TIDMSRP
RNS Number : 5542W
Serco Group PLC
02 August 2018
2018 half year results
2 August 2018
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Six months ended 30 June 2018 2017(5)
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Revenue(1) GBP1,366.2m GBP1,507.3m
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Underlying Trading Profit (UTP)(2) GBP37.6m GBP34.0m
Reported Operating Profit (ie after exceptional items)(2) GBP31.9m GBP20.4m
---------------------------------------------------------- ----------- -----------
Underlying EPS, basic(3) 1.88p 1.46p
Reported EPS, basic (ie after exceptional items) 1.32p (1.77p)
Free Cash Flow(4) (GBP26.0m) (GBP26.8m)
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Net Debt GBP220.1m GBP148.9m
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Rupert Soames, Serco Group Chief Executive, said: "As foreseen
in our five-year strategy, profits are now starting to grow, with
Underlying Trading Profit having increased by 20% at constant
currency in the first half. We have also seen a continuation of the
strong order intake achieved in 2017, with contract awards so far
in 2018 of some GBP1.6bn, around 80% of which is from customers
outside the UK; this order intake delivers another period during
which the book--to--bill ratio has exceeded 100%, and sees our
order book increase to GBP11.0bn. The financial and order intake
performance has been accompanied by strong operational delivery and
effective implementation of our transformation programme. In
addition we have also made progress with value-enhancing
acquisitions; BTP has been integrated within our US defence
business to deepen our satellite and radar capabilities, and we
have now completed the transfer of all six Carillion hospital
contracts which will materially increase the scale and
profitability of our UK health facilities management business.
Notwithstanding market conditions that remain less than ideal,
particularly in the UK, we are responding appropriately and
continue to make progress in line with our strategy."
-- Revenue(1) at constant currency was down 5.6%, comprising a
6.0% organic decline from net contract attrition, partially offset
by a 0.4% net contribution from acquisitions. In addition there was
an adverse currency impact of GBP57m or 3.8%, resulting in a 9.4%
decline in revenue at reported currency.
-- Order intake of GBP1.6bn, includes the rebid of our US health
insurance eligibility contract and 16 other awards worth more than
GBP10m; around 80% of order intake came from customers of our
Americas, Middle East and AsPac divisions, with the remaining 20%
from the UK & Europe. 70% of the order intake comprised
existing work being rebid or extended, and 30% was new
business.
-- Book-to-bill ratio of close to 120%; closing order book
increased to GBP11.0bn, up from GBP10.7bn at the start of the year;
a further GBP0.7bn will be added following the Carillion contract
transfers.
-- Underlying Trading Profit(2) at constant currency increased
by 20%, largely as a result of the successful implementation of our
transformation plans; adverse currency impact of GBP3.2m or 9%,
resulted in an 11% increase at reported currency. Margin increased
to 2.8% (2017: 2.3%).
-- Reported Operating Profit increased by 56% and includes a
GBP7.8m release of Contract & Balance Sheet Review items, which
is excluded from Underlying Trading Profit. Onerous Contract
Provisions (OCPs) tracking to plan and liability now stands at
GBP123m, down from GBP447m in 2014 and GBP168m at the start of the
year.
-- Pre--exceptional tax costs of GBP11m (2017: GBP16m); net
exceptional costs also lower at GBP11m (2017: GBP27m).
-- Underlying EPS increased by 29%, reflecting the growth in
Underlying Trading Profit, together with lower net finance costs
and tax rate; Reported EPS, which includes the impact of the other
non-underlying items and lower tax and exceptional costs, resulted
in a profit per share of 1.32p (2017: loss per share of 1.77p).
-- Free Cash Flow(4) outflow of GBP26m, similar to the
comparable period; in addition, GBP24m cash exceptional costs,
GBP15m net acquisition consideration and a GBP13m net foreign
exchange and hedging impact led to a GBP79m increase in net debt.
Leverage for covenant purposes of 1.75x, comfortably within our
normal target range of 1-2x.
-- Value-enhancing acquisitions: completed and integrated BTP
Systems within our US defence business to deepen our satellite and
radar capabilities; after the period end, completed the transfer of
the six Carillion health facilities management contracts in the
UK.
-- Pipeline of larger new bid opportunities increased to
GBP4.7bn, reflecting successfully reloading the pipeline with new
opportunities to replace those removed on bid outcomes during the
first half of the year.
-- Consistent with the closed period update issued on 29 June,
guidance for 2018 full year is revenue of GBP2.7-2.8bn and
Underlying Trading Profit to grow to around GBP80m. For 2019, we
expect revenues to be broadly flat in constant currency, and to see
further good growth in Underlying Trading Profit. With the
completion of the Carillion contract transactions in the second
half, we expect accounting net debt at the end of 2018 to increase
slightly from the June position and to be at the mid-to-upper end
of our GBP200-250m guidance range, equivalent to leverage for
covenant purposes of 1.5-2x.
For further information please contact Serco:
Stuart Ford, Head of Investor Relations T +44 (0) 7738 894
788
Marcus De Ville, Head of Media Relations T +44 (0) 7738 898
550
Presentation:
A presentation for institutional investors and analysts will be
held today at JPMorgan, 60 Victoria Embankment, London EC4Y 0JP,
starting at 9.00am. The presentation will be webcast live on
www.serco.com and subsequently available on demand. A dial-in
facility is also available on +44 (0)330 336 9105 (USA: +1 323 794
2094) with participant pin code 3895109.
Notes to summary table of financial results:
(1) Revenue is as defined under IFRS, which excludes Serco's
share of revenue of its joint ventures and associates. Organic
revenue growth is the change at constant currency after adjusting
to exclude the impact of relevant acquisitions or disposals. Change
at constant currency is calculated by translating non-Sterling
values for the six months ended 30 June 2018 into Sterling at the
average exchange rates for the six months ended 30 June 2017.
(2) Trading Profit is defined as IFRS Operating Profit adjusted
for (i) amortisation of intangibles arising on acquisition and (ii)
exceptional items. Consistent with IFRS, it includes Serco's share
of profit after interest and tax of its joint ventures and
associates. Underlying Trading Profit additionally excludes
Contract & Balance Sheet Review adjustments (principally
Onerous Contract Provision (OCP) releases or charges) and other
material one-time items (although there were no such items in the
latest or comparable period). A reconciliation of Underlying
Trading Profit to Trading Profit and Reported Operating Profit is
as follows:
Six months ended 30 June
GBPm 2018 2017
==================================================== ====== ======
Underlying Trading Profit 37.6 34.0
Include: non-underlying items
Contract & Balance Sheet Review adjustments 7.8 -
----------------------------------------------------
Trading Profit 45.4 34.0
Amortisation of intangibles arising on acquisition (1.9) (2.2)
---------------------------------------------------- ------ ------
Operating Profit Before Exceptional Items 43.5 31.8
Operating Exceptional Items (11.6) (11.4)
---------------------------------------------------- ------ ------
Reported Operating Profit (after exceptional items) 31.9 20.4
---------------------------------------------------- ------ ------
(3) Underlying EPS reflects the Underlying Trading Profit
measure after deducting net finance costs and related tax
effects.
(4) Free Cash Flow is the net cash flow from operating
activities before exceptional items as shown on the face of the
Group's Consolidated Cash Flow Statement, adding dividends we
receive from joint ventures and associates, and deducting net
interest paid and net capital expenditure on tangible and
intangible asset purchases.
(5) The results for the six months ended 30 June 2017 have been
restated for the adoption of IFRS15. The restatement to revenue is
GBP0.9m from GBP1,508.2m to GBP1,507.3m, and to Underlying Trading
Profit is GBP1.3m from GBP35.3m to GBP34.0m. All references to
comparable period performance referred to in the Chief Executive's
Review and the Divisional Reviews have been restated accordingly.
Further details regarding the impact of the adoption of IFRS15 are
included in note 1 to the condensed consolidated financial
statements on pages 40 to 51.
Reconciliations and further detail of financial performance are
included in the Finance Review on pages 14 to 29. This includes
full definitions and explanations of the purpose and usefulness of
each non-IFRS Alternative Performance Measure (APM) used by the
Group. The condensed consolidated financial statements and
accompanying notes are on pages 32 to 70.
Forward looking statements:
This announcement contains statements which are, or may be
deemed to be, "forward looking statements" which are prospective in
nature. All statements other than statements of historical fact are
forward looking statements. Generally, words such as "expect",
"anticipate", "may", "should", "will", "aspire", "aim", "plan",
"target", "goal", "ambition" and similar expressions identify
forward looking statements. By their nature, these forward looking
statements are subject to a number of known and unknown risks,
uncertainties and contingencies, and actual results and events
could differ materially from those currently being anticipated as
reflected in such statements. Factors which may cause future
outcomes to differ from those foreseen or implied in forward
looking statements include, but are not limited to: general
economic conditions and business conditions in Serco's markets;
contracts awarded to Serco; customers' acceptance of Serco's
products and services; operational problems; the actions of
competitors, trading partners, creditors, rating agencies and
others; the success or otherwise of partnering; changes in laws and
governmental regulations; regulatory or legal actions, including
the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or
regulatory approvals; exchange rate fluctuations; the development
and use of new technology; changes in public expectations and other
changes to business conditions; wars and acts of terrorism; and
cyber-attacks. Many of these factors are beyond Serco's control or
influence. These forward looking statements speak only as of the
date of this announcement and have not been audited or otherwise
independently verified. Past performance should not be taken as an
indication or guarantee of future results and no representation or
warranty, express or implied, is made regarding future performance.
Except as required by any applicable law or regulation, Serco
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward looking statements
contained in this announcement to reflect any change in Serco's
expectations or any change in events, conditions or circumstances
on which any such statement is based after the date of this
announcement, or to keep current any other information contained in
this announcement. Accordingly, undue reliance should not be placed
on the forward looking statements.
Chief Executive's Review
Summary of financial performance
Revenue and Trading Profit
Reported Revenue declined 9.4% to GBP1,366m (2017: GBP1,507m);
this measure excludes Serco's share of revenue from joint ventures
and associates of GBP192m (2017: GBP180m). Net currency movements
reduced revenue by GBP57m or 3.8%, while the contribution from
acquisitions net of disposals added GBP6m or 0.4%. At constant
currency the organic revenue decline was GBP91m or 6.0%; this
decline was driven by a GBP55m reduction in two particularly
volume--related areas in the Americas business (the CMS health
insurance eligibility support contract and our frameworks for ship
modernisation task orders), a GBP26m impact from the transfer of
the Glasgow ACCESS operations, and a GBP31m impact in AsPac from
the end of the Armidale Class Patrol Boats (ACPB) and the Western
Australia Court Security and Custodial Services (WACSCS) contracts.
These and the effect of other smaller contract attrition were only
partially offset by growth elsewhere including: hospital facility
management services for Barts Health NHS Trust and University
Hospital Southampton NHS Foundation Trust, and new Skills Support
for the Workforce (SSW) contracts also in the UK; in the US, growth
from new or expanded work for the Defense Logistics Agency (DLA),
and for Anti-Terrorism/Force Protection (ATFP) and Naval Electronic
Surveillance Systems (NESS) services; in AsPac from growth in a
number of Citizen Services contracts for contact centre and
processing support services; and in the Middle East from some
volume growth of transport operations.
Underlying Trading Profit increased 11% to GBP37.6m (2017:
GBP34.0m); excluding the GBP3.2m net currency impact, the increase
was GBP6.8m or 20%. The improvement was driven by transformation
savings and other cost efficiencies, which more than offset the
impact of contract attrition and the other areas of reduction in
workload volumes, as well as some new contracts that added revenue
growth but operated at reduced profitability due to their initial
transition and transformation stages. Transformation has continued
to focus on driving efficiencies in central support functions and
overheads, with our reported administrative expenses in the first
half some GBP16m lower. Reflecting the increase in profit on
reduced revenue, the Underlying Trading Profit margin increased to
2.8% (2017: 2.3%).
Trading Profit was GBP45.4m (2017: GBP34.0m), benefitting from a
GBP7.8m release of Contract & Balance Sheet Review items and
Onerous Contract Provisions (OCPs). As with prior periods, both
Trading Profit and Underlying Trading Profit benefited from losses
on previously-identified onerous contracts being neutralised by the
utilisation of OCPs; the GBP34m utilised in the first half of 2018
was in line with our expectations and lower than the GBP38m
utilised in the comparable period. The closing balance of OCPs now
stands at GBP123m, compared to GBP168m at the start of the year and
the initial charge of GBP447m taken at the end of 2014.
Financing and pensions
Net finance costs were GBP6.3m (2017: GBP7.4m); while average
net debt was GBP38m higher than the comparable period, this was
more than offset by our interest payable reducing from the foreign
exchange rate and the effect of having repaid some of our US
private placement notes, by the discount unwind on provisions being
lower, and by other small movements. Cash net interest paid was
GBP8.0m (2017: GBP9.2m).
Serco's pension schemes are in a strong funding position,
resulting in a balance sheet accounting surplus, before tax, of
GBP20m (31 December 2017: GBP26m) on scheme gross assets and gross
liabilities each of approximately GBP1.3bn. The net asset position
leads to a small net credit within net finance costs of GBP0.4m
(2017: GBP1.6m), which is lower than the comparable period due to
the purchase in June 2017 by the Trustees of the Serco Pension and
Life Assurance Scheme (SPLAS) of a bulk annuity from an insurer,
which, for a significant proportion of scheme members, has the
effect of fully removing longevity, investment and accounting
risks; the gross liability remains recognised on our balance sheet,
but there is an equal and opposite insurance asset reflecting the
perfect hedge established by the annuity.
Tax and exceptional costs
The underlying effective tax cost was GBP10.6m (2017: GBP10.6m),
representing an underlying effective rate of 34% (2017: 40%) based
upon GBP31.3m (2017: GBP26.6m) of Underlying Trading Profit less
net finance costs. The rate is higher than the UK statutory rate of
corporation tax as there was no deferred tax credit taken against
UK losses incurred in the period, and because it reflects the tax
charges at locally prevailing rates in the international divisions
which tend to be higher than the UK's rate; these two factors are
partially offset by the proportion of Serco's profit before tax
generated by consolidating our share of joint venture and associate
earnings which have already been taxed. The rate is lower than the
comparable period reflecting the increase and mix of profitability
and the net effect of US tax reform; we continue to expect the rate
to reduce further over the longer term assuming further improvement
in UK profitability.
Non-underlying tax was a net charge of GBP0.6m (2017: GBP5.7m).
Total pre-exceptional tax costs were therefore GBP11.2m (2017:
GBP16.3m). Cash net tax paid was GBP4.8m (2017: GBP7.9m). As
previously described, although we expect our cash tax to be
reasonably predictable in future periods, our effective tax rates
are likely to be volatile until we are able to show sufficient
profitability in our UK business to be able to recognise on our
balance sheet all of the UK tax asset arising from losses in 2014
and 2015 principally as a result of the Contract & Balance
Sheet Review.
The Group incurred operating exceptional costs of GBP11.6m
(2017: GBP11.4m), mainly comprising restructuring programme costs
of GBP11.3m (2017: GBP13.3m) related to the Transformation stage of
our strategy, including redundancy charges, asset impairments and
other incremental costs. Tax on exceptional items was a credit of
GBP0.2m (2017: GBP0.2m) and in the comparable period there was an
exceptional one-time non-cash deferred tax charge of GBP16.1m
related to the pension asset movements on the bulk annuity
purchase. Total net exceptional costs were therefore GBP11.4m
(2017: GBP27.3m).
Reported result for the period
The reported result for the period, as presented at the bottom
of the Group's Condensed Consolidated Income Statement on page 32,
was a profit of GBP14.6m (2017: loss of GBP19.2m). This reflects:
Trading Profit of GBP45.4m (2017: GBP34.0m); amortisation of
intangibles arising on acquisition of GBP1.9m (2017: GBP2.2m); net
finance costs of GBP6.3m (2017: GBP7.4m); pre-exceptional tax costs
of GBP11.2m (2017: GBP16.3m); and total net exceptional costs of
GBP11.4m (2017: GBP27.3m).
Earnings Per Share (EPS)
Underlying EPS, which reflects the Underlying Trading Profit
measure after deducting net finance costs and related tax effects,
increased by 29% to 1.88p (2017: 1.46p). The improvement reflects
the 11% increase in Underlying Trading Profit, together with the
lower net finance costs and tax rate; the weighted average number
of shares in issue was broadly unchanged at 1,096.6m (2017:
1,091.1m). Reported EPS, which includes the impact of the other
non-underlying items and lower tax and exceptional costs, was a
profit per share of 1.32p (2017: loss per share of 1.77p).
Cash Flow and Net Debt
Free Cash Flow was negative GBP26m (2017: negative GBP27m). Cash
generated from Underlying Trading Profit was broadly offset by the
outflows related to loss-making contracts subject to OCPs. These
cash outflows lessened versus the comparable period, as reflected
in the lower rate of OCP utilisation. There was an increased
working capital outflow of GBP27m (2017: outflow of GBP17m), and
the comparable period included GBP8m of reduction in the
utilisation of the Group's receivables financing facility; since
the first quarter of 2017 there has been no utilisation of the
GBP30m facility. The increased working capital outflow included
some short term timing factors around the end of the period.
Average working capital days in the period were unchanged, as is
our view of working capital and Free Cash Flow for the full
year.
Closing net debt at 30 June 2018 increased to GBP220m (31
December 2017: GBP141m); the increase of GBP79m includes the Free
Cash outflow of GBP26m, together with a GBP24m cash outflow related
to exceptional items, GBP15m net outflow for acquisitions and an
adverse currency translation and hedging effect on net debt of
GBP13m, predominantly reflecting the Group's US Private Placement
debt partially offset by the movement on hedging instruments. The
closing net debt compares to a daily average of GBP216m for the
period (2017: GBP178m) and a peak net debt of GBP278m (2017:
GBP243m).
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.75x EBITDA (31 December 2017: 1.4x), which
compares with the covenant requirement to be less than 3.5x and
remains within our medium term target range of 1-2x.
Dividends
The Board has not declared an interim dividend for 2018. 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 2018, we
have been mindful of the fact that whilst there has been an
improvement in earnings, there remains a free cash outflow and an
increase in net debt. In these circumstances, the Board believes
that it would not be prudent to resume dividend payments at the
current juncture. For the 2018 financial year as a whole, our
guidance is for continued improvement in Underlying Trading Profit,
but we anticipate a further Free Cash outflow and expect net debt
to still increase, largely as a result of cash outflows related to
exceptional restructuring costs and value-enhancing infill
acquisitions. The Board will continue to keep the dividend policy
under close consideration as we progress with transforming the
Group and implementing our strategy.
The Revenue and Trading Profit performances are described
further in the Divisional Reviews. More detailed analysis of
earnings, cash flow, financing and related matters are described
further in the Finance Review.
Contract awards, order book, rebids and pipeline
Contract awards
The Group signed contracts with a total value of GBP1.6bn during
the first half of 2018, representing a book-to-bill ratio close to
120% which therefore continues 2017's success as the first time
since 2012 that the ratio was over 100%. There were 17 contract
awards worth more than GBP10m each, by far the largest of which was
the rebid of our health insurance eligibility support contract in
the US for the Center for Medicare & Medicaid Services (CMS)
which is estimated to be worth around GBP700m over the next five
years. Given the importance of securing this as well as other
rebids and extensions of existing work, together they represented
approximately 70% of the total value signed, with the balance
represented by the value of new business won.
Other notable contract awards included, again in the US, a
sole-source contract vehicle to support Naval Electronic
Surveillance Systems (NESS), and a single-award Indefinite
Delivery/Indefinite Quantity (ID/IQ) to support the Federal
Emergency Management Agency (FEMA), though on the latter only a
very small initial value is included within the awards value and a
losing bidder protest requires conclusion. In the UK, we received
an 18-month extension for the NorthLink Ferries service, and a new
award for environmental services with Hart and Basingstoke
councils. In AsPac, awards were dominated by new contact centre
services for Victoria Police, Australia's National Disability
Insurance Scheme and the Department of Human Services. In the
Middle East, we added new fire and rescue services at King Fahd
International Airport in Saudi Arabia, extended air navigation
services in Iraq, and successfully rebid facilities management
support in Abu Dhabi. In aggregate, around 80% of order intake came
from customers of our Americas, AsPac and Middle East divisions,
with the remaining 20% from the UK.
The two largest losses during the period were the Defence Fire
& Risk Management Organisation (DFRMO) tender in the UK, and
maintenance and logistics support for Solid State Phased Array
Radar Systems (SSPARS) in the US. In regard to DFRMO, we have
submitted a legal challenge to the procurement. Of existing work,
very pleasingly, there were no losses of any note during the
period.
Win rates by volume were around 50% for new bids and well over
90% for rebids and extensions. Win rate by value was around 25% for
new work; the win rate by value was almost 100% for securing
existing work.
Order book
The Group's order book now stands at an estimated GBP11.0bn, up
by GBP0.3bn versus GBP10.7bn at the start of the year. This
excludes the further GBP0.7bn that will be added to the order book
as a result of the transfers of the six UK health facilities
management contracts completed since the period end. There is now
over GBP2.6bn of revenue already delivered or secured in the order
book for 2018, equivalent to around 95% visibility of our
GBP2.7-2.8bn revenue guidance at current exchange rates. The
secured order book is GBP2.0bn for 2019 and GBP1.4bn for 2020.
Rebids
Through to the end of 2020, across the Group there are around 60
contracts in our order book with annual revenue of over GBP5m where
an extension or rebid will be required, representing current annual
revenue of approximately GBP1.2bn in aggregate or around 40% of the
Group's 2018 GBP2.7-2.8bn revenue guidance. This proportion of
revenue that requires securing at some point over the next
two-and-a-half years is not unusual given our average contract
length of around seven years (or approximately ten years on average
on a revenue-weighted basis, as larger contracts typically have
longer terms). Contracts that could potentially end at some point
before the conclusion of 2018 have aggregate annual revenue of less
than GBP100m, with this being significantly lower than the
situation at the start of the year given securing in particular the
CMS contract. 2019 is an important year for the extension or rebid
of existing business, with over GBP700m aggregate annual revenue to
be determined; the outcome of a number of these contracts could
have significant impact on our future profitability. The current
MELABS contract is due to end at the very start of 2019; the
heavily loss-making COMPASS contract ends in September 2019, and we
are currently considering which regions to bid for its successor
(known as AASC); the Australian immigration services contract is
due for extension or re-compete at the very end of 2019. Other
contracts that are due for rebid or extension in 2019 include the
Dubai Metro, a US Navy installation contract and NorthLink Ferries.
In 2020, the annual value of rebid or extension revenue is
significantly lower at around GBP400m, with Prisoner Escorting
Services (PECS) in the UK being the largest contract anticipated to
become due in that year.
Pipeline
Our pipeline is tightly defined as measuring only opportunities
for new business, with estimated Annual Contract Value (ACV) of at
least GBP10m, and which we expect to bid and to be adjudicated
within a rolling 24-month timeframe. The Total Contract Value (TCV)
of individual opportunities is capped at GBP1bn. The definition
does not include rebids and extension opportunities, and on average
over the last five years, more than half of our order intake has
come from opportunities outside the reported pipeline. It is a
relatively small proportion of the total universe of opportunities,
many of which either have annual revenues less than GBP10m, or are
likely to be decided beyond the next 24 months, or are rebids and
extensions. It should also be remembered that in the Americas
division in particular, we have numerous arrangements which are
classed as 'ID/IQ' - Indefinite Delivery / Indefinite Quantity -
which are essentially framework agreements under which the customer
issues task orders one at a time; whilst the ultimate value of such
an agreement may be very large and run over many years, if these
frameworks are multi-award or in any other way uncertain in value
to Serco, then a value is only recorded in our order book when
there is sufficient certainty such as when 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.
The new bid pipeline stood at GBP4.4bn at the beginning of 2018.
Around GBP1.5bn has come out of the pipeline due to wins and
losses, together with the net effect of a small number of removals
due to opportunities no longer meeting our definition, and value
changes. A number of new opportunities have now matured to the
stage where they meet our pipeline definition, adding in aggregate
GBP1.8bn over the course of the period. As a result, the pipeline
has increased to now stand at GBP4.7bn, which consists of around 20
bids that have an ACV averaging approximately GBP35m and a contract
length averaging around seven years.
In the services industry in which Serco operates, pipelines are
often lumpy, as individual opportunities can be very large, and
when they come in and out of the pipeline they can have a material
effect on reported values. In 2017, a number of unusually large
bids moved through the pipeline, and, as anticipated, subsequently
replacing these has been challenging in the prevailing market
conditions. As we have previously noted, a lower pipeline is not a
matter of undue concern, as evidenced by the strong order intake in
the first half, and the large number of rebid and extension
opportunities that we have in 2019, as well as the GBP700m which
will be added to our order book by the acquisition of the Carillion
health facilities management contracts.
Key opportunities in the pipeline are described further in the
Divisional Reviews.
Guidance and outlook
At the end of June we provided 2018 full year guidance for
revenue of GBP2.7-2.8bn and Underlying Trading Profit of around
GBP80m. This guidance still holds, although we also reiterate that
there remains a wide range of potential outcomes reflecting the
sensitivity of our profits to even small changes in revenues and
costs, as well as further movements in currency during the balance
of the financial year. Our guidance includes the assumption that
latest currency rates continue for the remainder of 2018, which now
implies adverse currency impacts estimated at around GBP80m for
revenue and GBP4-5m for profit when compared to the average rates
for 2017.
