TIDMSRP
RNS Number : 1310E
Serco Group PLC
26 February 2020
2019 full year results
26 February 2020
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Change Change
at reported at constant
Year ended 31 December 2019 2018 currency currency
============================================= =========== =========== ============ ============
Revenue (1) GBP3,248.4m GBP2,836.8m +15% +13%
--------------------------------------------- ----------- ----------- ------------ ------------
Underlying Trading Profit (UTP) (2) GBP120.2m GBP93.1m +29% +25%
Reported Operating Profit (ie after
exceptional items) (2) GBP102.5m GBP80.5m +27% +22%
--------------------------------------------- ----------- ----------- ------------ ------------
Underlying Earnings Per Share (EPS),
diluted (3) 6.16p 5.21p +18% +15%
Reported EPS (ie after exceptional items),
diluted 4.21p 5.99p
Dividend Per Share (recommended re-instated) 1.0p n/a
--------------------------------------------- ----------- -----------
Free Cash Flow (4) GBP62.0m GBP16.3m
--------------------------------------------- ----------- -----------
Adjusted Net Debt (5) GBP214.5m GBP173.2m
Reported Net Debt (6) GBP584.4m GBP188.0m
--------------------------------------------- ----------- -----------
Rupert Soames, Serco Group Chief Executive, said: "The results
for 2019 represent the first year of revenue growth since 2013 and
the second successive year of growth in profits, and we expect
continued strong progress in 2020. 15% revenue growth of which 8%
was organic, 29% underlying profit growth and GBP5.4bn of order
intake compares favourably with a market growing at 2-3%. Free Cash
Flow has increased significantly, and our leverage ratio is at the
lower end of our target range. All this indicates that we have
finally achieved escape velocity, leaving behind the gravitational
pull of past mis-steps, and gives the Board confidence to recommend
paying a dividend for the first time since 2014, which is an
important milestone. We are immensely grateful to our committed and
hardworking colleagues, our patient shareholders and our supportive
customers who have helped us reach this point.
"The benefits of having a broad international presence, with
over 60% of our revenues and 50% of our employees outside the UK,
are once again evident. We have delivered double-digit organic
revenue growth in both our North America and Asia Pacific
Divisions, and demonstrated the ability to execute strategically
important acquisitions such as NSBU in markets with premium rates
of growth. But 2019 is also notable as being the first time since
2013 that revenues have grown in the UK.
"Perhaps the most significant aspect of 2019, however, was the
record GBP5.4bn of order intake, representing 170% of annual
revenues, and which resulted in our order book increasing to
GBP14.1bn, an increase of around 40% over the last three years.
This is the third successive year our order intake has exceeded our
revenues, and underlines the confidence governments have in Serco's
ability to deliver critical, sensitive and complex public
services."
Highlights
-- Revenue(1) of GBP3.2bn increased by 14.5%, comprising 8.2%
organic growth, 4.8% contribution from acquisitions and 1.5%
currency benefit. Very strong constant currency growth in Americas
(+35%, of which +19% was organic) and Asia Pacific (+16%). UK &
Europe (+5%) grew revenues for the first time since 2013; Middle
East (-2%) did well in a difficult market.
-- Underlying Trading Profit(2) of GBP120.2m increased by
GBP27.1m or 29% (25% at constant currency); the NSBU acquisition
contributed GBP8.6m of the increase. The Group's Underlying Trading
Profit margin increased by 40 basis points to 3.7%.
-- Reported Operating Profit increased by GBP22.0m, GBP5.1m less
than the increase in UTP as a result of the net impact of various
non-trading items including GBP22.9m related to the conclusion of
the SFO investigation and GBP9.6m related to the commercial
settlement received from the MoD as a result of the Defence Fire
and Rescue Project tender. Exceptional items included in Reported
Operating Profit, at GBP23.4m, were GBP8.5m lower than the prior
year.
-- Onerous Contract Provisions (OCPs) have run off broadly as we
expected, with the remaining liability now just GBP17m. We estimate
the total value of OCPs will have been within 2% of the original
GBP447m as at December 2014.
-- Underlying EPS of 6.16p increased by 18%, reflecting the
growth in Underlying Trading Profit, together with the benefit of
the tax rate reducing from 26% to 25%, but with this partially
offset by the increase in the number of shares following the Equity
Placing in May 2019 to fund the Naval Systems Business Unit (NSBU)
acquisition. Reported EPS in the prior year benefited from a number
of non-underlying tax credits totalling GBP11.8m which did not
recur in 2019.
-- Free Cash Flow(4) improved sharply to GBP62m (2018:
GBP16.3m), due to the increase in underlying profits, neutral
working capital movement and lower cash outflows on the residual
OCP portfolio. The number of supplier invoices in the UK paid
within 30 days increased to 86% (2018: 85%).
-- Adjusted Net Debt(5) at GBP215m increased over the year by
GBP41m, as the GBP62m of positive Free Cash Flow was offset by the
GBP55m of acquisition consideration not covered by the Equity
Placing relating to the NSBU acquisition; in addition there was a
GBP49m outflow related to exceptional items (2018: GBP19m).
-- Leverage for covenant purposes was 1.17x; underlying leverage
was 1.31x. Daily Average Adjusted Net Debt was broadly unchanged at
GBP231m (2018: GBP219m).
-- Acquisition of NSBU, a leading provider of ship and submarine
design and engineering services to the US Navy that adds materially
to the scale and capability of Serco's defence business, completed
in August 2019. Integration progressing smoothly and the business
has traded to plan. The acquisitions completed in 2018 of BTP
Systems (deepening our satellite and radar capabilities) and of six
Carillion health facilities management contracts (adding
significant scale to our UK Health business) have performed in line
with our expectations.
-- Order intake was very strong at a record GBP5.4bn,
representing around 170% of revenues; the three largest awards were
for asylum accommodation and support services in the UK valued at
GBP1.9bn, Prisoner Escort and Custody Services also in the UK
valued at GBP0.8bn, and defence healthcare provision in Australia
valued at GBP0.6bn; over 40% of the order intake comprised new
business, and the balance was existing work being rebid or
extended.
-- Order book increased by GBP2.1bn to GBP14.1bn, predominately
reflecting the strong order intake. Since the start of 2017 the
value of our order book has increased by around 40%.
-- The Pipeline of larger new bid opportunities closed 2019 at
GBP4.9bn; it was GBP5.3bn at the start of the year, but reduced to
GBP3.2bn at the half-year stage, reflecting in large part the very
strong result of contract awards, followed by good progress in
replenishing the pipeline during the second half of 2019.
-- Revenue guidance for 2020 is GBP3.4-3.5bn, representing total
growth of 6-8%, which assumes organic growth of around 4%, an
acquisition contribution of 5-6% from the annualisation of NSBU,
and a currency headwind (based upon recent rates(8) ) of 2-3%.
Underlying Trading Profit is expected to grow by about 20% to
around GBP145m. This guidance is unchanged from that given at the
Closed Period trading update issued on 12 December 2019(7) .
-- The Board recommends restarting dividends, last paid to Serco
shareholders in 2014, with a payment of 1.0p in respect of the 2019
financial year. Assuming this payment and an interim dividend for
2020 in line with our approach, Adjusted Net Debt guidance at the
end of 2020 is approximately GBP200m, with leverage expected to be
towards the lower end of our normal target range of 1-2x.
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) 207 192 8000 (USA: +1 631 510
7495) with participant pin code 5370067.
Notes to financial results summary table and highlights:
(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 year ended 31 December 2019 into Sterling at the
average exchange rates for the prior year.
(2) Trading Profit is defined as IFRS Operating Profit excluding
amortisation of intangibles arising on acquisition as well as
exceptional items. Consistent with IFRS, it includes Serco's share
of profit after interest and tax of its joint ventures and
associates. Underlying Trading Profit additionally excludes
Contract & Balance Sheet Review adjustments (principally
Onerous Contract Provision (OCP) releases or charges) and other
material one-time items. A reconciliation of Underlying Trading
Profit to Trading Profit and Reported Operating Profit is as
follows:
Year ended 31 December 2019 2018
GBPm
=========================================================== ====== ======
Underlying Trading Profit 120.2 93.1
Include: non-underlying items
Contract & Balance Sheet Review adjustments and one-time
items 3.6 23.6
Settlement received re DFRP tender 9.6 -
-----------------------------------------------------------
Trading Profit 133.4 116.7
Amortisation of intangibles arising on acquisition (7.5) (4.3)
----------------------------------------------------------- ------ ------
Operating Profit before exceptional items 125.9 112.4
Operating exceptional items (23.4) (31.9)
----------------------------------------------------------- ------ ------
Reported Operating Profit (after exceptional items) 102.5 80.5
----------------------------------------------------------- ------ ------
(3) Underlying EPS reflects the Underlying Trading Profit
measure after deducting pre-exceptional net finance costs and
related tax effects.
(4) Free Cash Flow is the net cash flow from operating
activities before exceptional items as shown on the face of the
Group's Consolidated Cash Flow Statement, adding dividends we
receive from joint ventures and associates, and deducting net
interest and net capital expenditure on tangible and intangible
asset purchases. The results for the year ended 31 December 2018
have been restated to include within Free Cash Flow the capital
repayment of finance lease liabilities of GBP8.7m (2019 includes an
equivalent GBP5.9m accounted for in accordance with IFRS16); as
this was previously included beneath Free Cash Flow, there is no
impact on net cash flow.
(5) Adjusted Net Debt has been introduced by Serco as an
additional non-IFRS Alternative Performance Measure (APM) used by
the Group. This measure more closely aligns with the covenant
measure for the Group's financing facilities than Reported Net Debt
because it excludes all lease liabilities including those newly
recognised under IFRS16. The results for the year ended 31 December
2018 have been restated to exclude from Adjusted Net Debt GBP14.8m
of obligations under finance leases accounted for in accordance
with the previous standard for leases, IAS17 (2019 excludes an
equivalent GBP8.9m accounted for in accordance with IFRS16).
(6) Reported Net Debt includes all lease liabilities, including
those newly recognised under IFRS16. In accordance with the Group
adopting the modified retrospective transition approach for IFRS16,
comparative information such as net debt and other financial
performance measures are not restated for the effect of this new
accounting standard; instead, the cumulative effect of initially
applying IFRS16 is reflected as an adjustment to opening equity at
the date of initial application, which for Serco is 1 January 2019.
A reconciliation of Adjusted Net Debt to Reported Net Debt is as
follows:
As at 31 Dec 31 Dec
GBPm 2019 2018
=========================================================== ====== ======
Adjusted Net Debt 214.5 173.2
Include: all lease liabilities accounted for in accordance
with IFRS16 369.9 n/a
Include: lease liabilities accounted for in accordance
with IAS17 n/a 14.8
----------------------------------------------------------- ------ ------
Reported Net Debt 584.4 188.0
----------------------------------------------------------- ------ ------
(7) Our outlook for 2020 is summarised as follows:
Latest As at
view 12 December
2020 outlook 2019
========================= ============ ============
Revenue GBP3.4-3.5bn GBP3.4-3.5bn
UTP GBP145m GBP145m
Closing Adjusted Net Debt GBP200m GBP200m
------------------------- ------------ ------------
(8) Our outlook for 2020 is based upon currency rates as at 31
January 2020. The rates used, along with their estimated impact on
revenue and UTP are as follows:
Year ended 31 December 2020 outlook 2019 actual 2018 actual
======================= ============ =========== ===========
Average FX rates:
US Dollar 1.31 1.28 1.34
Australian Dollar 1.95 1.83 1.78
Euro 1.19 1.14 1.13
Year-on-year impact:
Revenue (GBP80-90m) +GBP42m (GBP65m)
UTP (GBP5m) +GBP3.7m (GBP4.0m)
----------------------- ------------ ----------- -----------
Reconciliations and further detail of financial performance are
included in the Finance Review on pages 22-38. 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 39-71. Further details regarding the impact of
the adoption of IFRS16 are included in note 1 to the condensed
consolidated financial statements.
Chief Executive's Review
Summary of financial performance
Revenue and Trading Profit
Reported Revenue increased 14.5% to GBP3,248m (2018: GBP2,837m);
in accordance with IFRS this measure excludes Serco's share of
revenue from joint ventures and associates of GBP395m (2018:
GBP375m). Net currency movements increased revenue by GBP42m or
1.5%, whilst the net revenue contribution from acquisitions added
GBP140m or 4.8% which splits approximately 1% from the Carillion
health facilities management contracts that transferred to Serco
between June and August last year and 4% from Naval Systems
Business Unit (NSBU) which completed at the start of August 2019.
At constant currency, the organic revenue growth was therefore
GBP230m or 8.2%, accelerating from 4% in the first half of the year
to 12% in the second half. The very strong growth rate in the
second half included the start of the two particularly large
contract awards (the AASC asylum accommodation and support contract
in the UK, and the AHSC defence garrison healthcare services
contract in Australia) and better-than-expected short-term volume
related work, notably from our customers on US defence frameworks,
the US Federal Emergency Management Agency (FEMA) contract, as well
as certain Citizen Services operations in Australia. This has
resulted in particularly strong organic growth in each of our
Americas and AsPac Divisions, and, after several years of organic
decline in the UK & Europe Division, we saw encouraging organic
growth in the second half of 2019.
Underlying Trading Profit (UTP) increased by GBP27.1m or 29% to
GBP120.2m (2018: GBP93.1m); excluding the GBP3.7m favourable impact
of currency and the GBP1.2m increase from the adoption of IFRS16,
the increase in UTP was GBP22.2m or 24%. Profit growth was driven
by the Americas Division in the first half by the CMS contract,
which experienced an unusually high volume of fixed-price variable
work in the first few months of the year, and in the second half of
the year from the NSBU acquisition. Profits in the UK benefited
from the Carillion health facilities management acquisition;
successful mobilisation of the AASC contract saw mobilisation
costs, expensed largely in the first half of the year, being offset
by its move into profitability in the second half. Profits also
increased in the AsPac Division, again driven by its particularly
strong organic growth performance, whilst profits fell in the
Middle East Division, which largely reflects the significant
reduction in the defence logistics MELABS contract as described a
year earlier. The Group's Underlying Trading Profit margin was
3.7%, an increase of 40 basis points.
Trading Profit was GBP133.4m (2018: GBP116.7m), GBP13.2m higher
than UTP, which reflects a net GBP3.6m credit in Contract &
Balance Sheet Review and one-time items (2018: net credit of
GBP23.6m), and GBP9.6m of the commercial settlement received by
Serco regarding the Defence Fire and Rescue Project (DFRP) tender.
As with prior years, both Trading Profit and Underlying Trading
Profit benefited from losses on previously-identified onerous
contracts being neutralised by the utilisation of Onerous Contract
Provisions (OCPs); the GBP40.9m utilised on losses in 2019
(excluding IFRS16-related accelerated utilisation) was in line with
expectations and lower than the prior year utilisation of GBP51.8m;
we expect utilisation to drop further in 2020. The closing balance
of OCPs now stands at GBP17m, compared to GBP82m at the start of
the year and the initial charge of GBP447m taken at the end of
2014; we estimate the total value of OCPs will have been within 2%
of that original estimate.
Reported Operating Profit and Exceptional Costs
Reported Operating Profit of GBP102.5m (2018: GBP80.5m) was
GBP30.9m lower than Trading Profit as a result of, first, GBP7.5m
(2018: GBP4.3m) of amortisation of intangibles arising on
acquisition, and second, operating exceptional costs of GBP23.4m
(2018: GBP31.9m). The latter includes the GBP22.9m for the fine and
costs regarding the conclusion of the SFO investigation,
restructuring programme costs of GBP12.8m (2018: GBP32.3m) related
to the final steps in the implementation of the Transformation
stage of our strategy, and a GBP19.3m non-cash release of a
provision that had been originally charged in 2014 in relation to
commercial disputes. After exceptional net finance costs of GBPnil
(2018: GBP7.5m net credit) and an exceptional tax charge of GBP2.7m
(2018: credit of GBP2.1m), total net exceptional costs were
GBP26.1m (2018: GBP22.3m).
Financing and pensions
Pre-exceptional net finance costs were GBP21.8m (2018:
GBP13.9m), with the increase driven by GBP6.9m (2018: GBP0.6m) of
the interest component of leases as required under IFRS16, and
GBP3.0m of non-cash credits no longer earned following the
repayment of the Intelenet loan note in October 2018. On a daily
average basis, Adjusted Net Debt was broadly unchanged at GBP231m
(2018: GBP219m). Cash net interest paid was GBP22.2m (2018:
GBP18.1m).
Serco's pension schemes are in a strong funding position,
resulting in a balance sheet accounting surplus, before tax, of
GBP54m (31 December 2018: GBP71m) on scheme gross assets and gross
liabilities each of approximately GBP1.4bn. The opening net asset
position led to a net credit within net finance costs of GBP2.1m
(2018: GBP0.8m). For the Group's main scheme, the Serco Pension and
Life Assurance Scheme (SPLAS), the purchase of a bulk annuity from
an insurer, has the effect of fully removing longevity, investment
and accounting risks for around half of all scheme members; the
gross liability remains recognised on our balance sheet, but there
is an equal and opposite insurance asset reflecting the perfect
hedge established by the annuity.
Tax
The underlying effective tax cost was GBP24.4m (2018: GBP20.6m),
representing an underlying effective rate of 25% (2018: 26%) based
upon GBP98.4m (2018: GBP79.2m) 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 year, and because it reflects the tax
charges at locally prevailing rates in the international Divisions
which tend to be higher than the UK's rate; these two factors are
partially offset by the proportion of Serco's profit before tax
generated by consolidating our share of joint venture and associate
earnings which have already been taxed. The rate in 2019 is lower
than the prior year reflecting the improvement in, and changing mix
of, the Group's profitability; we expect the rate to continue at
around 25%, which reflects our updated expectations for the
proportions of profits coming from our UK and international
operations, and the anticipated tax rates in each jurisdiction.
