting to be settled by 31
December 2021.
14. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and
bonding facilities of its joint ventures and associates up to a
maximum value of GBP20.4m (2015: GBP21.1m). The actual commitment
outstanding at 31 December 2016 was GBP17.9m (2015: GBP20.8m).
The Company and its subsidiaries have provided certain
guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of
business. The total commitment outstanding as at 31 December 2016
was GBP252.1m (2015: GBP211.8m).
As we have disclosed before, we are under investigation by the
Serious Fraud Office. In November 2013, the UK's Serious Fraud
Office announced that it had opened an investigation, which remains
ongoing, into the Group's Electronic Monitoring Contract.
We are cooperating fully with the Serious Fraud Office's
investigation but it is not possible to predict the outcome.
However, disclosed in the Principal Risks and Uncertainties in this
Report is a description of the range of possible outcomes in the
event that the Serious Fraud Office decides to prosecute the
individuals and /or the Serco entities involved.
The Group is aware of other claims and potential claims which
involve or may involve legal proceedings against the Group. The
Directors are of the opinion, having regard to legal advice
received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material
effect on the Group's financial position.
15. Defined benefit schemes
The costs related to defined benefit pension schemes included
within operating profit in the year amount to GBP11.7m (2015:
GBP11.6m). Included in investment income and finance costs is a
credit of GBP4.7m (2015: GBP4.9m) relating to the net interest
income on our consolidated pension schemes. Among our non contract
specific schemes, the largest is the Serco Pension and Life
Assurance Scheme (SPLAS). The most recent full actuarial valuation
of this scheme was undertaken as at 5 April 2015 and resulted in an
actuarially assessed deficit of GBP4.0m.
The assets and liabilities of the schemes at 31 December
are:
Contract Non contract
specific specific Total
2016 2016 2016
Scheme assets at fair value GBPm GBPm GBPm
------------------------------------ --------- ------------ ---------
Equities 3.3 43.3 46.6
Bonds except LDI 0.7 20.2 20.9
Liability driven investments
(LDI) - 1,390.6 1,390.6
Gilts - 72.4 72.4
Property 0.6 - 0.6
Cash and other 1.2 4.2 5.4
Annuity policies - 20.0 20.0
------------------------------------ --------- ------------ ---------
Fair value of scheme assets 5.8 1,550.7 1,556.5
Present value of scheme liabilities (12.0) (1,418.0) (1,430.0)
------------------------------------ --------- ------------ ---------
Net amount recognised (6.2) 132.7 126.5
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.5 - 2.5
------------------------------------ --------- ------------ ---------
Net retirement benefit asset - 132.7 132.7
------------------------------------ --------- ------------ ---------
Net pension liability - (17.7) (17.7)
Net pension asset - 150.4 150.4
Deferred tax liabilities - (17.6) (17.6)
------------------------------------ --------- ------------ ---------
Net retirement benefit asset
(after tax) - 115.1 115.1
------------------------------------ --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Contract Non contract
specific specific Total
2015 2015 2015
Scheme assets at fair value GBPm GBPm GBPm
------------------------------------ --------- ------------ ---------
Equities 2.8 39.1 41.9
Bonds except LDI 0.3 - 0.3
Liability driven investments
(LDI) - 1,144.4 1,144.4
Gilts - 68.1 68.1
Property 0.6 - 0.6
Cash and other 0.9 30.7 31.6
Annuity policies - 22.0 22.0
------------------------------------ --------- ------------ ---------
Fair value of scheme assets 4.6 1,304.3 1,308.9
Present value of scheme liabilities (7.7) (1,188.7) (1,196.4)
------------------------------------ --------- ------------ ---------
Net amount recognised (3.1) 115.6 112.5
Franchise adjustment* 1.9 - 1.9
Members' share of deficit 1.2 - 1.2
------------------------------------ --------- ------------ ---------
Net retirement benefit asset - 115.6 115.6
------------------------------------ --------- ------------ ---------
Net pension liability - (11.5) (11.5)
Net pension asset - 127.1 127.1
Deferred tax liabilities - (20.8) (20.8)
------------------------------------ --------- ------------ ---------
Net retirement benefit asset
(after tax) - 94.8 94.8
------------------------------------ --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Key pension assumptions:
2016 2015
Main assumptions % %
----------------------------- --------------- ---------------
Rate of salary increases 2.80 2.80
Rate of increase in pensions 2.30 (CPI) 2.00 (CPI)
in payment and 3.30 (RPI) and 3.00 (RPI)
Rate of increase in deferred 2.30 (CPI) 2.10 (CPI)
pensions and 3.30 (RPI) and 3.10 (RPI)
Inflation assumption 2.30 (CPI) 2.10 (CPI)
and 3.30 (RPI) and 3.10 (RPI)
Discount rate 2.70 3.80
----------------------------- --------------- ---------------
2016 2015
Post retirement mortality years years
-------------------------- ------ ------
Current pensioners at 65
- male 22.5 22.6
Current pensioners at 65
- female 25.0 25.1
Future pensioners at 65 -
male 24.2 24.4
Future pensioners at 65 -
female 26.9 27.1
-------------------------- ------ ------
Pension assumption sensitivities:
2016 2015