Having anticipated a further small Free Cash outflow for the
year, our guidance range for accounting net debt at the end of 2018
was previously GBP200-250m, equivalent to leverage for covenant
purposes of 1.5-2x EBITDA. Notwithstanding the subsequent
completion of the acquisition of the Carillion healthcare
contracts, and the associated cash outflows, we still anticipate
being within that range, but most likely in the mid-to-upper end. A
vendor loan note with an original face value of GBP30m before
capitalised interest was issued on our disposal of Intelenet; this
may be repaid early as a consequence of the announcement that
Intelenet are to be acquired by Teleperformance. The value of this
loan note is already included within accounting net debt, but it is
excluded from covenant net debt, thus on any early repayment it
would lower covenant leverage by approximately 0.25x.
We anticipate net finance costs of GBP13-14m in 2018; this
includes approximately GBP4m non-cash credit related to the loan
note, which would no longer be earned following any early
repayment. Our underlying effective tax rate is anticipated to
reduce towards 30%, and exceptional restructuring costs are
expected to be approximately GBP30m as we implement further
transformation activity. Further background to these areas are
included in the Finance Review.
Looking further ahead to 2019, we expect broadly flat revenue on
a constant currency basis. However, we anticipate 2019 to be a year
of further good growth in Underlying Trading Profit, which is again
likely to be driven by additional transformation savings and
improvements in operating efficiency. As stated previously, the
rate of growth beyond 2019 will be more dependent on our ability to
grow revenues and to convert loss-making contracts into profitable
contracts on rebid. The Strategy Review announced in March 2015 set
out a long term ambition that the business could grow in line with
a market which was expected to expand at a long term trend rate of
5-7% a year and deliver margins of 5-6%. Our margin ambition was
predicated on three conditions: first, reducing costs as a
percentage of sales; second, containing losses on onerous contracts
and converting a number of them into profitable contracts on rebid;
and, thirdly, increasing margins by growing revenues whilst bearing
down on overheads. We remain broadly on track on costs and on
onerous contracts, but demand in some of our markets, and in
particular in the UK, which accounts for around 40% of the Group's
reported revenues, has weakened noticeably since 2015. We can and
will partly compensate for a weaker organic revenue outlook through
increased actions on the cost base, and our long term ambitions of
5-7% revenue growth and 5-6% margin remain intact, but the timing
of achieving this is inevitably dependent on the timing of demand
growth in our largest markets reverting to historic levels.
Update on market backdrop and concluding thoughts
Market conditions for Serco remain less than ideal, particularly
in the UK. Notwithstanding this, we are responding appropriately
and continuing to make progress in line with our strategy. I am
particularly pleased that while the first half of 2018 has seen
good profit growth and order intake, these have been accompanied by
equally strong operational delivery and effective implementation of
our transformation programme and targeted cost saving initiatives.
In addition we have also progressed with value-enhancing
acquisitions. Whilst demand across our main markets has not been as
strong as we anticipated at the time we announced our strategy in
2015, the availability of value-adding acquisitions, be they of
companies or of contracts, presents an opportunity to increase our
scale and capabilities which was not foreseen in 2015. In our US
defence business, the acquisition of BTP Systems for $20m has added
deep skills in satellite communication and radar engineering
technical services, which complements our existing service
offering, and has also brought with it further bidding
opportunities. In the UK, the transfer of six health facilities
management contracts from Carillion has now been completed, which
will significantly increase the scale and profitability of our
Health business and will add around GBP700m or 6% to our order
book.
In our non-UK markets, conditions remain mixed. In the US, we
are delighted to have secured our CMS contract to continue
providing eligibility processing services to those seeking health
insurance subsidies, and we are hopeful that government policy in
this area will continue to see our skills and capabilities required
in one form or another. There is also anticipation of growth in
Defence spending, though we await clearer signs of a more
meaningful increase in new tenders and in particular in task order
volumes on some of our key existing frameworks. In the Middle East,
we are starting to progress with rebuilding a pipeline of bidding
opportunities for Serco across a number of our sectors. Our
business in Australia already operates across four of our five
sectors and sees opportunities in its pipeline related to each,
though the political environment and appetite for private sector
involvement in the delivery of public services across the different
states is not uniform. We remain confident that our business
directly serving European bodies, which accounts for around 5% of
Serco's revenue, is unlikely to be greatly affected by the ongoing
Brexit negotiations, as we tend to serve this market with
EU-resident subsidiary companies and local workforce and supply
chains.
In the UK, which accounts for around 40% of the Group's reported
revenues, there are a number of factors which are affecting demand.
First, in regard to Brexit, as we have expressed before, our
prediction that the Government and the Civil Service would become
focused upon the immense challenges of negotiating and implementing
Brexit is proving to be correct, and this has had the effect of
reducing demand for new outsourcing and transformation projects. We
also remain mindful of the potential impact on labour cost and
availability in the UK if EU citizens are unwilling or are unable
to come to the UK to work in essential frontline service roles. If
there were such an effect, it would likely be indirect, as only 6%
of our employees in the UK are Continental EU nationals, but some
of the markets from which we recruit staff (eg construction and
health) have significantly higher proportions of EU staff. However,
we also believe that, in the medium term, the repatriation of
regulatory functions may lead to new opportunities for our
industry.
As well as the challenges of Brexit, the UK market for
Government outsourced services has been somewhat dysfunctional for
several years. However, the collapse of Carillion had the effect of
convincing Government that it needed to pay serious attention to
the state of the market. Although it is traditionally considered
inappropriate for Government suppliers to enter into public debate,
we took the decision to speak out in an attempt to influence a
public debate that seemed to us occasionally ill-informed and
increasingly politicised. In our 2017 results statement, and
subsequently in evidence to the House of Commons Public &
Constitutional Affairs Committee and to the Public Accounts
Committee, we set out our analysis of the problems besetting the
market, including pointing out the damage caused by the transfer by
Government of unmanageable risk to suppliers. Rather than just
moan, we made some constructive and balanced suggestions as to how
things could be made better, proposing Four Principles which we
felt could rebalance the relationship between Government and its
supply chain. These principles covered: greater Transparency in
regard to the make-or-buy decision-making process for Government
services, as well as publishing operational and financial key
performance indicators so that taxpayers
could see the quality of service they were receiving; Security
of Supply, including the lodging of 'living wills'; Orderly Exit
rights, for both the Government and suppliers; and Fairness,
including codes of conduct for both Government and suppliers.
The reaction to our analysis and ideas has been generally
encouraging. Both Committees to whom we had given evidence drew
heavily on our Four Principles in their reports and
recommendations, and there is now widespread consensus that there
must be change. However, all this would be of nought if Government
itself were not prepared to publicly defend the principle of
private sector involvement in the delivery of public services; it
was far from obvious that that it would do so, in the face of
fierce parliamentary opposition calling for taking services back in
house, and unease amongst many even in Government about the role of
private companies. We have therefore been pleased to see that
senior Government Ministers have devoted significant thought to the
question of private sector involvement in public service delivery,
and they have been straightforward and clear as to their
conclusions. David Lidington, Minister for the Cabinet Office, gave
a speech in June in which he called for a society where:
...people from all parts of our country can access the best
public services, and for those services to run efficiently and
smoothly for them and their families. Whether that service is
managed and provided directly by the public sector, by private
companies or by voluntary organisations, what matters is that it
works for them and their everyday needs, while providing value for
money for the taxpayer. From running our hospitals to operating our
call centres; building our railways to supporting our armed forces,
the private sector has a vital role to play in delivering public
services - something this government will never cease to
champion.
In similar vein, Oliver Dowden, Minister for Implementation at
the Cabinet Office, wrote in an article:
This government recognises the vital role of business in
delivering public services. This approach is not guided by
ideology, but because the evidence is clear on the benefits of
using the private sector. Economies of scale mean services can be
provided at better value for the taxpayer; indeed, academic
research has shown that outsourcing delivers savings of 20 per cent
compared with bringing services in-house. In doing so, the private
sector brings skills and expertise as well as creating jobs and
contributing to a vibrant economy.
This is all we as suppliers could ask for: a level playing field
in which the objective is to ensure the best outcomes in terms of
service delivery and value for money and Government is agnostic as
to whether that solution be delivered by the state or private
companies. The task now is to build on these supportive statements
to effect changes in the behaviours and contracting practices of
both suppliers and Government. We are under no illusion that this
will be an easy process, and it will take some time to shift some
deeply-ingrained attitudes to risk transfer, but we will be
continuing to work with Government to develop new approaches to
Government contracting which will deliver in the long term a
vibrant and competitive supply chain for public services.
Whilst we manage through what we believe is a market hiatus
caused by a combination of Brexit and market dysfunction, Serco is
fortunate to be focussed on frontline services such as prisons,
health, immigration, defence and transport, which are
non-discretionary elements of expenditure. This gives us a level of
assurance on future demand for existing services, and the
opportunity to acquire or win market share. Our strategy is to
weather as safely as we can the current storm, attempting to
influence for the better the future shape of the market as we
navigate the various hazards, dipping our net in the water if we
see opportunity, so we will be well positioned when we reach calmer
waters. In the meantime, we see significant opportunities in our
markets outside the UK, where we are now directing the majority of
our bidding investment, and which in the first half of 2018
contributed 80% of our order intake.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional divisions: UK
& Europe (UK&E); the Americas; the Asia Pacific region
(AsPac); and the Middle East. Reflecting statutory reporting
requirements, Serco's share of revenue from its joint ventures and
associates is not included in revenue, while Serco's share of joint
ventures and associates' profit after interest and tax is included
in Underlying Trading Profit. As previously disclosed and for
consistency with guidance, Serco's Underlying Trading Profit
measure excludes Contract & Balance Sheet Review adjustments
(principally OCP releases or charges).
Six months ended 30 June 2018 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
------------------------------------ ----- -------- ----- ------ --------- -------
Revenue 635.0 305.3 263.4 162.5 - 1,366.2
Change (3%) (17%) (14%) (7%) (9%)
Change at constant currency (4%) (10%) (9%) +2% (6%)
Organic change at constant currency (3%) (12%) (11%) +2% (6%)
Underlying Trading Profit/(Loss) 14.2 19.1 13.1 9.9 (18.7) 37.6
Change (1%) (14%) +27% +34% (7%) +11%
Change at constant currency (1%) (6%) +34% +45% (7%) +20%
Margin 2.2% 6.3% 5.0% 6.1% n/a 2.8%
Contract & Balance Sheet Review
adjustments 7.4 - 0.4 - - 7.8
Trading Profit/(Loss) 21.6 19.1 13.5 9.9 (18.7) 45.4
Amortisation of intangibles
arising on acquisition - (1.6) (0.3) - - (1.9)
Operating profit/(loss) before
exceptionals 21.6 17.5 13.2 9.9 (18.7) 43.5
------------------------------------ ----- -------- ----- ------ --------- -------
Six months ended 30 June 2017 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
--------------------------------- ----- -------- ----- ------ --------- -------
Revenue 656.6 369.0 307.1 174.6 - 1,507.3
Underlying Trading Profit/(Loss) 14.3 22.2 10.3 7.4 (20.2) 34.0
Margin 2.2% 6.0% 3.4% 4.2% n/a 2.3%
Contract & Balance Sheet Review
adjustments - - - - - -
Trading Profit/(Loss) 14.3 22.2 10.3 7.4 (20.2) 34.0
Amortisation of intangibles
arising on acquisition - (1.5) (0.7) - - (2.2)
Operating profit/(loss) before
exceptionals 14.3 20.7 9.6 7.4 (20.2) 31.8
--------------------------------- ----- -------- ----- ------ --------- -------
Year ended 31 December 2017 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
--------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,331.5 689.3 577.5 352.6 - 2,950.9
Underlying Trading Profit/(Loss) 34.9 36.4 22.3 17.3 (41.6) 69.3
Margin 2.6% 5.3% 3.9% 4.9% n/a 2.3%
Contract & Balance Sheet Review
adjustments (39.0) 3.4 11.4 - - (24.2)
Trading Profit/(Loss) (4.1) 39.8 33.7 17.3 (41.6) 45.1
Amortisation of intangibles
arising on acquisition - (3.0) (1.4) - - (4.4)
Operating profit/(loss) before
exceptionals (4.1) 36.8 32.3 17.3 (41.6) 40.7
--------------------------------- ------- -------- ----- ------ --------- -------
The trading performance and outlook for each division are
described on the following pages. Reconciliations and further
detail of financial performance are included in the Finance Review
on pages 14 to 29. This includes full definitions and explanations
of the purpose of each non-IFRS Alternative Performance Measure
(APM) used by the Group. The condensed consolidated financial
statements and accompanying notes are on pages 32 to 70.
UK & Europe
Serco's UK & Europe division supports public service
delivery and outcomes across all five of the Group's chosen
sectors: our Justice & Immigration business provides a wide
range of services to support safeguarding society and reducing
reoffending, from secure accommodation management through to
housing and welfare services for asylum seekers; in Defence, we are
trusted to deliver critical support services and operate sensitive
facilities; we operate complex public Transport systems and
services; our Health business provides primarily non-clinical
support services to hospitals; and the Citizen Services business
provides environmental and leisure services, as well as a wide
range of other front, middle and back-office services to support
public sector customers in the UK or European institutions. Serco's
operations in the UK represent approximately 40% of the Group's
reported revenue, and those across the rest of Europe approximately
5%.
Revenue for the first half of 2018 was GBP635.0m (2017:
GBP656.6m), a decline of 3%; reported revenue excludes that from
our joint venture and associate holdings which are predominantly
the operations of AWE and Merseyrail, with these representing the
vast majority of the Group's activity in joint ventures and
associates. At constant currency, the decline in revenue was 4%, or
GBP23m. The Glasgow ACCESS operations which transferred at the end
of 2017 accounted for GBP26m of the overall reduction; some other
smaller contracts ending as well as some areas of reduced project
work or volumes, such as the London Cycle Hire Scheme and the Child
Maintenance Group, extended the level of revenue reduction. There
was offset from new contract growth, in particular annualising last
year's start of hospital facility management services for Barts
Health NHS Trust and University Hospital Southampton NHS Foundation
Trust, as well as from the new Skills Support for the Workforce
(SSW) contracts.
Underlying Trading Profit was GBP14.2m (2017: GBP14.3m),
representing an implied margin of 2.2% (2017: 2.2%). Trading Profit
includes the profit contribution (from which interest and tax have
already been deducted) of joint ventures and associates; if the
GBP191m (2017: GBP176m) proportional share of revenue from joint
ventures and associates was also included and if the GBP3.3m (2017:
GBP3.2m) share of interest and tax cost was excluded, the overall
divisional margin would have been similar to that reported at 2.1%
(2017: 2.1%). The joint venture and associate profit contribution
was broadly flat at GBP14m. The reduction in Underlying Trading
Profit included the impact of contract attrition and in-contract
reductions, and the lower profitability from new contracts in their
initial transition and transformation stages. These were largely
offset by our own transformation savings and other cost
efficiencies. Within Underlying Trading Profit there was GBP30m of
OCP utilisation (2017: GBP29m), which served to offset the
Division's loss-making operations, principally the COMPASS UK
asylum seeker support services, Prisoner Escort & Custody
Services (PECS), Caledonian Sleeper and Lincolnshire Country
Council contracts.
Contract & Balance Sheet Review adjustments resulted in a
GBP7.4m release of non-OCP provisions (2017: nil adjustment), after
which Trading Profit was therefore GBP21.6m (2017: GBP14.3m).
The UK & Europe division represented around GBP0.3bn or 20%
of the Group's aggregate total value of signed contracts during the
period. The largest award was an 18-month contract extension to
continue managing and operating the NorthLink Ferries service for
Transport Scotland. The largest new contract was an eight-year
joint award for environmental services for Hart District Council
and Basingstoke & Deane Borough Council. Other notable awards
in the period included successfully rebidding our repair and
maintenance contract for Command Support Air Transport (CSAT)
aircraft operated out of RAF Northolt by 32 (The Royal) Squadron,
expanding our contact centre services for the DWP, launching a new
cycle hire scheme with Transport for Edinburgh, and extending our
support services for the European Organisation for Nuclear Research
(CERN).
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are around 20 contracts
with annual revenue of over GBP5m within the UK & Europe
division; in aggregate, these represent approximately 30% of the
current level of annual revenue for the division. The largest of
these are the NorthLink Ferries contract that was recently extended
to 31 October 2019; the COMPASS contract is also due in 2019; and
in 2020, the current PECS contract ends assuming a final extension
option is not exercised by the customer, as well as that year our
Anglia Support Partnership healthcare shared services operations
and the Lincolnshire County Council contract.
The rebid of our COMPASS contract for the housing and support
provided to asylum seekers is one of the largest opportunities the
Group is currently responding to. In its new form, it will be known
as AASC (the Asylum Accommodation and Support Services Contract),
and at the time of writing we are assessing which contract regions
we should be bidding for; if we are successful it is likely to have
a material impact on our order book as the contract term is for ten
years. Other smaller opportunities in our new bid pipeline include
those for various defence support, environmental and other Citizen
Services bids.
Americas
Our Americas division accounts for approximately 22% of Serco's
overall revenue, and provides professional, technology and
management services focused on Defence, Transport, and Citizen
Services. The US Federal Government, including the military,
civilian agencies and the national intelligence community, are our
largest customers. We also provide services to the Canadian
Government and to some US state and municipal governments.
Revenue for the first half of 2018 was GBP305.3m (2017:
GBP369.0m), a 17% reduction in reported currency. In US dollars,
the main currency for operations of the division, revenue for the
period was equivalent to approximately US$421m (2017: US$465m). The
strengthening of Sterling reduced revenue by GBP27m or 7%; the
acquisition of BTP added 2% to revenue; the organic change at
constant currency was therefore a decline of 12%, or GBP43m. Lower
volumes of work in relation to our CMS health insurance eligibility
support contract, together with fewer task orders in areas of ship
modernisation work, accounted for GBP55m of the constant currency
decline. There was partial offset from growth related to the new
contract for supply chain management services for the Defense
Logistics Agency (DLA), and for Anti-Terrorism/Force Protection
(ATFP) and Naval Electronic Surveillance Systems (NESS)
services.
Underlying Trading Profit was GBP19.1m (2017: GBP22.2m),
representing a margin of 6.3% (2017: 6.0%). The adverse currency
movement accounted for GBP1.8m of the decline, and the impact of
the reduction in task order volumes was largely offset by other
cost efficiencies. Within Underlying Trading Profit there was GBP1m
(2017: GBP2m) of OCP utilisation, which reflects the offset of
losses on the Ontario Driver Examination Services (DES) contract.
There were no Contract & Balance Sheet Review adjustments in
the latest or comparable period, therefore no difference between
Underlying Trading Profit and Trading Profit.
Americas represented around GBP1.1bn ($1.4bn) or 65% of the
Group's aggregate total value of signed contracts during the
period. The largest award was the rebid of our health insurance
eligibility support contract for the US Department of Health and
Human Services, Center for Medicare & Medicaid Services (CMS),
with an estimated total value to Serco, subject to workload
volumes, of approximately $900m if all options of the five-year
contract are exercised. The second largest was a $232m sole-source
contract vehicle for Serco to continue supporting Naval Electronic
Surveillance Systems (NESS). A new single-award Indefinite
Delivery/Indefinite Quantity (ID/IQ) contract to provide public
technical assistance to the Federal Emergency Management Agency
(FEMA) was awarded to Serco; while this has a potentially large
ceiling value of $600m over the next five years, only a very small
initial value for programme management is recognised in our value
of signed contracts and order book, as the workload will ultimately
be dictated by task orders issued in response to declared major
disasters and emergencies; transitioning this contract to Serco has
also been delayed by a losing bidder protest. Other notable awards
in the period included medical coding compliance services to
support the Air Force Medical Service (AFMS), along with numerous
defence equipment modernisation task orders under our various ID/IQ
frameworks.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 13 contracts with
annual revenue of over GBP5m within the Americas division; in
aggregate, these represent around 40% of the current level of
annual revenue for the division, which is a significantly lower
proportion now that the CMS and NESS contracts have been secured.
In 2019, the Global Installation Contract covering areas of our
defence ship modernisation work is due for rebid, while our support
to the Federal Aviation Administration's (FAA) Contract Tower (FCT)
Program will become due for rebid once again in 2020.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes further important opportunities
to provide various defence support functions, most notably a C5ISR
integration, kitting and cabling opportunity for the US Navy
(referred to a 'CIKC'). Other tenders include support to transport
operations, as well as those in aviation and air traffic control.
We also continue to look for opportunities to leverage Serco's
strength in our other core sectors.
AsPac
Operations in the Asia Pacific division include Justice,
Immigration, Defence, Health, Transport and Citizen Services in
Australia, New Zealand and Hong Kong. Serco's operations in
Australia are by far the largest element of the division; the
country represents approximately 19% of total Revenue for the
Group.
Revenue for the first half of 2018 was GBP263.4m (2017:
GBP307.1m), a decline of 14%. In Australian dollars, the main
currency for operations of the division, revenue for the period was
equivalent to approximately A$469m (2017: A$516m). The
strengthening of Sterling reduced revenue by GBP17m or 5%; the
acquisition of the other 50% of a small defence services joint
venture added 2% to revenue; the organic change at constant
currency was therefore a decline of 11%, or GBP33m. This reduction
was almost fully accounted for by the end of the Armidale Class
Patrol Boats (ACPB) and Western Australia Court Security &
Custodial Services (WACSCS) contracts, both of which ended in the
first half of 2017. There was some reduction in workload in
Immigration Services, though this was offset by growth in our
Citizen Services business which provides contact centre and
processing support services.
Underlying Trading Profit was GBP13.1m (2017: GBP10.3m),
representing a margin of 5.0% (2017: 3.4%). Progress on
transformation savings and other cost efficiencies more than offset
the adverse currency impact of GBP0.7m and the net of other
movements from contract attrition and growth from new work. Within
Underlying Trading Profit there was GBP2m of OCP utilisation (2017:
GBP7m), significantly reduced following the end of the ACPB
contract.
Contract & Balance Sheet Review adjustments resulted in a
GBP0.4m OCP release (2017: nil adjustment), after which Trading
Profit was therefore GBP13.5m (2017: GBP10.3m).
AsPac represented around GBP0.2bn or 10% of the Group's
aggregate total value of signed contracts during the year. The
largest new award was to provide and operate for Victoria Police
contact centre services for non-urgent incidents. Other similar
awards in our Citizen Services business have included contact
services for Australia's National Disability Insurance Scheme, and
further expanding operations supporting the Department of Human
Services.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 10 contracts with
annual revenue of over GBP5m within the AsPac division; in
aggregate, these represent over half of the current level of annual
revenue for the division; this high proportion reflects that the
Australia onshore immigration services contract requires rebid or
extension at the end of 2019, with this accounting for over 30% of
current divisional revenue. Also in 2019 our contract for South
Queensland Correctional Centre will require extending or rebidding,
with this prison also expected to be transitioned to a female
cohort by the end of the year. Others that will require extending
or rebidding include the Australian Tax Office framework contract
and our support to Traffic Camera Services in Victoria.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes several in Justice &
Immigration, Citizen Services and Defence support. We will look to
build the pipeline further in these sectors as well as Transport
and Health.
Middle East
Operations in the Middle East division include Transport,
Defence, Health and Citizen Services, with the region accounting
for approximately 12% of the Group's total revenue.
Revenue for the first half of 2018 was GBP162.5m (2017:
GBP174.6m), a decrease of 7%. The strengthening of Sterling reduced
revenue by GBP15m or 9%; the organic change at constant currency
was therefore growth of 2%. The increase included some volume
growth of transport operations, with other new or expanding
contracts broadly offsetting other small areas of attrition or
reductions in scope or volumes.
Underlying Trading Profit was GBP9.9m (2017: GBP7.4m),
representing a margin of 6.1% (2017: 4.2%). While there was a
GBP0.8m adverse currency movement, there was an overall improvement
in profitability due in large part to the non--repeat of the heavy
costs of bidding the rail tenders experienced in the comparable
period, together with progress on transformation savings and other
cost efficiencies. There are no OCP contracts in the division and
therefore no OCP utilisation within Underlying Trading Profit.
There were no Contract & Balance Sheet Review adjustments in
the latest or comparable period, therefore no difference between
Underlying Trading Profit and Trading Profit.
The Middle East represented around GBP0.1bn of the Group's
aggregate total value of signed contracts during the first half of
2018. The largest new contract was with Dammam Airports Company
(DACO) for the provision of fire and rescue services at King Fahd
International Airport (KFIA), the first Saudi airport to leverage
an international service provider's expertise in firefighting
systems. Other awards included further extensions to our air
navigation services and training in Iraq, and successfully
rebidding our facilities management contract for Abu Dhabi Global
Market Square.
Of existing work where an extension or rebid will be required at
some point before the end of 2020, there are 12 contracts with
annual revenue of over GBP5m within the Middle East division; in
aggregate, these represent well over half of the current level of
annual revenue for the division. The MELABS contract is due to end
at the start of 2019, and we currently await the conclusion of the
rebid process which will determine the magnitude of the profit
impact on that financial year. Other contracts that could
potentially come to an end in 2019 include the Dubai Metro and the
Cleveland Clinic Abu Dhabi contracts; by 2020, our Dubai Air
Navigation Services will also become due for further extension or
rebid.
Our pipeline of major new bid opportunities in the region
reduced very significantly in 2017 following the outcome of the
light rail and tram bids. There are some other smaller
opportunities in integrated facilities management and transport
support services, and effort is ongoing to rebuild a stronger
pipeline.