Tax on non-underlying items was a net charge of GBP3.0m (2018:
credit of GBP11.8m), which includes an additional GBP0.8m (2018:
GBP2.9m) of deferred tax asset in relation to UK losses to reflect
the improved forecast of UK taxable income; the prior year credit
related predominantly to deferred tax movements associated with
changes in the valuation of the Group's defined benefit pension
schemes. Total pre-exceptional tax costs were GBP27.4m (2018:
GBP8.8m). Tax on exceptional items was GBP2.7m (2018: tax credit of
GBP2.1m). The total tax charge was therefore GBP30.1m (2018:
GBP6.7m) and net cash tax paid was GBP31.2m (2018: GBP10.6m), which
includes the effect of tax paid in 2019 on non-underlying items
that were credits in the prior year, as well as the timing of tax
payments on account.
Reported result for the year
The reported result for 2019, as presented at the bottom of the
Group's Consolidated Income Statement on page 39, is a profit of
GBP50.6m (2018: GBP67.4m). This comprises Reported Operating Profit
of GBP102.5m (2018: GBP80.5m), Reported Profit Before Tax of
GBP80.7m (2018: GBP74.1m) and Tax of GBP30.1m (2018: GBP6.7m). The
reported tax charge increased by GBP23.4m in 2019 as a result of
increases in tax on non-underlying and exceptional items of
GBP19.6m in addition to the GBP3.8m increase in tax on underlying
profit.
Earnings Per Share (EPS)
Diluted Underlying EPS, which reflects the Underlying Trading
Profit measure after deducting pre-exceptional net finance costs
and related tax effects, increased by 18% to 6.16p (2018: 5.21p).
The improvement reflects the 29% increase in Underlying Trading
Profit and the lower tax rate, partially offset by the increase in
net finance costs; EPS growth was tempered by the 6% increase in
the weighted average number of shares in issue, after the dilutive
effect of share options, to 1,199.0m (2018: 1,125.4m), with the
increase largely as a result of the approximate seven-month effect
of the additional Placing shares from 28 May 2019. Diluted Reported
EPS, which includes the impact of the other non-underlying items
and exceptional costs, was 4.21p (2018: 5.99p).
Cash Flow and Net Debt
Free Cash Flow improved to GBP62.0m (2018: GBP16.3m), which
included the effect of the increase in underlying profits as
described above as well as receipt of the GBP9.6m DFRP settlement.
The cash outflows related to loss-making contracts subject to OCPs
(principally the Caledonian Sleeper, COMPASS and PECS) reduced,
reflected in the lower rate of provision utilisation of GBP40.9m
(2018: GBP51.8m). Working capital movements were also broadly
neutral, with a net outflow of just GBP0.1m compared to an outflow
of GBP21.6m in the prior year. The Group did not utilise any
working capital financing facilities in 2019 or the prior year, and
has no such facilities in place. Average working capital days for
the year were broadly unchanged; we are proud to say that 86% of UK
supplier invoices were paid in under 30 days, up from 85% in 2018,
and 96% were paid in under 60 days. Of other movements within Free
Cash Flow to note, cash tax paid was higher but capital expenditure
was lower, both of which include some timing effects.
Adjusted Net Debt at 31 December 2019 increased to GBP214.5m (31
December 2018: GBP173.2m); our key measure of Adjusted Net Debt
excludes all lease liabilities, which now total GBP370m including
those newly recognised under IFRS16, and the Adjusted measure more
closely aligns with that for covenant purposes of our financing
facilities. The increase of GBP41.3m includes the Free Cash inflow
of GBP62m, offset principally by three sources of outflow: first,
the GBP55m net outflow for acquisitions (2018: GBP31.3m), driven by
the consideration payment of GBP184m for NSBU and the GBP139m of
Equity Placing proceeds; second, GBP22.9m relating to the
conclusion of the SFO investigation; and thirdly an outflow of
GBP26.3m related to other exceptional items (2018: GBP19.2m). The
closing Adjusted Net Debt of GBP214.5m compares to a broadly
unchanged daily average of GBP231m (2018: GBP219m) and a peak net
debt of GBP357m (2018: GBP292m), with this increase reflecting the
timing of the payment of exceptional costs and acquisition
consideration.
Reported Net Debt was GBP584m (2018: GBP188m), which includes
the GBP370m (2018: GBP15m) related to leases. The increase in
leases was largely related to the mobilisation of the 10-year AASC
contract in 2019.
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.17x EBITDA (2018: 1.06x). This compares
with the covenant requirement to be less than 3.5x. Our underlying
net debt leverage, which excludes non-underlying items within
covenant EBITDA such as the DFRP settlement and OCP releases, was
1.31x (2018: 1.23x), which is in the lower half of our normal
target range of 1-2x underlying net debt to EBITDA.
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.
Dividend recommendation
When dividend payments were suspended in 2014, the Board
committed to resuming dividend payments to Serco's shareholders as
soon as it judged it prudent to do so. 2019 has been a year of very
strong operational and financial performance. It is also the last
year of significant outflows of cash related to OCPs and
restructuring exceptional costs. Our expectations for 2020 are for
further good progress in increasing underlying earnings and
reducing financial leverage.
The Board is therefore recommending the payment of a final
dividend in respect of the 2019 financial year. Our intention going
forward is to weight dividend payments roughly one-third :
two-thirds between interim and final payments. The Board considers
it appropriate to reintroduce the dividend payments at a level of
underlying EPS cover initially of around four times, equivalent to
a payout ratio of approximately 25%. The Board is therefore
recommending the payment of a final dividend in respect of the 2019
financial year of 1.0p. The dividend, subject to shareholder
approval at the Annual General Meeting on 14 May 2020, would be
paid on 5 June 2020.
A combination of this final dividend in respect of the 2019
financial year, together with an interim dividend in respect of
2020 aligned to the recommended dividend and outlook as described,
would result in a cash outflow for dividend payments to
shareholders of around GBP20m in 2020. This has been taken account
of in our guidance for 2020 Adjusted Net Debt and leverage.
The Board will keep the dividend, including the payout ratio,
under regular consideration as we continue to implement the growth
stage of our strategy. This will consider views of the Group's
underlying earnings, cash flows and financial leverage, together
with the prevailing market outlook. The Board is mindful of the
requirement to maintain an appropriate level of dividend cover, the
potential alternative uses of capital to generate incremental value
for shareholders, and the desire to maintain financial flexibility
and a strong balance sheet that is considered appropriate for
Serco's ability to deliver sustainable value for all of the Group's
stakeholders.
Contract awards, order book, rebids and Pipeline
Contract awards
2019 was a record year for order intake, with almost all regions
performing very strongly. At GBP5.4bn, order intake represented a
book-to-bill ratio (the relationship between orders received and
revenue recognised) of around 170%, and 2019 was the third year in
succession that the book-to-bill ratio exceeded 100%, which helped
to drive our order book to record levels. There were over 50
contract awards worth more than GBP10m each, but there were four
particularly large awards which accounted for approaching
two-thirds of the intake for the year.
In the UK, we won our largest ever contract, being an estimated
GBP1.9bn over 10 years for AASC (providing asylum accommodation and
support services). As previously set out, the AASC contracts are
particularly significant, as they replace the COMPASS contracts
which had been incurring losses (offset in the P&L by the
utilisation of the OCP) of around GBP15-20m on average per year for
the last five years. Under the new AASC contracts, we did not
retain the Scotland & Northern Ireland region, but gained the
much larger Midlands & East of England region, whilst retaining
our other previous COMPASS region of the North West; as a
consequence, we are now the largest provider of asylum seeker
accommodation in the UK. Given our past experience, we also bid the
regions at prices which we believe should allow us to make a fair
return. The Group's second largest contract award for the year was
also in the UK, where the UK Ministry of Justice (MoJ) selected
Serco to continue operating the Prisoner Escort & Custody
Services (PECS) in a contract valued at GBP0.8bn over 10 years.
Similar to COMPASS/AASC, this is a successful rebid of a contract
previously incurring losses that were being offset by an OCP, and
also similar to AASC in that Serco was selected to provide these
sensitive and demanding services over a significantly increased
geographical area.
The next two largest contract awards were in Australia. Serco
won a new AU$1.01bn (around GBP560m) contract over an initial
six-year term to provide health services personnel to the
Australian Defence Force at garrisons across the country, working
as a sub-contractor to BUPA. We also secured a two-year extension
for immigration services with an estimated value of GBP0.4bn.
We have not included within our order intake the contract to
continue operating the Northern Isles Ferry Services, which was
announced by the customer in September 2019 and has an estimated
total contract value of GBP450m, as we have not yet signed the
contract due to a procurement challenge by the unsuccessful bidder.
In early February 2020 the Scottish Government announced that all
barriers to the award of the contract had been resolved, and that
signing the definitive contract is anticipated to occur in the
coming months.
Other notable contract awards included, in the UK & Europe
Division: rebid and expansion of our work on the Skills Support for
the Workforce Programme; a new environmental services contract with
the Royal Borough of Windsor and Maidenhead, together with numerous
other contract extensions for similar services; extending defence
support contracts for the UK MOD and the US Air Forces in Europe;
and securing our contact centre operations for Companies House and
our support services to the European Organisation for Nuclear
Research (CERN).
Americas had a strong year of order intake, including: a new win
for field office services to the US Pension Benefit Guaranty
Corporation worth up to $200m; extending work we perform for the
Federal Retirement Thrift Investment Board (FRTIB); support to
transitioning military service members valued at $95m; an $82m
award for NexGen IT solutions US Air Force Civil Engineering;
increased task orders on ship and shore modernisation and hardware
frameworks totalling over $250m as well as those for our support
services to the Federal Emergency Management Agency (FEMA)
totalling over $100m; and the acquired businesses of NSBU and BTP
Systems also achieved pleasing contract awards as referred to in
the Acquisitions section below.
In AsPac, a new AU$115m contract to operate the Adelaide Remand
Centre on behalf of the South Australia Department for Correctional
Services was won, we extended our contract for South Queensland
Correctional Centre and successfully rebid our contract for traffic
camera services in the State of Victoria. In the Middle East, we
signed the contract extension to continue operating the Dubai
Metro, as well as extensions for air traffic control services in
Dubai and Iraq, several facilities management awards in Abu Dhabi,
and a new contract for public infrastructure advisory services for
Mashroat in Saudi Arabia.
Of the total order intake, over 40% comprised new business, with
the balance represented by the value of rebids and extensions of
existing work. Reflecting the scale of the AASC and PECS awards,
around 55% of order intake came from the UK, with the remaining 45%
from customers of our Americas, AsPac, Middle East and continental
European businesses.
Bids for new work that were unsuccessful in the year included
the defence deployable health opportunity in Australia, the Eastern
Harbour Crossing and the Tsing Ma Control Area transport operations
in Hong Kong, and environmental services and health facilities
management tenders in the UK and AsPac. Of existing work, the
largest loss was for the Scotland & Northern Ireland region of
the COMPASS contract, however this was more than offset by winning
the new larger region of the Midlands & East of England, whilst
keeping our existing North West of England region. The next largest
rebid loss was that for transport management of the Tsing Sha
Control Area in Hong Kong which had annual revenue of around
GBP20m, equivalent to around 0.6% of the Group overall; as this was
an onerous contract it does not impact UTP. The next two largest
rebid losses each had annual revenue of GBP10-15m, which were the
Cleveland Clinic healthcare facilities management contract in Abu
Dhabi and traffic management services to the US state of Georgia
Department of Transportation.
The win rate by value for new work, which has been 20-25% for
the last four years, increased to around 40% particularly as a
result of the value of the new AASC Midlands & East of England
region and the new Australia defence health contract. The win rate
by value for securing existing work was around 65%, which is lower
than the 75-90% trend in recent years, but which is reflective of
losing the existing Scotland COMPASS region; if the Scotland
COMPASS region were excluded, the win rate by value for existing
work would have been over 90%. Win rates by volume were over 50%
for new bids and over 90% for rebids and extensions.
2019's GBP5.4bn of order intake was an exceptional performance.
However, in our business, order intake is lumpy, and we expect in
2020 that order intake will be significantly lower than that which
we saw in 2019.
Order book
Driven by the very strong order intake, the Group's order book
closed the year at an estimated GBP14.1bn, up by GBP2.1bn versus
the GBP12.0bn at the start of 2019. The order book takes into
account any required changes in assumptions for existing contracts
including currency movements, as well as the addition through the
acquisition of NSBU which has visibility of around $700m of future
revenue but only $200m is taken into the order book as the balance
is unexercised options. This order book definition is therefore
aligned with the IFRS15 disclosures of the future revenue expected
to be recognised from the remaining performance obligations on
existing contractual arrangements. It is worth noting that as it
excludes unsigned extension periods; the GBP14.1bn would be
GBP15.3bn if option periods in our US business were included; as
option periods have always tended to be exercised in our US
business, we do include these in our assessment of order intake,
but in accordance with IFRS15 we do not include them in the order
book until they are exercised. Furthermore, the order book
definition excludes our share of expected revenue from contractual
arrangements of our joint ventures and associates which would add a
further GBP1.5bn if included within our order book, driven by the
current pricing period of the AWE operations and the Merseyrail
franchise.
There is GBP2.6bn of revenue already secured in the order book
for 2020, equivalent to around 75% visibility of our GBP3.4-3.5bn
revenue guidance; the 'gap' in visibility is typically closed by
our US business receiving the exercise of contract option periods
and through short-term task order work on framework contracts,
together with the necessary securing of contract extensions or
rebids across the rest of the Group.
Rebids
As we look ahead the customary three years through to the end of
2022, across the Group there are over 70 contracts in our order
book with annual revenue of over GBP5m where an extension or rebid
will be required, representing current annual revenue of around
GBP1.5bn in aggregate or over 40% of the Group's 2020 revenue
guidance. The proportion of revenue that requires securing at some
point over the next three years is normal given our average
contract length of around seven years (or approximately ten years
on average on a revenue-weighted basis, as larger contracts
typically have longer terms); at the start of 2018 the three-year
forward rebid value was GBP1.4bn and at the start of 2019 it was
GBP1.2bn. Contracts that could potentially end at some point before
the end of 2020 have aggregate annual revenue of around GBP300m,
though none individually exceed GBP50m. In 2021, the aggregate
annual value of contracts due for extension or recompete is
currently around GBP800m, with this including our operations for
the Dubai Metro and Fiona Stanley Hospital in Australia, each of
which account approximately for 3% of Group revenue. In 2022, the
aggregate annual revenue due for extension or recompete at some
point in that year is around GBP400m; this includes the Australian
immigration services contract due to end in December 2021 unless
the option for a further extension is exercised or a rebid is won,
and which currently accounts for over 5% of Group revenue.
Pipeline
As we have previously described, Serco's measure of Pipeline is
probably more narrowly defined than is common in our industry; it
was originally designed as an indicator of future growth and
focuses on bids for new business only. As a consequence, on average
over the last five years, less than half of our achieved order
intake has come from the Pipeline. It measures only opportunities
for new business that have an estimated Annual Contract Value (ACV)
greater than GBP10m, and which we expect to bid and to be awarded
within a rolling 24-month timeframe; we cap the Total Contract
Value (TCV) of individual opportunities at GBP1bn, to attenuate the
impact of single large opportunities; the definition does not
include rebids and extension opportunities; and in the case of
framework, or call-off, contracts such as 'ID/IQ' (Indefinite
Delivery / Indefinite Quantity contracts which are common in the
US) we only take the individual task orders into account. It is
thus 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.
On this definition our Pipeline stood at GBP4.9bn at the close
of 2019. At the beginning of 2019 it was GBP5.3bn, however, as we
noted at the time of reporting the results for the 2018 financial
year back in February 2019, we had already won in the first month
of the year the two largest opportunities in this Pipeline which
reduced it by GBP1.7bn. Other wins, losses and a small number of
removals due to opportunities no longer meeting our definition
reduced the Pipeline further, such that it stood at GBP3.2bn at the
half-year stage. With a number of opportunities maturing to the
stage where they meet our Pipeline definition, together with our
ongoing Business Development progress to reload the Pipeline with
new opportunities, we therefore saw the Pipeline increase in the
second half of the year. The closing position consisted of around
30 bids that have an ACV averaging approximately GBP30m and a
contract length averaging around six years. The UK & Europe and
Americas Divisions each represent around 40% of the Group's
pipeline, with the AsPac and Middle East Divisions the balance.
As we have noted before, in the services industry in which Serco
operates, pipelines are often lumpy, as individual opportunities
can be very large, and when they come in and out of the Pipeline
they can have a material effect on reported values. Whilst the
second half of 2019 did produce an expected increase in the
Pipeline, and market conditions may over time become more
favourable, it does not particularly support that Pipeline progress
is either 'straight line' nor strongly predictive of future
revenues.
Going forward, Serco will change its Pipeline definition to no
longer exclude opportunities for new business that have an
estimated ACV smaller than GBP10m. At around GBP1.6bn, smaller
opportunities in aggregate are a significant component of the
Pipeline and potential growth, and likely to be increasingly so
given the use of task orders under framework contracts; the
Pipeline on this basis therefore increases from GBP4.9bn to
approximately GBP6.5bn.
Operational progress, transformation, innovation and people
We have an ambition to be the best-managed business in our
sector. Achieving this will require investment in people, processes
and systems. Each are described below.
People
Serco is a business that provides people-enabled public
services. In nearly all our contracts, what government customers
are buying is the service and expertise of people who are
knowledgeable, disciplined, reliable, committed to delivering
public services, appropriately paid and well led and managed. It
therefore is central to our ability to deliver effectively to our
customers that our colleagues within the business feel engaged.
Since 2011, Serco has carried out an employee survey every year,
to which a large majority of the eligible workforce respond -
around 27,000 people in 2019. The survey has about 50 questions
covering everything from attitudes to health and safety,
relationships with peers, respect for diversity and many other
dimensions. We also test an "engagement score" which is a standard
method of allowing companies to measure and benchmark from year to
year what in olden times would have been called "morale". The
progression of these scores in the run-up to the disastrous years
of 2013 and 2014, and our subsequent recovery, tell the tale of
Serco's turnaround as eloquently as any financial metrics:
2011 2012 2013 April 2014* Oct 2014* 2015 2016 2017 2018** 2019
Leaders 65 56 51 38 51 55 72 71 69 77
Managers 54 51 49 n/a 58 59 62 65 70 73
All employees 45 45 42 42 51 53 54 56 67 71
* in 2014 two surveys were done.
** in 2018, the methodology for calculating employee engagement
changed, aligned to the new specialist third party provider of the
survey. As reported at the time, it is not possible to adjust
historic data to restate to the new methodology, but analysis
performed by the new provider in 2018 indicated that the engagement
level for that year was broadly stable on the previous year's
score.