GBPm GBPm
------------------------------ ------- ------
Discount rate - 0.5% increase (116.5) (98.6)
Discount rate - 0.5% decrease 132.5 111.3
Inflation - 0.5% increase 106.1 97.4
Inflation - 0.5% decrease (87.6) (88.2)
Rate of salary increase -
0.5% increase 7.8 10.4
Rate of salary increase -
0.5% decrease (7.4) (10.0)
Mortality - one year age
rating 44.2 28.7
------------------------------ ------- ------
16. Notes to the consolidated cash flow statement
2015
2016 Before
Before 2016 exceptional 2015 2015
exceptional Exceptional 2016 items Exceptional Total
items items Total (restated) items (restated)
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------------ ------------ -------- ------------ ------------ -----------
Operating profit / (loss)
for the year -continuing
operations* 98.5 (56.3) 42.2 106.1 (109.9) (3.8)
Operating (loss) / profit
for the year -discontinued
operations (3.3) (14.2) (17.5) 26.5 (77.6) (51.1)
Operating profit / (loss)
for the year* 95.2 (70.5) 24.7 132.6 (187.5) (54.9)
Adjustments for:
Share of profits in
joint ventures and associates (33.4) - (33.4) (37.0) - (37.0)
Share based payment
expense 9.7 - 9.7 9.8 - 9.8
Exceptional impairment
of goodwill - 17.8 17.8 - 153.4 153.4
Exceptional impairment
of property, plant and
equipment - (0.8) (0.8) - 0.8 0.8
Exceptional impairment
of intangible assets - 0.3 0.3 - (0.3) (0.3)
Impairment and write
down of intangible assets 0.7 - 0.7 11.5 - 11.5
Impairment of property,
plant and equipment 0.7 - 0.7 2.1 - 2.1
Depreciation of property,
plant and equipment 24.8 - 24.8 28.9 - 28.9
Amortisation of intangible
assets 26.2 - 26.2 29.0 - 29.0
Exceptional profit on
disposal of subsidiaries
and operations - (0.1) (0.1) - (2.8) (2.8)
Loss on disposal of
property, plant and
equipment 0.4 - 0.4 0.1 - 0.1
Loss on disposal of
intangible assets 0.8 - 0.8 1.5 - 1.5
Non cash R&D expenditure
offset against intangible
assets 0.2 - 0.2 0.8 - 0.8
Decrease in provisions (118.4) (1.1) (119.5) (116.0) (9.5) (125.5)
Other non-cash movements* 0.4 - 0.4 (0.1) - (0.1)
Total non-cash items (54.5) 16.1 (38.4) (32.4) 141.6 109.2
------------------------------- ------------ ------------ -------- ------------ ------------ -----------
Operating cash inflow
/ (outflow) before movements
in working capital 7.3 (54.4) (47.1) 63.2 (45.9) 17.3
Decrease in inventories 1.3 - 1.3 5.6 - 5.6
Decrease in receivables 59.0 13.9 72.9 20.6 - 20.6
Decrease in payables (84.0) 0.6 (83.4) (48.8) (10.7) (59.5)
------------------------------- ------------ ------------ -------- ------------ ------------ -----------
Movements in working
capital (23.7) 14.5 (9.2) (22.6) (10.7) (33.3)
------------------------------- ------------ ------------ -------- ------------ ------------ -----------
Cash generated by operations* (16.4) (39.9) (56.3) 40.6 (56.6) (16.0)
Tax paid (5.6) - (5.6) (2.7) - (2.7)
Non cash R&D expenditure (0.4) - (0.4) (0.7) - (0.7)
------------------------------- ------------ ------------ -------- ------------ ------------ -----------
Net cash (outflow) /
inflow from operating
activities* (22.4) (39.9) (62.3) 37.2 (56.6) (19.4)
------------------------------- ------------ ------------ -------- ------------ ------------ -----------
* Operating Profit has been restated following the change in
accounting policy to include foreign exchange movements on
investment and financing arrangements in net finance costs.
17. Related party transactions
Transactions between the Company and its wholly owned
subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions
between the Group and its joint venture undertakings and associates
are disclosed below.
During the year, Group companies entered into the following
transactions with joint ventures and associates:
Current Non current
outstanding outstanding
at 31 at 31
Transactions December December
2016 2016 2016
GBPm GBPm GBPm
------------------------------------ ------------ ------------ ------------
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 6.2 0.5 -
Other
Dividends received - joint ventures 20.4 - -
Dividends received - associates 19.6 - -
Receivable from consortium for
tax - joint ventures 3.2 7.7 -
Total 49.9 8.3 -
------------------------------------ ------------ ------------ ------------
Joint venture receivable and loan amounts outstanding have
arisen from transactions undertaken during the general course of
trading, are unsecured, and will be settled in cash. Interest
arising on loans is based on LIBOR, or its equivalent, with an
appropriate margin. No guarantee has been given or received. The
only loan amounts owed by joint ventures or associates related to a
single entity which have been provided for in full.
Current Non current
outstanding outstanding
at 31 at 31
Transactions December December
2015 2015 2015
GBPm GBPm GBPm
------------------------------------ -------------- ------------- ------------
Sale of goods and services
Joint ventures 6.1 0.6 -
Other
Dividends received - joint ventures 32.5 - -
Loans and other receivables - joint
ventures - 0.8 7.2
Receivable from consortium for tax
- joint ventures 4.2 9.3 -
Total 42.8 10.7 7.2
------------------------------------ -------------- ------------- ------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEWSSEFWSESE
(END) Dow Jones Newswires
February 22, 2017 02:01 ET (07:01 GMT)
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