Corporate costs
Corporate costs relate to typical central function costs of
running the Group, including executive, governance and support
functions such as HR, finance and IT. Where appropriate, these
costs are stated after allocation of recharges to operating
divisions. The costs of Group-wide programmes and initiatives are
also incurred centrally.
Benefiting from actions to deliver savings and improve
efficiencies of our central functions, corporate costs in the first
half of 2018 reduced by 7% to GBP18.7m (2017: GBP20.2m).
Finance Review
Amortisation
and
impairment
of
intangibles
Non arising Statutory
For the six underlying on pre Exceptional
months ended Underlying items Trading acquisition exceptional items Statutory
30 June 2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Revenue 1,366.2 - 1,366.2 - 1,366.2 - 1,366.2
Cost of sales (1,247.2) 7.8 (1,239.4) - (1,239.4) - (1,239.4)
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Gross profit 119.0 7.8 126.8 - 126.8 - 126.8
Administrative
expenses (96.4) - (96.4) (1.9) (98.3) (11.6) (109.9)
Share of
profits in
joint ventures
and
associates,
net of
interest
and tax 15.0 - 15.0 - 15.0 - 15.0
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Profit before
interest and
tax 37.6 7.8 45.4 (1.9) 43.5 (11.6) 31.9
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Margin 2.8% 3.3% 3.2% 2.3%
Net finance
costs (6.3) - (6.3) - (6.3) - (6.3)
Other gains - - - - - - -
Profit before
tax 31.3 7.8 39.1 (1.9) 37.2 (11.6) 25.6
Tax charge (10.6) (1.0) (11.6) 0.4 (11.2) 0.2 (11.0)
Effective tax
rate (33.9%) (29.7%) (30.1%) (43.0%)
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Profit for the
period 20.7 6.8 27.5 (1.5) 26.0 (11.4) 14.6
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Minority
interest 0.1 0.1 0.1 0.1
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Earnings per
share (pence) 1.88 2.50 2.36 1.32
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Amortisation
and
impairment
of
intangibles
For the six Non arising Statutory
months ended underlying on pre Exceptional
30 June 2017 Underlying items Trading acquisition exceptional items Statutory
(restated*) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Revenue 1,507.3 - 1,507.3 - 1,507.3 - 1,507.3
Cost of sales (1,375.2) - (1,375.2) - (1,375.2) - (1,375.2)
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Gross profit 132.1 - 132.1 - 132.1 - 132.1
Administrative
expenses (112.7) - (112.7) (2.2) (114.9) (11.4) (126.3)
Share of profits
in joint
ventures
and associates,
net of interest
and tax 14.6 - 14.6 - 14.6 - 14.6
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Profit before
interest and
tax 34.0 - 34.0 (2.2) 31.8 (11.4) 20.4
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Margin 2.3% 2.3% 2.1% 1.4%
Net finance
costs (7.4) - (7.4) - (7.4) - (7.4)
Other gains - - - - - - -
Profit before
tax 26.6 - 26.6 (2.2) 24.4 (11.4) 13.0
Tax charge (10.6) (6.3) (16.9) 0.6 (16.3) (15.9) (32.2)
Effective tax
rate (39.8%) (63.5%) (66.8%) (247.7%)
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Profit/(loss)
for the period 16.0 (6.3) 9.7 (1.6) 8.1 (27.3) (19.2)
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Minority
interest 0.1 0.1 0.1 0.1
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
Earnings/(loss)
per share
(pence) 1.46 0.88 0.73 (1.77)
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------- ----------------
* Results for the six months ended 30 June 2017 have been
restated to reflect the adoption of IFRS15 with effect from 1
January 2017. See note 3 to the Condensed Consolidated Financial
Statements.
Amortisation
and
impairment
of
intangibles
For the year Non arising Statutory
ended underlying on pre Exceptional
31 December 2017 Underlying items Trading acquisition exceptional items Statutory
(restated*) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Revenue 2,950.9 - 2,950.9 - 2,950.9 - 2,950.9
Cost of sales (2,686.4) (24.2) (2,710.6) - (2,710.6) - (2,710.6)
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Gross profit 264.5 (24.2) 240.3 - 240.3 - 240.3
Administrative
expenses (222.2) - (222.2) (4.4) (226.6) (19.6) (246.2)
Share of profits
in joint
ventures
and associates,
net of interest
and tax 27.0 - 27.0 - 27.0 - 27.0
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Profit before
interest and
tax 69.3 (24.2) 45.1 (4.4) 40.7 (19.6) 21.1
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Margin 2.3% 1.5% 1.4% 0.7%
Net finance
costs (11.2) - (11.2) - (11.2) - (11.2)
Other gains - 0.7 0.7 - 0.7 - 0.7
Profit before
tax 58.1 (23.5) 34.6 (4.4) 30.2 (19.6) 10.6
Tax charge (20.2) 5.0 (15.2) 1.6 (13.6) (5.0) (18.6)
Effective tax
rate (34.8%) (43.9%) (45.0%) (175.5%)
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Profit/(loss)
for the period 37.9 (18.5) 19.4 (2.8) 16.6 (24.6) (8.0)
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Minority
interest 0.3 0.3 0.3 0.3
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
Earnings/(loss)
per share
(pence) 3.45 1.75 1.50 (0.76)
----------------------- ---------------- ------------- ---------------- ------------- ---------------- ------------- ----------------
* Results for the year ended 31 December 2017 have been restated
to reflect the adoption of IFRS15 with effect from 1 January 2017.
See note 3 to the Condensed Consolidated Financial Statements.
Restatement for the impact of IFRS15
IFRS15 Revenue from Contracts with Customers was adopted during
the period, replacing previous revenue recognition guidance for
goods, services and construction contracts. The cumulative effect
of initial application of the standard has been applied as an
adjustment to brought forward retained earnings as at 1 January
2017 and the results for the comparative periods restated to
reflect the impact as if the standard had always been in place
(subject to any practical expedients as described in note 3). The
new accounting standard has no impact on the historic or future
cash flows of the Group, but does have an impact on the timing of
revenues and profits.
The impact for the Group of adopting IFRS15 was a reduction in
revenue, UTP and retained profit of GBP0.9m, GBP1.3m and GBP1.0m
respectively for the six months ended 30 June 2017. Full details of
the impact of adopting IFRS15 are provided in note 3 to the
Condensed Consolidated Financial Statements.
The total adjustment to the opening balance of the Group's
equity at 1 January 2017 was a decrease of GBP33.8m. The principal
components of the adjustment were as follows:
-- A decrease of GBP14.7m due to revenues being recognised at a
constant amount over the life of the contract where the level of
services provided is broadly consistent.
-- A decrease of GBP11.8m due to a change in the basis of
measuring progress for asset maintenance and replacement services,
including dry docking. Where the resources used to fulfil the
performance obligations best depicts how control is passed to the
customer, the input method of accounting has been applied.
-- A decrease of GBP7.0m due to upfront fees and transition
payments being deferred and spread in line with delivery of the
core services.
Alternative Performance Measures (APMs) and other related
definitions
Overview
APMs used by the Group are reviewed below to provide a
definition and reconciliation from each non-IFRS APM to its IFRS
equivalent, and to explain the purpose and usefulness of each
APM.
In general, APMs are presented externally to meet investors'
requirements for further clarity and transparency of the Group's
financial performance. The APMs are also used internally in the
management of our business performance, budgeting and forecasting,
and for determining Directors' remuneration and that of other
management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being
included in an APM, this reflects revenues presented elsewhere
within the reported financial information, except where amounts are
recalculated to reflect constant currency. Where items of profits
or costs are being excluded in an APM, these are included elsewhere
in our reported financial information as they represent actual
profits or costs of the Group, except where amounts are
recalculated to reflect constant currency. As a result, APMs allow
investors and other readers to review different kinds of revenue,
profits and costs and should not be used in isolation. Other
commentary within the announcement, including the other sections of
this Finance Review, as well as the Condensed Consolidated
Financial Statements and the accompanying notes, should be referred
to in order to fully appreciate all the factors that affect our
business. We strongly encourage readers not to rely on any single
financial measure, but to carefully review our reporting in its
entirety.
The methodology applied to calculating the APMs has not changed
during the period for any measure.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 32, reflects revenue translated at the
average exchange rates for the period. In order to provide a
comparable movement on the prior period's results, reported revenue
is recalculated by translating non-Sterling values for the six
months ended 30 June 2018 into Sterling at the average exchange
rate for the six months ended 30 June 2017. All revenue in 2017 and
2018 arose from continuing activities.
2018
For the six months ended 30 June GBPm
--------------------------------------------- --------------
Reported revenue at constant currency 1,422.9
Foreign exchange differences (56.7)
--------------------------------------------- --------------
Reported revenue at reported currency 1,366.2
--------------------------------------------- --------------
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses
acquired during a particular year and/or generated by businesses
sold during a particular year up to the date of disposal. In order
to provide a comparable movement which ignores the effect of both
acquisitions and disposals on the previous year's results, Organic
Revenue at constant currency is recalculated by excluding the
impact of any relevant acquisitions or disposals.
For the six months ended 30 June 2017, an adjustment was
required for the disposal of the remaining element of the UK
private sector BPO business, consisting of a single contract, sold
on 3 July 2017. The Group disposed of Service Glasgow LLP on 1
December 2017, which also consisted of a single contract. However,
this disposal arose as a result of normal contract attrition rather
than as a result of the disposal of a wider business and hence this
is not excluded for the Organic Revenue calculation.
There are two acquisitions excluded for the calculation of
Organic Revenue in the six months to 30 June 2018. The first
relates to the acquisition of 50% of the issued share capital of
Serco Sodexo Defence Services Pty Ltd (SSDS) on 7 September 2017,
resulting in full control being obtained. SSDS was previously a 50%
owned joint venture accounted for on an equity accounting basis and
therefore no revenues had previously been recorded in the Group's
results. The second relates to the acquisition of 100% of the
issued share capital of BTP Systems, LLC (BTP) on 26 January 2018.
The first of six UK health facilities management contracts was
transferred from Carillion in the latter part of June 2018, with no
significant revenues being recognised in this half year period,
therefore no adjustment was required.
Organic Revenue growth is calculated by comparing the current
period Organic Revenue at constant currency exchange rates with the
prior period Organic Revenue at reported currency exchange
rates.
2018
For the six months ended 30 June GBPm
--------------------------------------------- --------------
Organic Revenue at constant currency 1,411.2
Foreign exchange differences (55.9)
--------------------------------------------- --------------
Organic Revenue at reported currency 1,355.3
Impact of acquisitions 10.9
--------------------------------------------- --------------
Reported revenue at reported currency 1,366.2
--------------------------------------------- --------------
2017
(restated)
For the six months ended 30 June GBPm
--------------------------------------------- --------------
Organic Revenue at reported currency 1,502.0
Impact of disposals 5.3
--------------------------------------------- --------------
Reported revenue at reported currency 1,507.3
--------------------------------------------- --------------
Revenue including share of joint ventures and associates
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 32, excludes the Group's share of revenue
from joint ventures and associates, with Serco's share of profits
in joint ventures and associates (net of interest and tax)
consolidated within Reported Operating Profit as a single line
further down the Condensed Consolidated Income Statement. The
alternative measure includes the share of joint ventures and
associates for the benefit of reflecting the overall change in
scale of the Group's ongoing operations, which is particularly
relevant for evaluating Serco's presence in market sectors such as
Defence and Transport. The alternative measure allows the
performance of the joint venture and associate operations
themselves, and their impact on the Group as a whole, to be
evaluated on measures other than just the post tax result.
Six months
ended Year ended
Six months 30 June 31 December
ended 2017 2017
30 June
2018 (restated) (restated)
GBPm GBPm GBPm
---------------------------------------------------- -------------- -------------- --------------
Revenue including share of joint ventures
and associates 1,558.5 1,687.5 3,307.3
Exclude share of revenue from joint ventures
and associates (192.3) (180.2) (356.4)
---------------------------------------------------- -------------- -------------- --------------
Reported revenue 1,366.2 1,507.3 2,950.9
---------------------------------------------------- -------------- -------------- --------------
Alternative profit measures
Six months
ended Year ended
Six months 30 June 31 December
ended 2017 2017
30 June
2018 (restated) (restated)
GBPm GBPm GBPm
---------------------------------------------------------- ------------- ------------- -------------
Underlying Trading Profit 37.6 34.0 69.3
Non-underlying items:
Include OCP charges and releases 0.4 - (27.4)
Include other Contract & Balance Sheet Review
adjustments 7.4 - 3.2
---------------------------------------------------------- ------------- ------------- -------------
7.8 - (24.2)
---------------------------------------------------------- ------------- ------------- -------------
Trading Profit 45.4 34.0 45.1
Include operating exceptional items (11.6) (11.4) (19.6)
Include amortisation and impairment of intangibles
arising on acquisition (1.9) (2.2) (4.4)
Operating profit 31.9 20.4 21.1
---------------------------------------------------------- ------------- ------------- -------------
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur within
Trading Profit and remove the impact of historical issues. UTP
therefore provides a measure of the underlying performance of the
business in the current period.
Charges and releases on all Onerous Contract Provisions (OCPs)
are excluded in the current and prior periods. OCPs reflect the
future multi-year cost of delivering onerous contracts and do not
reflect only the current cost of operating the contract in the
latest individual period. It should be noted that, as for operating
profit, UTP benefits from OCP utilisation of GBP33.7m in 2018 (2017
restated: GBP38.2m) which neutralises the in-period losses on
previously identified onerous contracts, therefore it is only
charges or releases of OCPs that are adjusted for.
Revisions to accounting estimates and judgements which arose
during the 2014 Contract & Balance Sheet Review are separately
reported where the impact of an individual item is material. Only
one such item was noted in 2018, relating to a release of part of a
non-OCP provision made during the Contract & Balance Sheet
Review, which has been credited following a change in the Group's
obligations.
Both OCP adjustments and other Contract & Balance Sheet
Review adjustments are identified and separated in the APM in order
to give clarity of the underlying performance of the Group and to
separately disclose the progress made on these items.
Finally, any other significant items that have a one-time
financial impact are excluded. However, no such material one-time
items occurred in the current or comparative periods.
Underlying trading margin is calculated as UTP divided by
revenue.
The non-underlying column in the summary income statement on
page 14 includes the tax impact of the above items and tax items
that, in themselves, are considered to be non-underlying. Further
detail of such items is provided in the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to
operating profit, as shown on the Group's Condensed Consolidated
Income Statement on page 32, by making two adjustments. Trading
Profit is a metric used to determine the performance and
remuneration of the Executive Directors and other management.
First, Trading Profit excludes exceptional items, being those
considered material and outside of the normal operating practice of
the Group to be suitable of separate presentation and detailed
explanation.
Second, amortisation and impairment of intangibles arising on
acquisitions are excluded, because these charges are based on
judgements about the value and economic life of assets that, in the
case of items such as customer relationships, would not be
capitalised in normal operating practice.
UTP at constant currency
UTP disclosed above has been translated at the average foreign
exchange rates for the period. In order to provide a comparable
movement on the previous period's results, UTP is recalculated by
translating non-Sterling values for the six months ended 30 June
2018 into Sterling at the average exchange rate for the six months
ended 30 June 2017.
2018
For the six months ended 30 June GBPm
------------------------------------------------------ ------------
Underlying Trading Profit at constant currency 40.8
Foreign exchange differences (3.2)
------------------------------------------------------ ------------
Underlying Trading Profit at reported currency 37.6
------------------------------------------------------ ------------
Alternative Earnings or Loss Per Share (EPS) measures
Six months
ended
Six months
ended 30 June Year ended
31 December
30 June 2017 2017
2018 (restated) (restated)
pence pence pence
------------------------------------------------------- ------------- ------------- -------------
Underlying EPS, basic 1.88 1.46 3.45
Impact of non-underlying items and amortisation
and impairment of intangibles arising on
acquisition 0.48 (0.73) (1.95)
------------------------------------------------------- ------------- ------------- -------------
EPS before exceptional items 2.36 0.73 1.50
Impact of exceptional items (1.04) (2.50) (2.26)
------------------------------------------------------- ------------- ------------- -------------
Reported EPS, basic 1.32 (1.77) (0.76)
------------------------------------------------------- ------------- ------------- -------------
EPS before exceptional items
EPS before exceptional items, as shown on the Group's Condensed
Consolidated Income Statement on page 32, aids consistency between
historical results and is a metric used in assessing the
performance and remuneration of the Executive Directors and other
management.
Underlying EPS
Reflecting the same adjustments made to operating profit to
calculate UTP as described above, and including the related tax
effects of each adjustment and any other non underlying tax
adjustments as described in the tax charge section below, an
alternative measure of EPS is presented. This aids consistency with
historical results, and enables performance to be evaluated before
the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS is provided
in the summary income statements on page 14.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect net
cash inflow from operating activities before exceptional items,
which is the measure shown on the Condensed Consolidated Cash Flow
Statement on page 36. The IFRS measure is adjusted to include
dividends we receive from joint ventures and associates and
deducting net interest paid and net capital expenditure on tangible
and intangible asset purchases. FCF is considered relevant to
reflect the cash performance of business operations after meeting
usual obligations of financing and tax. It is therefore a measure
that is before all other remaining cash flows, being those related
to exceptional items, acquisitions and disposals, other
equity-related and debt-related funding movements, and foreign
exchange impacts on financing and investing activities. FCF is
therefore a measure to assess the cash flow generated by the
business and aids consistency for comparison to historical results.
FCF is a metric used to determine the performance and remuneration
of the Executive Directors and other management.
Six months
ended
30 June Year ended
Six months 31 December
ended 2017 2017
30 June
2018 (restated) (restated)
GBPm GBPm GBPm
--------------------------------------------------- ------------- ------------- -------------
Free Cash Flow (26.0) (26.8) (6.7)
Exclude dividends from joint ventures
and associates (16.1) (13.8) (28.2)
Exclude net interest paid 8.0 9.2 17.0
Exclude purchase of intangible and tangible
assets net of proceeds from disposal* 17.5 14.9 30.1
--------------------------------------------------- ------------- ------------- -------------
Cash flow from operating activities before
exceptional items* (16.6) (16.5) 12.2
Exceptional operating cash flows (24.1) (19.7) (32.5)
--------------------------------------------------- ------------- ------------- -------------
Cash flow from operating activities* (40.7) (36.2) (20.3)
--------------------------------------------------- ------------- ------------- -------------
* While the impact of IFRS15 has had no impact on cash flows,
certain items previously capitalised as tangible assets are no
longer treated as such and all such expense is treated as an
operating cash flow.
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In
order to calculate an appropriate cash conversion metric equivalent
to UTP, Trading Cash Flow is derived from FCF by excluding tax and
interest items. UTP cash conversion therefore provides a measure of
the efficiency of the business in terms of converting profit into
cash before taking account of the impact of interest, tax and
exceptional items. As Trading Cash Flow was an outflow in the six
months ended 30 June 2018 and 2017, a conversion percentage of UTP
is not presented.
Six months
ended Year ended
Six months 31 December
30 June ended 2017
30 June
2018 2017 (restated) (restated)
GBPm GBPm GBPm
-------------------------------------------------- ------------- ------------------ -------------
Free Cash Flow (26.0) (26.8) (6.7)
Add back:
Tax paid 4.8 7.9 11.4
Non-cash R&D expenditure - - 0.2
Net interest paid 8.0 9.2 17.0
Trading Cash Flow (13.2) (9.7) 21.9
-------------------------------------------------- ------------- ------------------ -------------
Underlying Trading Profit* 37.6 34.0 69.3
-------------------------------------------------- ------------- ------------------ -------------
Underlying Trading Profit cash conversion* N/A N/A 32%
-------------------------------------------------- ------------- ------------------ -------------
* While the impact of IFRS15 has had no impact on cash flows,
the impact on UTP results in an impact on the Underlying Trading
Profit cash conversion rate.
Net Debt
We present an alternative measure to bring together the various
funding sources that are included on the Group's Condensed
Consolidated Balance Sheet on page 35 and the accompanying notes.
Net Debt is a measure to reflect the net indebtedness of the Group
and includes all cash and cash equivalents and any debt or debt
like items, including any derivatives entered into in order to
manage risk exposures on these items.
As at As at As at
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
---------------------------------------- -------------- -------------- --------------
Cash and cash equivalents 50.3 117.7 112.1
Loans receivable 26.5 23.5 25.7
Loans payable (284.7) (281.7) (271.5)
Obligations under finance leases (15.3) (21.5) (20.2)
Derivatives relating to Net Debt 3.1 13.1 12.8
---------------------------------------- -------------- -------------- --------------
Net Debt (220.1) (148.9) (141.1)
---------------------------------------- -------------- -------------- --------------
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used
by the Group and is a metric used to determine the performance and
remuneration of the Executive Directors and other management. ROIC
is calculated based on UTP and Trading Profit 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.
The comparative period for the six months ended 30 June 2017 has
not been provided. Calculating the IFRS15 impact on the balance
sheet position at 30 June 2016 for the opening Invested Capital and
the results of the Group for the six months ended 31 December 2016
would require significant incremental effort and only the full year
measure is used as a performance measure. The 30 June 2018 period
is provided for indicative purposes only.
31 December
2017
30 June (restated)
2018
GBPm GBPm
--------------------------------------------------------- -------------- --------------
Non-current assets
Goodwill 567.0 551.3
Other intangible assets 64.3 66.7
Property, plant and equipment 63.3 61.3
Interest in joint ventures and associates 19.9 19.7
Trade and other receivables 59.7 57.3
Current assets
Inventory 20.8 17.4
Trade and other receivables 575.8 512.0
Total invested capital assets 1,370.8 1,285.7
--------------------------------------------------------- -------------- --------------
Current liabilities
Trade and other payables (517.3) (471.9)
Non-current liabilities
Trade and other payables (93.6) (103.3)
--------------------------------------------------------- -------------- --------------
Total invested capital liabilities (610.9) (575.2)
--------------------------------------------------------- -------------- --------------
Invested Capital 759.9 710.5
--------------------------------------------------------- -------------- --------------
Two point average of opening and closing Invested
Capital 747.2 721.9
--------------------------------------------------------- -------------- --------------
Trading Profit, 12 months ended 56.5 45.1
--------------------------------------------------------- -------------- --------------
ROIC% 7.6% 6.2%
--------------------------------------------------------- -------------- --------------
Underlying Trading Profit, 12 months ended 72.9 69.3
--------------------------------------------------------- -------------- --------------
Underlying ROIC% 9.8% 9.6%
--------------------------------------------------------- -------------- --------------
Overview of financial performance
Revenue
Reported Revenue declined by 9% to GBP1,366.2m when compared
with the same six-month period in the prior year (2017 restated:
GBP1,507.3m), a 6% reduction in constant currency.
Commentary on the revenue performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews
sections.
Trading Profit
Trading Profit for the six months was GBP45.4m, an increase of
34% when compared with the same six-month period in the prior year
(2017 restated: GBP34.0m).
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 GBP37.6m (2017 restated: GBP34.0m), up 11%. At constant
currency, the increase in UTP was GBP6.8m, up 20%.
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 GBP0.4m and net
releases of GBP7.4m in respect of non OCP items identified during
the 2014 Contract & Balance Sheet Review. There were no such
items in the comparable period.
As at 30 June 2018 the cumulative to date improvement to Trading
Profit as a result of adjustments to items identified during the
2014 Contract & Balance Sheet Review, including those related
to OCPs, was GBP27.1m. This represents 4% of the 2014 total charge
to Trading Profit arising from the Contract & Balance Sheet
Review.
The tax impact of items in UTP and other non underlying tax
items is discussed in the tax section of this Finance Review.
Joint ventures and associates - share of results
In 2018, the most significant joint ventures and associates in
terms of scale of operations are AWE Management Limited and
Merseyrail Services Holding Company Limited, with dividends
received of GBP11.8m (2017: GBP9.9m) and GBP4.3m (2017: GBP3.3m)
respectively. Total revenues generated by these businesses were
GBP533.2m (2017: GBP480.2m) and GBP80.2m (2017: GBP78.2m)
respectively.
While the revenues and individual line items are not
consolidated in the Group Condensed Consolidated Income Statement,
summary financial performance measures for the Group's proportion
of the aggregate of all joint ventures and associates are set out
below for information purposes.
Year ended
Six months Six months 31 December
ended ended
30 June 30 June 2017
2018 2017
(restated*)
GBPm GBPm GBPm
-------------------------------------------------- ------------ ------------ -------------
Revenue 192.3 180.2 356.4
-------------------------------------------------- ------------ ------------ -------------
Operating profit 18.3 17.8 34.1
Net investment finance costs (0.1) - (0.1)
Income tax expense (3.2) (3.2) (7.0)
-------------------------------------------------- ------------ ------------ -------------
Profit after tax 15.0 14.6 27.0
-------------------------------------------------- ------------ ------------ -------------
Dividends received from joint ventures and
associates 16.1 13.8 28.2
-------------------------------------------------- ------------ ------------ -------------
* Restated to reflect the impact of IFRS15, no impact in the six months ended 30 June 2017.
Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the performance of the
Group.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
--------------------------------------------------------- ------------- ------------- -------------
Exceptional profit on disposal of subsidiaries
and operations - 0.1 0.3
Other exceptional operating items
Restructuring costs (11.3) (13.3) (28.6)
Costs associated with UK Government review (0.3) (0.4) (0.4)
Release of UK frontline clinical health contract
provisions - - 0.4
Settlement of defined benefit pension obligations - - 10.3
Impairment of interest in joint venture and
related loan balances - 2.2 4.5
Impairment of AsPac customer lists - - (6.1)
Other exceptional operating items (11.6) (11.5) (19.9)
--------------------------------------------------------- ------------- ------------- -------------
Exceptional operating items (11.6) (11.4) (19.6)
Exceptional tax 0.2 (15.9) (5.0)
--------------------------------------------------------- ------------- ------------- -------------
Total operating and financing exceptional
items post tax (11.4) (27.3) (24.6)
--------------------------------------------------------- ------------- ------------- -------------
The Group is incurring costs in relation to restructuring
programmes resulting from the Strategy Review announced in 2015.