Two things shine out from these numbers: in 2011 and 2012, there
was a huge difference in the experience as an employee of Serco to
the experience of the 300 or so leaders. And in 2018 and 2019, not
only are the scores much higher, they are much more tightly
grouped, which says that the morale of the workforce is similar to
that of managers and leaders. It is a good thing, and actually
quite rare, to find such close correlation between leaders' and
employees' morale in companies in our industry and with our
scale.
One other fact worth mentioning: in 2019 we opened up the
questionnaire to allow free-text answers to questions, with
specific opportunities to make comments to the Board. To our
amazement, the 27,000 respondents made some 50,000 individual
comments, and ever since we have been trying to work out how we can
digest that much feedback. Our solution has been to pick at random
500 of them - the good the bad and the ugly - and publish them. If
anyone has any doubt as to the fact that Serco colleagues are a
feisty, fearless and passionate lot who care deeply about their
work delivering public services and about Serco, we need look no
further than those comments.
Three other data points are worth mentioning as regards people:
in 2019, we estimate that over 500,000 people applied to work for
Serco, so it appears that our ambition to make Serco an employer of
choice seems to be working. And in the last three years, from a
senior management cohort of around 350, the rate of annual
voluntary turnover has been around 3%. Finally, in 2019, we
launched our first graduate recruitment scheme in the UK; bearing
in mind that Serco's reputation, particularly in the UK, was so
badly damaged a few years ago, it was gratifying to see that around
1,000 graduates applied, over 400 sat the aptitude tests, 45
attended a selection day, and we hired 14.
We continue to make significant investment in training. At a
Group Level, we have continued to run our highly successful Serco
Senior Management Programme. This course, exclusive to Serco, and
designed and delivered by us and Saïd Business School, Oxford, has
been an outstanding success, and so far some 11 courses, embracing
330 senior managers, have been run. In 2019, we added a specific
Contract Managers' course, which also runs at Oxford. Within the
businesses, Operational Excellence practices continue to be
embedded across the business, with 2 Master Black Belts, 9 Black
Belts and 154 Green Belts now supporting the 3,471 Yellow Belts
that have been trained over the last four years. And in addition,
our Divisional Chief Executives are encouraged to develop their own
regional courses, and we have a plethora of different local courses
available to management.
Systems and processes
However well trained the people, they need the tools to do the
job, and these are in part processes, and in part systems.
Significant progress has been achieved on our core IT systems; in
2018, we migrated our SAP system into the cloud, thereby avoiding
the multi-million pound investment we would have had to have made
in upgrading our IBM servers, and allowing us to vacate our largest
server farm. In 2019, we followed this up by upgrading our SAP
versions from the heavily customised 2009 release to the latest
version. Few companies can claim to have their core ERP system both
cloud-based and on current release. We also did extensive and
complex work migrating a large number of specialist applications to
the cloud, which has allowed us to close the second of our two
large server centres in the UK in December. We will also be
upgrading our core US ERP system to latest version in 2020.
Many contracts are supported by IT systems we have developed. In
the US, we have used sophisticated Robotic Process Automation and
Artificial Intelligence tools to transform the speed and efficiency
of key processes on our CMS contract, which has allowed us to
handle large variations in volumes of work without hiring and
firing people. In the UK, using the latest workflow tools we have
completely re-written the systems used to manage the AASC and PECS
contracts. Similarly, in Australia, we have created a highly
efficient set of systems which have allowed us to recruit and
manage over 1,000 healthcare professionals to serve the Australian
Defence Force; we have also developed and launched a combined
online and call centre application which allows citizens to report
non-urgent issues to the Victoria Police. So far, we have taken
over 500,000 calls to this service.
A key priority for the Company is to improve the productivity
and efficiency of our workforce, and to streamline processes such
as payroll and absence management. Whilst this sounds
straightforward, in a company employing over 50,000 people, many on
terms and conditions inherited from previous employers, it has
proved to be a major task, on which we have so far spent not far
short of GBP10m. However, we are now rolling out workforce
management systems, and have around 13,000 users on various levels
of system, ranging from simple clock-in-clock-out time management,
to full rostering, absence management and workforce planning.
In the critical area of cyber security we continue to invest,
and regularly achieve the accreditations and standards demanded by
our various government clients of their contractors. Our hopes that
we would be able to reduce our IT costs as we shed old server farms
and systems have been largely set to nought by the inexorable
increase in investment we need to make on protecting our IT systems
and data from those who would do us and our customers harm.
A major challenge for the IT team was the integration of around
1,000 NSBU employees onto our systems. Both Serco North America and
NSBU work on highly classified contracts, and managing the task of
migration whilst maintaining the appropriate security was complex.
Rather than try and merge the two environments, we have given all
NSBU employees new laptops which meet our security requirements and
"lifted and shifted" all the NSBU data onto our proven Serco secure
network.
The basic operational transformation of Serco is now largely
complete in terms of HR, IT, Procurement and Finance. But much work
still remains to bring systems and processes from "acceptable" up
to "best-in-class" in our industry, and we intend to continue to
invest, with the priority in 2020 being the creation of a new
front-end to our HR systems outside North America ("Project
Goldfinch") and beginning to use the analytics available in our
workforce management systems to improve efficiency and productivity
and create sustainable competitive advantage. A business which
employs over 50,000 people, receives over 500,000 job applications
and recruits over 15,000 new hires a year has the scale to be
efficient.
Innovation does not only come from IT. The new Clarence prison
in New South Wales, which opens in mid-2020, is a minor miracle of
innovation and stands in sharp contrast to prisons built 20 years
ago, let alone 100 years ago. Advances in materials - specifically
strengthened glass, have allowed us to create a prison where there
is barely a steel bar to be seen. Cells are airy and light, with
large windows, likewise visiting areas; prisoners will have their
own tablets which allow them to communicate with family, read books
and watch films. And yet security is world class. Our new
Caledonian Sleeper trains, running between Scotland and London,
have replaced notoriously shabby 40-year old rolling stock, and
have double beds and ensuite showers and toilets. Our Northlink
ferries have introduced disabled changing and toilet facilities
that transform the experience of disabled people who travel between
the mainland and the Northern Isles. In Australia, we have
developed an "e-order" mobile trolley system for ordering and
tracking clinical pathology tests in Fiona Stanley Hospital, which
other hospitals are considering adopting.
The Serco Institute
In 2019, we relaunched Serco Institute. Originally active in the
early days of outsourcing as a way to encourage thinking and
research about the delivery of government services, it had a
reputation for providing interesting and challenging articles for
those interested in public service delivery. After 2011 it was left
to wither, and has been dormant for several years. However, at a
time when the idea that private companies can deliver public
services is being widely questioned, when citizens' expectations of
public services continue to increase and evolve, and where
over-aggressive risk-transfer has led in the UK to huge damage to
the UK Government's supply chain, we feel that there is need for a
forum in which ideas about the delivery of public services can be
expressed.
We have brought together people to discuss ways of capturing
social value in government contracts; we have commissioned
independent research from Capital Economics on the economics of
outsourcing, as well as work in conjunction with Kings College on
the Whole Force approach for the British military; we have
commissioned research on why rates of violence are so much lower in
Australian prisons than UK prisons. The Serco Institute works to
help governments understand what works in service delivery; what
sets it apart from other think tanks is the international
dimension, access to colleagues' deep operational expertise, and
the live public service environment we have to conduct studies and
run trials.
It is early days, but we believe that the Serco Institute can
make a meaningful contribution to understanding what works, and
why, in policy delivery, and disseminating knowledge of innovations
in public services.
Acquisitions
Acquisitions can have an important role in sustainable value
creation by bringing new capabilities and skills to our customers,
enhancing returns for our shareholders and improving opportunities
for the employees and business partners of Serco. Generally
speaking, we regard acquisitions as higher risk than organic
growth, so any candidates have to meet our stringent criteria of
being both strategically and financially compelling. In 2019 we
undertook a major acquisition (described below) in the form of
NSBU, having made two much smaller 'bolt on' acquisitions of BTP
Systems and the Carillion health facilities management contracts in
2018.
In May 2019, Serco announced that it had entered into a
definitive Asset Purchase Agreement to acquire for $225m the Naval
Systems Business Unit and a small number of related contracting
entities (collectively, 'NSBU'), from Alion Science &
Technology Corporation. NSBU is a leading provider of naval design,
systems engineering, as well as production and lifecycle support
services to the US Navy, US Army and Royal Canadian Navy. In the 12
months to September 2018 NSBU had revenues of $336m, which compares
with Serco's North American Defence revenues in 2018 of $453m.
The acquisition marked an important step for Serco, materially
adding to the scale and capability of our US defence business, and
in particular to the maritime support segment. Prior to the
acquisition, Serco employed some 6,000 people in North America, of
whom 2,300 worked in defence, and Serco has been providing services
to the US Navy for nearly 30 years. NSBU, which employs around
1,000 people, has brought world-class ship and submarine design,
systems, and engineering services, production support and
in-service sustainment capabilities, which are highly complementary
to Serco's existing skills in ship modernisation, hardware
integration and naval logistics.
As well as broadening capabilities, the acquisition increases
significantly the scale of our international Defence businesses.
Serco Group's revenue mix from Defence has increased from 30% in
2018 to around 35% of 2019 revenues on a pro forma basis, which is
equivalent to approximately $1.7bn (GBP1.3bn), while the Americas
Division as a proportion of the Group has increased from 20% in
2018 to around 29% on a pro forma basis, equivalent to
approximately $1.4bn (GBP1.1bn).
The combined business is a top tier supplier of services to the
US Navy, and increases our exposure to US Navy fleet expansion,
which is one of the fastest-growing areas of public procurement.
The US Navy has announced plans to increase the fleet from 280 to
355 ships by 2034, and we see a long-term and growing demand for
the capabilities that the combination of Serco and NSBU will be
able to provide.
The acquisition was financed through a combination of a new
GBP45m debt facility together with an Equity Placing for cash of
10% of existing share capital that raised gross proceeds of around
GBP140m on the day that the transaction was announced. As stated at
the time of the acquisition, in 2020, NSBU is expected to
contribute revenue of approximately $370m (GBP285m), EBITDA of $28m
(GBP21m) and Underlying Trading Profit of $27m (GBP20m), resulting
in transaction multiples of 0.6x, 8.1x and 8.3x, respectively. This
includes the benefit of sharing Serco's fixed overheads across a
wider revenue base in North America, which we expect to be worth
$3-4m of UTP in the first year.
Serco received all necessary regulatory approvals, including
customary Hart-Scott-Rodino ('HSR') and Committee on Foreign
Investments into the United States ('CFIUS'), and completed the
transaction at the start of August 2019. The integration has
progressed well and the business has traded to plan. This has
included good progress on contract awards such as the $162m
contract to continue the support to the US Navy's Amphibious
Warfare Program Office (PMS 377) and the $43m five-year contract to
deliver design and engineering services for the US Navy's next
generation of unmanned and small surface combatant vessels.
The businesses acquired in 2018 have also performed well in
2019, their first full year under Serco ownership. BTP Systems
deepens the Group's satellite and radar capabilities, and it too
has achieved good progress on contract awards such as successfully
rebidding and expanding its largest operation with the $49m
five-year contract for system engineering technical services on the
Submarine High Data Rate (SubHDR) program. The acquisition of the
six Carillion health facilities management contracts added
significant scale to our UK health business, and has contributed to
improved profit performance of the UK business in 2019.
Electronic Monitoring investigations
In 2013, the UK Serious Fraud Office (SFO) opened an
investigation following allegations of overcharging on our
Electronic Monitoring (EM) contracts for the UK Ministry of Justice
(MoJ). The investigations related to these allegations were finally
concluded with the announcement on 3 July 2019 that one of Serco's
UK subsidiaries, Serco Geografix Ltd (SGL), had reached an
agreement to a Deferred Prosecution Agreement (DPA); the agreement
received final judicial approval the following day. The DPA related
to three offences of fraud and two of false accounting committed
between 2010 and 2013 associated with the reporting to the UK
Ministry of Justice (MoJ) of the levels of profitability of Serco's
EM contract. Investigations into allegations of wrongful billing
which were the subject - understandably - of significant public and
Parliamentary ire in 2013 were concluded without any criminal
charges against Serco. An investigation by the Financial Reporting
Council into misconduct by the Group's auditors at the time
concluded with sanctions and penalties imposed against Deloitte and
two of its audit engagement partners. Nothing in these matters
impacts the previously reported statutory accounts of Serco
Group.
The DPA concludes the SFO's investigation into Serco companies.
As noted in the summary of financial performance above, and in note
7 to the financial statements on pages 56-57 regarding exceptional
items, a GBP22.9m charge was taken to reflect the payment of the
GBP19.2m fine together with GBP3.7m related to the SFO's
investigation costs. The fine reflected a discount of 50% as a
result of Serco's self-reporting and significant and substantial
cooperation with the investigation. The SFO determined that no
further damages or disgorgement of profit was payable to the MoJ
because Serco had already fully compensated the Department in
December 2013.
As noted in the announcements made in July, the SFO recognised
the significant steps Serco has taken to reform itself, including
the thorough implementation under independent supervision of a
comprehensive Corporate Renewal Programme approved by the UK
Government. This programme included over 80 actions and
initiatives, and included rewriting our system of management
control, as well as strengthening our bidding, contract management,
internal audit and management assurance processes. Nobody who sat
on the Board of Serco Group, or who was part of the Executive
Management Team at the time these offences were committed, works
for Serco today.
Whilst all financial liability is considered to now have been
extinguished following the SFO's long and very detailed
investigation into Serco companies, as well as the internal and
customer-led investigations and reviews which preceded and ran in
parallel with the SFO, Serco has subsequently received a claim
seeking damages for alleged losses following the reduction in
Serco's share price in 2013. This claim will be energetically and
robustly resisted. As referred to in our contingent liabilities
note on page 64, the merit, likely outcome and potential impact on
the Group of any such claim is subject to a number of significant
uncertainties.
Market outlook
Our approach to strategy planning is to conduct annual planning
exercises, updating five-year forward plans, using internal
resources. Every 4-5 years we conduct a root-and-branch review,
with external help, of our markets. The last such review was in
2018, and in our 2018 results announcement, we set out our views on
our markets. Other than a new and much stronger Government in the
UK, and certainty that the UK will leave the EU, nothing has
happened to change our previous assessment. In summary:
-- We still believe that the Four Forces (relentlessly
increasing demand for public services; expectations of higher
service quality; structural fiscal deficits; electoral resistance
to tax increases) will continue to encourage governments to seek
innovative ways to deliver more services, of higher quality, and at
lower cost (what we call 'More and Better for Less').
-- In 2018 we estimated that the weighted average rate of growth
across all our geographies and sectors was running at 2-3%, which
was lower than the 5%+ seen several years earlier and which we
think the market could revert to in the longer term; the reduction
was in large part because of the conditions in the UK, which
represents around 40% of our revenues. A year passing has not
changed our view on market growth.
-- The UK Government has been commissioning very little which is
new in the world of public service outsourcing, as it deals with
other priorities such as Brexit. New contracts have tended to be
rebids of existing work, and whilst this may have increased
Government spend, this will be because previous contracts were
loss-making and on re-bid the Government is having to spend more;
this represents an adjustment to the market value, not volume
growth. Examples of such "value resets" would be the AASC and PECS
tenders, which Serco won at increased value compared to the
previous generation of contracts following years of losses. There
have been some new opportunities in UK Central Government - notably
new MOD programmes around training and fire services, the new
prisons build programme and electronic monitoring for immigration
applications - but they have been few and far between.
-- In terms of life post-Brexit, the determination of the UK
Government to "take back control" from the EU and to have its own
standards and regulation is in effect insourcing regulation on a
national scale. The UK will have to invest in rebuilding the
regulatory capability that for the last 40 years has been
outsourced to the EU. Supporting Government in this work may
produce opportunities for companies like Serco in the longer term.
The Government is also determined to simplify procurement
regulations, which may make bidding a little less expensive and
long-winded, and the new Playbook for outsourcing is a genuine
attempt by Government to procure services contracts in a more
effective and balanced way. Our direct exposure to Brexit is small
as Serco neither exports nor imports to any significant degree; our
business in continental Europe is conducted through
long-established local subsidiaries, and we employ relatively few
continental European citizens in the UK.
-- Elsewhere, US defence spending, and particularly Navy
procurement, is very robust, and the Department of Defense is busy
trying to work out how they will fulfil the requirement, mandated
by Congress with bi-partisan support, to increase the Navy from
around 280 ships to 355. The startling increase in the valuations
accorded to our quoted peers in the US in the last 12 months
suggests that there is confidence that demand will remain strong;
our view is that the rate of growth in US defence spending will
likely slow, but that there is plenty of work to bid for, and the
main constraint for us is availability of labour. If finding
welders in the US is difficult at a time of 3.5% unemployment,
finding welders with the security clearances required to work on
sensitive defence contracts is doubly so.
-- Australia remains a diverse market in that different states
elect governments who have sharply different views about the
private provision of public services. But overall, the competition
amongst different administrations in the Commonwealth to provide
improved services provides a healthy back-drop to the market, and
the Federal Government remains a major purchaser of public services
in defence and immigration.
-- We are continuing to search for opportunities to grow our
position in Europe; we have energetic and effective management who
have won us our first European defence contracts, and we are
hopeful we can grow our position.
-- In Serco Middle East, we also have new management who are
bringing new dynamism and ambition to the business. We have just
signed a large and significant new contract with Dubai airport; our
contract in Saudi Arabia with the Government to provide a framework
and processes and procedures for asset and facility management
across the whole of Government is of great significance to our
position in that market. Whilst the Middle East will always be a
volatile and difficult market, we believe that it will continue to
grow.
-- Although we have not yet seen any material impact on our
business, we are closely monitoring the developing situation
relating to the Coronavirus (COVID-19). As a major employer and
provider of essential frontline services, the health and safety of
our colleagues and service users is paramount, and supporting our
government customers, frequently in very challenging situations, is
at the heart of what Serco does. There is limited necessity for
travel of our employees, and, given the nature of our services, we
consider any supply chain risk to be small at the current time. We
will continue to evaluate this situation and provide any update to
our stakeholders at the appropriate time.
Guidance for 2020
At our Closed Period trading update on 12 December 2019, we
provided our initial outlook for 2020 and remarked that we
anticipated continued progress and further strong growth in line
with analyst consensus expectations, taking into account the
previously announced PECS transition costs and recent currency
movements at that time. No element of guidance has changed since
that date, except for more recent currency rates and to take into
account the impact of the resumption of dividend payments to
Serco's shareholders announced with our 2019 results.
Revenue in 2020 is expected to be GBP3.4-3.5bn, which would
represent total growth of 6-8%. This assumes organic growth of
around 4%. Within this, the performance of the Americas Division is
more susceptible to the volumes of task order work, such as in our
Ship & Shore modernisation operations and the FEMA contract,
which have been particularly strong in 2019, and this creates a
tough comparative for 2020. The acquisition of NSBU is expected to
add to revenue growth by about 5-6%, representing the seven months
through to the anniversary of completion of the transaction in
August. If recent currency rates were to prevail throughout 2020,
there would be a currency headwind across the Group of estimated at
GBP80-90m or 2-3% of revenues.
Underlying Trading Profit is expected to be around GBP145m,
which would represent growth of about 20%, and includes an assumed
currency headwind of approximately GBP5m. 2020 will benefit from
the full-year contribution of the AASC and AHSC contracts, as well
as the annualisation of the NSBU acquisition. The transition of the
recently awarded PECS contract is expected to cost around GBP4m in
2020, as set out in our announcement of 30 October, and, as
previously indicated, we expect a significant reduction in
contribution from the US CMS contract.
Net Finance Costs, as previously indicated, are expected to
increase by approximately GBP5m, which includes the full-year
impact of new property leases related to the AASC contract. The
underlying effective tax rate is expected to continue at around
25%, which reflects the higher proportion of our pre-tax profits
now coming from our international operations, particularly the US.
The weighted average number of shares for diluted EPS purposes,
fully annualising for the Equity Placing conducted in May 2019, is
expected to be approximately 1,250m.
A broadly similar level of Free Cash Flow is anticipated in
2020, and closing Adjusted Net Debt is expected to reduce to
approximately GBP200m, resulting in leverage towards the lower end
of our normal target range of 1-2x; this guidance now includes an
assumed outflow of around GBP20m to take account of the assumption
for the resumption of dividend payments if approved by Serco's
shareholders as described above.
Our outlook for 2020 is based upon recent currency rates. The
rates used, along with their estimated impact on revenue and UTP,
are shown in the table on page 3.
Serco gives unusually detailed forward guidance across a large
number of key metrics, giving numbers rather than opaque words, so
that investors and other stakeholders have a clear idea of what we
think will happen at a given point of time. The disadvantage of
this approach is that it is almost inevitable that events will
prove us wrong on one or more metrics. We believe however that
transparency and clarity is helpful, albeit that, as we always
point out, our profits can be affected by small percentage changes
in revenues and costs, as well as currency rates.
Summary and concluding thoughts
If 2018 marked an inflection point, where we moved into growth
after five years of declining trading profit, 2019 can perhaps be
described as the year we achieved escape velocity, being the point
at which we were able to leave behind the gravitational drag of
previous missteps, and become a "normal" company again. By
"normal", we mean a company with growing revenues, profits and cash
flows; producing good returns on capital; winning profitable
business; executing well; valued by its customers; being a place
people want to work; and a company which has enough confidence in
its future to pay shareholder dividends. From fighting for
survival, we can now spend more time plotting how to find new
sources of growth; new ways to build sustainable competitive
advantage; new ways to deliver public services. We also perhaps
have a bit more space to think about how to adapt to a world where
a company's approach to Environmental, Social and Governance (ESG)
issues has become so much more important to many stakeholders than
they were even twelve months ago.
Our position on ESG issues has, for many years, been a strong
one, and is at the very heart of what we do: Serco has a clear
social Purpose - "to be a trusted partner of governments,
delivering superb public services, that transform outcomes and make
a positive difference for our fellow citizens". Our Values of
Trust, Pride, Innovation and Care are embedded deeply in our
culture. We have a good track record of delivering high quality
services to often vulnerable individuals on behalf of governments.
We have strong governance and invest heavily in it as well as in
the skills of our people. For the last five years, we have worked
hard to make Serco a business which is both profitable and
sustainable.
Notwithstanding this strong position, the fact is that some of
the work governments are expected to do is controversial, and
doubly so when they ask private companies to carry this work out on
their behalf. Be it running prisons, or supporting immigration
policy, or helping to deliver strategic nuclear deterrence the work
we do is seen by some as wrong, either because people object in
principle to private companies delivering public services, or
because people object to the nature of the work government asks us
to do. Furthermore, as a provider of public services, and paid for
by taxpayers' money, we are regularly (and rightly) challenged to
justify either the quality of service we deliver and / or the value
for money we provide to the taxpayer.
In short, what we see as a strong Purpose - delivering social
value by supporting governments in providing essential services to
protect and support their citizens - others see as its antithesis.
This presents a complex and confusing picture to investors and ESG
analysts who are having to consider these matters ever more
carefully, and part of our job is to help them make informed
judgements. It is our responsibility to ensure that Serco continues
to behave in a sensible, thoughtful, transparent and responsible
way towards all its stakeholders, whilst making a positive
difference to the lives of people who access or pay for public
services.
Returning to the operational management of the business, one of
the lessons of the last five years is that providing services to
governments is not easy. By their nature, margins in the sector are
slim, and risks are high; the relationship between risk and reward
is asymmetrical. Being successful requires constant diligence,
strong execution, an understanding that no deal is better than a
bad deal, and a willingness to say no. On the other hand, unlike
many other sectors, we can wake up each morning without the fear
that our customers may not be able to pay their bills, or that
demand for our services might evaporate, or that our services might
be disintermediated by a start-up. And running these businesses
does not require large amounts of capital, so slim margins can
still deliver attractive returns.
The election of a Government in the UK - our largest market -
with a large majority and a determination to deliver renewal,
re-order and change is a good thing for our market as the more
governments want to do, and the more they care about value for
money, the more they need a strong private sector to help them. The
UK Government will need to resolve how it wants to finance new
infrastructure and other initiatives (PFI being, unjustly in our
view, the scoundrel du jour) and how to balance expenditure on new
assets with maintaining existing assets. In the NHS alone, there is
a backlog of GBP6.5bn on maintenance, as funds are diverted from
capital and maintenance budgets to day-to-day service delivery. But
those who provide public services, be they civil servants or
suppliers, tend to thrive when governments know what they want and
have the determination to get it.
2020 will be a busy year for Serco: there are some very large
contracts such as PECS, Clarence Correctional Centre and Dubai
Airport Services which need to be transitioned; we will also be
handing over the world's most advanced icebreaker vessel to the
Australian Government. We need to rebuild our pipeline, denuded
(the right way) by three years of strong order intake. And we need
to continue to invest in making our internal systems and processes
sing for their supper.
And we intend to stick with the strategy we developed in 2014,
and which has so far served us well:
What we do: we are an international business providing
people-enabled services, supported by best-in-class systems and
processes, to governments.
How we do it: we use a management framework, as set out
below.
Our Values: Trust, Care, Innovation, Pride
Our Purpose: to be a trusted partner of governments, delivering
superb public services, that transform outcomes and make a positive
difference for our fellow citizens.
Our Organising Principles: loose-tight, disciplined
entrepreneurialism
Our Method: being the best-managed business in the sector.
Our Deliverables: high and rising employee engagement, margins
of 5%, growing revenues at 5%.
We intend to continue working hard to deliver this strategy.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional Divisions: UK
& Europe (UK&E); the Americas; the Asia Pacific region
(AsPac); and the Middle East. Reflecting statutory reporting
requirements, Serco's share of revenue from its joint ventures and
associates is not included in revenue, while Serco's share of joint
ventures and associates' profit after interest and tax is included
in Underlying Trading Profit (UTP). As previously disclosed and for
consistency with guidance, Serco's Underlying Trading Profit
measure excludes Contract & Balance Sheet Review adjustments
(principally OCP releases or charges).
Year ended 31 December 2019 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
------------------------------------ ------- -------- ------ -------- --------- -------
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
Change +5% +42% +13% +2% +15%
Change at constant currency +5% +35% +16% (2%) +13%
Organic change at constant currency +2% +19% +16% (2%) +8%
UTP excluding the effect of
IFRS16 adoption 40.6 79.2 31.1 13.6 (45.5) 119.0
Change +4% +73% +16% (37%) +13% +28%
Change at constant currency +4% +64% +19% (39%) +13% +24%
Margin excluding the effect
of IFRS16 3.0% 8.6% 5.0% 3.9% n/a 3.7%
Change 0bps +150bps +10bps (240bps) +40bps
Effect of IFRS16 adoption on
UTP (2.2) 2.9 0.2 0.3 - 1.2
------------------------------------ ------- -------- ------ -------- --------- -------
UTP 38.4 82.1 31.3 13.9 (45.5) 120.2
Margin 2.8% 9.0% 5.0% 4.0% n/a 3.7%
Contract & Balance Sheet Review
adjustments 0.3 9.5 - - (6.2) 3.6
Other one-time items - DFRP
settlement 9.6 - - - - 9.6
Trading Profit/(Loss) 48.3 91.6 31.3 13.9 (51.7) 133.4
Amortisation of intangibles
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Operating profit/(loss) before
exceptionals 47.1 85.4 31.2 13.9 (51.7) 125.9
------------------------------------ ------- -------- ------ -------- --------- -------
Year ended 31 December 2018 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
-------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,300.7 645.6 548.2 342.3 - 2,836.8
UTP 39.2 45.7 26.8 21.5 (40.1) 93.1
Margin 3.0% 7.1% 4.9% 6.3% n/a 3.3%
Contract & Balance Sheet Review
adjustments 12.4 (2.5) 13.7 - - 23.6
Trading Profit/(Loss) 51.6 43.2 40.5 21.5 (40.1) 116.7
Amortisation of intangibles
arising on acquisition (0.5) (3.2) (0.6) - - (4.3)
Operating profit/(loss) before
exceptionals 51.1 40.0 39.9 21.5 (40.1) 112.4
-------------------------------- ------- -------- ----- ------ --------- -------
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 22-38. 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 39-71. Included in the
accompanying notes are the Group's policies on recognising revenue
across the various revenue streams associated with the diverse
range of goods and services discussed within the Divisional
Reviews. The various revenue recognition policies are applied to
each individual circumstance as relevant, taking into account the
nature of the Group's obligations under the contract with the
customer and the method of delivering value to the customer in line
with the terms of the contract.
UK & Europe
Serco's UK & Europe Division supports public service
delivery across all five of the Group's chosen sectors: our Justice
& Immigration business provides a wide range of services to
support the safeguarding of society, the reduction of reoffending,
and the effective management of the UK's immigration system, and
includes prison management as well as the provision of housing and
welfare services for asylum seekers; in Defence, we are trusted to
deliver critical support services and operate highly sensitive
facilities of national strategic importance; we operate complex
public Transport systems and services; our Health business provides
primarily non-clinical support services to hospitals; and our
Citizen Services business provides environmental and leisure
services, as well as a wide range of other front, middle and
back-office services to support public sector customers in the UK
and international organisations across Europe, including the
European Patent Organisation and the European Space Agency. On a
Reported Revenue basis, Serco's operations in the UK represent
approximately 39% of the Group's reported revenue, and those across
the rest of Europe approximately 3%.
Revenue for 2019 was GBP1,361.7m (2018: GBP1,300.7m), an
increase of 4.7%. Reported Revenue excludes that from our joint
venture and associate holdings which largely comprise the
operations of AWE, Merseyrail and Viapath. At constant currency,
the growth in Revenue was also 4.7%, or GBP62m. The net
contribution to revenue from the acquisition of the Carillion
health facilities management contracts that transferred to Serco
between June and August 2018 was GBP32m, therefore the organic
growth was GBP30m or 2.4%. Within the organic growth, the largest
contributor was from the expanded operations of Asylum
Accommodation and Support Services Contracts (AASC) which replaced
the previous COMPASS contracts in the second half of the year.
Other examples of contracts with growth included those for the
Skills Support for the Workforce (SSW) Programme and services to
the Department for Work & Pensions (DWP), and the start of our
new contract for environmental services for Hart District Council
and Basingstoke & Deane Borough Council; there was partial
offset to this growth from the early exits of the previously
onerous contracts for East Kent Hospitals University NHS Foundation
Trust and for the Anglia Support Partnership, and lower revenue in
our European operations.
Underlying Trading Profit (UTP), excluding the effect of IFRS16
adoption, was GBP40.6m (2018: GBP39.2m), representing an implied
margin of 3.0% (2018: 3.0%) and growth of 4% at constant currency.
Trading Profit includes the profit contribution (from which
interest and tax have already been deducted) of joint ventures and
associates; if the GBP395m (2018: GBP374m) proportional share of
revenue from joint ventures and associates was also included and if
the GBP6.4m (2018: GBP5.7m) share of interest and tax cost was
excluded, the overall Divisional margin would have been 2.7% (2018:
2.7%). The joint venture and associate profit contribution was
modestly lower at GBP27.3m (2018: GBP28.1m), largely as a result of
the start of a new three-year pricing period at AWE. On the AASC
contracts, the transition costs that were expensed as they were
incurred largely in the first half of the year were more than
offset with the move to profitability in the second half. There was
also improved profit performance in the healthcare business, driven
by the Carillion acquisition.
Within UTP there was a reduced rate of OCP utilisation
(excluding IFRS16-related accelerated utilisation) of GBP33m (2018:
GBP47m), which served to offset the Division's loss-making
operations, principally the Caledonian Sleeper, COMPASS and
Prisoner Escort & Custody Services (PECS) contracts. Excluded
from UTP is GBP9.6m of the commercial settlement received from the
Ministry of Defence (MOD) in relation to the Defence Fire and
Rescue Project tender, together with Contract & Balance Sheet
Review and other one-time items that resulted in a GBP0.3m net
credit (2018: GBP12.4m net credit) to Trading Profit. Together with
the adverse net effect of IFRS16 implementation of GBP2.2m (2018:
n/a), this resulted in Trading Profit of GBP48.3m (2018:
GBP51.6m).
The UK & Europe Division's order intake was more than
GBP3bn, or over 50% of that for the whole Group. By far the largest
element of this was the estimated GBP1.9bn ten-year value for the
AASC contracts. As previously set out, these are very significant
for the Division, and indeed for the Group. AASC supersedes the
prior COMPASS contracts which incurred losses (offset in the
P&L by the utilisation of the OCP) of around GBP15-20m on
average per year for the past five years. Under the new AASC
contracts, we did not retain the Scotland & Northern Ireland
region, but gained the much larger Midlands & East of England
region, whilst retaining our other previous COMPASS region of the
North West; as a consequence, we are now the largest provider of
asylum seeker accommodation in the UK. Given our past experience,
we also bid the regions at prices which we believe should allow us
to make a fair return.
The second largest contract award in the year was with the UK
Ministry of Justice (MoJ) for PECS, estimated at approximately
GBP800m over the ten-year term which starts on 29 August 2020.
Similar to COMPASS/AASC, this is a successful rebid of a contract
previously incurring losses that were being offset by an OCP, and
also similar to AASC is that Serco was selected to provide these
sensitive and demanding services over a significantly increased
geographical area. Other contract awards included: significantly
expanding on rebid our operations for the SSW programme which
provides training and related employment services to Local
Enterprise Partnership areas; a new environmental services contract
with the Royal Borough of Windsor and Maidenhead, together with
extensions for our services to numerous other similar contracts; we
have also extended during the year contracts such as for defence
support services to the UK MOD and the US Air Forces in Europe
(USAFE), contact centre operations for Companies House and our
operations at the European Organisation for Nuclear Research
(CERN).
We have not included within our order intake the contract to
continue operating the Northern Isles Ferry Services, which was
announced by the customer in September 2019 and has an estimated
total contract value of GBP450m, as we have not yet signed the
contract due to a procurement challenge by the unsuccessful bidder.
In early February 2020, the Scottish Government announced that all
challenges had been resolved, and that they would be proceeding to
sign the contract with Serco in the coming months.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 25 contracts
with annual revenue of over GBP5m within the UK & Europe
Division; in aggregate, these represent approximately 25% of the
current level of annual revenue for the Division; this excludes the
Northern Isles operations, which would represent a further 5%. The
largest to further secure in 2021 include our strategic partnership
contract supporting Hertfordshire County Council, and in 2022 our
UK Navy fleet support contract known as Future Provision of Marine
Services (FPMS) and our UK MOD Skynet satellite support
operations.
The rebid profile and the new bid Pipeline both reduced with the
successful outcome of our bidding for AASC. Opportunities in the
new bid Pipeline at the end of 2019 include several defence support
opportunities, together with other tenders such as the first of the
new build prison manage and operate contracts (HMP Wellingborough),
in immigration services and in environmental and other Citizen
Services support services. On 20 February 2020, Serco announced
that we had signed a new contract to manage the Gatwick Immigration
Centres valued at approximately GBP200m. Following a string of
important contract wins, replenishing the UK & Europe pipeline
across each of our five sectors of operation remains a key focus of
the business in 2020.
Americas
Our Americas Division accounts for 28% of Serco's reported
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 2019 was GBP915.7m (2018: GBP645.6m), an increase of
42% in reported currency. In US dollars, the main currency for
operations of the Division, revenue for the year was equivalent to
approximately US$1,172m (2018: US$860m). The strengthening of local
currency against Sterling increased revenue by GBP43m or 7%; as the
Naval Systems Business Unit (NSBU) acquisition completed at the
start of August 2019, it contributed five months of revenue which
drove the Divisional growth from acquisitions of 16%; the organic
change at constant currency was therefore growth of 19%, or
GBP119m. A key driver of this was a significant increase in task
order volumes and related procurement services for our Ship &
Shore modernisation and hardware work for the US Navy, with
particularly strong demand and new task order wins under the
Consolidated Afloat Networks Enterprise Services (CANES) Indefinite
Delivery / Indefinite Quantity (ID/IQ) multiple-award contract for
various naval vessel classes. There was also increased task orders
on the US Federal Emergency Management Agency (FEMA) contract
framework, as well as growth from new contract awards started in
the year such as support services to the US Pension Benefit
Guaranty Corporation (PBGC) and deploying IT solutions for the US
Air Force.