These costs include redundancy payments, provisions, external
advisory fees and other incremental costs. Due to the nature and
scale of the impact of the transformation phase of the Strategy
Review, the incremental costs associated with this programme are
considered to be exceptional. Costs associated with the
restructuring programme resulting from the Strategy Review must
meet the following criteria: that they are directly linked to the
implementation of the Strategy Review; they are incremental costs
as a result of the activity; and they are non business as usual
costs. In the six months ended 30 June 2018 a charge of GBP11.3m
(2017: GBP13.3m) arose in relation to the restructuring programme
resulting from the Strategy Review. Non-exceptional restructuring
charges are incurred by the business as part of normal operational
activity, which totalled GBP4.1m in the period (2017: GBP7.5m) and
were included within operating profit before exceptional items. We
expect restructuring costs of approximately GBP30m will be treated
as exceptional in the year ended 31 December 2018.
There were exceptional costs totalling GBP0.3m (2017: GBP0.4m)
associated with the UK Government reviews and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2018.
Exceptional tax
Exceptional tax for the six months was a credit of GBP0.2m
(2017: charge of GBP15.9m). In 2018 the credit relates purely to
tax on exceptional items within operating profit whereas in the six
months ended 30 June 2017 there was a credit of GBP0.2m in relation
to tax on exceptional items within operating profit and a charge of
GBP16.1m in respect of exceptional tax items. The 2017 exceptional
tax items arose from the tax impact of the pension buy-in reported
in that period which gave rise to a deferred tax charge of
GBP16.1m.
Exceptional costs of GBP11.6m only gave rise to a credit of
GBP0.2m, as the majority of these costs were incurred in the UK
where they only impact our unrecognised deferred tax in relation to
losses.
Pre exceptional finance costs and investment revenue
Investment revenue of GBP2.7m (2017: GBP3.6m) includes interest
accruing on net retirement benefit assets of GBP0.4m (2017:
GBP1.6m), interest earned on deposits and other receivables of
GBP1.4m (2017: GBP1.4m), the movement in discounting of other
receivables of GBP0.7m (2017: GBP0.6m) and interest arising on
customer contracts of GBP0.2m (2017 restated: GBP0.2m).
Finance costs of GBP9.0m (2017: GBP11.2m) includes interest
incurred on the USPP loans and the Revolving Credit Facility of
GBP6.5m (2017: GBP7.2m), facility fees and other charges of GBP1.8m
(2017: GBP1.4m), interest payable on finance leases of GBP0.2m
(2017: GBP0.8m), the movement in discount on provisions of GBP0.3m
(2017: GBP1.7m) and a charge for foreign exchange on financing
activities of GBP0.2m (2017: credit of GBP0.1m).
Tax
Tax charge
Underlying tax
We recognised a tax charge of GBP10.6m on underlying trading
profits after finance cost. The effective tax rate (33.9%) is
slightly lower than 2017 (39.8% restated). This is mainly because
of differences in the proportions of profits and losses made in the
various geographical regions in which we operate which affects the
tax charge due to both the varying tax rates and the impact of not
recognising the tax benefits arising on UK losses.
Pre exceptional tax
We recognised a tax charge of GBP11.2m (2017 restated: GBP16.3m)
on pre exceptional profits, which includes GBP10.6m underlying tax,
a GBP0.4m credit on amortisation of intangibles arising on
acquisition and a GBP1.0m charge on non-underlying items. The
GBP1.0m charge consists of the tax impact of movements in the
valuation of the Group's defined benefit pension schemes which lead
to a corresponding adjustment to the deferred tax asset to match
the future profit forecasts. Such a change in the deferred tax
asset impacts tax in the income statement. Where deferred tax
charges or releases are the result of movements in the pension
scheme valuations rather than trading activity, these are excluded
from the calculation of tax on underlying profit and the underlying
effective tax rate.
The tax rate on profits before exceptional items on continuing
operations, at 30.1% (2017 restated: 66.8%) is higher than the UK
corporation tax rate of 19%. This is due to the upward impact of
higher rates of tax on profits arising on our international
operations, together with the absence of any deferred tax credit
for current year losses incurred in the UK. This is only partially
offset by the downward impact of our joint ventures whose post-tax
results are included in our pre-tax profit. Our tax charge in
future years will continue to be materially impacted by our
accounting for UK deferred taxes. To the extent that future UK tax
losses are incurred and are not recognised, our effective tax rate
will be higher than prevailing standard corporation tax rates. When
our UK business returns to sustainable profitability our existing
UK tax losses will be recognised or utilised, and the effective
rate will be reduced.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items
section above.
Deferred tax assets
As at June 2018 there is a deferred tax asset of GBP38.6m (31
December 2017 restated: GBP39.3m). This consists of a deferred tax
asset of GBP60.1m (31 December 2017 restated: GBP59.7m) and a
deferred tax liability of GBP21.5m (31 December 2017 restated:
GBP20.4m).
A GBP17.4m UK tax asset has been recognised at 30 June 2018 (31
December 2017: GBP17.4m) on the basis of utilisation of losses
against forecast taxable profits.
At 30 June 2018, the Group has estimated unrecognised UK
deferred tax assets of GBP164m which are contingent on further
improvement in the UK profit forecast.
Taxes paid
Net corporation tax of GBP4.8m was paid during the period,
relating primarily to our operations in AsPac (GBP5.9m), Europe
(GBP1.5m) and Middle East (GBP0.6m). The Group's UK operations have
transferred tax losses to its profitable joint ventures and
associates giving a cash tax inflow in the UK of GBP2.8m and a tax
repayment in Canada due to the carry back of tax losses led to a
cash tax inflow in Americas (GBP0.4m).
The amount of tax paid (GBP4.8m) differs from the tax charge in
the period (GBP11.0m) mainly due to the effect of future expected
cash tax outflows for which a charge has been taken in the current
period and the impact of the time lag on receipts of cash from
joint ventures and associates for losses transferred to them.
Dividends
The Board has not declared an interim dividend for 2018. 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 2018, we
have been mindful of the fact that whilst there has been an
improvement in earnings, there remains a free cash outflow and an
increase in net debt. In these circumstances, the Board believes
that it would not be prudent to resume dividend payments at the
current juncture. For the 2018 financial year as a whole, our
guidance is for continued improvement in Underlying Trading Profit,
but we anticipate a further Free Cash outflow and expect net debt
to still increase, largely as a result of cash outflows related to
exceptional restructuring costs and value-enhancing infill
acquisitions. The Board will continue to keep the dividend policy
under close consideration as we progress with transforming the
Group and implementing our strategy.
Share count and EPS
The weighted average number of shares for EPS purposes was
1,096.6m for the six months ended 30 June 2018 (2017: 1,091.1m).
EPS before exceptional items was 2.36p per share (2017 restated:
0.73p); including the impact of exceptional items, EPS was 1.32p
(2017 restated: loss of 1.77p). Underlying EPS was 1.88p per share
(2017 restated: 1.46p).
Cash flows
The UTP of GBP37.6m (2017 restated: GBP34.0m) converts into a
trading cash outflow of GBP13.2m (2017: outflow of GBP8.0m). The
negative conversion is primarily due to the cash outflows arising
on the utilisation of contract provisions of GBP33.7m (2017
restated: GBP38.2m).
The table below shows the operating profit and FCF reconciled to
movements in Net Debt. FCF for the period was an outflow of
GBP26.0m compared to an outflow of GBP26.8m in 2017, with an
increase in profits offset by an increase in working capital.
The movement in Net Debt is an increase of GBP79.0m in 2018, a
reconciliation of which is provided at the bottom of the following
table. In addition to the FCF outflow of GBP26.0m, the movement
includes GBP24.1m cash expenditure on exceptional items and a net
outflow of GBP14.9m arising on the acquisition and disposal of
subsidiaries, primarily relating to the acquisition of BTP Systems,
LLC, for consideration of GBP14.4m. During the six months ended 30
June 2018 GBP31.3m was paid down against loan notes maturing in May
and GBP38.0m was drawn down against the Group's revolving credit
facility, resulting in a net cash inflow from loan facilities of
GBP6.7m.
Year ended
Six months
ended 31 December
Six months
ended 30 June 2017
30 June
2018 2017 (restated*) (restated*)
GBPm GBPm GBPm
-------------------------------------------------------- -------------- ------------------ --------------
Operating profit* 31.9 20.4 21.1
Remove exceptional items* 11.6 11.4 19.6
-------------------------------------------------------- -------------- ------------------ --------------
Operating profit before exceptional items* 43.5 31.8 40.7
Less: profit from joint ventures and associates* (15.0) (14.6) (27.0)
Movement in provisions* (42.9) (40.3) (33.6)
Depreciation, amortisation and impairment
of property, plant and equipment and intangible
assets* 22.2 24.7 46.6
Other non-cash movements 7.5 6.8 11.4
-------------------------------------------------------- -------------- ------------------ --------------
Operating cash inflow before movements in
working capital, exceptional items and tax* 15.3 8.4 38.1
Working capital movements* (27.1) (17.0) (14.3)
Tax paid (4.8) (7.9) (11.4)
Non-cash R&D expenditure - - (0.2)
-------------------------------------------------------- -------------- ------------------ --------------
Cash flow from operating activities before
exceptional items* (16.6) (16.5) 12.2
Dividends from joint ventures and associates 16.1 13.8 28.2
Interest received 0.2 0.3 0.5
Interest paid (8.2) (9.5) (17.5)
Purchase of intangible and tangible assets
net of proceeds from disposals* (17.5) (14.9) (30.1)
-------------------------------------------------------- -------------- ------------------ --------------
Free Cash Flow (26.0) (26.8) (6.7)
Net cash (outflow)/inflow on acquisition
and disposal of subsidiaries (14.9) 0.8 (5.6)
Purchase of own shares net of share option (0.6) - -
proceeds
Other movements on investment balances (0.3) - 0.2
Capitalisation and amortisation of loan
costs (0.5) (0.4) (0.8)
Unwind of discounting and capitalisation
of interest on loans receivable 0.8 0.6 3.4
New, acquired and disposed finance leases (0.1) (1.0) (4.7)
Exceptional items (24.1) (19.7) (32.5)
Cash movements on hedging instruments 3.3 (1.6) (2.5)
Foreign exchange (loss)/gain on Net Debt (16.6) 8.5 17.4
-------------------------------------------------------- -------------- ------------------ --------------
Movement in Net Debt (79.0) (39.6) (31.8)
Opening Net Debt (141.1) (109.3) (109.3)
-------------------------------------------------------- -------------- ------------------ --------------
Closing Net Debt (220.1) (148.9) (141.1)
-------------------------------------------------------- -------------- ------------------ --------------
* While the impact of IFRS15 has had no impact on cash flows,
the impact on the certain items in the Group's income statement and
balance sheet have resulted in the restatement of the highlighted
items above.
Net Debt
As at As at As at
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
---------------------------------------- -------------- -------------- --------------
Cash and cash equivalents 50.3 117.7 112.1
Loans receivable 26.5 23.5 25.7
Loans payable (284.7) (281.7) (271.5)
Obligations under finance leases (15.3) (21.5) (20.2)
Derivatives relating to Net Debt 3.1 13.1 12.8
---------------------------------------- -------------- -------------- --------------
Net Debt (220.1) (148.9) (141.1)
---------------------------------------- -------------- -------------- --------------
Average Net Debt as calculated on a daily basis for the six
months ended 30 June 2018, was GBP216.3m (2017: GBP178.2m),
compared with the opening and closing positions of GBP141.1m and
GBP220.1m respectively. Peak Net Debt was GBP277.9m (2017:
GBP242.7m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks
that include liquidity, the effects of changes in foreign currency
exchange rates, interest rates and credit risk. The Group has a
centralised treasury function whose principal role is to ensure
that adequate liquidity is available to meet the Group's funding
requirements as they arise and that the financial risk arising from
the Group's underlying operations is effectively identified and
managed.
Treasury operations are conducted in accordance with policies
and procedures approved by the Board and are reviewed annually.
Financial instruments are only executed for hedging purposes and
speculation is not permitted. A monthly report is provided to
senior management outlining performance against the Treasury Policy
and the treasury function is subject to periodic internal audit
review.
Liquidity and funding
As at 30 June 2018, the Group had committed funding of GBP715m
(at 31 December 2017: GBP741m), comprising GBP235m of private
placement notes and a GBP480m revolving credit facility with a
syndicate of banks, which was drawn down by GBP38m at 30 June 2018
(at 31 December 2017: undrawn). In addition, the Group had a
receivables financing facility of GBP30.0m which was unutilised at
the start and end of the six-month period.
Interest rate risk
Given the nature of the Group's business, we have a preference
for fixed rate debt to reduce the volatility of net finance costs.
Our Treasury Policy requires us to maintain a minimum proportion of
fixed rate debt as a proportion of overall Net Debt and for this
proportion to increase as the ratio of EBITDA to interest expense
falls. As at 30 June 2018, 112% of the Group's Net Debt was at
fixed rates. Interest on the revolving credit facility is at
floating rate.
Foreign exchange risk
The Group is subject to currency exposure on the translation to
Sterling of its net investments in overseas subsidiaries. The Group
manages this risk where appropriate, by borrowing in the same
currency as those investments. Group borrowings are predominantly
denominated in Sterling and US Dollar. The Group manages its
currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward
contracts where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise
to credit risk on the amounts due from counterparties. The Group
manages this risk by adhering to counterparty exposure limits based
on external credit ratings of the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across
the private placement loan notes, receivables financing facility
and revolving credit facility, with a maximum Consolidated Total
Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and minimum
covenant EBITDA to net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set
out in the table below.
The comparative period for the twelve months ended 30 June 2017
has not been provided. Calculating the IFRS15 impact on the results
of the Group six months ended 31 December 2016 would require
significant incremental effort and covenant ratios are calculated
on a pre IFRS15 basis. The CTNB/covenant EBITDA ratio was 1.4x for
the twelve months ended 30 June 2017 and the Covenant
EBITDA/covenant net finance costs ratio was 8.1x.
Year ended
31 December
Twelve
months
ended 2017
30 June
2018 (restated*)
GBPm GBPm
-------------------------------------------------------------- ------------- -------------
Operating profit before exceptional items* 52.4 40.7
Remove: Amortisation and impairment of intangibles
arising on acquisition 4.1 4.4
-------------------------------------------------------------- ------------- -------------
Trading Profit* 56.5 45.1
Exclude: Share of joint venture post-tax profits* (27.4) (27.0)
Include: Dividends from joint ventures 30.5 28.2
Add back: Net non-exceptional charges to OCPs* 27.0 27.4
Add back: Depreciation, amortisation and impairment
of property, plant and equipment and non acquisition
intangible assets* 40.0 42.2
Add back: Foreign exchange credit on investing and
financing arrangements 0.3 0.4
Add back: Share based payment expense 11.4 11.4
Other covenant adjustments to EBITDA* 0.2 3.6
-------------------------------------------------------------- ------------- -------------
Covenant EBITDA 138.5 131.3
-------------------------------------------------------------- ------------- -------------
Net finance costs* 10.1 11.2
Exclude: Net interest receivable on retirement benefit
obligations 2.6 3.8
Exclude: Movement in discount on other debtors 1.3 1.2
Exclude: Foreign exchange on investing and financing
arrangements 0.3 0.4
Add back: Movement in discount on provisions 0.1 (1.3)
Other covenant adjustments to net finance costs* 0.4 0.4
-------------------------------------------------------------- ------------- -------------
Covenant net finance costs 14.8 15.7
-------------------------------------------------------------- ------------- -------------
Recourse Net Debt 220.1 141.1
Exclude: Disposal vendor loan note, encumbered cash
and other adjustments 26.5 30.3
Covenant adjustment for average FX rates (4.4) 7.8
-------------------------------------------------------------- ------------- -------------
CTNB 242.2 179.2
-------------------------------------------------------------- ------------- -------------
CTNB/covenant EBITDA (not to exceed 3.5x) 1.75x 1.36x
-------------------------------------------------------------- ------------- -------------
Covenant EBITDA/covenant net finance costs (at least
3.0x) 9.4x 8.4x
-------------------------------------------------------------- ------------- -------------
* While the impact of IFRS15 has had no impact on the Group's
covenants as a result of provisions to remove the impact of any
changes in accounting standards, the impact on the certain items in
the Group's income statement have resulted in the restatement of
the highlighted items above.
Net assets summary
As at As at As at
30 June 31 December
30 June 2017 2017
2018 (restated*) (restated*)
GBPm GBPm GBPm
-------------------------------------------- ---------------- ---------------- ----------------
Non-current assets
Goodwill 567.0 564.4 551.3
Other intangible assets 64.3 75.5 66.7
Property, plant and equipment* 63.3 62.5 61.3
Other non-current assets* 83.8 77.3 80.7
Deferred tax assets* 60.1 58.6 59.7
Retirement benefit assets 31.8 18.3 41.8
-------------------------------------------- ---------------- ---------------- ----------------
870.3 856.6 861.5
-------------------------------------------- ---------------- ---------------- ----------------
Current assets
Inventories 20.8 16.6 17.4
Trade and other current assets* 578.7 580.4 522.3
Current tax assets 6.1 14.1 11.2
Cash and cash equivalents 50.3 117.7 112.1
-------------------------------------------- ---------------- ---------------- ----------------
655.9 728.8 663.0
-------------------------------------------- ---------------- ---------------- ----------------
Total assets 1,526.2 1,585.4 1,524.5
-------------------------------------------- ---------------- ---------------- ----------------
Current liabilities
Trade and other current liabilities* (521.1) (523.4) (473.0)
Current tax liabilities (24.2) (28.2) (25.3)
Provisions* (122.4) (147.8) (147.3)
Obligations under finance leases (6.6) (9.6) (8.5)
Loans (38.0) (33.1) (31.8)
-------------------------------------------- ---------------- ---------------- ----------------
(712.3) (742.1) (685.9)
-------------------------------------------- ---------------- ---------------- ----------------
Non-current liabilities
Other non-current liabilities* (93.6) (105.7) (103.3)
Deferred tax liabilities (21.5) (34.1) (20.4)
Provisions* (154.0) (187.8) (182.7)
Obligations under finance leases (8.7) (11.9) (11.7)
Loans (246.7) (248.6) (239.7)
Retirement benefit obligations (11.5) (17.5) (15.5)
-------------------------------------------- ---------------- ---------------- ----------------
(536.0) (605.6) (573.3)
-------------------------------------------- ---------------- ---------------- ----------------
Total liabilities* (1,248.3) (1,347.7) (1,259.2)
-------------------------------------------- ---------------- ---------------- ----------------
Net assets* 277.9 237.7 265.3
-------------------------------------------- ---------------- ---------------- ----------------
* Balances as at 30 June 2017 and as at 31 December 2017 have
been restated to reflect the adoption of IFRS15 with effect from 1
January 2017.
At 30 June 2018 the balance sheet had net assets of GBP277.9m, a
movement of GBP12.6m from the closing net asset position of
GBP265.3m as at 31 December 2017 (restated). The increase in net
assets is mainly due to the following movements:
-- Net Debt increased by GBP79.0m. Further detail of the
movement is provided in the Net Debt section above.
-- A decrease in provisions of GBP53.6m. Further details on
provision movements are provided below.
-- An increase in goodwill of GBP15.7m, driven by acquisitions
in the period and movements in foreign exchange rates.
-- The combined position of trade and other current assets and
trade and other current liabilities increased by GBP8.3m.
Provisions
The total of current and non-current provisions has decreased by
GBP53.6m since 31 December 2017. The movement is due to a decrease
in onerous contract provisions of GBP34.6m, an increase in
employee-related provisions of GBP1.4m, a decrease in property
provisions of GBP1.8m and a reduction in other provisions of
GBP18.6m.
Included in the reduction in other provisions is GBP7.4m of
releases related to non-OCP provisions created during the Contract
and Balance Sheet Review, for which the obligations lapsed during
the period. Also, during the period, the final GBP8.3m of the
obligation in respect of the Dockland Light Railway defined benefit
pension scheme was repaid, further decreasing the amounts provided
for.
Movements in contract provisions since the 31 December 2017
balance sheet date are as follows:
Onerous
Contract
Provisions
GBPm
------------------------------------------------- -------------
As at 1 January 2018 as previously stated 168.2
Impact of adoption of IFRS15 (10.4)
------------------------------------------------- -------------
As at 1 January 2018 as restated 157.8
Released to income statement - trading (0.4)
Utilisation (33.7)
Unwinding of discount 0.3
Foreign exchange (0.8)
As at 30 June 2018 123.2
------------------------------------------------- -------------
The balance of OCPs at 30 June 2018 was GBP123.2m (31 December
2017 restated): GBP157.8m). 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 which takes place in the second half of the year.
Utilisation in the year to date was GBP33.7m (2017 restated:
GBP38.2m).
Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share
capital of BTP Systems, LLC, for consideration of US Dollar $20.5m
in cash. The acquired business contributed GBP5.6m of revenue and
GBP0.7m of UTP to the Group's results during the six months ended
30 June 2018.
Working closely with the Special Managers and Liquidators of
Carillion, together with all other relevant parties, Serco agreed
acquisition terms to take responsibility for facilities management
services at six major NHS hospital sites: Great Western Hospital in
Swindon; Darent Valley Hospital in Dartford; James Cook University
Hospital in Middlesbrough; Harplands Hospital in Stoke-on-Trent;
The Langlands Unit of Queen Elizabeth University Hospital in
Glasgow; and Addenbrooke's Treatment Centre in Cambridge. The first
contract, Great Western Hospital in Swindon, transferred in June
2018, with the remainder having completed subsequently. Revenues
from the Great Western Hospital contract in the period were
immaterial. The five remaining acquisitions took place after the
period end and therefore the financial results and impact of these
five contracts have not been recognised in these Condensed
Consolidated Financial Statements. The total annual revenue of all
six contracts is expected to be around GBP70m and the estimated
operating profit before exceptional items, including an appropriate
allocation of charges for shared support services and other
incremental overheads, will be approximately GBP4m, the aggregate
consideration payable is approximately GBP18m, which includes
finalised adjustments for potential liabilities and indemnities. As
there will only be a part-year trading contribution in 2018, after
the costs of the transition and integration phase that will be
completed over the coming months, this will likely result in a
small negative impact on Serco's net profitability for the 2018
financial year; this has been taken into account in our guidance as
stated in the Chief Executive's review. The transactions will be
immediately accretive to earnings following the completion of the
integration phase.
Angus Cockburn
Group Chief Financial Officer
1 August 2018
Principal risks and uncertainties
The principal risks and uncertainties that could materially
affect Serco's results and operations are set out on pages 20 to 29
of the 2017 Annual Report and Accounts and the key headline risks
for the remainder of 2018 are restated below. This summary is not
intended, and should not be used, as a substitute for reading the
appropriate pages of the 2017 Annual Report and Accounts which
include further commentary on the risks and the Group's management
of them.
-- Failure to grow profitably
-- Failure to manage our reputation
-- Failure to deliver expected benefits from Transformation
-- Financial control failure
-- Major information security breach
-- Contract non-compliance, non-performance or misreporting
-- Failure of business critical partner, supplier, or sub-contractor
-- Failure to act with integrity
-- Catastrophic incident
-- Material legal and regulatory compliance failure
In addition to the principal risks and uncertainties listed
above, there may be additional risks unknown to Serco and other
risks, currently believed to be immaterial, which could turn out to
be material. These risks, whether they materialise individually or
simultaneously, could significantly affect the Group's business and
financial results.
Responsibility statement
We confirm to the best of our knowledge:
a. the condensed set of financial statements has been prepared
in accordance with IAS34 Interim Financial Reporting;
b. the interim management report includes a fair review of the
information required by the DTR 4.2.7R, being an indication of
important events that have occurred during the first six months of
the financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
c. the interim management report includes a fair review of the
information required by DTR 4.2.8R, being related party
transactions that have taken place in the first six months of the
current financial year and that have materially affected the
financial position or performance of the entity during that period;
and any changes in the related party transactions described in the
last annual report that could do so.