Underlying Trading Profit, excluding the effect of IFRS16
adoption, was GBP79.2m (2018: GBP45.7m), representing a margin of
8.6% (2018: 7.1%) and growth of 73%; excluding the favourable
currency movement of GBP4.3m, growth at constant currency was 64%.
Whilst revenue was broadly flat on our health insurance eligibility
support contract for the Center for Medicare & Medicaid
Services (CMS), profitability benefited from an unusually high
volume of fixed priced variable work, particularly in the first
half of the year; as previously described, we do not expect margins
to recur at these levels in the future, and profits on this
contract are expected to be noticeably lower in 2020. The increase
in profits also included the GBP8.6m contribution from the NSBU
acquisition, as well as the benefit from the growth in short-term
volume related work on various frameworks and new contracts started
in the year.
Within Underlying Trading Profit there was GBP4m of OCP
utilisation required to offset the previously loss-making Ontario
Driver Examination Services (DES) contract (2018: n/a); an OCP is
no longer required on this contract. Contract & Balance Sheet
Review adjustments resulted in a GBP9.5m net credit (2018: GBP2.5m
net charge) to Trading Profit which, together with the beneficial
effect of IFRS16 implementation of GBP2.9m (2018: n/a), increased
to GBP91.6m (2018: GBP43.2m).
Americas represented around GBP1.1bn ($1.4bn) or 20% of the
Group's order intake. The largest award for new work was that for
field office services to the US PBGC with a first task order valued
at $112m over five years and a total potential value of $200m.
Other new contracts included career training and counselling
services to transitioning military service members valued at $95m
over five years, and a five-and-a-half year task order valued at
$82m was awarded by the US Air Force to enhance NexGen IT solutions
for US Air Force Civil Engineering, which includes deploying
TRIRIGA, an integrated workplace management system owned by IBM.
Across our Ship & Shore modernisation and hardware services,
including the CANES, Naval Electronic Surveillance Systems (NESS)
the Global Installation Contract (GIC) ID/IQ frameworks, the
cumulative value of IT, engineering, maintenance and sustainment
support task orders totalled over $250m. Serco also received 15
task orders for our Public Assistance Technical Assistance Contract
for the Federal Emergency Management Agency (FEMA) totalling over
$100m.
Within awards that were rebid or extended were those for our
support to the Federal Retirement Thrift Investment Board (FRTIB),
motorist assistance patrol operations in Louisiana and for our
support to psychological health outreach services to the US Navy.
Serco also resecured places on the ID/IQ frameworks for both ship
and shore-based C4ISR systems modernisation services over the next
ten years that replace the previous GIC frameworks. Serco also
secured a place on a similar ID/IQ framework but which it was not
previously on the predecessor contract; this covers C4I Testing,
Integration and Installation (CTII) services for the Carrier and
Air Integration Program Office (PMW 750).
The progress on contract awards of the businesses recently
acquired have also been pleasing. These include for NSBU the $162m
contract to continue the support to the US Navy's Amphibious
Warfare Program Office (PMS 377) and the $43m five-year contract to
deliver design and engineering services for the US Navy's next
generation of unmanned and small surface combatant vessels; and for
BTP, a $49m five-year contract for system engineering technical
services on the Submarine High Data Rate (SubHDR) program.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 25 contracts
with annual revenue of over GBP5m within the Americas Division; in
aggregate, these represent around 40% of the current level of
annual revenue for the Division. Those coming up for rebid or
extension in 2020 include the Federal Aviation Administration's
(FAA) Contract Tower (FCT) Program; in 2021, the
Anti-Terrorism/Force Protection (ATFP) framework contract for the
US Naval Facilities Command and our support to support services at
the 5 Wing Canadian Forces Base in Goose Bay; and in 2022,
resecuring a position on the successor framework for CANES. Of the
NSBU business, it has a number of contract option periods,
extensions or rebids to secure, including in 2020 its support to
the US Navy Surface Warfare Directorate and in 2021 to the
Shipbuilding Command for surface ships.
Our Pipeline of major new bid opportunities due for decision
within the next 24 months includes a broad spread of defence
support functions, including those added with the NSBU acquisition,
as well as others such as air traffic control support within our
Transport business. Our Citizen Services business unit has also had
a number of wins during the year, and building further the Pipeline
in this area also remains a target.
AsPac
Serco operates in Australia, New Zealand and Hong Kong in the
Asia Pacific region, providing services in each of the Justice,
Immigration, Defence, Health, Transport and Citizen Services
sectors. The AsPac Division accounts for 19% of the reported
revenue for the Group.
Revenue for 2019 was GBP621.4m (2018: GBP548.2m), an increase of
13% in reported currency. In Australian dollars, the main currency
for operations of the Division, revenue for the year was equivalent
to approximately A$1,137m (2018: A$980m). The weakening of local
currency against Sterling reduced revenue by GBP15m or 3%; the
organic change at constant currency was therefore growth of 16%, or
GBP88m. The largest contributor to this growth was the start of
operations on 1 July 2019 of the AHSC defence garrison healthcare
services contract in Australia. There was also strong growth in our
Citizen Services operations, including further expanding our
support to the Department of Human Services and Australia's
National Disability Insurance Agency, together with new contact
centre services to the Victoria Police Assistance Line for
non-emergency incidents. There was also an increase in workload in
Immigration Services.
Underlying Trading Profit, excluding the effect of IFRS16
adoption, was GBP31.1m (2018: GBP26.8m), representing a margin of
5.0% (2018: 4.9%) and an increase of 16%; excluding the adverse
currency movement of GBP0.9m, the increase at constant currency was
19%. The improvement in profitability includes the benefit of the
growth in our Citizen Services operations, as well as the AHSC
contract moving to its full operational stage quicker than
anticipated, with profitability in the second half of the year more
than offsetting the transition costs mainly incurred in the first
half.
Within Underlying Trading Profit there was GBP3m of OCP
utilisation required to offset the loss-making operations in Hong
Kong (2018: GBP5m). Contract & Balance Sheet Review adjustments
were GBPnil (2018: GBP13.7m net credit), therefore Trading Profit,
taking into account the beneficial effect of IFRS16 implementation
of GBP0.2m (2018: n/a), was GBP31.3m (2018: GBP40.5m).
AsPac represented around GBP1.1bn or 20% of the Group's order
intake. The largest was the AHSC contract for the provision of
healthcare services personnel at defence garrisons across
Australia, which was valued at AU$1.01bn (around GBP560m) over the
initial six-year term; working as a sub-contractor to BUPA, Serco
will source and manage more than 1,200 professional healthcare
staff to support the delivery of on-base integrated health care to
over 80,000 Australian Defence Force members and reservists across
Australia. A further new contract was the AU$115m seven-year
contract to operate Adelaide Remand Centre on behalf of the South
Australia Department for Correctional Services. Important
extensions were also secured during the year, including the
two-year extension for Australian immigration services with an
estimated value of GBP0.4bn, and South Queensland Correctional
Centre also for two years. Serco was also successful in our rebid
for the Victorian Department of Justice and Community Safety to
continue operating the road traffic camera program across the
State. The one rebid of note that was lost in 2019 is that for
transport management of the Tsing Sha Control Area in Hong Kong
which had annual revenue of around GBP20m but was an onerous
contract and therefore does not impact UTP.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 10 contracts
with annual revenue of over GBP5m within the AsPac Division; in
aggregate, these represent well over half of the current level of
annual revenue for the Division; this high proportion reflects that
the Australia onshore immigration services contract requires
further extension or rebid again at the end of 2021, with this
accounting for around 30% of current Divisional revenue. Others
that will require extending or rebidding in 2020 are the Australian
Department of Human Services framework contract, while Fiona
Stanley Hospital, Acacia Prison, South Queensland Correctional
Centre and the Tax Office framework contract all become potentially
due in 2021. In October 2019, AsPac responded to the tender for the
Royal Australian Navy contracts to replace to the existing Fleet
Marine Services contracts (to be known as the Defence Marine
Support Services (DMSS) contracts). The DMSS contacts awards are
anticipated to be announced in the first half of 2020. Serco's
current Fleet Marine Services contract will continue to operate
until 30 September 2021.
As set out above, the largest opportunity in our Pipeline of
major new bid opportunities at the start of 2019 was won - defence
health support in Australia. A number of other opportunities were
either lost or removed from the Pipeline during the year.
Rebuilding the Pipeline saw progress in the second half with a
small number of opportunities added across the Justice &
Immigration, Defence and Citizen Services sectors, with further
progress across these and the Transport and Health sectors
anticipated in 2020.
Middle East
Operations in the Middle East Division include Transport,
Defence, Health and Citizen Services, with the region accounting
for approximately 11% of the Group's reported revenue.
Revenue for 2019 was GBP349.6m (2018: GBP342.3m), an increase of
2% in reported currency. The strengthening of local currency
against Sterling increased revenue by GBP15m or 4%; the organic
change at constant currency was therefore a decline of 2%. There
was growth from expanded services at the Dubai Metro and from the
new contracts for fire and rescue services at King Fahd
International Airport (KFIA), support services at Dr. Soliman
Fakeeh Hospital (DSFH) and advisory services to Mashroat in Saudi
Arabia. These were offset by reduced revenue on the rebid of the
MELABS contract providing defence base logistics and support
services, the loss of the Bahrain air navigation services contract
and a reduction in our Saudi rail operations.
Underlying Trading Profit, excluding the effect of IFRS16
adoption, was GBP13.6m (2018: GBP21.5m), representing a margin of
3.9% (2018: 6.3%) and a decline of 37%; excluding the favourable
currency movement of GBP0.4m, the decline at constant currency was
39%. As expected, this decline was driven by the significant
reduction in margins on the MELABS contract, following the
successful rebid which has extended the life of the contract for a
further five years including option periods. 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 prior year. Trading
Profit, after the beneficial effect of IFRS16 implementation of
GBP0.3m (2018: n/a), was therefore GBP13.9m (2018: GBP21.5m).
The Middle East represented GBP0.2bn of the Group's order
intake. Included in the 2018 order intake following receipt of a
letter of intent was the two-year extension to continue operating
and maintaining the Dubai Metro until September 2021. Intake in the
year included new contracts for advisory services to Mashroat
(Saudi Arabia's National Program to Support the Management of
Projects in Public Entities), facilities management and
patient-facing services to DSFH in Jeddah, and several other
facilities management contracts in Abu Dhabi. During the year Serco
also secured further contract extensions for our Air Navigation
Services (ANS) support in Dubai and Baghdad.
Of existing work where an extension or rebid will be required at
some point before the end of 2022, there are around 15 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 relatively high proportion
reflects that the Dubai Metro contract becomes due for rebid in
September 2021, with this accounting for around 30% of current
Divisional revenue. Further extensions or rebids will also be
required for each of the Dubai and Baghdad ANS contracts, together
with the MELABS and Saudi rail operations.
Our Pipeline of major new bid opportunities in the Middle East
includes a small number in the Transport sector. The Pipeline
remains significantly lower than in prior years, and effort is
ongoing to rebuild it across all Serco's sectors of operation in
the region. We still believe that the dynamism and ambition of
governments in the GCC offers the opportunity to deliver truly
innovative and world-leading services. Therefore, we have recently
established a new ExperienceLab, mirroring what we have in the UK,
for user-centred design to deliver exciting improvements to
existing and new customers in 2020.
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.
While there are ongoing actions to deliver savings and improve
efficiencies of our central functions, in 2019 there were some
areas of investment and increases in costs which resulted in
overall corporate costs at the Underlying Trading Profit level that
were GBP5.4m higher at GBP45.5m (2018: GBP40.1m).
The Group operates a large number of long-term contracts at
different phases of their contract life cycle. Within the Group's
portfolio, there are a small number of contracts where the balance
of risks and opportunities indicates that they might be onerous if
transformation initiatives or contract changes are not successful.
The Group has concluded that these contracts do not require an
onerous contract provision on an individual basis. Following the
individual contract reviews, the Group has also undertaken a top
down assessment which assumes that, whilst the contracts may not be
onerous on an individual basis, as a portfolio there is a risk that
at least some of the transformation programmes or customer
negotiations required to avoid a contract loss, will not be fully
successful, and it is more likely than not that one or more of
these contracts will be onerous. Therefore, in considering the
Group's overall onerous contract provision, the Group has made a
best estimate of the provision required to take into consideration
this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a
critical estimate for the Group. The amount recognised in the year
is GBP6.2m at the Trading Profit level within the Corporate costs
segment, which after this charge is therefore GBP51.7m (2018:
GBP40.1m).
Finance Review
Amortisation
and
impairment
of
intangibles
Non arising Statutory
underlying on pre Exceptional
For the year ended Underlying items Trading acquisition exceptional items Statutory
31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Revenue 3,248.4 - 3,248.4 - 3,248.4 - 3,248.4
Cost of sales (2,941.5) 13.2 (2,928.3) - (2,928.3) - (2,928.3)
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Gross profit 306.9 13.2 320.1 - 320.1 - 320.1
Administrative
expenses (214.2) - (214.2) (7.5) (221.7) (23.4) (245.1)
Share of profits in
joint
ventures and
associates,
net of interest and
tax 27.5 - 27.5 - 27.5 - 27.5
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Profit before interest
and tax 120.2 13.2 133.4 (7.5) 125.9 (23.4) 102.5
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Margin 3.7% 4.1% 3.9% 3.2%
Net finance costs (21.8) - (21.8) - (21.8) - (21.8)
Profit before tax 98.4 13.2 111.6 (7.5) 104.1 (23.4) 80.7
Tax charge (24.4) (4.5) (28.9) 1.5 (27.4) (2.7) (30.1)
Effective tax rate (24.8%) (25.9%) (26.3%) (37.3%)
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Profit / (loss) for
the
period 74.0 8.7 82.7 (6.0) 76.7 (26.1) 50.6
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Minority interest 0.2 0.2 0.2 0.2
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Earnings per share -
basic (pence) 6.31 7.05 6.54 4.31
Earnings per share -
diluted (pence) 6.16 6.89 6.39 4.21
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Amortisation
and
impairment
of
intangibles
Non arising Statutory
underlying on pre Exceptional
For the year ended Underlying items Trading acquisition exceptional items Statutory
31 December 2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Revenue 2,836.8 - 2,836.8 - 2,836.8 - 2,836.8
Cost of sales (2,570.2) 23.6 (2,546.6) - (2,546.6) - (2,546.6)
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Gross profit 266.6 23.6 290.2 - 290.2 - 290.2
Administrative expenses (202.3) - (202.3) (4.3) (206.6) (31.9) (238.5)
Share of profits in
joint
ventures and
associates,
net of interest and tax 28.8 - 28.8 - 28.8 - 28.8
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Profit before interest
and tax 93.1 23.6 116.7 (4.3) 112.4 (31.9) 80.5
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Margin 3.3% 4.1% 4.0% 2.8%
Net finance costs (13.9) - (13.9) - (13.9) 7.5 (6.4)
Profit before tax 79.2 23.6 102.8 (4.3) 98.5 (24.4) 74.1
Tax charge (20.6) 8.7 (11.9) 3.1 (8.8) 2.1 (6.7)
Effective tax rate (26.0%) (11.6%) (8.9%) (9.0%)
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Profit / (loss) for the
period 58.6 32.3 90.9 (1.2) 89.7 (22.3) 67.4
7
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Minority interest 0.0 0.0 0.0 0.0
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Earnings per share -
basic (pence) 5.36 8.31 8.20 6.16
Earnings per share -
diluted (pence) 5.21 8.08 7.97 5.99
------------------------- ----------- ----------- ---------- ------------- ------------ ------------- ----------
Alternative Performance Measures (APMs) and other related
definitions
Overview
APMs used by the Group are reviewed below to provide a
definition and reconciliation from each non-IFRS APM to its IFRS
equivalent, and to explain the purpose and usefulness of each
APM.
In general, APMs are presented externally to meet investors'
requirements for further clarity and transparency of the Group's
financial performance. The APMs are also used internally in the
management of our business performance, budgeting and forecasting,
and for determining Executive Directors' remuneration and that of
other management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being
included in an APM, this reflects revenues presented elsewhere
within the reported financial information, except where amounts are
recalculated to reflect constant currency. Where items of profits
or costs are being excluded in an APM, these are included elsewhere
in our reported financial information as they represent actual
profits or costs of the Group, except where amounts are
recalculated to reflect constant currency. As a result, APMs allow
investors and other readers to review different kinds of revenue,
profits and costs and should not be used in isolation. Other
commentary within the Strategic Report, including the other
sections of this Finance Review, as well as the Consolidated
Financial Statements and their accompanying notes, should be
referred to in order to fully appreciate all the factors that
affect our business. We strongly encourage readers not to rely on
any single financial measure, but to carefully review our reporting
in its entirety.
With effect from 1 January 2019, the Group has applied IFRS16
Leases in the preparation of its financial results. The prior
period financial information has not been restated under IFRS16 in
accordance with the modified retrospective approach to transition
taken by the Group. This approach has been taken as it most closely
aligns to the full retrospective approach without requiring an
extensive review of historical changes to lease agreements within
the Group. The following APMs have been redefined to take into
consideration the impact of IFRS16 and to ensure they continue to
be useful measures for investors and readers of the accounts, and
the impact of the definition change has been illustrated within the
Finance Review: Free Cash Flow; Trading Cash Flow and Invested
Capital. A new APM has also been introduced which has been termed
Adjusted Net Debt, the definition of which is provided below.
Certain APMs for the current period have been provided on a
basis consistent with the accounting standards applied for the
prior period to illustrate the impact of IFRS16 and to assist with
comparability. This information has been provided at the end of
this Finance Review.
The methodology applied to calculating the APMs has not changed
during the year for any measure other than those outlined
above.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Consolidated Income
Statement on page 39, reflects revenue translated at the average
exchange rates for the period. In order to provide a comparable
movement on the previous year's results, reported revenue is
recalculated by translating non-Sterling values for the year to 31
December 2019 into Sterling at the average exchange rate for the
year ended 31 December 2018.
2019
For the year ended 31 December GBPm
--------------------------------------- --------
Reported revenue at constant currency 3,206.2
Foreign exchange differences 42.2
--------------------------------------- --------
Reported revenue at reported currency 3,248.4
--------------------------------------- --------
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses
acquired during a particular year from the date of acquisition
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.
There are three acquisitions excluded for the calculation of
Organic Revenue in the year to 31 December 2019:
-- The acquisition of 100% of the issued share capital of BTP
Systems, LLC (BTP) on 26 January 2018.
-- The acquisition of six UK health facilities management
contracts which were transferred from Carillion plc between June
2018 and August 2018.
-- The acquisition of the Naval Systems Business Unit (NSBU)
from Alion Science and Technology Corporation on 1 August 2019.
An adjustment is required for one disposal:
-- The disposal of certain contracts within the Anglia Support Partnership on 31 October 2018.
Organic Revenue growth is calculated by comparing the current
year Organic Revenue at constant currency exchange rates with the
prior year Organic Revenue at reported currency exchange rates.
2019
For the year ended 31 December GBPm
-------------------------------------------------- --------
Organic Revenue at constant currency 3,014.1
Foreign exchange differences 34.5
-------------------------------------------------- --------
Organic Revenue at reported currency 3,048.6
Impact of any relevant acquisitions or disposals 199.8
-------------------------------------------------- --------
Reported revenue at reported currency 3,248.4
-------------------------------------------------- --------
2018
For the year ended 31 December GBPm
-------------------------------------------------- --------
Organic Revenue at reported currency 2,784.5
Impact of any relevant acquisitions or disposals 52.3
-------------------------------------------------- --------
Reported revenue at reported currency 2,836.8
-------------------------------------------------- --------
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group's Consolidated Income
Statement on page 39, 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 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.
2019 2018
For the year ended 31 December GBPm GBPm
---------------------------------------------- -------- --------
Revenue plus share of joint ventures and
associates 3,643.0 3,211.9
Exclude share of revenue from joint ventures
and associates (394.6) (375.1)
---------------------------------------------- -------- --------
Reported revenue 3,248.4 2,836.8
---------------------------------------------- -------- --------
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur and to
remove the impact of historical issues. UTP therefore provides a
measure of the underlying performance of the business in the
current year.
2019 2018
For the year ended 31 December GBPm GBPm
--------------------------------------------------- ------- -------
Underlying Trading Profit 120.2 93.1
Non-underlying items:
OCP charges and releases 0.8 12.8
Other Contract & Balance Sheet Review adjustments
and one-time items 12.4 10.8
Total non-underlying items 13.2 23.6
--------------------------------------------------- ------- -------
Trading Profit 133.4 116.7
Operating exceptional items (23.4) (31.9)
Amortisation and impairment of intangibles
arising on acquisition (7.5) (4.3)
Operating profit 102.5 80.5
--------------------------------------------------- ------- -------
Charges and releases on all Onerous Contract Provisions (OCPs)
that arose during the 2014 Contract & Balance Sheet Review are
excluded from UTP in the current and prior years. Charges
associated with the creation of new OCPs identified are included
within UTP to the extent that they are not considered sufficiently
material to require separate disclosure on an individual basis.
OCPs reflect the future multiple year cost of delivering onerous
contracts and do not reflect only the current cost of operating the
contract in the latest individual year. It should be noted that, as
for operating profit, UTP benefits from OCP utilisation of GBP53.6m
in 2019 (2018: GBP51.8m). The utilisation, which neutralises the
in-year losses on previously identified onerous contracts, consists
of GBP12.7m accelerated utilisation associated with the impairment
of right of use assets on onerous contracts created during the
period, in accordance with IFRS16, and GBP40.9m against other
contract losses. In addition, an amount of GBP3.8m in respect of
impairment of right of use assets was recognised within underlying
profit.
Revisions to accounting estimates and judgements which arose
during the 2014 Contract & Balance Sheet Review are reported
alongside other one-time items where the impact of an individual
item is material. Items in 2019 which were recorded within this
category included the impairment of assets created in accordance
with IFRS16 on the Caledonian Sleepers contract for which the
provision had been fully utilised, the receipt of an insurance
claim for costs previously reported outside of UTP recognised in
the 2014 Contract & Balance Sheet Review and monies in respect
of the DFRP settlement amounting to GBP9.6m.
Both OCP adjustments and other Contract & Balance Sheet
Review and one-time items are identified and separated from the APM
in order to give clarity of the underlying performance of the Group
and to separately disclose the progress made on these items.
Underlying trading margin is calculated as UTP divided by
statutory revenue.
The non-underlying column in the summary income statement on
page 22 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 Consolidated Income
Statement on page 39, by making two adjustments.
Firstly, Trading Profit excludes exceptional items, being those
considered material and outside of the normal operating practices
of the Group to be suitable for separate presentation and detailed
explanation.
Secondly, amortisation and impairment of intangibles arising on
acquisitions are excluded, because these charges are based on
judgements about the value and economic life of assets that, in the
case of items such as customer relationships, would not be
capitalised in normal operating practice.
UTP at constant currency
UTP disclosed above has been translated at the average foreign
exchange rates for the year. In order to provide a comparable
movement on the previous year's results, UTP is recalculated by
translating non-Sterling values for the year to 31 December 2019
into Sterling at the average exchange rate for the year ended 31
December 2018.
2019
For the year ended 31 December GBPm
------------------------------------------------ ------
Underlying Trading Profit at constant currency 116.5
Foreign exchange differences 3.7
------------------------------------------------ ------
Underlying Trading Profit at reported currency 120.2
------------------------------------------------ ------
Alternative Earnings Per Share (EPS) measures
For the year ended 31 December 2019 2018
pence pence
------------------------------------------------------- ------- -------
Underlying EPS, basic 6.31 5.36
Net impact of non-underlying items and amortisation
and impairment of intangibles arising on acquisition 0.23 2.84
------------------------------------------------------- ------- -------
EPS before exceptional items, basic 6.54 8.20
Impact of exceptional items (2.23) (2.04)
------------------------------------------------------- ------- -------
Reported EPS, basic 4.31 6.16
------------------------------------------------------- ------- -------
2019 2018
For the year ended 31 December pence pence
------------------------------------------------------- ------- -------
Underlying EPS, diluted 6.16 5.21
Net impact of non-underlying items and amortisation
and impairment of intangibles arising on acquisition 0.23 2.76
------------------------------------------------------- ------- -------
EPS before exceptional items, diluted 6.39 7.97
Impact of exceptional items (2.18) (1.98)
Reported EPS, diluted 4.21 5.99
------------------------------------------------------- ------- -------
EPS before exceptional items
EPS, as shown on the Group's Consolidated Income Statement on
page 39, includes exceptional items charged or credited to the
income statement in the year. EPS before exceptional items aids
consistency with historical operating performance.
Underlying EPS
Reflecting the same adjustments made to operating profit to
calculate UTP as described above and including the related tax
effects of each adjustment and any other non-underlying tax
adjustments as described in the tax charge section below, an
alternative measure of EPS is presented. This aids consistency with
historical results and enables performance to be evaluated before
the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS is provided
in the summary income statements on page 22.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect cash
flow from operating activities before exceptional items, which is
the measure shown on the Consolidated Cash Flow Statement on page
43. This IFRS measure is adjusted to include dividends we receive
from joint ventures and associates and deducting net interest paid,
the capital element of lease payments and net capital expenditure
on tangible and intangible asset purchases. This is a change to the
definition applied in the prior year, where the capital element of
finance leases was excluded from FCF. The adjustment has been made
following the implementation of IFRS16, under which all leases,
excluding short term and low value leases, are accounted for as
lease liabilities under the new standard and cash payments
associated with the lease liabilities include a capital and
interest component. The previous definition of FCF would result in
the capital component of leases being excluded from FCF which is
not considered to be reflective of the operating cash flow of the
Group.
2018
2019 (*restated)
For the year ended 31 December GBPm GBPm
--------------------------------------------- ------- -------------
Free Cash Flow 62.0 16.3
Exclude dividends from joint ventures and
associates (25.4) (29.7)
Exclude net interest paid 21.0 16.1
Exclude capitalised finance costs paid 1.2 2.0
Exclude capital element of lease repayments 70.2 8.7
Exclude proceeds received from exercise of (0.2) -
share options
Exclude purchase of intangible and tangible
assets net of proceeds from disposal 23.3 29.5
--------------------------------------------- ------- -------------
Cash flow from operating activities before
exceptional items 152.1 42.9
Exceptional operating cash flows (49.2) (40.2)
--------------------------------------------- ------- -------------
Cash flow from operating activities 102.9 2.7
--------------------------------------------- ------- -------------
* Following the implementation of IFRS16 Leases , the definition
of Free Cash Flow has been amended to include the capital element
of lease payments in 2018.
2019 2018
For the year ended 31 December GBPm GBPm
------------------------------------------- ------- ------
Free Cash Flow under previous definition 132.2 25.0
Include capital element of lease payments (70.2) (8.7)
------------------------------------------- ------- ------
Free Cash Flow 62.0 16.3
------------------------------------------- ------- ------
The high Free Cash Flow in 2019 under the previous definition
excludes the cash payments associated with operating leases which
are cash outflows associated with a combination of capital and
interest payments under IFRS16 Leases . This supports the rationale
behind the change in definition for Free Cash Flow adopted in
2019.
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.
2018
( *restated
2019 )
For the year ended 31 December GBPm GBPm
------------------------------------------- ------ --------------
Free Cash Flow 62.0 16.3
Add back:
Tax paid 31.2 10.6
Non-cash R&D expenditure 0.1 0.1
Net interest paid 21.0 16.1
Capitalised finance costs paid 1.2 2.0
------------------------------------------- ------ --------------
Trading Cash Flow 115.5 45.1
------------------------------------------- ------ --------------
Underlying Trading Profit 120.2 93.1
------------------------------------------- ------ --------------
Underlying Trading Profit cash conversion 96% 48%
------------------------------------------- ------ --------------
* Following the implementation of IFRS16 Leases , the definition
of Free Cash Flow has been amended to include the capital element
of lease payments in 2018.
Net Debt and Adjusted Net Debt
We present an alternative measure to bring together the various
funding sources that are included on the Group's Consolidated
Balance Sheet on page 42 and the accompanying notes. Net Debt is a
measure to reflect the net indebtedness of the Group and includes
all cash and cash equivalents and any debt or debt-like items,
including any derivatives entered into in order to manage risk
exposures on these items. Net Debt includes all lease liabilities
recognised under IFRS16 and therefore the Group has introduced the
alternative measure of Adjusted Net Debt which excludes all lease
liabilities recognised under IFRS16 for the year ended 31 December
2019. For the year ended 31 December 2018, liabilities for leases
previously categorised as finance leases are excluded in arriving
at Adjusted Net Debt.
The Adjusted Net Debt measure has been introduced because it
more closely aligns to the Consolidated Total Net Borrowings
measure used for the Group's debt covenants, which is prepared
under accounting standards applicable prior to the adoption of
IFRS16. Principally as a result of the Asylum Accommodation and
Support Services Contract (AASC), the Group has entered into a
significant number of leases which contain a termination option.
The use of Adjusted Net Debt removes the volatility that would
result from estimations of lease periods and the recognition of
liabilities associated with such leases where the Group has the
right to cancel the lease and hence the corresponding obligation.
Though the intention is not to exercise the options to cancel the
leases, it is available unlike other debt obligations.
2019 2018
For the year ended 31 December GBPm GBPm
---------------------------------- -------- --------
Cash and cash equivalents 89.5 62.5
Loans payable (305.0) (239.5)
Lease liabilities (369.9) (14.8)
Derivatives relating to Net Debt 1.0 3.8
---------------------------------- -------- --------
Net Debt (584.4) (188.0)
---------------------------------- -------- --------
Add back: Lease liabilities 369.9 14.8
---------------------------------- -------- --------
Adjusted Net Debt (214.5) (173.2)
---------------------------------- -------- --------
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used
by the Group and is a metric used to determine the performance and
remuneration of the Executive Directors. ROIC is calculated based
on UTP and Trading Profit using the Income Statement for the year
and a two-point average of the opening and closing balance sheets.
The composition of Invested Capital and calculation of ROIC are
summarised in the table below.
The definition of Invested Capital has been adjusted from the
prior year to exclude right of use assets recognised under IFRS16
Leases. This is because the Invested Capital of the Group are those
items within which resources are, or have been, committed, which is
not the case for many leases within the Group, which would
previously have been classified as operating leases, where
termination options exist and commitments for expenditure are in
future years. The impact of the change in the alternative
performance measure has been set out below. In the prior year, only
finance lease assets have been removed as no right of use assets
existed for operating leases prior to the adoption of IFRS16.
2018
( *restated
2019 )
For the year ended 31 December GBPm GBPm
------------------------------------------------ -------- --------------
ROIC excluding right of use assets
Non-current assets
Goodwill 671.2 579.6
Other intangible assets 96.5 63.7
Property, plant and equipment 47.3 44.3
Interest in joint ventures and associates 23.6 20.6
Trade and other receivables 26.5 30.3
Current assets
Inventory 18.3 22.9
Contract assets, trade and other receivables 609.2 543.8
Total invested capital assets 1,492.6 1,305.2
------------------------------------------------ -------- --------------
Current liabilities
Contract liabilities, trade and other payables (555.8) (494.0)
Non-current liabilities
Contract liabilities, trade and other payables (72.7) (109.9)
------------------------------------------------ -------- --------------
Total invested capital liabilities (628.5) (603.9)
------------------------------------------------ -------- --------------
Invested Capital 864.1 701.3
------------------------------------------------ -------- --------------
Two-point average of opening and closing
Invested Capital 782.7 686.3
------------------------------------------------ -------- --------------
Trading Profit 133.4 116.7
------------------------------------------------ -------- --------------
ROIC% 17.0% 17.0%
------------------------------------------------ -------- --------------
Underlying Trading Profit 120.2 93.1
------------------------------------------------ -------- --------------
Underlying ROIC% 15.4% 13.6%
------------------------------------------------ -------- --------------
* The ROIC calculation at 31 December 2018 has been restated to
exclude right of use assets. The measure at 31 December 2018 has
been adjusted from that disclosed within the 30 June 2019 Stock
Exchange Announcement so the 31 December 2017 balance sheet, used
in the two-point average, is in accordance with IFRS15. For
reference, using the same principles for the calculation as at 30
June 2018 yields a ROIC of 7.9%.
2018
For the year ended 31 December ( *restated
2019 )
GBPm GBPm
------------------------------------------------ -------- --------------
ROIC including right of use assets
Invested Capital including right of use assets 1,209.4 725.4
Impact of including right of use assets (345.3) (24.1)
------------------------------------------------ -------- --------------
Invested Capital 864.1 701.3
------------------------------------------------ -------- --------------
ROIC% including right of use assets 13.8% 16.4%
Impact of including right of use assets 3.2% 0.6%
------------------------------------------------ -------- --------------
ROIC% 17.0% 17.0%
------------------------------------------------ -------- --------------
Underlying ROIC% including right of use assets 12.4% 13.1%
Impact of including right of use assets 3.0% 0.5%
------------------------------------------------ -------- --------------
Underlying ROIC% 15.4% 13.6%
------------------------------------------------ -------- --------------
* The ROIC calculation at 31 December 2018 has been restated to
exclude right of use assets. The measure at 31 December 2018 has
been adjusted from that disclosed within the 30 June 2019 Stock
Exchange Announcement so the 31 December 2017 balance sheet, used
in the two-point average, is in accordance with IFRS15. For
reference, using the same principles for the calculation as at 30
June 2018 yields a ROIC of 7.9%.
Overview of financial performance
Revenue
Reported revenue increased by 14.5% in the year to GBP3,248.4m
(2018: GBP2,836.8m), a 13.0% increase in constant currency. Organic
revenue growth at constant currency was 8.2%.
Commentary on the revenue performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews
sections.
Trading Profit
Trading Profit for the year was GBP133.4m (2018: GBP116.7m).
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 GBP120.2m ( 2018: GBP93.1m), up 29.1%. At constant
currency, UTP was GBP116.5m, up 25.1%.
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 GBP0.8m (2018:
net releases of GBP12.8m) following the detailed reassessment
undertaken as part of the budgeting process. Also excluded from UTP
were net releases and additional profits of GBP12.4m (2018: net
releases and additional profits of GBP10.8m) relating to items
identified during the 2014 Contract & Balance Sheet Review, and
other one-time items.
The cumulative to date improvement to Trading Profit as a result
of OCP charges and releases and adjustments to items identified
during the 2014 Contract & Balance Sheet Review is within 2% of
the 2014 total charge to Trading Profit arising from the
review.
The tax impact of items in UTP and other non-underlying tax
items is discussed in the tax section of this Finance Review.
Joint ventures and associates - share of results
In 2019, the most significant joint ventures and associates in
terms of scale of operations were AWE Management Limited and
Merseyrail Services Holding Company Limited, with dividends
received of GBP17.6m (2018: GBP20.0m) and GBP7.8m (2018: GBP8.7m)
respectively. Total revenues generated by these businesses were
GBP1,065.4m (2018: GBP1,024.7m) and GBP177.9m (2018: GBP160.8m)
respectively.
While the revenues and individual line items are not
consolidated in the Group 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.
2019 2018
For the year ended 31 December GBPm GBPm
--------------------------------------------- ------ ------
Revenue 394.6 375.1
--------------------------------------------- ------ ------
Operating profit before exceptional items 33.8 34.6
Net investment revenue 0.3 0.3
Income tax expense (6.6) (6.1)
--------------------------------------------- ------ ------
Profit after tax before exceptional charge 27.5 28.8
--------------------------------------------- ------ ------
Exceptional pension charge (see exceptional
items below) - (0.3)
Profit after tax 27.5 28.5
--------------------------------------------- ------ ------
Dividends received from joint ventures and
associates 25.4 29.7
--------------------------------------------- ------ ------
Revenue across both of the Group's material joint ventures has
increased during the year due to changes in the volumes transacted
by the underlying contracts. Profitability on both remained
consistent with the prior year.
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.