By order of the Board,
Rupert Soames Angus Cockburn
Group Chief Executive Group Chief Financial Officer
1 August 2018
Independent review report to Serco Group PLC
Conclusion
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2018 which comprises the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement
of Comprehensive Income, the Condensed Consolidated Statement of
Changes in Equity, the Condensed Consolidated Balance Sheet, the
Condensed Consolidated Cash Flow Statement and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2018 is not prepared, in all material respects, in accordance
with IAS34 Interim Financial Reporting as adopted by the EU and the
Disclosure Guidance and Transparency Rules ("the DTR") of the UK's
Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with
IAS34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
John Luke
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London, E14 5GL
1 August 2018
Financial Statements
Condensed Consolidated Income Statement
Six months
ended Year ended
Six months
ended 30 June 31 December
30 June 2017 2017
2018 (restated*) (restated*)
Continuing operations GBPm GBPm GBPm
--------------------------------------------------- ---------- ------------ ------------
Revenue* 1,366.2 1,507.3 2,950.9
Cost of sales* (1,239.4) (1,375.2) (2,710.6)
--------------------------------------------------- ---------- ------------ ------------
Gross profit* 126.8 132.1 240.3
Administrative expenses
General and administrative expenses (96.4) (112.7) (222.2)
Exceptional profit on disposal of subsidiaries
and operations - 0.1 0.3
Other exceptional operating items (11.6) (11.5) (19.9)
Other expenses - amortisation and impairment
of intangibles arising on acquisition (1.9) (2.2) (4.4)
--------------------------------------------------- ---------- ------------ ------------
Total administrative expenses (109.9) (126.3) (246.2)
Share of profits in joint ventures and associates,
net of interest and tax 15.0 14.6 27.0
--------------------------------------------------- ---------- ------------ ------------
Operating profit* 31.9 20.4 21.1
--------------------------------------------------- ---------- ------------ ------------
Operating profit before exceptional items* 43.5 31.8 40.7
--------------------------------------------------- ---------- ------------ ------------
Investment revenue* 2.7 3.8 8.0
Finance costs (9.0) (11.2) (19.2)
Net finance costs* (6.3) (7.4) (11.2)
--------------------------------------------------- ---------- ------------ ------------
Other gains - - 0.7
--------------------------------------------------- ---------- ------------ ------------
Profit before tax* 25.6 13.0 10.6
--------------------------------------------------- ---------- ------------ ------------
Tax on profit before exceptional items* (11.2) (16.3) (13.6)
Exceptional tax 0.2 (15.9) (5.0)
--------------------------------------------------- ---------- ------------ ------------
Tax charge (11.0) (32.2) (18.6)
--------------------------------------------------- ---------- ------------ ------------
Profit/(loss) for the period* 14.6 (19.2) (8.0)
--------------------------------------------------- ---------- ------------ ------------
Attributable to:
Equity owners of the Company* 14.5 (19.3) (8.3)
Non controlling interests 0.1 0.1 0.3
--------------------------------------------------- ---------- ------------ ------------
Earnings per share (EPS)
Basic EPS* 1.32p (1.77p) (0.76p)
Diluted EPS* 1.27p (1.77p) (0.76p)
--------------------------------------------------- ---------- ------------ ------------
* Results for the six months ended 30 June 2017 and the year
ended 31 December 2017 have been restated to reflect the adoption
of IFRS15 with effect from 1 January 2017. See note 3.
Condensed Consolidated Statement of Comprehensive Income
Six months
ended Year ended
Six months
ended 30 June 31 December
30 June 2017 2017
2018 (restated***) (restated***)
GBPm GBPm GBPm
------------------------------------------------- ---------- -------------- --------------
Profit/(loss) for the period*** 14.6 (19.2) (8.0)
Other comprehensive income for the period:
Items that will not be reclassified subsequently
to profit or loss:
Net actuarial loss on defined benefit pension
schemes* (4.6) (130.8) (106.5)
Actuarial loss on reimbursable rights* (0.9) - (0.6)
Tax relating to items not reclassified* 1.0 22.4 18.1
Share of other comprehensive income in joint
ventures and associates 1.2 0.8 0.9
Items that may be reclassified subsequently
to profit or loss:
Net exchange loss on translation of foreign
operations** (4.8) (7.2) (14.6)
Fair value loss on cash flow hedges** (0.2) (0.3) (0.2)
Tax relating to items that may be reclassified - 0.1 -
Share of other comprehensive income in joint - - -
ventures and associates
------------------------------------------------- ---------- -------------- --------------
Total other comprehensive income for the period (8.3) (115.0) (102.9)
Total comprehensive income for the period*** 6.3 (134.2) (110.9)
------------------------------------------------- ---------- -------------- --------------
Attributable to:
Equity owners of the Company*** 6.2 (134.2) (111.0)
Non controlling interest 0.1 - 0.1
------------------------------------------------- ---------- -------------- --------------
* Recorded in retirement benefit obligations reserve in the
Condensed Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Condensed
Consolidated Statement of Changes in Equity.
*** Results for the six months ended 30 June 2017 and the year
ended 31 December 2017 have been restated to reflect the adoption
of IFRS15 with effect from 1 January 2017. See note 3.
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
2017
(restated*) 22.0 327.9 0.1 49.3 (91.1) 82.9 (52.1) 24.6 363.6 1.4
Total
comprehensive
income for
the period - - - (18.3) (108.4) - - (7.5) (134.2) -
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (1.1) 1.1 - - -
Expense in
relation to
share based
payments - - - - - 6.9 - - 6.9 -
Change in non - - - - - - - - - -
controlling
interest
At 30 June
2017
(restated*) 22.0 327.9 0.1 31.0 (199.5) 88.7 (51.0) 17.1 236.3 1.4
Total
comprehensive
income for
the period - - - 10.8 19.4 - - (7.0) 23.2 0.1
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (4.9) 4.9 - - -
Expense in
relation to
share based
payments - - - - - 4.5 - - 4.5 -
Change in non
controlling
interest - - - - - - - - - (0.2)
At 31 December
2017
(restated*) 22.0 327.9 0.1 41.8 (180.1) 88.3 (46.1) 10.1 264.0 1.3
Total
comprehensive
income for
the period - - - 15.7 (4.5) - - (5.0) 6.2 0.1
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (13.8) 13.2 - (0.6) -
Expense in
relation to
share based
payments - - - - - 6.9 - - 6.9 -
Change in non - - - - - - - - - -
controlling
interest
At 30 June
2018 22.0 327.9 0.1 57.5 (184.6) 81.4 (32.9) 5.1 276.5 1.4
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
* Opening retained earnings for each of the periods provided and
total comprehensive income for the six months ended 30 June 2017
and the year ended 31 December 2017 have been restated to reflect
the adoption of IFRS15 with effect from 1 January 2017. See note
3.
Condensed Consolidated Balance Sheet
As at As at
As at 30 June 31 December
30 June 2017 2017
2018 (restated*) (restated*)
GBPm GBPm GBPm
---------------------------------------------- --------- ------------ ------------
Non current assets
Goodwill 567.0 564.4 551.3
Other intangible assets 64.3 75.5 66.7
Property, plant and equipment* 63.3 62.5 61.3
Interests in joint ventures and associates* 19.9 21.7 19.7
Trade and other receivables 59.7 51.1 57.3
Derivative financial instruments 4.2 4.5 3.7
Deferred tax assets* 60.1 58.6 59.7
Retirement benefit assets 31.8 18.3 41.8
---------------------------------------------- --------- ------------ ------------
870.3 856.6 861.5
---------------------------------------------- --------- ------------ ------------
Current assets
Inventories 20.8 16.6 17.4
Trade and other receivables* 575.8 568.8 512.0
Current tax assets 6.1 14.1 11.2
Cash and cash equivalents 50.3 117.7 112.1
Derivative financial instruments 2.9 11.6 10.3
---------------------------------------------- --------- ------------ ------------
655.9 728.8 663.0
Total assets* 1,526.2 1,585.4 1,524.5
---------------------------------------------- --------- ------------ ------------
Current liabilities
Trade and other payables* (517.3) (520.4) (471.9)
Derivative financial instruments (3.8) (3.0) (1.1)
Current tax liabilities (24.2) (28.2) (25.3)
Provisions* (122.4) (147.8) (147.3)
Obligations under finance leases (6.6) (9.6) (8.5)
Loans (38.0) (33.1) (31.8)
---------------------------------------------- --------- ------------ ------------
(712.3) (742.1) (685.9)
---------------------------------------------- --------- ------------ ------------
Non current liabilities
Trade and other payables* (93.6) (105.7) (103.3)
Deferred tax liabilities (21.5) (34.1) (20.4)
Provisions* (154.0) (187.8) (182.7)
Obligations under finance leases (8.7) (11.9) (11.7)
Loans (246.7) (248.6) (239.7)
Retirement benefit obligations (11.5) (17.5) (15.5)
---------------------------------------------- --------- ------------ ------------
(536.0) (605.6) (573.3)
---------------------------------------------- --------- ------------ ------------
Total liabilities* (1,248.3) (1,347.7) (1,259.2)
---------------------------------------------- --------- ------------ ------------
Net assets* 277.9 237.7 265.3
---------------------------------------------- --------- ------------ ------------
Equity
Share capital 22.0 22.0 22.0
Share premium account 327.9 327.9 327.9
Capital redemption reserve 0.1 0.1 0.1
Retained earnings* 57.5 31.0 41.8
Retirement benefit obligations reserve (184.6) (199.5) (180.1)
Share based payment reserve 81.4 88.7 88.3
Own shares reserve (32.9) (51.0) (46.1)
Hedging and translation reserve 5.1 17.1 10.1
---------------------------------------------- --------- ------------ ------------
Equity attributable to owners of the Company* 276.5 236.3 264.0
Non controlling interest 1.4 1.4 1.3
---------------------------------------------- --------- ------------ ------------
Total equity* 277.9 237.7 265.3
---------------------------------------------- --------- ------------ ------------
* Balances as at 30 June 2017 and as at 31 December 2017 have
been restated to reflect the adoption of IFRS15 with effect from 1
January 2017. See note 3.
Condensed Consolidated Cash Flow Statement
Six months
ended Year ended
Six months
ended 30 June 31 December
30 June 2017 2017
2018 (restated*) (restated*)
GBPm GBPm GBPm
------------------------------------------------------ ---------- ------------ ------------
Net cash (outflow)/inflow from operating activities
before exceptional items* (16.6) (16.5) 12.2
Exceptional items (24.1) (19.7) (32.5)
------------------------------------------------------ ---------- ------------ ------------
Net cash outflow from operating activities* (40.7) (36.2) (20.3)
------------------------------------------------------ ---------- ------------ ------------
Investing activities
Interest received 0.2 0.3 0.5
Movement in security deposits (0.3) - 0.2
Dividends received from joint ventures and
associates 16.1 13.8 28.2
Proceeds from disposal of property, plant and
equipment 0.1 0.3 1.5
Proceeds from disposal of intangible assets 0.1 0.1 0.1
Net cash inflow/(outflow) on disposal of subsidiaries
and operations 1.8 0.8 (7.1)
Acquisition of subsidiaries, net of cash acquired (16.7) - 1.5
Proceeds from loans receivable - - 0.6
Purchase of other intangible assets (4.6) (8.3) (18.4)
Purchase of property, plant and equipment* (13.1) (7.0) (13.3)
------------------------------------------------------ ---------- ------------ ------------
Net cash outflow from investing activities* (16.4) - (6.2)
------------------------------------------------------ ---------- ------------ ------------
Financing activities
Interest paid (8.2) (9.5) (17.5)
Net repayment of loans - (3.8) (3.8)
Net loan advances 6.7 - -
Capital element of finance lease repayments (5.0) (7.6) (12.6)
Cash movements on hedging instruments 3.3 (1.6) (2.5)
Purchase of own shares net of share option
proceeds (0.6) - -
Net cash outflow from financing activities (3.8) (22.5) (36.4)
------------------------------------------------------ ---------- ------------ ------------
Net decrease in cash and cash equivalents (60.9) (58.7) (62.9)
Opening cash and cash equivalents 112.1 177.8 177.8
Net exchange loss (0.9) (1.4) (2.8)
Closing cash and cash equivalents 50.3 117.7 112.1
------------------------------------------------------ ---------- ------------ ------------
* While the impact of IFRS15 has had no impact on cash flows,
the impact on the certain items in the Group's income statement and
balance sheet have resulted in the restatement of the highlighted
items above.
Notes to the Condensed Consolidated Financial Statements
1. General information, accounting policies and going
concern
The financial information herein for the year ended 31 December
2017 does not constitute the Company's statutory accounts as
defined in section 434 of the Companies Act 2006, but is derived
from those accounts. The auditors' report on the 2017 accounts
contained no emphasis of matter and did not contain statements
under S498 (2) or (3) of the Companies Act 2006 or equivalent
preceding legislation.
The annual financial statements of Serco Group plc are prepared
in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union (EU). The condensed set of
financial statements included in this half yearly financial report
has been prepared in accordance with International Accounting
Standard (IAS) 34 Interim Financial Reporting, as adopted by the
EU. The financial statements have been prepared on the historical
cost basis, except for the revaluation of financial instruments.
Historical cost is generally based on the fair value of the
consideration given in exchange for goods and services.
In the six months ended 30 June 2018, the only significant
change to accounting under IFRS which has impacted the Group's
consolidated financial statements is in respect of the adoption of
IFRS15 Revenue from Contracts with Customers. Details of the
restatement for IFRS15 are provided in note 3. With the exception
of the adoption of IFRS15, the same accounting policies,
presentation and methods of computation are followed in the
condensed set of financial statements as applied in the Group's
latest annual audited financial statements. The significant
judgements made by management in applying the Group's accounting
policies and the key sources of estimation uncertainty were the
same as those that applied to the consolidated financial statements
as at and for the year ended 31 December 2017.
IFRS9 Financial Instruments became effective on 1 January 2018.
This standard replaces IAS39 and introduces new requirements for
classifying and measuring financial instruments and puts in place a
new hedge accounting model that is designed to be more closely
aligned with how entities undertake risk management activities when
hedging financial and non-financial risk exposures. The impact of
IFRS9 on the regular trading activities of the Group has been
immaterial. The key areas of focus for the Group under IFRS9
are:
-- Expected credit losses being recognised on trade debtors and
contract assets recognised under IFRS15.
-- External loan receivables, including those from equity accounted entities.
-- Debt refinancing not accounted for as a significant
modification under IAS39, which is not applicable in the current or
comparator periods.
-- Intercompany loan recoverability with respect to individual companies' financial statements.
With the exception of IFRS16 Leases, none of the accounting
standards issued but not yet effective are expected to have a
significant impact on the Group's annual financial statements,
including IFRIC23 Uncertainty over income tax treatments. With
respect to IFRS16, we have not quantified the likely impact of the
new standard or the transition approach to be taken. The
quantitative impact of the adoption of IFRS16 will be disclosed
prior to the adoption of this new standard.
Going concern
The Directors have a reasonable expectation that the Company and
the Group will be able to operate within the level of available
facilities and cash for the foreseeable future, and accordingly
believe that it is appropriate to prepare the financial statements
on a going concern basis.
In assessing the basis of preparation of the financial
statements for the six months ended 30 June 2018, the Directors
have considered the principles of the Financial Reporting Council's
'Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting, 2014'; particularly in assessing
the applicability of the going concern basis, the review period and
disclosures. The Directors have undertaken a rigorous assessment of
going concern and liquidity, taking into account financial
forecasts, which indicate sufficient capacity in our financing
facilities and associated covenants to support the Group. In order
to satisfy themselves that they have adequate resources for the
future, the Directors have reviewed the Group's existing debt
levels, the committed funding and liquidity positions under our
debt covenants, and our ability to generate cash from trading
activities and working capital requirements. The Group's current
principal debt facilities as at 30 June 2018 comprised a GBP480m
revolving credit facility, and GBP235m of US private placement
notes. As at 30 June 2018, the Group had GBP715m of committed
credit facilities and committed headroom of GBP479m.
In undertaking this review the Directors have considered the
business plans which provide financial projections for the
foreseeable future. For the purposes of this review, we consider
that to be the period ending 31 December 2019.
2. Critical accounting judgements and key sources of estimation
uncertainty
In the process of applying the Group's accounting policies,
which are described in note 1 above, management has made the
following judgements that have the most significant effect on the
amounts recognised in the financial statements. As described below,
many of these areas of judgement also involve a high level of
estimation uncertainty.
Use of Alternative Performance Measures: Operating profit before
exceptional items
IAS1 requires material items to be disclosed separately in a way
that enables users to assess the quality of a company's
profitability. In practice, these are commonly referred to as
'exceptional' items, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in arriving at an
Alternative Performance Measure which excludes such exceptional
items. We consider items which are material and outside of the
normal operating practice of the Company to be suitable for
separate presentation. Further details can be seen in note 8.
The segmental analysis in note 4 includes the additional
performance measure of Trading Profit, which is reconciled to
reported operating profit in that note. The Group uses Trading
Profit as an alternative measure to reported operating profit by
making several adjustments. Firstly, Trading Profit excludes
exceptional items, being those we consider material and outside of
the normal operating practice of the Company to be suitable of
separate presentation and detailed explanation. Secondly,
amortisation and impairment of intangibles arising on acquisitions
are excluded, because these charges are based on judgments about
the value and economic life of assets that, in the case of items
such as customer relationships, would not be capitalised in normal
operating practice.
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions
requires assumptions and complex judgements to be made about the
future performance of the Group's contracts. The level of
uncertainty in the estimates made, either in determining whether a
provision is required, or in the calculation of a provision booked,
is linked to the complexity of the underlying contract and the form
of service delivery. Due to the level of uncertainty and
combination of variables associated with those estimates there is a
significant risk that there could be material adjustment to the
carrying amounts of onerous contract provisions within the next
financial reporting period.
In the current period no material revisions have been made to
historic onerous contract provisions.
Major sources of uncertainty which could result in a material
adjustment within the next financial reporting period are:
-- The ability of the Company to maintain or improve operational
performance to ensure costs or performance related penalties are in
line with expected levels.
-- Volume driven revenue and costs being within the expected ranges.
-- The outcome of matters dependent on the behaviour of the
customer, such as a decision to extend a contract where it has the
unilateral right to do so.
-- The outcome of open claims made by or against a customer regarding contractual performance.
-- The ability of suppliers to deliver their contractual obligations on time and on budget.
To mitigate the level of uncertainty in making these estimates,
Management regularly compares actual performance of the contracts
against previous forecasts and considers whether there have been
any changes to significant judgements. A detailed bottom up review
of the provisions is performed as part of the Group's formal annual
budgeting process.
The future range of possible outcomes in respect of those
assumptions and significant judgements made to determine the
carrying value of onerous contracts could result in either a
material increase or decrease in the value of onerous contract
provisions in the next financial reporting period. The extent to
which actual results differ from estimates made at the reporting
date depends on the combined outcome and timing of a large number
of variables associated with performance across multiple
contracts.
The individual provisions are discounted where the impact is
assessed to be significant. Discount rates used are calculated
based on the estimated risk free rate of interest for the region in
which the provision is located and matched against the ageing
profile of the provision. Rates applied are in the range of 0.72%
and 1.95%.
Investigation by the Serious Fraud Office
In November 2013, the UK's Serious Fraud Office announced that
it had opened an investigation, which remains ongoing, into the
Group's Electronic Monitoring contract.
We are cooperating fully with the Serious Fraud Office's
investigation but it is not possible to predict the outcome.
However, disclosed in the Principal Risks and Uncertainties in the
2017 Annual Report and Accounts is a description of the range of
possible outcomes in the event that the Serious Fraud Office
decides to prosecute the individuals and/or the Serco entities
involved.
Impairment of assets
Identifying whether there are indicators of impairment for
assets involves a high level of judgement and a good understanding
of the drivers of value behind the asset. At each reporting period
an assessment is performed in order to determine whether there are
any such indicators, which involves considering the performance of
our business and any significant changes to the markets in which we
operate.
We seek to mitigate the risk associated with this judgement by
putting in place processes and guidance for the finance community
and internal review procedures.
Determining whether assets with impairment indicators require an
actual impairment involves an estimation of the expected value in
use of the asset (or CGU to which the asset relates). The value in
use calculation involves an estimation of future cash flows and
also the selection of appropriate discount rates, both of which
involve considerable judgement. The future cash flows are derived
from approved forecasts, with the key assumptions being revenue
growth, margins and cash conversion rates. Discount rates are
calculated with reference to the specific risks associated with the
assets and are based on advice provided by external experts. Our
calculation of discount rates are performed based on a risk free
rate of interest appropriate to the geographic location of the cash
flows related to the asset being tested, which is subsequently
adjusted to factor in local market risks and risks specific to
Serco and the asset itself. Discount rates used for internal
purposes are post tax rates, however for the purpose of impairment
testing in accordance with IAS36 Impairment of Assets we calculate
a pre tax rate based on post tax targets.
A key area of focus in recent years has been in the impairment
testing of goodwill as a result of the pressure on the results of
the Group. However, no impairment of goodwill was noted in the year
ended 31 December 2017 and no indicators of impairment were noted
as at 30 June 2018.
Deferred tax
Deferred tax assets are recognised for unused tax losses to the
extent that it is probable that taxable profit will be available
against which the losses can be utilised. Significant management
judgement is required to determine the amount of deferred tax
assets that can be recognised, based upon the likely timing and the
level of future taxable profits. Recognition has been based on
forecast future taxable profits.
Further details on taxes are disclosed in note 11.
Current tax
Liabilities for tax contingencies require management judgement
and estimates in respect of tax audits and also tax exposures in
each of the jurisdictions in which we operate. Management is also
required to make an estimate of the current tax liability together
with an assessment of the temporary differences that arise as a
consequence of different accounting and tax treatments. Key
judgement areas include the correct allocation of profits and
losses between the countries in which we operate and the pricing of
intercompany services. Where management conclude that a tax
position is uncertain, a current tax liability is held for
anticipated taxes that are considered probable based on the current
information available.
These liabilities can be built up over a long period of time but
the ultimate resolution of tax exposures usually occurs at a point
in time, and given the inherent uncertainties in assessing the
outcomes of these exposures, these estimates are prone to change in
future periods. It is not currently possible to estimate the timing
of potential cash outflow, but on resolution, to the extent this
differs from the liability held, this will be reflected through the
tax charge/(credit) for that period. Each potential liability and
contingency is revisited on an annual basis and adjusted to reflect
any changes in positions taken by the Company, local tax audits,
the expiry of the statute of limitations following the passage of
time and any change in the broader tax environment.
On the basis of the currently available information, the Group
does not anticipate a material change to the estimated liability in
the short term.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit
obligation as a result of contractual arrangements entered into
requires a level of judgement, largely driven by the legal position
held between the Group, the customer and the relevant pension
scheme. The Group's retirement benefit obligations are covered in
note 17.
The calculation of retirement benefit obligations is dependent
on material key assumptions including discount rates, mortality
rates, inflation rates and future contribution rates.
In accounting for the defined benefit schemes, the Group has
applied the following principles:
-- The asset recognised for the Serco Pension and Life Assurance
Scheme is based on the assumption that the full surplus will
ultimately be available to the Group as a future refund of
surplus.
-- No foreign exchange item is shown in the disclosures as the
non UK liabilities are not material.
-- No pension assets are invested in the Group's own financial instruments or property.
-- Pension annuity assets are remeasured to fair value at each
reporting date based on the share of the defined benefit obligation
covered by the insurance contract.
3. Prior year restatement for the impact of IFRS15 Revenue from
Contracts with Customers
IFRS15 Revenue from Contracts with Customers was adopted during
the period, replacing previous revenue recognition guidance for
goods, services and construction contracts included in IAS11
Construction Contracts and IAS18 Revenue.
Under the transition rules, IFRS15 has been applied
retrospectively to the prior period in accordance with IAS8
Accounting policies, changes in accounting estimates and errors,
subject to the following expedients:
-- contracts completed prior to 1 January 2018 and that begin
and end within the same annual reporting period have not been
restated;
-- for contracts that have variable consideration and which
completed prior to 1 January 2018, the revenues recognised
reflected the actual outcome, rather than being estimated and trued
up; and
-- the disclosures required for comparative periods in respect
of amount of revenue allocated to the remaining performance
obligations, and an explanation of when that amount is expected to
be recognised, will not be made in the financial statements for the
year ended 31 December 2018.
There was no material impact of applying the practical
expedients noted above.
The cumulative effect of initial application of the standard has
been applied as an adjustment to brought forward retained earnings
as at 1 January 2017.
The following table details the specific areas impacted as a
result of the adoption of IFRS15 and cross-referenced below the
table are Serco's policies in adopting the requirements of the
standard:
Operating
profit before
Impact on retained earnings as at 1 January Retained exceptional
2017 and the consolidated income statement earnings Revenue items
for the year ended 31 December 2017 GBPm GBPm GBPm
-------------------------------------------------------------- --------- ------- --------------
As previously stated 83.1 2,953.6 49.6
IFRS15 adjustments:
(i) Declining unit prices (14.7) 5.4 5.1
(ii) Upfront fees (2.7) 0.9 0.5
Transition, transformation and other mobilisation
(iii) activities (4.3) 2.2 (1.6)
Asset maintenance and replacement, including
(iv) vessel dry docking (11.8) 1.3 (3.9)
(v) Pass through revenues and procurement arrangements - (12.5) -
(vi) Consideration payable to a customer - (0.5) -
(vii) Percentage of completion accounting (0.3) 0.5 0.1
(viii) OCP charges and releases - - (8.4)
------- ----------------------------------------------------- --------- ------- --------------
As restated 49.3 2,950.9 40.7
-------------------------------------------------------------- --------- ------- --------------
The Group's accounting policy for the items above are covered in
the Group's revenue recognition policy below this restatement
section. The reason the adjustments noted above arise is:
(i) Declining unit prices. Where unit prices have been set to
decline over the future periods, revenue recognised in prior years
for these contracts has been deferred under IFRS15 in order to
recognise revenue consistently in line with output received by the
customer.
(ii) Upfront fees. In some instances upfront fees were
recognised as revenue under IAS18 but are deferred under IFRS15
where no separate performance obligation exists relating to these
fees.
(iii) Transition, transformation and other mobilisation
activities. In some instances revenue recognised under IAS18 has
been deferred under IFRS15 where no separate performance obligation
exists.
(iv) Asset maintenance and replacement, including vessel dry
docking. Adopting IFRS15 has resulted in the deferral of revenue
recognised under IAS18 on certain contracts as a result of changing
to the appropriate revenue recognition method.
(v) Pass through revenues and procurement arrangements. For
certain procurement arrangements the Group does not have control
prior to transfer, but does have a level of risk associated with
the activity, therefore these arrangements are recognised on a net
basis under IFRS15 instead of the gross basis under IAS18.