2019 2018
For the year ended 31 December GBPm GBPm
------------------------------------------------- ------- -------
Exceptional items arising
Exceptional loss on disposal of subsidiaries
and operations - (0.5)
Other exceptional operating items
Restructuring costs (12.8) (32.3)
Increase in onerous lease provision - (1.8)
Costs associated with SFO investigation (25.2) 0.4
Reversal of impairment of interest in joint
venture and related loan balances - 0.8
Reversal of impairment on loan balances - 13.9
Cost of Guaranteed Minimum Pension equalisation - (9.6)
Release of/(increase in) other provisions
and other items 19.3 (2.8)
Costs associated with the acquisition of (4.7) -
Naval Systems Business Unit
Other exceptional operating items (23.4) (31.4)
------------------------------------------------- ------- -------
Exceptional operating items (23.4) (31.9)
------------------------------------------------- ------- -------
Exceptional finance income - 7.5
Exceptional tax (2.7) 2.1
------------------------------------------------- ------- -------
Total operating and financing exceptional
items net of tax (26.1) (22.3)
------------------------------------------------- ------- -------
Other exceptional operating items
The Group is incurring costs in relation to restructuring
programmes resulting from the Strategy Review. These costs include
redundancy payments, provisions (including onerous leases),
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 2019, a charge of GBP12.8m (2018: GBP32.3m) arose in
relation to the restructuring programme resulting from the Strategy
Review. The Strategy Review is discussed in more detail in the
Group's Strategic Report which forms part of the Consolidated
Annual Report and Accounts. The transformation activities
associated with this are complete and, as such, all exceptional
restructuring costs related to this programme have ended in 2019.
Non-exceptional restructuring charges are incurred by the business
as part of normal operational activity, which in the year totalled
GBP8.9m (2018: GBP6.3m) and were included within operating profit
before exceptional items.
There was an exceptional charge totalling GBP25.2m (2018: credit
of GBP0.4m) associated with the SFO's investigation and the
programme of Corporate Renewal. These costs have historically been
treated as exceptional and consistent treatment is applied in 2019.
During the year the Group paid GBP22.9m in penalties and legal
costs associated with the SFO's investigation. The final judgement
was provided on 4 July 2019. The credit in 2018 reflects the
recovery of costs from the Group's insurance providers. The
remaining GBP2.3m relates to legal costs incurred by the Group in
respect of the investigation.
In 2018, an exceptional charge of GBP9.6m was recorded to
recognise the Group's obligations associated with equalising the
Guaranteed Minimum Pension (GMP) payments between male and female
employees for the Group's defined benefit pension schemes following
a High Court ruling made in October 2018. The Serco Pension and
Life Assurance Scheme (SPLAS) recorded the largest charge being
GBP9.0m. There was no equivalent charge in 2019.
The decrease in other provisions and other items of GBP19.3m
(2018: increase of GBP2.8m) predominantly relates to a commercial
dispute which was settled in 2019. The treatment of the reduction
as exceptional is consistent with the recognition of the original
charge associated with the same matter in 2014.
The Group completed the acquisition of the Naval Systems
Business Unit (NSBU) from Alion Science and Technology Corporation
in 2019. The acquisition achieved final regulatory approvals and
completed in August 2019. The transaction and implementation costs
of GBP4.7m have been treated as exceptional in line with the
Group's accounting policy.
An exceptional profit of GBP13.9m was recognised in 2018 for the
settlement of consideration associated with the sale of Serco GmbH
in 2012 through the offsetting of outstanding loan balances, the
receivable of which had been impaired. An exceptional loss on
disposal of GBP27.7m was recorded in 2012 in respect of the sale.
No such transactions took place in 2019.
Exceptional finance costs
There were no exceptional finance costs in the year ended 31
December 2019. During 2018, part of the consideration for the sale
of the Group's private sector BPO business in 2015 was a loan note
with a face value of GBP30m accruing compound interest of 7%. The
receivable associated with this loan note was recorded at a fair
value of GBP19.5m. The discount on the loan note was unwound
through the Group's net finance cost on an annual basis. During
October 2018, the Intelenet business was sold and therefore
repayment of the loan note was triggered resulting in a gain of
GBP7.5m. As this gain was outside the normal financing arrangements
of the Group and significant in size it was recorded as exceptional
finance income.
Exceptional tax
Exceptional tax for the year was a charge of GBP2.7m (2018:
credit of GBP2.1m) which arises on exceptional items within
operating profit. This charge arises mainly in connection with the
decrease in provisions in respect of commercial disputes and legal
claims for which a tax credit had been recorded when the provisions
were originally recognised. This charge is partially offset by tax
deductions in respect of the global restructuring programme and in
the US on acquisition costs.
No tax credit arises on the exceptional charge associated with
the costs in connection with the SFO investigation.
Pre-exceptional finance costs and investment revenue
Investment revenue of GBP2.7m (2018: GBP4.3m) includes interest
accruing on net retirement benefit assets of GBP2.1m (2018:
GBP0.8m), interest earned on deposits and other receivables of
GBP0.5m (2018: GBP2.3m) and the movement in discounting of other
receivables of GBP0.1m (2018: GBP1.2m). The decrease in the year is
the result of the repayment of the loan note, as noted above, which
was previously accruing interest and did so for nine months during
2018. No such interest income arose during 2019.
Finance costs of GBP24.5m (2018: GBP18.2m) includes interest
incurred on the USPP loans and the Revolving Credit Facility of
GBP13.9m (2018: GBP13.8m), facility fees and other charges of
GBP1.7m (2018: GBP3.1m), lease interest payable of GBP6.9m (2018:
GBP0.6m) which has increased as a result of the adoption of IFRS16
Leases, the movement in discount on provisions of GBP1.2m (2018:
GBP0.5m) and a loss for foreign exchange on financing activities of
GBP0.8m (2018: GBP0.2m).
Tax
Tax charge
Underlying tax
In 2019 we recognised a tax charge of GBP24.4m on underlying
trading profits after finance costs. The effective tax rate (24.8%)
is slightly lower than in 2018 (26.0%). This is due to a relative
reduction in permanent disallowable items which is only partially
offset by the geographic mix of where profits have been made,
notably the substantial increase in profits in the US.
Pre-exceptional tax
We recognised a tax charge of GBP27.4m (2018: GBP8.8m) on
pre-exceptional profits which includes underlying tax (GBP24.4m),
tax credit from amortisation of intangibles arising on acquisition
of GBP1.5m and a GBP4.5m charge arising on non-underlying items.
This GBP4.5m charge consists of the tax impact on non-underlying
items together with tax items, that are in themselves considered to
be non-underlying:
-- The tax on non-underlying items which consists of Contract
and Balance Sheet Review adjustments and other material one-time
items during the period, totalled a charge of GBP2.6m reflecting
the impact of current or future tax charges (2018: GBP3.2m
charge).
-- During the current period we have recognised an additional
GBP0.8m of deferred tax asset in relation to UK losses to reflect
the improved forecast taxable income of our UK operations (2018:
GBP2.9m).
-- Generally, movements in the valuation of the Group's defined
benefit pension schemes and the associated deferred tax impact are
reported in the Statement of Comprehensive Income (SOCI) and do not
flow through the income statement, therefore do not impact profit
before tax or the tax charge. However, the net amount of deferred
tax recognised in the balance sheet relates to both the pension
accounting and other timing differences, such as recoverable
losses. As the net deferred tax balance sheet position is at the
maximum level supported by future profit forecasts, the decrease in
the deferred tax liability associated with the pension scheme (with
the benefit reported in the SOCI) leads to a corresponding decrease
in the deferred tax asset to match the future profit forecasts.
Such a decrease in the deferred tax asset therefore leads to a
charge to tax in the income statement. Where deferred tax charges
or releases are the result of movements in the pension scheme
valuations rather than trading activity, these are excluded from
the calculation of tax on underlying profit and the underlying
effective tax rate. These amounted to GBP2.7m charge for 2019
(2018: GBP9.0m credit).
The tax rate on profits before exceptional items, at 26.3%, is
higher than the UK standard corporation tax rate of 19%. This is
due to the impact of the absence of any deferred tax credit for
current year losses incurred, predominantly in the UK, and the
impact of higher rates of tax on profits arising on our
international operations which is only partially offset by the
impact of our joint ventures whose post-tax results are included in
our pre-tax profits. Our tax charge in future years could 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 driven higher than
prevailing standard corporation tax rates.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items
section above.
Contingent tax assets
At 31 December 2019, the Group has gross estimated unrecognised
deferred tax of GBP1.1bn (tax effected GBP195m asset), which are
potentially available to offset against future taxable income.
These principally relate to tax trading losses of GBP900m. Of these
tax losses, GBP760m have arisen in the UK business (tax effected
GBP129m).
A GBP21.1m UK tax asset has been recognised at 31 December 2019
(2018: GBP20.3m) on the basis of forecast utilisation against
future taxable income.
Taxes paid
Net corporate income tax of GBP31.2m (2018: GBP10.6m) was paid
during the year, relating primarily to our operations in AsPac of
GBP19.4m (2018: GBP8.7m), North America of GBP12.1m (2018: nil),
Europe of GBP1.1m (2018: GBP4.1m) and Middle East of GBP1.1m (2018:
GBP1.1m). The Group's UK operations have transferred tax losses to
its profitable joint ventures and associates giving a cash tax
inflow in the UK of GBP2.5m (2018: GBP3.3m).
The amount of tax paid (GBP31.2m) differs from the tax charge in
the period (GBP30.1m) mainly due to the effect of future expected
cash tax outflows for which a charge has been taken in the current
period. In addition, taxes paid/received from Tax Authorities can
arise in later periods to the associated tax charge/credit and also
there is a time lag on receipts of cash from joint ventures and
associates for losses transferred to them.
Further detail is shown below of taxes that have been paid
during the year.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as
determined by local legislation in the countries in which we
operate, means that we pay a variety of taxes across the Group. In
order to increase the transparency of our tax profile, we have
shown below the cash taxes that we have paid across our regional
markets.
In total during 2019, Serco globally contributed GBP625.7m of
tax to government in the jurisdictions in which we operate.
Taxes by category
Taxes Taxes
borne collected Total
For the year ended 31 December 2019 GBPm GBPm GBPm
------------------------------------- ------- ----------- ------
Corporation tax 33.5 - 33.5
VAT and similar 9.6 173.0 182.6
People taxes 109.6 291.9 401.5
Other taxes 7.6 0.5 8.1
------------------------------------- ------- ----------- ------
Total 160.3 465.4 625.7
------------------------------------- ------- ----------- ------
Taxes by region
Taxes Taxes
borne collected Total
For the year ended 31 December 2019 GBPm GBPm GBPm
------------------------------------- ------- ----------- ------
UK & Europe 80.8 251.1 331.9
AsPac 37.9 131.6 169.5
Americas 39.1 79.6 118.7
Middle East 2.5 3.1 5.6
------------------------------------- ------- ----------- ------
Total 160.3 465.4 625.7
------------------------------------- ------- ----------- ------
Corporation tax, which is the only cost to be separately
disclosed in our Financial Statements, is only one element of our
tax contribution. For every GBP1 of corporate tax paid directly by
the Group (tax borne), we bear a further GBP3.78 in other business
taxes. The largest proportion of these is in connection with
employing our people.
In addition, for every GBP1 of tax that we bear, we collect
GBP2.90 on behalf of national governments (taxes collected). This
amount is directly impacted by the people that we employ and the
sales that we make.
Dividends
When dividend payments were suspended in 2014, the Board
committed to resuming dividend payments to Serco's shareholders as
soon as it judged it prudent to do so. 2019 has been a year of very
strong operational and financial performance. It is also the last
year of significant outflows of cash related to OCPs and
restructuring exceptional costs. Our expectations for 2020 are for
further good progress in increasing underlying earnings reducing
financial leverage.
The Board is therefore recommending the payment of a final
dividend in respect of the 2019 financial year of 1.0p, aligned to
the recommended dividend and outlook as described in the Chief
Executive's Review. The dividend, subject to shareholder approval
at the Annual General Meeting on 14 May 2020, would be paid on 5
June 2020.
Share count and EPS
The weighted average number of shares for EPS purposes was
1,171.4m for the year ended 31 December 2019 (2018: 1,094.4m) and
diluted weighted average number of shares was 1,199.0m (2018:
1,125.4m).
In May 2019, the company completed a placement of 111,216,400
new ordinary shares of 2p each raising net proceeds of GBP138.7m
(2018: nil). Additionally, in March 2019, 13,600,000 shares were
issued to the Employee Share Ownership Trust to satisfy awards
under the Group's share award schemes.
Basic EPS before exceptional items was 6.54p per share (2018:
8.20p); including the impact of exceptional items, Basic EPS was
4.31p (2018: 6.16p). Basic Underlying EPS was 6.31p per share
(2018: 5.36p).
Diluted EPS before exceptional items was 6.39p per share (2018:
7.97p); including the impact of exceptional items, Diluted EPS was
4.21p (2018: 5.99p). Diluted Underlying EPS was 6.16p per share
(2018: 5.21p).
Cash flows
The UTP of GBP120.2m (2018: GBP93.1m) converts into a trading
cash inflow of GBP115.5m (2018 restated: GBP45.1m). The improvement
in 2019 cash conversion reflects the increase in profitability from
revenue growth and cost efficiencies. In 2019, operating profit for
the year has increased by GBP22.0m, the working capital outflow was
GBP0.1m (2018: GBP21.6m) and OCP utilisation was GBP53.6m (2018:
GBP51.8m), although in 2019, GBP12.7m of the utilisation was not
related to a cash cost but rather was related to the impairment of
right of use assets created on adoption of IFRS16 within onerous
contracts.
The table below shows the operating profit and FCF reconciled to
movements in Net Debt. FCF for the year was an inflow of GBP62.0m
compared to GBP16.3m in 2018. The improvement in FCF is largely as
a result of improved trading cash inflows as discussed above.
Offsetting the improvement in trading cash inflows is an increase
in tax outflows of GBP20.6m principally arising in our AsPac and
Americas operations as described above.
The movement in Adjusted Net Debt is an increase of GBP41.3m in
2019, a reconciliation of which is provided at the bottom of the
following table. The movement includes a net inflow of GBP138.7m
from the placement of 111.2m new shares in May 2019 and exceptional
items of GBP49.2m (2018: GBP19.2m).
The net cash outflow on acquisition includes the net cash
outflow on the acquisition of NSBU of GBP183.9m and GBP9.3m of
deferred consideration paid in respect of historic acquisitions. In
addition, GBP4.7m of acquisition related costs associated with the
NSBU acquisition were recognised as exceptional in the year.
Exceptional cash outflows are higher than the exceptional income
statement charge largely due to the provision release of GBP19.4m
seen in the income statement which was a non-cash item.
2018
2019 (*restated)
For the year ended 31 December GBPm GBPm
------------------------------------------------- -------- -------------
Operating profit 102.5 80.5
Remove exceptional items 23.4 31.9
------------------------------------------------- -------- -------------
Operating profit before exceptional items 125.9 112.4
Less: profit from joint ventures and associates (27.5) (28.8)
Movement in provisions (43.1) (68.1)
Depreciation, amortisation and impairment
of leased property, plant and equipment and
intangible assets 75.6 6.8
Depreciation, amortisation and impairment
of owned property, plant and equipment and
intangible assets 43.3 36.4
Other non-cash movements 9.3 16.5
------------------------------------------------- -------- -------------
Operating cash inflow before movements in
working capital, exceptional items and tax 183.5 75.2
Working capital movements (0.1) (21.6)
Tax paid (31.2) (10.6)
Non-cash R&D expenditure (0.1) (0.1)
------------------------------------------------- -------- -------------
Cash flow from operating activities before
exceptional items 152.1 42.9
Dividends from joint ventures and associates 25.4 29.7
Interest received 0.4 0.6
Interest paid (21.4) (16.7)
Capital element of lease repayments (70.2) (8.7)
Capitalised finance costs paid (1.2) (2.0)
Purchase of intangible and tangible assets
net of proceeds from disposals (23.3) (29.5)
Proceeds received from exercise of share 0.2 -
options
------------------------------------------------- -------- -------------
Free Cash Flow 62.0 16.3
Net cash outflow on acquisition and disposal
of subsidiaries (193.2) (31.3)
Issue of share capital 138.7 -
Other movements on investment balances 0.2 (0.3)
Capitalisation and amortisation of loan costs 0.1 1.3
Unwind of discounting and capitalisation
of interest on loans receivable - 3.0
Exceptional items (49.2) (19.2)
Cash movements on hedging instruments (2.0) 0.2
Foreign exchange gain/(loss) on Adjusted
Net Debt 2.1 (22.3)
------------------------------------------------- -------- -------------
Movement in Adjusted Net Debt (41.3) (52.3)
Opening Adjusted Net Debt (173.2) (120.9)
------------------------------------------------- -------- -------------
Closing Adjusted Net Debt (214.5) (173.2)
------------------------------------------------- -------- -------------
Lease liabilities (369.9) (14.8)
------------------------------------------------- -------- -------------
Closing Net Debt at 31 December (584.4) (188.0)
------------------------------------------------- -------- -------------
* Following the implementation of IFRS16 Leases, the definition
of Free Cash Flow has been amended to exclude the capital element
of lease payments. In addition, proceeds from the exercise of share
options has been included within Free Cash Flow.
Net Debt
2019 2018
As at 31 December GBPm GBPm
---------------------------------- -------- --------
Cash and cash equivalents 89.5 62.5
Loans payable (305.0) (239.5)
Lease liabilities (369.9) (14.8)
Derivatives relating to Net Debt 1.0 3.8
---------------------------------- -------- --------
Net Debt (584.4) (188.0)
Exclude Lease Liabilities 369.9 14.8
---------------------------------- -------- --------
Adjusted Net Debt (214.5) (173.2)
---------------------------------- -------- --------
Average Adjusted Net Debt as calculated on a daily basis for the
year ended 31 December 2019 was GBP231.0m (2018 restated:
GBP218.7m). Peak Adjusted Net Debt was GBP356.8m (2018 restated:
GBP292.0m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks
that include liquidity, the effects of changes in foreign currency
exchange rates, interest rates and credit risk. The Group has a
centralised Treasury function whose principal role is to ensure
that adequate liquidity is available to meet the Group's funding
requirements as they arise and that the financial risk arising from
the Group's underlying operations is effectively identified and
managed.
Treasury operations are conducted in accordance with policies
and procedures approved by the Board and are reviewed annually.