(vi) Consideration payable to a customer. Under IFRS15 all
amounts payable to a customer (including all payments to the
customer and all reductions to amounts paid by the customer) are
recorded as a reduction in revenue. In 2017, an element of
reductions have been recorded as costs.
(vii) Percentage of completion accounting. Changes to the
Group's current accounting policy arise when the percentage of
completion model under IAS11 is replaced by the output method of
accounting. The output method is used where the customer
simultaneously receives and consumes the benefits in direct
proportion to the deliverable performed rather than the level of
expense incurred to date.
(viii) OCP charges and releases. Where an adjustment is required
by IFRS15 and the relevant contract is loss making, the deferral of
revenue from prior years can result in a decrease in the level of
OCP needed under IFRS15, as future losses will reduce by the level
of deferred revenue. During the second half of 2017, one contract
recorded a release against the OCP balance held under current
accounting standards. As a result of IFRS15, revenues on this
contract have been deferred, reducing the opening OCP balance,
increasing deferred revenue and therefore the release of the
relevant OCP balance is lower under IFRS15.
The impact on the Group's primary financial statements as a
result of adopting IFRS15 was as follows:
Six months
ended Six months
30 June ended
2017 30 June
as previously 2017
stated Adjustment as restated
Impact on consolidated income statement GBPm GBPm GBPm
--------------------------------------------------- -------------- ---------- ------------
Revenue 1,508.2 (0.9) 1,507.3
Cost of sales (1,374.8) (0.4) (1,375.2)
--------------------------------------------------- -------------- ---------- ------------
Gross profit 133.4 (1.3) 132.1
Administrative expenses
General and administrative expenses (112.7) - (112.7)
Exceptional profit on disposal of subsidiaries
and operations 0.1 - 0.1
Other exceptional operating items (11.5) - (11.5)
Other expenses - amortisation and impairment
of intangibles arising on acquisition (2.2) - (2.2)
--------------------------------------------------- -------------- ---------- ------------
Total administrative expenses (126.3) - (126.3)
Share of profits in joint ventures and associates,
net of interest and tax 14.6 - 14.6
--------------------------------------------------- -------------- ---------- ------------
Operating profit 21.7 (1.3) 20.4
--------------------------------------------------- -------------- ---------- ------------
Operating profit before exceptional items 33.1 (1.3) 31.8
--------------------------------------------------- -------------- ---------- ------------
Investment revenue 3.6 0.2 3.8
Finance costs (11.2) - (11.2)
Net finance costs (7.6) 0.2 (7.4)
--------------------------------------------------- -------------- ---------- ------------
Other gains - - -
--------------------------------------------------- -------------- ---------- ------------
Profit before tax 14.1 (1.1) 13.0
--------------------------------------------------- -------------- ---------- ------------
Tax on profit before exceptional items (16.4) 0.1 (16.3)
Exceptional tax (15.9) - (15.9)
--------------------------------------------------- -------------- ---------- ------------
Tax charge (32.3) 0.1 (32.2)
--------------------------------------------------- -------------- ---------- ------------
Loss for the period (18.2) (1.0) (19.2)
--------------------------------------------------- -------------- ---------- ------------
Six months
ended Six months
30 June ended
2017 30 June
as previously 2017
Impact on consolidated statement of other comprehensive stated Adjustment as restated
income GBPm GBPm GBPm
-------------------------------------------------------- -------------- ---------- ------------
Loss for the period (18.2) (1.0) (19.2)
Other comprehensive income for the period:
Items that will not be reclassified subsequently
to profit or loss:
Net actuarial loss on defined benefit pension
schemes (130.8) - (130.8)
Tax relating to items not reclassified 22.4 - 22.4
Share of other comprehensive income in joint
ventures and associates 0.8 - 0.8
Items that may be reclassified subsequently
to profit or loss:
Net exchange loss on translation of foreign
operations (7.2) - (7.2)
Fair value loss on cash flow hedges (0.3) - (0.3)
Tax relating to items that may be reclassified 0.1 - 0.1
Total other comprehensive income for the period (115.0) - (115.0)
Total comprehensive income for the period (133.2) (1.0) (134.2)
-------------------------------------------------------- -------------- ---------- ------------
As at
30 June As at
2017 30 June
as previously 2017
stated Adjustment as restated
Impact on consolidated balance sheet GBPm GBPm GBPm
--------------------------------------------- -------------- ---------- ------------
Non current assets
Goodwill 564.4 - 564.4
Other intangible assets 75.5 - 75.5
Property, plant and equipment 66.6 (4.1) 62.5
Interests in joint ventures and associates 16.0 5.7 21.7
Trade and other receivables 51.1 - 51.1
Derivative financial instruments 4.5 - 4.5
Deferred tax assets 54.1 4.5 58.6
Retirement benefit assets 18.3 - 18.3
--------------------------------------------- -------------- ---------- ------------
850.5 6.1 856.6
--------------------------------------------- -------------- ---------- ------------
Current assets
Inventories 16.6 - 16.6
Trade and other receivables 563.0 5.8 568.8
Current tax assets 14.1 - 14.1
Cash and cash equivalents 117.7 - 117.7
Derivative financial instruments 11.6 - 11.6
--------------------------------------------- -------------- ---------- ------------
723.0 5.8 728.8
Total assets 1,573.5 11.9 1,585.4
--------------------------------------------- -------------- ---------- ------------
Current liabilities
Trade and other payables (512.4) (8.0) (520.4)
Derivative financial instruments (3.0) - (3.0)
Current tax liabilities (28.2) - (28.2)
Provisions (156.4) 8.6 (147.8)
Obligations under finance leases (9.6) - (9.6)
Loans (33.1) - (33.1)
--------------------------------------------- -------------- ---------- ------------
(742.7) 0.6 (742.1)
--------------------------------------------- -------------- ---------- ------------
Non current liabilities
Trade and other payables (26.0) (79.7) (105.7)
Deferred tax liabilities (34.1) - (34.1)
Provisions (220.2) 32.4 (187.8)
Obligations under finance leases (11.9) - (11.9)
Loans (248.6) - (248.6)
Retirement benefit obligations (17.5) - (17.5)
--------------------------------------------- -------------- ---------- ------------
(558.3) (47.3) (605.6)
--------------------------------------------- -------------- ---------- ------------
Total liabilities (1,301.0) (46.7) (1,347.7)
--------------------------------------------- -------------- ---------- ------------
Net assets 272.5 (34.8) 237.7
--------------------------------------------- -------------- ---------- ------------
Equity
Share capital 22.0 - 22.0
Share premium account 327.9 - 327.9
Capital redemption reserve 0.1 - 0.1
Retained earnings 65.8 (34.8) 31.0
Retirement benefit obligations reserve (199.5) - (199.5)
Share based payment reserve 88.7 - 88.7
Own shares reserve (51.0) - (51.0)
Hedging and translation reserve 17.1 - 17.1
--------------------------------------------- -------------- ---------- ------------
Equity attributable to owners of the Company 271.1 (34.8) 236.3
Non controlling interest 1.4 - 1.4
--------------------------------------------- -------------- ---------- ------------
Total equity 272.5 (34.8) 237.7
--------------------------------------------- -------------- ---------- ------------
Six months
ended Six months
30 June ended
2017 30 June
as previously 2017
stated Adjustment as restated
Impact on components of the cash flow statement GBPm GBPm GBPm
--------------------------------------------------- -------------- ---------- ------------
Operating profit for the period 21.7 (1.3) 20.4
Adjustments for:
Share of profits in joint ventures and associates (14.6) - (14.6)
Share based payment expense 6.9 - 6.9
Exceptional impairment of intangible assets 2.8 - 2.8
Depreciation of property, plant and equipment 13.1 (1.8) 11.3
Amortisation of intangible assets 13.4 - 13.4
Exceptional profit on disposal of subsidiaries
and operations (0.8) - (0.8)
Loss on disposal of property, plant and equipment 0.1 - 0.1
Non cash R&D expenditure offset against intangible
assets (0.4) - (0.4)
Decrease in provisions (42.7) 1.8 (40.9)
Other non cash movements 0.2 - 0.2
Total non cash items (22.0) - (22.0)
--------------------------------------------------- -------------- ---------- ------------
Operating cash outflow before movements in
working capital (0.3) (1.3) (1.6)
Decrease in inventories 5.6 - 5.6
Decrease in receivables (25.8) 0.1 (25.7)
Decrease in payables (4.6) (2.0) (6.6)
--------------------------------------------------- -------------- ---------- ------------
Movements in working capital (24.8) (1.9) (26.7)
--------------------------------------------------- -------------- ---------- ------------
Cash generated by operations (25.1) (3.2) (28.3)
Tax paid (7.9) - (7.9)
Non cash R&D expenditure - - -
--------------------------------------------------- -------------- ---------- ------------
Net cash outflow from operating activities (33.0) (3.2) (36.2)
--------------------------------------------------- -------------- ---------- ------------
Year ended
31 December Year ended
2017 31 December
as previously 2017
stated Adjustment as restated
Impact on consolidated income statement GBPm GBPm GBPm
--------------------------------------------------- -------------- ---------- ------------
Revenue 2,953.6 (2.7) 2,950.9
Cost of sales (2,704.7) (5.9) (2,710.6)
--------------------------------------------------- -------------- ---------- ------------
Gross profit 248.9 (8.6) 240.3
Administrative expenses
General and administrative expenses (222.2) - (222.2)
Exceptional profit on disposal of subsidiaries
and operations 0.3 - 0.3
Other exceptional operating items (19.9) - (19.9)
Other expenses - amortisation and impairment
of intangibles arising on acquisition (4.4) - (4.4)
--------------------------------------------------- -------------- ---------- ------------
Total administrative expenses (246.2) - (246.2)
Share of profits in joint ventures and associates,
net of interest and tax 27.3 (0.3) 27.0
--------------------------------------------------- -------------- ---------- ------------
Operating profit 30.0 (8.9) 21.1
--------------------------------------------------- -------------- ---------- ------------
Operating profit before exceptional items 49.6 (8.9) 40.7
--------------------------------------------------- -------------- ---------- ------------
Investment revenue 7.6 0.4 8.0
Finance costs (19.2) - (19.2)
Net finance costs (11.6) 0.4 (11.2)
--------------------------------------------------- -------------- ---------- ------------
Other gains 0.7 - 0.7
--------------------------------------------------- -------------- ---------- ------------
Profit before tax 19.1 (8.5) 10.6
--------------------------------------------------- -------------- ---------- ------------
Tax on profit before exceptional items (14.0) 0.4 (13.6)
Exceptional tax (5.0) (5.0)
--------------------------------------------------- -------------- ---------- ------------
Tax charge (19.0) 0.4 (18.6)
--------------------------------------------------- -------------- ---------- ------------
Profit for the year 0.1 (8.1) (8.0)
--------------------------------------------------- -------------- ---------- ------------
Year ended
31 December Year ended
2017 31 December
as previously 2017
Impact on consolidated statement of other comprehensive stated Adjustment as restated
income GBPm GBPm GBPm
-------------------------------------------------------- -------------- ---------- ------------
Profit for the year 0.1 (8.1) (8.0)
Other comprehensive income for the year:
Items that will not be reclassified subsequently
to profit or loss:
Net actuarial loss on defined benefit pension
schemes (106.5) - (106.5)
Actuarial loss on reimbursable rights (0.6) - (0.6)
Tax relating to items not reclassified 18.1 - 18.1
Share of other comprehensive income in joint
ventures and associates 0.9 - 0.9
Items that may be reclassified subsequently
to profit or loss:
Net exchange loss on translation of foreign
operations (14.6) - (14.6)
Fair value loss on cash flow hedges (0.2) - (0.2)
Total other comprehensive income for the year (102.9) - (102.9)
Total comprehensive income for the year (102.8) (8.1) (110.9)
-------------------------------------------------------- -------------- ---------- ------------
Aa at
31 December As at
2017 31 December
as previously 2017
stated Adjustment as restated
Impact on consolidated balance sheet GBPm GBPm GBPm
--------------------------------------------- -------------- ---------- ------------
Non current assets
Goodwill 551.3 - 551.3
Other intangible assets 66.7 - 66.7
Property, plant and equipment 65.2 (3.9) 61.3
Interests in joint ventures and associates 14.3 5.4 19.7
Trade and other receivables 57.3 - 57.3
Derivative financial instruments 3.7 - 3.7
Deferred tax assets 55.0 4.7 59.7
Retirement benefit assets 41.8 - 41.8
--------------------------------------------- -------------- ---------- ------------
855.3 6.2 861.5
--------------------------------------------- -------------- ---------- ------------
Current assets
Inventories 17.4 - 17.4
Trade and other receivables 506.5 5.5 512.0
Current tax assets 11.2 - 11.2
Cash and cash equivalents 112.1 - 112.1
Derivative financial instruments 10.3 - 10.3
--------------------------------------------- -------------- ---------- ------------
657.5 5.5 663.0
Total assets 1,512.8 11.7 1,524.5
--------------------------------------------- -------------- ---------- ------------
Current liabilities
Trade and other payables (462.9) (9.0) (471.9)
Derivative financial instruments (1.1) - (1.1)
Current tax liabilities (25.3) - (25.3)
Provisions (148.5) 1.2 (147.3)
Obligations under finance leases (8.5) - (8.5)
Loans (31.8) - (31.8)
--------------------------------------------- -------------- ---------- ------------
(678.1) (7.8) (685.9)
--------------------------------------------- -------------- ---------- ------------
Non current liabilities
Trade and other payables (28.7) (74.6) (103.3)
Deferred tax liabilities (20.4) - (20.4)
Provisions (211.5) 28.8 (182.7)
Obligations under finance leases (11.7) - (11.7)
Loans (239.7) - (239.7)
Retirement benefit obligations (15.5) - (15.5)
--------------------------------------------- -------------- ---------- ------------
(527.5) (45.8) (573.3)
--------------------------------------------- -------------- ---------- ------------
Total liabilities (1,205.6) (53.6) (1,259.2)
--------------------------------------------- -------------- ---------- ------------
Net assets 307.2 (41.9) 265.3
--------------------------------------------- -------------- ---------- ------------
Equity
Share capital 22.0 - 22.0
Share premium account 327.9 - 327.9
Capital redemption reserve 0.1 - 0.1
Retained earnings 83.7 (41.9) 41.8
Retirement benefit obligations reserve (180.1) - (180.1)
Share based payment reserve 88.3 - 88.3
Own shares reserve (46.1) - (46.1)
Hedging and translation reserve 10.1 - 10.1
--------------------------------------------- -------------- ---------- ------------
Equity attributable to owners of the Company 305.9 (41.9) 264.0
Non controlling interest 1.3 - 1.3
--------------------------------------------- -------------- ---------- ------------
Total equity 307.2 (41.9) 265.3
--------------------------------------------- -------------- ---------- ------------
Year ended
31 December Year ended
2017 31 December
as previously 2017
stated Adjustment as restated
Impact on components of the cash flow statement GBPm GBPm GBPm
--------------------------------------------------- -------------- ---------- ------------
Operating profit for the year 30.0 (8.9) 21.1
Adjustments for:
Share of profits in joint ventures and associates (27.3) 0.3 (27.0)
Share based payment expense 11.4 - 11.4
Exceptional impairment of intangible assets 8.9 - 8.9
Impairment and write down of intangible assets (0.1) - (0.1)
Depreciation of property, plant and equipment 24.3 (3.4) 20.9
Amortisation of intangible assets 25.8 - 25.8
Exceptional profit on disposal of subsidiaries
and operations (0.3) - (0.3)
Loss on disposal of property, plant and equipment 0.3 - 0.3
Loss on disposal of intangible assets 0.3 - 0.3
Non cash R&D expenditure offset against intangible
assets (0.7) - (0.7)
Decrease in provisions (56.0) 12.8 (43.2)
Other non cash movements 0.1 - 0.1
Total non cash items (13.3) 9.7 (3.6)
--------------------------------------------------- -------------- ---------- ------------
Operating cash inflow before movements in working
capital 16.7 0.8 17.5
Decrease in inventories 3.7 - 3.7
Decrease in receivables 12.6 0.4 13.0
Decrease in payables (37.2) (5.7) (42.9)
--------------------------------------------------- -------------- ---------- ------------
Movements in working capital (20.9) (5.3) (26.2)
--------------------------------------------------- -------------- ---------- ------------
Cash generated by operations (4.2) (4.5) (8.7)
Tax paid (11.4) - (11.4)
Non cash R&D expenditure (0.2) - (0.2)
--------------------------------------------------- -------------- ---------- ------------
Net cash outflow from operating activities (15.8) (4.5) (20.3)
--------------------------------------------------- -------------- ---------- ------------
As at
31 December As at
2016 31 December
as previously 2016
stated Adjustment as restated
Impact on consolidated balance sheet GBPm GBPm GBPm
--------------------------------------------- -------------- ---------- ------------
Non current assets
Goodwill 577.9 - 577.9
Other intangible assets 83.6 - 83.6
Property, plant and equipment 69.3 (2.1) 67.2
Interests in joint ventures and associates 14.4 5.7 20.1
Trade and other receivables 44.4 - 44.4
Derivative financial instruments 14.2 - 14.2
Deferred tax assets 50.8 4.5 55.3
Retirement benefit assets 150.4 - 150.4
--------------------------------------------- -------------- ---------- ------------
1,005.0 8.1 1,013.1
--------------------------------------------- -------------- ---------- ------------
Current assets
Inventories 22.4 - 22.4
Trade and other receivables 543.5 5.9 549.4
Current tax assets 11.0 - 11.0
Cash and cash equivalents 177.8 - 177.8
Derivative financial instruments 4.9 - 4.9
--------------------------------------------- -------------- ---------- ------------
759.6 5.9 765.5
Total assets 1,764.6 14.0 1,778.6
--------------------------------------------- -------------- ---------- ------------
Current liabilities
Trade and other payables (524.5) (16.8) (541.3)
Derivative financial instruments (0.6) - (0.6)
Current tax liabilities (25.9) - (25.9)
Provisions (172.3) 10.2 (162.1)
Obligations under finance leases (12.3) - (12.3)
Loans (9.7) - (9.7)
--------------------------------------------- -------------- ---------- ------------
(745.3) (6.6) (751.9)
--------------------------------------------- -------------- ---------- ------------
Non current liabilities
Trade and other payables (16.8) (73.8) (90.6)
Deferred tax liabilities (30.5) - (30.5)
Provisions (249.4) 32.6 (216.8)
Obligations under finance leases (15.9) - (15.9)
Loans (290.2) - (290.2)
Retirement benefit obligations (17.7) - (17.7)
--------------------------------------------- -------------- ---------- ------------
(620.5) (41.2) (661.7)
--------------------------------------------- -------------- ---------- ------------
Total liabilities (1,365.8) (47.8) (1,413.6)
--------------------------------------------- -------------- ---------- ------------
Net assets 398.8 (33.8) 365.0
--------------------------------------------- -------------- ---------- ------------
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 (33.8) 49.3
Retirement benefit obligations reserve (91.1) - (91.1)
Share based payment reserve 82.9 - 82.9
Own shares reserve (52.1) - (52.1)
Hedging and translation reserve 24.6 - 24.6
--------------------------------------------- -------------- ---------- ------------
Equity attributable to owners of the Company 397.4 (33.8) 363.6
Non controlling interest 1.4 - 1.4
--------------------------------------------- -------------- ---------- ------------
Total equity 398.8 (33.8) 365.0
--------------------------------------------- -------------- ---------- ------------
Revenue recognition: Repeat service based contracts
The majority of the Group's contracts are repeat service based
contracts, where value and control is transferred to the customer
over time as the core services are delivered, and therefore in most
cases revenue is recognised on the output basis, with revenue
linked to the deliverables provided to the customer.
There are some contracts where a separate performance obligation
has been identified for services where the pattern of delivery
differs to the core services and are capable of being distinct. In
these instances, where the transfer of control is most closely
aligned to our efforts in delivering the service, then the input
method is used to measure progress, and revenue is recognised in
direct proportion to costs incurred. Where deemed appropriate, the
Group will utilise the practical expedient within IFRS15, allowing
revenue to be recognised at the amount which the Group has the
right to invoice, where that amount corresponds directly with the
value to the customer of the Group's performance completed to
date.
The transaction price recognised as revenue is determined with
reference to the facts and circumstances for specific contracts
together with any variations and options which are deemed to be
performance obligations of the contract. For variable revenue, an
estimate is made at each reporting date and the transaction price
adjusted to reflect any changes to the unit price which results
from the amended forecast. The total transaction price is reduced
as appropriate for discounts, service penalties or customer claims
where it is highly probable that the revenue associated with these
will reverse.
Specific areas of accounting policy applied by the Group are as
follows:
(i) Declining unit prices. Where any price step downs are
required in a contract which is accounted for under the output
basis and output is not decreasing, revenue requires deferral from
initial years to subsequent years in order for revenue to be
recognised on a consistent basis. Depending on the nature of the
contract, for example where volume increases lead to fall in unit
prices, a level of estimation uncertainty may exist, given that
future volumes will be required to be forecast.
(ii) Upfront fees. For some contracts, the Group receives
non-refundable amounts at the start of the contract to cover
initial costs. Unless upfront fees are attributable to a good or a
service the customer is in control of, such fees do not constitute
a separate performance obligation and instead are allocated to the
performance obligations of the contract, therefore being spread
over the life of the other services. Upfront payments are analysed
to determine whether they constitute a material financing
arrangement.
(iii) Transition, transformation and other mobilisation
activities. Transition activities which are administrative in
nature are not treated as separate performance obligations.
Transition and transformation activities which are more than
administrative in nature are assessed to determine whether they
form a separate performance obligation. Where it can be
demonstrated that the transition activities benefit the customer
without future activities being provided then the transition phase
is accounted for as a separate performance obligation under the
contract and revenue recognised accordingly. Where it is concluded
that the transformation, transition or mobilisation activity does
not form a separate performance obligation under the contract, any
payments received from the customer are allocated to the
performance obligations of the contract and recognised over the
life of the other services.
(iv) Asset maintenance and replacement, including vessel dry
docking. In many of the contracts the Group enters into, the
provision of maintenance and replacement services are capable of
being distinct and therefore these have been accounted for as
separate performance obligations. The input method of accounting is
used to reflect the pattern of delivery to the customer and the
enhancement of customer owned assets. In some instances the output
method of accounting is used due to the ongoing repetitive nature
and frequency of the services. Where the input method is used, an
estimate must be made of the total inputs expected to the end of
the performance obligation.
(v) Pass through revenues and procurement arrangements. A pass
through arrangement is where goods or services are provided by a
third party, but sourced by the Group on behalf of the customer. In
this instance, the Group does not recognise revenue for the amount
received from the customer as compensation of the cost of the good
or service but rather only the margin element (if any) is recorded
as revenue. Recognition of such revenues is linked directly to
whether the Group has control of the deliverable prior to
transfer.
(vi) Consideration payable to a customer. All amounts payable to
a customer (including all payments to the customer and all
reductions to amounts paid by the customer) are recorded as a
reduction in revenue.
(vii) Contract variations. Contract modifications such as change
orders, variations, change notices and amendments could be approved
in writing, by oral agreement or implied by customary business
practices. Contract modifications are changes in the scope or price
(or both) of a contract that is approved by the parties to the
contract. If the parties to the contract have not approved a
contract modification, revenue continues to be recognised in
accordance with the existing contractual terms and associated cash
payments are deferred until there is evidence of customer agreement
in line with the Group's policies.
(viii) Variable revenues requiring estimation. If consideration
paid by a customer includes a variable amount requiring judgement,
it is only recognised where it is highly probable that a
significant reversal will not occur. Service penalties or any
claims made by us against the customer which must be recognised in
revenue unless it is highly probable that they will not result in
future settlement.
(ix) Extension periods granted or other options. Providing the
option for a customer to obtain extension periods or other services
may lead to a separate performance obligation where a material
right exists. If a separate performance obligation exists then
there would be an allocation of the transaction price from the
original contract in addition to any revenues earned through the
option period. A separate performance obligation exists for options
under a contract if both of the following conditions are met:
First, if the customer is unable to obtain the right to acquire the
additional goods or services on the same or similar terms without
entering into the original contract (for example they cannot get
the option without first entering into the main contract, which
would be the case for any extension period). Second, the option
does not simply give the customer the right to acquire additional
goods or services at a price that reflects the stand alone selling
price for those goods or services (for example if the pricing of
the option is consistent with what the pricing would have been in
any case there is no separate performance obligation, as the
customer gains no incremental benefit from the existence of the
option).
(x) Significant financing component. Where the timing of
payments agreed with the customer provides either party with a
significant benefit of financing (either explicitly or implicitly),
the associated asset/liability is adjusted for the time value of
money and an interest charge or income is recognised and a
corresponding offset in revenue. The Group's policy is to consider
"significant" to be greater than 5% of the total transaction price
of the contractual arrangement and no such arrangements are in
place.
(xi) Non cash consideration. If a customer contributes goods or
services (for example, materials, equipment or labour) to
facilitate the fulfilment of the contract, the Group assesses
whether control is obtained for those contributed goods or
services. If the Group obtains control of the contributed goods or
services, then the estimated fair value of these would be
recognised as revenue. Such transactions are rare and
immaterial.
(xii) Licence income. Where the Group receives income for
software licences and maintenance services provided through ongoing
support and operational functionality, this licence revenue is
recognised over the period when the maintenance obligation exists.
There are currently no material significant licencing arrangements
entered into by the Group with its customers.
Revenue recognition: Long-term project-based contracts
The Group has a limited number of long-term contracts for the
provision of complex, project-based services. When control of such
a deliverable is passed onto the customer at the final stage of a
contract, the recognition of revenue is delayed until control has
been passed. However, where the customer has control over the life
of the deliverable or where the Group has a legally enforceable
right to remuneration for the work completed to date, or at
milestone periods, revenue will be recognised in line with the
associated transfer of control or milestone dates.
Revenue recognition: Other
Sales of goods are recognised when goods are delivered and title
has passed.
Interest income is accrued for on a time basis, by reference to
the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial
asset to that asset's net carrying amount.
Dividend income from investments is recognised when the right to
receive payment has been established.
Contract costs
Bid costs are capitalised when they relate directly to a
contract and are incremental to securing the contract. Any costs
which would have been incurred whether or not the contract is
actually won are not considered to be capitalised bid costs.
Contract costs are charged to the income statement as incurred,
including the necessary accrual for costs which have not yet been
invoiced, unless the expense relates to a specific time frame
covering future periods.
Contract costs can only be capitalised when the expenditure
meets all of the following three criteria and are not within the
scope of another accounting standard, such as inventories,
intangible assets, or property, plant and equipment:
-- The costs relate directly to a contract. These include:
direct labour, being the salaries and wages of employees providing
the promised services to the customer; direct materials such as
supplies used in providing the promised services to a customer; and
other costs that are incurred only because an entity entered into
the contract, such as payments to subcontractors.
-- The costs generate or enhance the resources used in
satisfying performance obligations in the future. For initial
contract costs capitalised, such costs only fall into one of the
following two categories: the mobilisation of contract staff, being
the costs of moving existing contract staff to other Group
locations; or directly incremental costs incurred in meeting
contractual obligations incurred prior to contract delivery, which
are required to ensure a proper handover from the previous
contractor. Redundancy costs are never capitalised.
-- The costs are expected to be recovered, i.e. the contract is
expected to be profitable after amortising the capitalised
costs.
4. Segmental information
The Group's operating segments reflecting the information
reported to the Board in the six months ended 30 June 2018 under
IFRS8 Operating Segments are as set out below.
Reportable segments Operating segments
------------------- --------------------------------------------------------------
UK & Europe Services for sectors including Defence, Justice & Immigration,
Transport, Health, and Citizen Services delivered to
UK Government, UK devolved authorities and other public
sector customers in the UK and Europe;
------------------- --------------------------------------------------------------
Americas Services for sectors including Defence, Transport and
Citizen Services delivered to US federal and civilian
agencies, selected state and municipal governments and
the Canadian Government;
------------------- --------------------------------------------------------------
AsPac Services for sectors including Defence, Justice & Immigration,
Transport, Health and Citizen Services in the Asia Pacific
region including Australia, New Zealand and Hong Kong;
------------------- --------------------------------------------------------------
Middle East Services for sectors including Defence, Transport, Health
and Citizen Services in the Middle East region; and
------------------- --------------------------------------------------------------
Corporate Central and head office costs.
------------------- --------------------------------------------------------------
Each operating segment is focused on a narrow group of customers
in a specific geographic region and is run by a local management
team which report directly to the CODM on a regular basis. As a
result of this focus, the sectors in each region have similar
economic characteristics and are aggregated at the operating
segment level in these condensed financial statements.
Revenue disaggregation
An analysis of the Group's revenue from contracts with customers
is as follows:
Middle
UK&E Americas AsPac East Total
Six months ended 30 June 2018 GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- -------- ----- ------ -------
Key sectors
Defence 136.2 154.1 28.3 20.8 339.4
Justice & Immigration 130.3 - 134.7 - 265.0
Transport 70.5 42.4 9.8 98.3 221.0
Health 102.8 - 44.9 13.7 161.4
Citizen Services 195.2 108.8 45.7 29.7 379.4
------------------------------- ----- -------- ----- ------ -------
635.0 305.3 263.4 162.5 1,366.2
------------------------------ ----- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Six months ended 30 June 2017 GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- -------- ----- ------ -------
Key sectors
Defence 149.0 171.0 48.2 19.8 388.0
Justice & Immigration 128.9 - 159.5 - 288.4
Transport 75.3 41.4 17.5 103.1 237.3
Health 80.1 - 45.8 17.8 143.7
Citizen Services 223.3 156.6 36.1 33.9 449.9
------------------------------- ----- -------- ----- ------ -------
656.6 369.0 307.1 174.6 1,507.3
------------------------------ ----- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Year ended 31 December 2017 GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- -------- ----- ------ -------
Key sectors
Defence 291.9 325.7 76.9 41.2 735.7
Justice & Immigration 258.0 - 303.0 - 561.0
Transport 153.0 86.5 32.5 204.9 476.9
Health 180.7 - 91.1 33.7 305.5
Citizen Services 447.9 277.1 74.0 72.8 871.8
----------------------------- ------- -------- ----- ------ -------
1,331.5 689.3 577.5 352.6 2,950.9
---------------------------- ------- -------- ----- ------ -------
Revenues from external customers are attributed to individual
countries on the basis of the location of the customer.
Information about major customers
The Group has four major governmental customers which each
represent more than 10% of Group revenues. The customers' revenues
were GBP528m for the UK Government, GBP257m for the US Government,
GBP262m for the Australian Government and GBP109m for the
Government of the United Arab Emirates.
Financial performance and position
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2018 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Revenue 635.0 305.3 263.4 162.5 - 1,366.2
------------------------------------------- ------- -------- ------- ------ --------- ---------
Result
------------------------------------------- ------- -------- ------- ------ --------- ---------
Trading profit/(loss)* 21.6 19.1 13.5 9.9 (18.7) 45.4
Amortisation and impairment of intangibles
arising on acquisition - (1.6) (0.3) - - (1.9)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Operating profit/(loss) before exceptional
items 21.6 17.5 13.2 9.9 (18.7) 43.5
Other exceptional operating items** (1.7) - (0.6) - (9.3) (11.6)
Operating profit/(loss) 19.9 17.5 12.6 9.9 (28.0) 31.9
Investment revenue 2.7
Finance costs (9.0)
Profit before tax 25.6
Tax charge (11.2)
Tax on exceptional items 0.2
------------------------------------------- ------- -------- ------- ------ --------- ---------
Profit for the period 14.6
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 14.9 - 0.1 - - 15.0
------------------------------------------- ------- -------- ------- ------ --------- -----------
Depreciation of plant, property and
equipment (6.7) (1.6) (1.2) (0.4) (0.8) (10.7)
Impairment of plant, property and - - - - - -
equipment
------------------------------------------- ------- -------- ------- ------ --------- -----------
Total depreciation and impairment
of plant, property and equipment (6.7) (1.6) (1.2) (0.4) (0.8) (10.7)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Amortisation of intangible assets
arising on acquisition - (1.6) (0.3) - - (1.9)
Amortisation of other intangible
assets (0.5) (0.7) (2.4) (0.1) (5.9) (9.6)
Total amortisation and impairment
of intangible assets (0.5) (2.3) (2.7) (0.1) (5.9) (11.5)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Segment assets
Interests in joint ventures and associates 19.0 - 0.5 0.4 - 19.9
Other segment assets*** 468.3 429.9 232.9 131.8 119.8 1,382.7
------------------------------------------- ------- -------- ------- ------ --------- -----------
Total segment assets 487.3 429.9 233.4 132.2 119.8 1,402.6
Unallocated assets 123.6
------------------------------------------- ------- -------- ------- ------ --------- -----------
Consolidated total assets 1,526.2
------------------------------------------- ------- -------- ------- ------ --------- -----------
Segment liabilities
Segment liabilities*** (383.2) (132.5) (158.7) (92.9) (133.1) (900.4)
Unallocated liabilities (347.9)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Consolidated total liabilities (1,248.3)
------------------------------------------- ------- -------- ------- ------ --------- -----------
* Trading profit/(loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business.
*** The Corporate segment assets and liabilities include balance
sheet items which provide benefit to the wider Group, including
defined benefit pension schemes and corporate intangible
assets.
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2017 (restated***) GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Revenue 656.6 369.0 307.1 174.6 - 1,507.3
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Result
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Trading profit/(loss)* 14.3 22.2 10.3 7.4 (20.2) 34.0
Amortisation and impairment of intangibles
arising on acquisition - (1.5) (0.7) - - (2.2)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Operating profit/(loss) before exceptional
items 14.3 20.7 9.6 7.4 (20.2) 31.8
Exceptional profit on disposal of
subsidiaries and operations 0.1 - - - - 0.1
Other exceptional operating items** 1.0 - (0.7) - (11.8) (11.5)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Operating profit/(loss) 15.4 20.7 8.9 7.4 (32.0) 20.4
Investment revenue 3.8
Finance costs (11.2)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Profit before tax 13.0
Tax charge (16.3)
Tax on exceptional items (15.9)
Profit for the period (19.2)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 14.0 - 0.6 - - 14.6
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Depreciation of plant, property and
equipment (7.0) (1.6) (1.6) (0.4) (0.7) (11.3)
Impairment of plant, property and - - - - - -
equipment
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Total depreciation and impairment
of plant, property and equipment (7.0) (1.6) (1.6) (0.4) (0.7) (11.3)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Amortisation of intangible assets
arising on acquisition - (1.5) (0.7) - - (2.2)
Amortisation of other intangible
assets (0.6) (0.8) (2.3) (0.1) (7.4) (11.2)
Exceptional impairment of other intangible
assets - - - - (2.8) (2.8)
------- -------- ------- ------ --------- ---------
Total amortisation and impairment
of intangible assets (0.6) (2.3) (3.0) (0.1) (10.2) (16.2)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment assets
Interests in joint ventures and associates 19.2 - 2.1 0.4 - 21.7
Other segment assets**** 482.0 412.7 251.0 115.9 100.0 1,361.6
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Total segment assets 501.2 412.7 253.1 116.3 100.0 1,383.3
Unallocated assets, including assets
held for sale 202.1
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total assets 1,585.4
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment liabilities
Segment liabilities**** (433.8) (134.7) (196.9) (90.7) (132.2) (988.3)
Unallocated liabilities, including
liabilities held for sale (359.4)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total liabilities (1,347.7)
-------------------------------------------- ------- -------- ------- ------ --------- ---------
* Trading profit/(loss) is defined as operating (loss)/profit
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business.
*** Restated to reflect the impact of IFRS15.
**** The Corporate segment assets and liabilities include
balance sheet items which provide benefit to the wider Group,
including defined benefit pension schemes and corporate intangible
assets.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2017 (restated***) GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Revenue 1,331.5 689.3 577.5 352.6 - 2,950.9
------------------------------------------- ------- -------- ------- ------ --------- ---------
Result
------------------------------------------- ------- -------- ------- ------ --------- ---------
Trading profit/(loss)* (4.1) 39.8 33.7 17.3 (41.6) 45.1
Amortisation and impairment of intangibles
arising on acquisition - (3.0) (1.4) - - (4.4)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Operating profit/(loss) before exceptional
items (4.1) 36.8 32.3 17.3 (41.6) 40.7
Exceptional profit on disposal of
subsidiaries and operations 0.3 - - - - 0.3
Other exceptional operating items** 11.9 (0.3) (7.4) 0.1 (24.2) (19.9)
Operating profit/(loss) 8.1 36.5 24.9 17.4 (65.8) 21.1
Investment revenue 8.0
Finance costs (19.2)
Other gains 0.7
------------------------------------------- ------- -------- ------- ------ --------- ---------
Profit before tax 10.6
Tax charge (13.6)
Tax on exceptional items (5.0)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Loss for the year (8.0)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 26.3 - 0.8 - (0.1) 27.0
------------------------------------------- ------- -------- ------- ------ --------- ---------
Depreciation of plant, property and
equipment (12.3) (3.2) (3.2) (0.8) (1.4) (20.9)
Reversal of impairment of plant,
property and equipment 0.1 - - - - 0.1
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total depreciation and impairment
of plant, property and equipment (12.2) (3.2) (3.2) (0.8) (1.4) (20.8)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Amortisation of intangible assets
arising on acquisition - (3.0) (1.4) - - (4.4)
Exceptional impairment and write
down of intangible assets arising
on acquisition - - (6.1) - - (6.1)
Amortisation of other intangible
assets (1.1) (1.5) (4.8) (0.2) (13.8) (21.4)
Exceptional impairment of other intangible
assets - - - - (2.8) (2.8)
Total amortisation and impairment
of intangible assets (1.1) (4.5) (12.3) (0.2) (16.6) (34.7)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment assets
Interests in joint ventures and associates 18.9 - 0.4 0.4 - 19.7
Other segment assets**** 452.4 387.6 225.2 113.7 133.2 1,312.1
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total segment assets 471.3 387.6 225.6 114.1 133.2 1,331.8
Unallocated assets 192.7
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total assets 1,524.5
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment liabilities
Segment liabilities**** (407.5) (124.9) (161.3) (86.2) (142.0) (921.9)
Unallocated liabilities (337.3)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total liabilities (1,259.2)
------------------------------------------- ------- -------- ------- ------ --------- ---------
* Trading profit/(loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business.
*** Restated to reflect the impact of IFRS15.
**** The Corporate segment assets and liabilities include
balance sheet items which provide benefit to the wider Group,
including defined benefit pension schemes and corporate intangible
assets.
5. Joint ventures and associates
AWE Management Limited (AWEML), Merseyrail Services Holding
Company Limited (MSHCL) and Northern Rail Holdings Limited (NRHL)
were the only equity accounted entities which were material to the
Group during the six months ended 30 June 2018 or comparative
periods. Dividends of GBP11.8m (2017: GBP9.9m), GBP4.3m (2017:
GBP3.3m) and GBPnil (2017: GBP0.5m) respectively were received from
these companies in the period. 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:
30 June 2018
Group portion
Group portion of other
AWEML MSHCL NRHL of material joint venture
(100% (100% of (100% of joint ventures arrangements
of results) results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Revenue 533.2 80.2 0.1 170.8 21.5 192.3
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Operating profit 58.1 7.4 0.1 18.1 0.2 18.3
Net investment revenue/(finance
costs) 0.2 (0.2) - (0.1) - (0.1)
Income tax charge (10.4) (1.3) - (3.2) - (3.2)
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Profit 47.9 5.9 0.1 14.8 0.2 15.0
Other comprehensive income - 2.5 - 1.2 - 1.2
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Total comprehensive income 47.9 8.4 0.1 16.0 0.2 16.2
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Non current assets 660.0 8.5 - 166.0 2.2 168.2
Current assets 180.8 48.1 5.4 71.1 13.2 84.3
Current liabilities (162.8) (30.6) (2.2) (56.3) (11.4) (67.7)
Non current liabilities (658.6) (1.6) - (162.2) (2.7) (164.9)
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Net assets 19.4 24.4 3.2 18.6 1.3 19.9
Proportion of group ownership 24.5% 50.0% 50.0% - - -
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Carrying amount of investment 4.8 12.2 1.6 18.6 1.3 19.9
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Supplementary information
Cash and cash equivalents 77.2 33.6 6.0 38.7 2.5 41.2
Current financial liabilities
excluding trade and other
payables and provisions (8.3) (1.9) - (2.9) (0.9) (3.8)
Non current financial
liabilities excluding
trade and other payables
and provisions - - - - (2.7) (2.7)
Depreciation and amortisation - (2.2) - (1.1) (1.4) (2.5)
Interest income 0.2 0.1 - 0.1 - 0.1
Interest expense - (0.3) - (0.2) - (0.2)
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective proportion of Group ownership.
30 June 2017
Group portion
Group portion of other
AWEML MSHCL NRHL of material joint venture
(100% (100% of (100% of joint ventures arrangements
of results) results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Revenue 480.2 78.2 0.1 156.8 23.4 180.2
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Operating profit 49.5 8.2 1.1 16.7 1.1 17.8
Net investment revenue 0.1 - - - - -
Income tax charge (9.8) (1.6) - (3.2) - (3.2)
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Profit 39.8 6.6 1.1 13.5 1.1 14.6
Other comprehensive income - 1.8 - 0.9 (0.1) 0.8
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Total comprehensive income 39.8 8.4 1.1 14.4 1.0 15.4
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Non current assets 1,092.5 11.8 - 273.5 3.3 276.8
Current assets 155.0 39.4 11.3 63.3 17.4 80.7
Current liabilities (139.9) (35.6) (7.7) (55.9) (14.8) (70.7)
Non current liabilities (1,090.9) (1.2) - (267.8) (3.0) (270.8)
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Net assets 16.7 14.4 3.6 13.1 2.9 16.0
Proportion of group ownership 24.5% 50.0% 50.0% - - -
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Carrying amount of investment 4.1 7.2 1.8 13.1 2.9 16.0
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
Supplementary information
Cash and cash equivalents 85.6 31.9 11.3 42.6 4.9 47.5
Current financial liabilities
excluding trade and other
payables and provisions (7.8) (1.6) 0.2 (2.6) (0.9) (3.5)
Non current financial
liabilities excluding
trade and other payables
and provisions - (0.5) - (0.3) (2.9) (3.2)
Depreciation and amortisation - (1.1) - (0.6) (0.8) (1.4)
Interest income 0.1 - - - - -
Interest expense - - - - - -
--------------------------------- ------------ --------- --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective proportion of Group ownership.
31 December 2017 (restated*)
MSHCL
Group portion
of material
(100% of joint ventures
AWEML results) NRHL and associates** Total
Group portion
of other
joint venture
(100% (100% of arrangements
of results) (restated*) results) (restated*) and associates** (restated*)
Summarised financial information GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Revenue* 951.8 155.1 0.3 310.9 45.5 356.4
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Operating profit* 90.8 17.2 3.8 32.7 1.4 34.1
Net investment revenue/(finance
costs) 0.2 (0.2) - (0.1) - (0.1)
Income tax charge (18.8) (3.9) (0.5) (6.9) (0.1) (7.0)
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Profit* 72.2 13.1 3.3 25.7 1.3 27.0
Other comprehensive income - 2.0 - 1.0 (0.1) 0.9
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Total comprehensive income* 72.2 15.1 3.3 26.7 1.2 27.9
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Non current assets 665.6 8.7 - 167.5 2.2 169.7
Current assets 197.3 43.5 5.2 72.7 14.5 87.2
Current liabilities* (179.0) (26.1) (2.0) (58.0) (13.0) (71.0)
Non current liabilities (664.3) (1.6) - (163.5) (2.7) (166.2)
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Net assets* 19.6 24.5 3.2 18.7 1.0 19.7
Proportion of group ownership 24.5% 50.0% 50.0% - - -
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Carrying amount of investment* 4.8 12.3 1.6 18.7 1.0 19.7
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
Supplementary information
Cash and cash equivalents 77.2 33.6 6.0 38.7 2.5 41.2
Current financial liabilities
excluding trade and other
payables and provisions (8.3) (1.9) 0.1 (2.9) (0.6) (3.5)
Non current financial
liabilities excluding
trade and other payables
and provisions - - - - (2.7) (2.7)
Depreciation and amortisation - (2.2) - (1.1) (1.4) (2.5)
Interest income 0.2 0.1 - 0.1 - 0.1
Interest expense - (0.3) - (0.2) - (0.2)
--------------------------------- ------------ ------------ --------- ---------------- ---------------- ------------
* Restated to reflect the impact of IFRS15, no impact in the six months ended 30 June 2017.
** Total results of the entity multiplied by the respective proportion of Group ownership.
6. Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share
capital of BTP Systems, LLC (BTP). The acquired business
contributed GBP5.6m of revenue and GBP0.7m of operating profit
before exceptional items to the Group's results during the six
months ended 30 June 2018. Had the acquisition taken place on 1
January 2018 Group revenue and operating profit before exceptional
items for the period would have increased by GBP1.1m and
approximately GBP0.1m respectively, taking total Group revenue to
GBP1,367.3m and total Group operating profit before exceptional
items to GBP43.6m.
BTP provides satellite communications (SATCOM), radar
modernisation, operations and maintenance and sustainment services
that enable customers to extend the lives of existing systems and
achieve phased upgrades with new technology to enhance operational
capability. BTP specialises in areas including obsolescence
engineering, systems engineering services, test equipment and
design, and field engineering services, and maintains a near-field
and compact antenna test range at their Ludlow, MA headquarters.
BTP's expertise spans shipboard and submarine SATCOM antenna
systems, Military Strategic & Tactical Relay command post
antennas and radar antennas. The acquisition is expected to
increase the Group's market share.
Provisional Provisional
fair value fair value
US $m GBPm
--------------------------------------------- ----------- -----------
Goodwill 13.6 9.6
Acquisition related intangible assets 4.4 3.1
Property, plant and equipment 0.3 0.2
Inventories 0.4 0.3
Trade and other receivables 2.5 1.7
Cash and cash equivalents 1.7 1.2
Trade and other payables (1.7) (1.2)
Provisions (0.7) (0.5)
---------------------------------------------- ----------- -----------
Acquisition date fair value of consideration
transferred 20.5 14.4
---------------------------------------------- ----------- -----------
Satisfied by:
Cash 20.5 14.4
---------------------------------------------- ----------- -----------
Total consideration 20.5 14.4
---------------------------------------------- ----------- -----------
The net cash outflow as a result of the acquisition was
GBP13.2m, being GBP1.2m cash acquired less GBP14.4m consideration
paid. No acquisition related costs were incurred.
Working closely with the Special Managers and Liquidators of
Carillion, together with all other relevant parties, Serco agreed
acquisition terms to take responsibility for facilities management
services at six major NHS hospital sites: Great Western Hospital in
Swindon; Darent Valley Hospital in Dartford; James Cook University
Hospital in Middlesbrough; Harplands Hospital in Stoke-on-Trent;
The Langlands Unit of Queen Elizabeth University Hospital in
Glasgow; and Addenbrooke's Treatment Centre in Cambridge. The first
contract, Great Western Hospital in Swindon, transferred in June
2018, with the remainder having completed subsequently. The impact
of the initial acquisition was immaterial to these financial
statements. The acquisition is expected to increase the Group's
market share.
The total impact of acquisitions in the period to the Group's
cash flow position was as follows:
GBPm
------------------------------------------------------------------ ------
Net cash outflow on acquisition of BTP (13.2)
Consideration paid in respect of Carillion contract acquisition
completed (1.0)
Consideration paid in respect of Carillion contracts acquisitions
not yet completed (2.0)
Deferred consideration paid in respect of historic acquisition
(SSDS) (0.5)
------------------------------------------------------------------ ------
Net cash outflow arising on acquisitions in the period (16.7)
------------------------------------------------------------------ ------
7. Disposals
No material disposals took place in the six months ended 30 June
2018. Cash proceeds of GBP1.8m were received in respect of historic
disposals.
8. Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the performance of the
Group.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
--------------------------------------------------------- ------------- ------------- -------------
Exceptional profit on disposal of subsidiaries
and operations - 0.1 0.3
Other exceptional operating items
Restructuring costs (11.3) (13.3) (28.6)
Costs associated with UK Government review (0.3) (0.4) (0.4)
Release of UK frontline clinical health contract
provisions - - 0.4
Settlement of defined benefit pension obligations - - 10.3
Impairment of interest in joint venture and
related loan balances - 2.2 4.5
Impairment of AsPac customer lists - - (6.1)
Other exceptional operating items (11.6) (11.5) (19.9)
--------------------------------------------------------- ------------- ------------- -------------
Exceptional operating items (11.6) (11.4) (19.6)
--------------------------------------------------------- ------------- ------------- -------------
The Group is incurring costs in relation to restructuring
programmes resulting from the Strategy Review announced in 2015.
These costs include redundancy payments, provisions, external
advisory fees and other incremental costs. Due to the nature and
scale of the impact of the transformation phase of the Strategy
Review, the incremental costs associated with this programme are
considered to be exceptional. Costs associated with the
restructuring programme resulting from the Strategy Review must
meet the following criteria: that they are directly linked to the
implementation of the Strategy Review; they are incremental costs
as a result of the activity; and they are non business as usual
costs. In the six months ended 30 June 2018 a charge of GBP11.3m
(2017: GBP13.3m) arose in relation to the restructuring programme
resulting from the Strategy Review. Non-exceptional restructuring
charges are incurred by the business as part of normal operational
activity, which in the period totalled GBP4.1m (2017: GBP7.5m) and
were included within operating profit before exceptional items. We
expect restructuring costs of approximately GBP30m will be treated
as exceptional in the year ended 31 December 2018.
There were exceptional costs totalling GBP0.3m (2017: GBP0.4m)
associated with the UK Government reviews and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2018.
Exceptional costs of GBP11.6m only gave rise to a credit of
GBP0.2m, as the majority of these costs were incurred in the UK
where they only impact our unrecognised deferred tax in relation to
losses.
9. Investment revenue
Six months
ended Year ended
Six months
ended 30 June 31 December
30 June 2017 2017
2018 (restated*) (restated*)
GBPm GBPm GBPm
------------------------------------------------ ---------- ------------ ------------
Interest receivable on other loans and deposits 1.4 1.4 2.6
Net interest receivable on retirement benefit
obligations (note 17) 0.4 1.6 3.8
Interest arising on customer contracts* 0.2 0.2 0.4
Movement in discount on other debtors 0.7 0.6 1.2
------------------------------------------------ ---------- ------------ ------------
2.7 3.8 8.0
------------------------------------------------ ---------- ------------ ------------
* Restated to reflect the impact of IFRS15.
10. Finance costs
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
---------------------------------------------- ---------- ---------- ------------
Interest payable on obligations under finance
leases (0.2) (0.8) (1.3)
Interest payable on other loans (6.5) (7.2) (14.0)
Facility fees and other charges (1.8) (1.4) (3.0)
Movement in discount on provisions (0.3) (1.7) (1.3)
---------------------------------------------- ---------- ---------- ------------
(8.8) (11.1) (19.6)
Foreign exchange on financing activities (0.2) (0.1) 0.4
---------------------------------------------- ---------- ---------- ------------
(9.0) (11.2) (19.2)
---------------------------------------------- ---------- ---------- ------------
11. Tax
We recognised a tax charge of GBP11.2m (2017 restated: GBP16.3m)
on pre exceptional profits, which includes GBP10.6m underlying tax,
a GBP0.4m tax impact of amortisation on intangibles arising on
acquisition and a GBP1.0m charge on non-underlying items. The
GBP1.0m charge relates to the tax impact of movements in the
valuation of the Group's defined benefit pension schemes which
leads to a corresponding adjustment to the deferred tax asset to
match the future profit forecasts. Such a change in the deferred
tax asset impacts tax in the income statement. Where deferred tax
charges or releases are the result of movements in the pension
scheme valuations rather than trading activity, these are excluded
from the calculation of tax on underlying profit and the underlying
effective tax rate.
The tax rate on profits before exceptional items, at 30.1% (2017
restated: 66.8%) is higher than the UK standard corporation tax
rate of 19%. This is due to the upward impact of higher rates of
tax on profits arising on our international operations, together
with the absence of any deferred tax credit for current year losses
incurred in the UK. This is only partially offset by the downward
impact of our joint ventures whose post-tax results are included in
our pre-tax profit. Our tax charge in future years will continue to
be materially impacted by our accounting for UK deferred taxes. To
the extent that future UK tax losses are incurred and are not
recognised, our effective tax rate will be higher than prevailing
standard corporation tax rates. When our UK business returns to
sustainable profitability our existing UK tax losses will be
recognised or utilised, and the effective rate will be reduced.
12. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been
calculated in accordance with IAS33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the
following data:
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Number of shares millions millions millions
---------------------------------------------- ---------- ---------- ------------
Weighted average number of ordinary shares
for the purpose of basic EPS 1,096.6 1,091.1 1,089.7
Effect of dilutive potential ordinary shares:
Share options 46.5 51.7 44.9
---------------------------------------------- ---------- ---------- ------------
Weighted average number of ordinary shares
for the purpose of diluted EPS 1,143.1 1,142.8 1,134.6
---------------------------------------------- ---------- ---------- ------------
At 30 June 2018, options over 139,049 (30 June 2017: 214,632)
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 period and
they were, therefore, anti-dilutive.
Due to the loss making position in 2017, the dilutive impact has
not been separately disclosed for those measures of
profitability.
Per share Per share Per share
Earnings amount Earnings amount Earnings amount
30 June 30 June 30 June 30 June 31 December 31 December
2018 2018 2017 2017 2017 2017
Earnings and EPS GBPm pence GBPm pence GBPm pence
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
Reported, basic 14.5 1.32 (19.3) (1.77) (8.3) (0.76)
Effect of dilutive potential
ordinary shares - (0.05) - - - -
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
Reported, diluted 14.5 1.27 (19.3) (1.77) (8.3) (0.76)
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
Earnings and EPS excluding exceptional
items
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
Reported, basic 14.5 1.32 (19.3) (1.77) (8.3) (0.76)
Add back exceptional items 11.6 1.06 11.4 1.04 19.6 1.80
Add back tax on exceptional
items (0.2) (0.02) 15.9 1.46 5.0 0.46
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
Excluding exceptional items,
basic 25.9 2.36 8.0 0.73 16.3 1.50
Effect of dilutive potential
ordinary shares - (0.09) - - - -
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
Excluding exceptional items,
diluted 25.9 2.27 8.0 0.73 16.3 1.50
--------------------------------------- -------- --------- -------- ------------- ------------ ------------
13. 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 an earlier review is also required.
There have been no indicators of impairment since the full
impairment test undertaken for 2017 year end. Headroom has
historically been closest for the UK&E Health CGU and the
Americas CGU. However, both businesses have performed within
expected tolerances in the six months ended 30 June 2018. During
the six-month period the Group announced the progress made with
regards to the acquisition of selected Carillion UK health
facilities management contracts. In addition, the US Department of
Health and Human Services awarded the Group a contract to continue
to support eligibility determinations for citizens purchasing
health insurance through the Federal Health Insurance Exchanges.
The contract has a one-year base period and four one-year option
periods, with an estimated total value to Serco, subject to
workload volumes, of approximately $900m if all option years are
exercised. As a result, there is a reduced level of uncertainty
over the future expected cash flows of the Americas CGU.
14. Analysis of Net Debt
As at As at
1 January Cash Exchange Non cash 30 June
2018 flow Acquisitions* Disposals differences movements 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
Loans payable (271.5) (6.7) - - (6.0) (0.5) (284.7)
Obligations under
finance leases (20.2) 5.0 - - - (0.1) (15.3)
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
Liabilities arising
from financing activities (291.7) (1.7) - - (6.0) (0.6) (300.0)
Cash and cash equivalents 112.1 (62.1) 1.2 - (0.9) - 50.3
Loan receivables 25.7 - - - - 0.8 26.5
Derivatives relating
to Net Debt 12.8 - - - (9.7) - 3.1
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
Net Debt (141.1) (63.8) 1.2 - (16.6) 0.2 (220.1)
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
As at As at
1 January Cash Exchange Non cash 30 June
2017 flow Acquisitions* Disposals differences movements 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
Loans payable (299.9) 3.8 - - 14.8 (0.4) (281.7)
Obligations under
finance leases (28.2) 7.6 - - 0.1 (1.0) (21.5)
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
Liabilities arising
from financing activities (328.1) 11.4 - - 14.9 (1.4) (303.2)
Cash and cash equivalents 177.8 (58.7) - - (1.4) - 117.7
Loan receivables 22.9 - - - - 0.6 23.5
Derivatives relating
to Net Debt 18.1 - - - (5.0) - 13.1
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
Net Debt (109.3) (47.3) - - 8.5 (0.8) (148.9)
--------------------------- ---------- ------ ------------- --------- ------------ ----------- --------
As at As at
1 January Cash Exchange Non cash 31 December
2017 flow Acquisitions* Disposals differences movements 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ------ ------------- --------- ------------ ----------- ------------
Loans payable (299.9) 3.8 - - 25.4 (0.8) (271.5)
Obligations under
finance leases (28.2) 12.6 - - 0.1 (4.7) (20.2)
--------------------------- ---------- ------ ------------- --------- ------------ ----------- ------------
Liabilities arising
from financing activities (328.1) 16.4 - - 25.5 (5.5) (291.7)
Cash and cash equivalents 177.8 (57.3) 1.5 (7.1) (2.8) - 112.1
Loan receivables 22.9 (0.6) - - - 3.4 25.7
Derivatives relating
to Net Debt 18.1 - - - (5.3) - 12.8
--------------------------- ---------- ------ ------------- --------- ------------ ----------- ------------
Net Debt (109.3) (41.5) 1.5 (7.1) 17.4 (2.1) (141.1)
--------------------------- ---------- ------ ------------- --------- ------------ ----------- ------------
15. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------------------- -------- --------- --------- ------ ------
As at 1 January 2018 as previously
stated 55.7 14.3 168.2 121.8 360.0
Impact of the adoption of
IFRS15 - - (10.4) (19.6) (30.0)
----------------------------------- -------- --------- --------- ------ ------
As at 1 January 2018 as restated 55.7 14.3 157.8 102.2 330.0
Arising on acquisition - - - 0.5 0.5
Charged to income statement
- exceptional 1.4 - - - 1.4
Charged to income statement
- other 6.2 0.2 - 3.1 9.5
Released to income statement
- other (0.6) (0.9) (0.4) (10.1) (12.0)
Utilised during the year (5.3) (1.0) (33.7) (12.8) (52.8)
Unwinding of discount - - 0.3 - 0.3
Exchange differences (0.3) (0.1) (0.8) 0.7 (0.5)
----------------------------------- -------- --------- --------- ------ ------
As at 30 June 2018 57.1 12.5 123.2 83.6 276.4
----------------------------------- -------- --------- --------- ------ ------
Analysed as:
Current 13.6 4.0 67.3 37.5 122.4
Non current 43.5 8.5 55.9 46.1 154.0
----------------------------------- -------- --------- --------- ------ ------
57.1 12.5 123.2 83.6 276.4
----------------------------------- -------- --------- --------- ------ ------
Contract provisions relate to onerous contracts which will be
utilised over the life of each individual contract, up to a maximum
of 6.5 years from the balance sheet date. The present value of the
estimated future cash outflow required to settle the contract
obligations as they fall due over the respective contracts has been
used in determining the provision. The individual provisions are
discounted where the impact is assessed to be significant. Discount
rates used are calculated based on the estimated risk free rate of
interest for the region in which the provision is located and
matched against the ageing profile of the provision.
16. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and
bonding facilities of its joint ventures and associates up to a
maximum value of GBP4.3m (31 December 2017: GBP4.3m). The actual
commitment outstanding at 30 June 2018 was GBP4.3m (31 December
2017: GBP4.3m).
The Company and its subsidiaries have provided certain
guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of
business. The total commitment outstanding as at 30 June 2018 was
GBP233.2m (31 December 2017: GBP227.1m).
As we have disclosed before, we are under investigation by the
Serious Fraud Office. In November 2013, the UK's Serious Fraud
Office announced that it had opened an investigation, which remains
ongoing, into the Group's Electronic Monitoring contract.
We are cooperating fully with the Serious Fraud Office's
investigation but it is not possible to predict the outcome.
However, a description of the range of possible outcomes in the
event that the Serious Fraud Office decides to prosecute the
individuals and/or the Serco entities involved was disclosed in the
Principal Risks and Uncertainties section of the Group's 2017
Annual Report and Accounts.
The Group is aware of other claims and potential claims which
involve or may involve legal proceedings against the Group. The
Directors are of the opinion, having regard to legal advice
received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material
effect on the Group's financial position.
17. Defined benefit schemes
Characteristics
Among our non contract specific schemes, the largest is the
Serco Pension and Life Assurance Scheme (SPLAS). The most recent
full actuarial valuation of this scheme was undertaken as at 5
April 2015 and resulted in an actuarially assessed deficit of
GBP4.0m for funding purposes. Pension obligations are valued
separately for accounting and funding purposes and there is often a
material difference between these valuations. The most recent
summary valuation was undertaken as at 31 December 2017 when the
estimated actuarial deficit of SPLAS was GBP33.7m based on the
actuarial assessment on the funding basis whereas the accounting
valuation resulted in an asset of GBP41.8m. The primary reason a
difference arises is that pension scheme accounting requires the
valuation to be performed on the basis of a best estimate whereas
the funding valuation used by the trustees makes more prudent
assumptions. A revised schedule of contributions for SPLAS was
agreed during 2017, with 29% of pensionable salaries due to be paid
from 1 November 2017 to 31 October 2018 and 28% from 1 November
2018 to 18 December 2022. An additional shortfall contribution of
GBP1.2m was paid on 30 April 2018 and four further payments of
GBP0.5m are payable at the end of each April from 2019 through to
2022.
Values recognised in total comprehensive income
The total amounts recognised in the financial statements in
respect of all schemes are analysed as follows:
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- ---------- ---------- ------------
Current service cost - employer 2.9 4.3 8.6
Past service cost - - 0.3
Curtailment gain recognised - - (2.0)
Administrative expenses and taxes 2.0 3.0 5.3
----------------------------------------------- ---------- ---------- ------------
Recognised in arriving at operating profit 4.9 7.3 12.2
----------------------------------------------- ---------- ---------- ------------
Interest income on scheme assets - employer (16.9) (20.6) (41.8)
Interest on franchise adjustment - (0.1) (0.1)
Interest cost on scheme liabilities - employer 16.5 19.1 38.1
----------------------------------------------- ---------- ---------- ------------
Finance income (0.4) (1.6) (3.8)
----------------------------------------------- ---------- ---------- ------------
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Included within the SOCI GBPm GBPm GBPm
--------------------------------------------- ---------- ---------- ------------
Impact of SPLAS pension buy-in - (95.0) -
Cost of exiting the SPLAS longevity swap - (7.5) -
Actual return on scheme assets (54.5) 1.1 (39.7)
Less: interest income on scheme assets (17.0) (20.7) (41.8)
--------------------------------------------- ---------- ---------- ------------
(71.5) (122.1) (81.5)
Effect of changes in demographic assumptions - - 1.0
Effect of changes in financial assumptions 75.2 (19.2) (31.6)
Effect of experience adjustments (8.3) 10.5 5.6
--------------------------------------------- ---------- ---------- ------------
Remeasurements (4.6) (130.8) (106.5)
--------------------------------------------- ---------- ---------- ------------
Change in franchise adjustment (0.5) 0.1 (0.2)
Change in members' share (0.4) (0.1) (0.4)
--------------------------------------------- ---------- ---------- ------------
Actuarial losses on reimbursable rights (0.9) - (0.6)
--------------------------------------------- ---------- ---------- ------------
Total pension gain recognised in the SOCI (5.5) (130.8) (107.1)
--------------------------------------------- ---------- ---------- ------------
Balance sheet values
The total assets and liabilities of all schemes are:
30 June 30 June 31 December
2018 2017 2017
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- --------- -----------
Equities 58.8 53.5 56.2
Bonds except LDIs 25.0 23.2 23.7
LDIs 668.9 761.5 709.8
Gilts 0.2 - 0.2
Property 2.5 1.3 1.6
Cash and other 10.3 6.3 6.0
Annuity policies 524.9 572.2 587.5
----------------------------------------- --------- --------- -----------
Fair value of scheme assets 1,290.6 1,418.0 1,385.0
Present value of scheme liabilities (1,275.6) (1,423.7) (1,364.7)
----------------------------------------- --------- --------- -----------
Net amount recognised 15.0 (5.7) 20.3
Franchise adjustment* 3.2 3.9 3.6
Members' share of deficit 2.1 2.6 2.4
----------------------------------------- --------- --------- -----------
Net retirement benefit asset 20.3 0.8 26.3
----------------------------------------- --------- --------- -----------
Net pension liability (11.5) (17.5) (15.5)
Net pension asset 31.8 18.3 41.8
----------------------------------------- --------- --------- -----------
Net retirement benefit asset 20.3 0.8 26.3
Deferred tax liabilities (1.5) (0.2) (2.5)
----------------------------------------- --------- --------- -----------
Net retirement benefit asset (after tax) 18.8 0.6 23.8
----------------------------------------- --------- --------- -----------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which represents
92% of total liabilities and 93% of total assets of the defined
benefit pension schemes in which the Group participates. The
significant actuarial assumptions with regards to the determination
of the defined benefit obligation are set out below.
30 June 30 June 31 December
2018 2017 2017
Main assumptions % % %
------------------------- -------------- ----------------- -----------------
Rate of salary increases 2.6 2.7 2.7
Rate of increase in 2.30 (CPI) and 2.2 (CPI) and 3.2 2.3 (CPI) and 3.
pensions in payment 3.00 (RPI) (RPI) (RPI)
Rate of increase in 2.15 (CPI) and 2.2 (CPI) and 3.2 2.3 (CPI) and 3.
deferred pensions 3.10 (RPI) (RPI) (RPI)
Inflation assumption 2.10 (CPI) and 2.2 (CPI) and 3.2 2.2 (CPI) and 3.2
3.10 (RPI) (RPI) (RPI)
Discount rate 2.8 2.6 2.5
------------------------- -------------- ----------------- -----------------
30 June 30 June 31 December
2018 2017 2017
Post retirement mortality years years years
-------------------------- ------- ------- -----------
Current pensioners
at 65 - male 22.6 22.5 22.5
Current pensioners
at 65 - female 25.1 25.1 25.1
Future pensioners at
65 - male 24.4 24.3 24.3
Future pensioners at
65 - female 27.0 26.9 26.9
-------------------------- ------- ------- -----------
Sensitivity analysis is provided below, based on reasonably
possible changes of the assumptions occurring at the end of the
reporting period, assuming all other assumptions are held constant.
The sensitivities have been derived in the same manner as the
defined benefit obligation as at 30 June 2018 where the defined
benefit obligation is estimated using the Projected Unit Credit
method. Under this method each participant's benefits are
attributed to years of service, taking into consideration future
salary increases and the scheme's benefit allocation formula. Thus,
the estimated total pension to which each participant is expected
to become entitled at retirement is broken down into units, each
associated with a year of past or future credited service. The
defined benefit obligation as at 30 June 2018 is calculated on the
actuarial assumptions agreed as at that date. The sensitivities are
calculated by changing each assumption in turn following the
methodology above with all other things held constant. The change
in the defined benefit obligation from updating the single
assumption represents the impact of that assumption on the
calculation of the defined benefit obligation.
30 June 30 June 31 December
Pension assumption 2018 2017 2017
sensitivities GBPm GBPm GBPm
-------------------------- ------- ------- -----------
Discount rate - 0.5%
increase (99.0) (113.7) (107.9)
Discount rate - 0.5%
decrease 111.9 128.5 122.0
Inflation - 0.5% increase 77.6 89.6 83.4
Inflation - 0.5% decrease (75.3) (86.5) (78.0)
Rate of salary increase
- 0.5% increase 4.1 7.7 3.6
Rate of salary increase
- 0.5% decrease (3.9) (7.4) (3.5)
Mortality - one year
age rating 37.5 42.7 41.6
-------------------------- ------- ------- -----------
18. Related party transactions
Transactions between the Company and its wholly owned
subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions
between the Group and its joint venture undertakings and associates
are disclosed below.
Transactions
During the period, Group companies entered into the following
transactions with joint ventures and associates:
Transactions
for the
six months Current Non current
ended 30 outstanding outstanding
June at 30 June at 30 June
2018 2018 2018
GBPm GBPm GBPm
------------------------------------------- ------------ ------------ ------------
Sale of goods and services
Joint ventures 0.4 - -
Associates 3.3 0.5 -
Other
Dividends received - joint ventures 4.3 - -
Dividends received - associates 11.8 - -
Receivable from consortium for tax - joint
ventures (2.1) 3.2 -
------------------------------------------- ------------ ------------ ------------
Total 17.7 3.7 -
------------------------------------------- ------------ ------------ ------------
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.
Transactions
for the
six months Current Non current
ended 30 outstanding outstanding
June at 30 June at 30 June
2017 2017 2017
GBPm GBPm GBPm
------------------------------------------- ------------ ------------ ------------
Sale of goods and services
Joint ventures 0.2 - -
Associates 3.4 0.7 -
Other
Dividends received - joint ventures 3.9 - -
Dividends received - associates 9.9 - -
Receivable from consortium for tax - joint
ventures 1.0 8.7 -
------------------------------------------- ------------ ------------ ------------
Total 18.4 9.4 -
------------------------------------------- ------------ ------------ ------------
Transactions
for the Current Non current
year ended outstanding outstanding
31 December at 31 December at 31 December
2017 2017 2017
GBPm GBPm GBPm
------------------------------------------- -------------- --------------- ---------------
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 7.1 0.5 -
Other
Dividends received - joint ventures 11.1 - -
Dividends received - associates 17.1 - -
Receivable from consortium for tax - joint
ventures 2.4 5.3 -
------------------------------------------- -------------- --------------- ---------------
Total 38.2 5.9 -
------------------------------------------- -------------- --------------- ---------------
19. Notes to the Condensed Consolidated Cash Flow Statement
2018 2017 (restated*)
Before Before
exceptional 2018 Exceptional 2018 exceptional 2017 Exceptional 2017 (restated*)
items items Total items items Total
Six months ended 30 June GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------------ ---------------- ------ ---------------- ---------------- ----------------
Operating profit for the
period* 43.5 (11.6) 31.9 31.8 (11.4) 20.4
Adjustments for:
Share of profits in
joint ventures
and associates (15.0) - (15.0) (14.6) - (14.6)
Share based payment
expense 6.9 - 6.9 6.9 - 6.9
Exceptional impairment
of intangible
assets - - - - 2.8 2.8
Depreciation of
property, plant
and equipment* 10.7 - 10.7 11.3 - 11.3
Amortisation of
intangible assets 11.5 - 11.5 13.4 - 13.4
Exceptional profit on
disposal
of subsidiaries and
operations - - - - (0.8) (0.8)
Loss on disposal of
property,
plant and equipment 0.3 - 0.3 0.1 - 0.1
Loss on disposal of
intangible
assets 0.3 - 0.3 - - -
Non cash R&D expenditure
offset
against intangible
assets - - - (0.4) - (0.4)
Decrease in provisions* (42.9) (11.0) (53.9) (40.3) (0.6) (40.9)
Other non cash movements - - - 0.2 - 0.2
Total non cash items* (28.2) (11.0) (39.2) (23.4) 1.4 (22.0)
------------------------ ------------ ---------------- ------ ---------------- ---------------- ----------------
Operating cash
inflow/(outflow)
before movements in
working
capital* 15.3 (22.6) (7.3) 8.4 (10.0) (1.6)
(Increase)/decrease in
inventories (3.0) - (3.0) 5.6 - 5.6
Increase in receivables* (60.1) - (60.1) (24.3) (1.4) (25.7)
Decrease in payables* 36.0 (1.5) 34.5 1.7 (8.3) (6.6)
------------------------ ------------ ---------------- ------ ---------------- ---------------- ----------------
Movements in working
capital* (27.1) (1.5) (28.6) (17.0) (9.7) (26.7)
------------------------ ------------ ---------------- ------ ---------------- ---------------- ----------------
Cash generated by
operations* (11.8) (24.1) (35.9) (8.6) (19.7) (28.3)
Tax paid (4.8) - (4.8) (7.9) - (7.9)
Non cash R&D expenditure - - - - - -
------------------------ ------------ ---------------- ------ ---------------- ---------------- ----------------
Net cash outflow from
operating
activities* (16.6) (24.1) (40.7) (16.5) (19.7) (36.2)
------------------------ ------------ ---------------- ------ ---------------- ---------------- ----------------
* While the impact of IFRS15 has had no impact on cash flows,
the impact on the certain items in the Group's income statement and
balance sheet have resulted in the restatement of the highlighted
items above.
2017 2017
(restated*) 2017 (restated*)
Before
exceptional Exceptional
items items Total
Year ended 31 December GBPm GBPm GBPm
----------------------------------------- --- --- --- ------------- ------------ -------------
Operating profit for the year* 40.7 (19.6) 21.1
Adjustments for:
Share of profits in joint ventures
and associates* (27.0) - (27.0)
Share based payment expense 11.4 - 11.4
Exceptional impairment of intangible
assets - 8.9 8.9
Reversal of impairment of property,
plant and equipment (0.1) - (0.1)
Depreciation of property, plant and
equipment* 20.9 - 20.9
Amortisation of intangible assets 25.8 - 25.8
Exceptional profit on disposal of
subsidiaries and operations - (0.3) (0.3)
Loss on disposal of property, plant
and equipment (0.3) - (0.3)
Loss on disposal of intangible assets 0.3 - 0.3
Non cash R&D expenditure offset against
intangible assets (0.7) - (0.7)
Decrease in provisions* (33.6) (9.6) (43.2)
Other non cash movements 0.1 - 0.1
Total non cash items* (2.6) (1.0) (3.6)
-------------------------------------------------------- ------------- ------------ -------------
Operating cash inflow/(outflow) before
movements in working capital* 38.1 (20.6) 17.5
Decrease in inventories 3.7 - 3.7
Decrease in receivables* 8.5 4.5 13.0
Decrease in payables* (26.5) (16.4) (42.9)
-------------------------------------------------------- ------------- ------------ -------------
Movements in working capital* (14.3) (11.9) (26.2)
-------------------------------------------------------- ------------- ------------ -------------
Cash generated by operations* 23.8 (32.5) (8.7)
Tax paid (11.4) - (11.4)
Non cash R&D expenditure (0.2) - (0.2)
-------------------------------------------------------- ------------- ------------ -------------
Net cash inflow/(outflow) from operating
activities* 12.2 (32.5) (20.3)
-------------------------------------------------------- ------------- ------------ -------------
* While the impact of IFRS15 has had no impact on cash flows,
the impact on the certain items in the Group's income statement and
balance sheet have resulted in the restatement of the highlighted
items above.
20. Post balance sheet events
As explained in note 6, the Group was in the process of
acquiring facilities management businesses which operate at six
major NHS hospital sites: Great Western Hospital in Swindon; Darent
Valley Hospital in Dartford; James Cook University Hospital in
Middlesbrough; Harplands Hospital in Stoke-on-Trent; The Langlands
Unit of Queen Elizabeth University Hospital in Glasgow; and
Addenbrooke's Treatment Centre in Cambridge. The first business,
Great Western Hospital in Swindon, was acquired in June 2018. The
five remaining acquisitions took place subsequent to the period end
and therefore the financial results and impact of these five
contracts have not been recognised in these Condensed Consolidated
Financial Statements. The total annual revenue of all six contracts
is expected to be around GBP70m and the estimated operating profit
before exceptional items, including an appropriate allocation of
charges for shared support services and other incremental
overheads, will be approximately GBP4m, the aggregate consideration
payable is approximately GBP18m, which includes finalised
adjustments for potential liabilities and indemnities. As there
will only be a part-year trading contribution in 2018, after the
costs of the transition and integration phase that will be
completed over the coming months, this will likely result in a
small negative impact on Serco's net profitability for the 2018
financial year; this has been taken into account in our guidance as
stated in the Chief Executive's review. The transactions will be
immediately accretive to earnings following the completion of the
integration phase.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR UAOWRWRAWRAR
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