Financial instruments are only executed for hedging purposes and
speculation is not permitted. A monthly report is provided to
senior management outlining performance against the Treasury Policy
and the treasury function is subject to periodic internal audit
review.
Liquidity and funding
As at 31 December 2019, the Group had committed funding of
GBP508m (2018: GBP492m), comprising GBP213m of private placement
notes, a GBP45m acquisition loan facility which was fully drawn and
a GBP250m revolving credit facility (RCF), of which GBP200m was
undrawn. In addition, during December 2019, the Group cancelled its
receivables financing facility of GBP30m (2018: facility of GBP30m
which was unutilised).
The Group's RCF provides GBP250m of committed funding for five
years from the arrangement date in December 2018.
Interest rate risk
Given the nature of the Group's business, we have a preference
for fixed rate debt to reduce the volatility of net finance costs.
Our Treasury Policy requires us to maintain a minimum proportion of
fixed rate debt as a proportion of overall Adjusted Net Debt and
for this proportion to increase as the ratio of EBITDA to interest
expense falls. As at 31 December 2019, 99% of the Group's Adjusted
Net Debt was at fixed rates.
Foreign exchange risk
The Group is subject to currency exposure on the translation to
Sterling of its net investments in overseas subsidiaries. The Group
manages this risk where appropriate, by borrowing in the same
currency as those investments. Group borrowings are predominantly
denominated in Sterling and US Dollar. The Group manages its
currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward
contracts where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise
to credit risk on the amounts due from counterparties. The Group
manages this risk by adhering to counterparty exposure limits based
on external credit ratings of the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across
the private placement loan notes and revolving credit facility,
with a maximum Consolidated Total Net Borrowings (CTNB) to covenant
EBITDA of 3.5 times and minimum covenant EBITDA to net finance
costs of 3.0 times, tested semi-annually. A reconciliation of the
basis of calculation is set out in the table below.
Following the refinancing in December 2018, the debt covenants
have been amended to include the impact of IFRS15. The covenants
continue to exclude the future impact of IFRS16 on the Group's
results.
2019 2018
For the year ended 31 December GBPm GBPm
---------------------------------------------------- ------- -------
Operating profit before exceptional items 125.9 112.4
Remove: Amortisation and impairment of intangibles
arising on acquisition 7.5 4.3
Trading Profit 133.4 116.7
Exclude: Share of joint venture post-tax
profits (27.5) (28.8)
Include: Dividends from joint ventures 25.4 29.7
Add back: Net non-exceptional charges to 7.2 -
OCPs
Add back: Depreciation, amortisation and
impairment of owned property, plant and equipment
and non-acquisition intangible assets 35.8 32.1
Add back: Depreciation, amortisation and
impairment of property, plant and equipment
and non-acquisition intangible assets held
under finance leases - in accordance with
IAS17 Leases 5.8 6.8
Add back: Foreign exchange credit on investing
and financing arrangements (0.8) (0.2)
Add back: Share based payment expense 11.6 14.7
Other covenant adjustments to EBITDA 9.8 -
---------------------------------------------------- ------- -------
Covenant EBITDA 200.7 171.0
---------------------------------------------------- ------- -------
Net finance costs 21.8 13.9
Exclude: Net interest receivable on retirement
benefit obligations 2.1 0.8
Exclude: Movement in discount on other debtors 0.1 1.2
Exclude: Foreign exchange on investing and
financing arrangements (0.8) (0.2)
Add back: Movement in discount on provisions (1.2) (0.5)
Other covenant adjustments to net finance (6.6) -
costs resulting from IFRS16
---------------------------------------------------- ------- -------
Covenant net finance costs 15.4 15.2
---------------------------------------------------- ------- -------
Adjusted net debt 214.5 173.2
Obligations under finance leases - in accordance
with IAS17 Leases 8.9 14.8
---------------------------------------------------- ------- -------
Recourse Net Debt 223.4 188.0
Exclude: Disposal vendor loan note, encumbered
cash and other adjustments 4.1 2.3
Covenant adjustment for average FX rates 7.6 (8.8)
---------------------------------------------------- ------- -------
CTNB 235.1 181.5
---------------------------------------------------- ------- -------
CTNB / covenant EBITDA (not to exceed 3.5x) 1.17x 1.06x
---------------------------------------------------- ------- -------
Covenant EBITDA / covenant net finance costs
(at least 3.0x) 13.0x 11.2x
---------------------------------------------------- ------- -------
Net assets summary
2019 2018
As at 31 December GBPm GBPm
------------------------------------------------ ---------- ----------
Non-current assets
Goodwill 671.2 579.6
Other intangible assets 96.5 67.3
Property, plant and equipment 392.6 64.8
Other non-current assets 50.1 51.0
Deferred tax assets 63.9 60.9
Retirement benefit assets 78.3 85.8
------------------------------------------------ ---------- ----------
1,352.6 909.4
------------------------------------------------ ---------- ----------
Current assets
Inventories 18.3 22.9
Contract assets, trade receivables and other
current assets 612.2 551.5
Current tax assets 6.8 7.3
Cash and cash equivalents 89.5 62.5
------------------------------------------------ ---------- ----------
Total current assets 726.8 644.2
------------------------------------------------ ---------- ----------
Total assets 2,079.4 1,553.6
------------------------------------------------ ---------- ----------
Current liabilities
Contract liabilities, trade payables and other
current liabilities (557.7) (497.7)
Current tax liabilities (18.7) (29.2)
Provisions (58.4) (120.1)
Lease obligations (84.6) (5.7)
Loans (56.1) (21.9)
------------------------------------------------ ---------- ----------
Total current liabilities (775.5) (674.6)
------------------------------------------------ ---------- ----------
Non-current liabilities
Contract liabilities, trade payables and other
non-current liabilities (72.7) (109.9)
Deferred tax liabilities (26.7) (21.4)
Provisions (103.4) (119.3)
Lease obligations (285.3) (9.1)
Loans (248.9) (217.6)
Retirement benefit obligations (24.0) (14.9)
------------------------------------------------ ---------- ----------
(761.0) (492.2)
------------------------------------------------ ---------- ----------
Total liabilities (1,536.5) (1,166.8)
------------------------------------------------ ---------- ----------
Net assets 542.9 386.8
------------------------------------------------ ---------- ----------
At 31 December 2019 the balance sheet had net assets of
GBP542.9m, a movement of GBP156.1m from the closing net asset
position of GBP386.8m as at 31 December 2018. The increase in net
assets is mainly due to the following movements:
-- A decrease in provisions of GBP77.6m. Further details on
provision movements is provided below.
-- Adjusted Net Debt increased by GBP41.3m. Further details of
these movements are provided in the cash flow and Net Debt sections
above.
-- An increase in property, plant and equipment of GBP327.8m,
which includes right of use assets with a net book value of
GBP345.3m at 31 December 2019 following the adoption of IFRS16
Leases, although this is offset by a combined increase in lease
liabilities of GBP355.1m. Of the total increase in the lease
liability, GBP78.9m is recognised in current liabilities which has
contributed to the increase in net current liabilities to
GBP48.7m.
-- An increase in goodwill and intangibles of GBP115.3m and
GBP52.6m respectively as a result of the acquisition of NSBU,
offset by movements in exchange rates and amortisation of
intangibles charged in the year.
Provisions
The total of current and non-current provisions has decreased by
GBP77.6m since 31 December 2018. The movement is predominantly due
to:
-- A decrease in onerous contract provisions of GBP65.6m.
-- A GBP19m net release of other provisions excluded from UTP as
the provisions related to items created as an exceptional cost.
-- GBP7m net charges on end of contract employee related
provisions and other items, none of which were individually
material.
Movements in onerous contract provisions since the 31 December
2018 balance sheet date, are as follows:
Onerous
Contract
Provisions
GBPm
---------------------------------- ------------
At 1 January 2019 82.1
Opening adjustment - IFRS16 (13.3)
Charged to the income statement
during the year - trading 10.6
Released to the income statement
- trading (9.6)
Utilisation during the year (53.6)
Unwinding of discount 0.2
Foreign exchange 0.1
At 31 December 2019 16.5
---------------------------------- ------------
The balance of OCPs at 31 December 2019 was GBP16.5m (2018:
GBP82.1m). OCP balances are subject to ongoing review and a full
bottom-up assessment of the forecasts that form the basis of the
OCPs is conducted as part of the annual budgeting process. The net
non-exceptional charge to OCPs was GBP1.0m (2018: GBP12.8m release)
and utilisation was GBP53.6m (2018: GBP51.8m).
In 2019, the release from OCPs is reflective of the Group's
ability to forecast the final years of contracts which are nearing
completion. Additional charges of GBP10.6m (2018: GBP3.4m) have
been made in respect of future losses on new and existing onerous
contract provisions to reflect the updated forecasts and releases
of GBP9.6m (2018: GBP16.2m) as settlements are agreed and contracts
near completion. The Group undertakes a robust assessment at each
reporting date to determine whether any individual customer
contracts, which the Group has entered into, are onerous and
require a provision to be recognised in accordance with IAS37.
The Group operates a large number of long-term contracts at
different phases of their contract life cycle. Within the Group's
portfolio, there are a small number of contracts where the balance
of risks and opportunities indicates that they might be onerous if
transformation initiatives or contract changes are not successful.
The Group has concluded that these contracts do not require an
onerous contract provision on an individual basis. Following the
individual contract reviews, the Group has also undertaken a top
down assessment which assumes that, whilst the contracts may not be
onerous on an individual basis, as a portfolio there is a risk that
at least some of the transformation programmes or customer
negotiations required to avoid a contract loss, will not be fully
successful, and it is more likely than not that one or more of
these contracts will be onerous. Therefore, in considering the
Group's overall onerous contract provision, the Group has made a
best estimate of the provision required to take into consideration
this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a
critical estimate for the Group. The amount recognised in the year
is GBP6.2m at the Trading Profit level within the Corporate costs
segment, which after this charge is therefore GBP51.7m (2018:
GBP40.1m).
Acquisitions
On 1 August 2019, the Group acquired the Naval Systems Business
Unit and a small number of related contracting entities
(collectively, 'NSBU'), from Alion Science & Technology
Corporation. Serco acquired the net assets of the business as well
as the Alion Canada and Alion IPS legal entities. The acquired
business contributed GBP109.8m of revenue and GBP8.1m of operating
profit before exceptional items to the Group's results during the
year to 31 December 2019. As a result of the acquisition, Alion
Canada, now known as Serco Canada Marine, and Alion IPS are 100%
owned, indirect subsidiaries of Serco Group plc.
NSBU is a leading provider of naval design, systems engineering,
as well as production and lifecycle support services to the US
Navy, US Army and Royal Canadian Navy. The combined business will
be a top tier supplier of services to the US Navy and increases our
exposure to US Navy fleet expansion, which is one of the
fastest-growing areas of public procurement. The US Navy has
announced plans to increase the fleet from 280 to 355 ships by
2034, and we see a long-term and growing demand for the
capabilities that the combination of Serco and NSBU will be able to
provide.
The total annual revenue of NSBU in 2020 is expected to be
around $370m (GBP285m) and the estimated operating profit before
exceptional items, including an appropriate allocation of charges
for shared support services and fully allocated overheads, of
around $27m (GBP20m).
IFRS16
A new leasing standard, IFRS16 Leases was adopted by the Group
with effect from 1 January 2019. IFRS16 requires the recognition of
a lease liability and corresponding right of use asset for any
lease not covered by a low-value or short-term exemption.
The following table illustrates the impact which IFRS16 has had
on the results for the year ended 31 December 2019 for key
Alternative Performance Measures. This has been provided to assist
the reader in understanding the business performance outside of
changes to accounting standards.
No restatement has been made to the results for the year ended
31 December 2018 in accordance with the modified retrospective
approach to transition adopted by the Group.
Impact APM pre-IFRS16
of IFRS16
As reported 31 December 31 December
2019 2019
31 December 31 December
2019 2018
---------------------------- -------------- ------------- --------------- -------------
Underlying Trading Profit
(GBPm) 120.2 1.2 119.0 93.1
Trading Profit (GBPm) 133.4 2.3 131.1 116.7
Operating Profit (GBPm) 102.5 2.3 100.2 80.5
Net Finance Costs (GBPm) 21.8 6.6 15.2 6.4
Profit Before Tax (GBPm) 80.7 (4.3) 85.0 74.1
Diluted Underlying EPS (p) 6.16 (0.46) 6.62 5.21
Net Debt (GBPm) 584.4 360.9 223.5 188.0
---------------------------- -------------- ------------- --------------- -------------
Serious Fraud Office Investigation
On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary,
received judicial approval of a Deferred Prosecution Agreement
(DPA) with the UK Serious Fraud Office (SFO). This ruling concluded
the SFO's investigation into Serco companies announced in November
2013. As part of the DPA, the Group has paid a fine of GBP19.2m
during the year and also paid SFO investigation costs of
GBP3.7m.
The Group has received a claim seeking damages for alleged
losses following the reduction in Serco's share price in 2013. The
merit, likely outcome and potential impact on the group of any such
litigation that either has been or might potentially be brought
against the group is subject to a number of significant
uncertainties and, therefore, it is not possible to assess the
quantum of any such litigation as at the date of this
disclosure.
Financial Statements
Consolidated Income Statement
For the year ended 31 December
2019 2018
GBPm GBPm
--------------------------------------------------- --------- ---------
Revenue 3,248.4 2,836.8
Cost of sales (2,928.3) (2,546.6)
---------------------------------------------------- --------- ---------
Gross profit 320.1 290.2
Administrative expenses
Other general and administrative expenses (214.2) (202.3)
Exceptional loss on disposal of subsidiaries
and operations - (0.5)
Other exceptional operating items (23.4) (31.4)
Other expenses - amortisation and impairment
of intangibles arising on acquisition (7.5) (4.3)
---------------------------------------------------- --------- ---------
Total administrative expenses (245.1) (238.5)
Share of profits in joint ventures and associates,
net of interest and tax 27.5 28.8
---------------------------------------------------- --------- ---------
Operating profit 102.5 80.5
---------------------------------------------------- --------- ---------
Operating profit before exceptional items 125.9 112.4
---------------------------------------------------- --------- ---------
Investment revenue 2.7 4.3
Finance costs (24.5) (18.2)
Exceptional finance income - 7.5
Total net finance costs (21.8) (6.4)
---------------------------------------------------- --------- ---------
Profit before tax 80.7 74.1
---------------------------------------------------- --------- ---------
Profit before tax and exceptional items 104.1 98.5
---------------------------------------------------- --------- ---------
Tax on profit before exceptional items (27.4) (8.8)
Exceptional tax (2.7) 2.1
---------------------------------------------------- --------- ---------
Tax charge (30.1) (6.7)
---------------------------------------------------- --------- ---------
Profit for the year 50.6 67.4
---------------------------------------------------- --------- ---------
Attributable to:
Equity owners of the Company 50.4 67.4
Non controlling interests 0.2 -
---------------------------------------------------- --------- ---------
Earnings per share (EPS)
Basic EPS 4.31p 6.16p
Diluted EPS 4.21p 5.99p
---------------------------------------------------- --------- ---------
The accompanying notes form an integral part of the condensed
consolidated financial statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 December
2019 2018
GBPm GBPm
------------------------------------------------- ------ -----
Profit for the year 50.6 67.4
Other comprehensive income for the year:
Items that will not be reclassified subsequently
to profit or loss:
Net actuarial (loss)/gain on defined benefit
pension schemes* (20.3) 52.1
Actuarial gain/(loss) on reimbursable rights* 3.2 (0.2)
Tax relating to items not reclassified* 2.7 (9.2)
Share of other comprehensive income in joint
ventures and associates 1.3 2.0
Items that may be reclassified subsequently
to profit or loss:
Net exchange loss on translation of foreign
operations** (33.3) (5.3)
Fair value (loss)/gain on cash flow hedges
during the year** (0.1) 0.6
Total other comprehensive (loss)/income for
the year (46.5) 40.0
Total comprehensive income for the year 4.1 107.4
-------------------------------------------------- ------ -----
Attributable to:
Equity owners of the Company 4.0 107.3
Non controlling interest 0.1 0.1
-------------------------------------------------- ------ -----
* Recorded in retirement benefit obligations reserve in the
Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the
Consolidated Statement of Changes in Equity.
The accompanying notes form an integral part of the condensed
consolidated financial statements.
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
2018 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 year - - - 69.3 42.7 - - (4.7) 107.3 0.1
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (28.0) 27.4 - (0.6) -
Expense in
relation to
share based
payments - - - - - 14.7 - - 14.7 -
At 1 January
2019 22.0 327.9 0.1 111.1 (137.4) 75.0 (18.7) 5.4 385.4 1.4
Opening
balance
adjustment
- IFRS16
(note
2) - - - 3.0 - - - - 3.0 -
Total
comprehensive
income for
the year - - - 51.8 (14.4) - - (33.4) 4.0 0.1
Issue of share
capital 2.5 135.0 - - - - (0.3) - 137.2 -
Shares
transferred
to option
holders
on exercise
of share
options - - - - - (14.4) 14.6 - 0.2 -
Expense in
relation to
share based
payments - - - - - 11.6 - - 11.6 -
At 31 December
2019 24.5 462.9 0.1 165.9 (151.8) 72.2 (4.4) (28.0) 541.4 1.5
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
The accompanying notes form an integral part of the condensed
consolidated financial statements.
Consolidated Balance Sheet
At 31 December At 31 December
2019 2018
GBPm GBPm
--------------------------------- -------------- --------------
Non current assets
Goodwill 671.2 579.6
Other intangible assets 96.5 67.3
Property, plant and equipment 392.6 64.8
Interests in joint ventures
and associates 23.6 20.6
Trade and other receivables 26.5 30.3
Derivative financial instruments - 0.1
Deferred tax assets 63.9 60.9
Retirement benefit assets 78.3 85.8
---------------------------------- -------------- --------------
1,352.6 909.4
--------------------------------- -------------- --------------
Current assets
Inventories 18.3 22.9
Contract assets 293.5 244.3
Trade and other receivables 315.7 299.5
Current tax assets 6.8 7.3
Cash and cash equivalents 89.5 62.5
Derivative financial instruments 3.0 7.7
---------------------------------- -------------- --------------
726.8 644.2
Total assets 2,079.4 1,553.6
---------------------------------- -------------- --------------
Current liabilities
Contract liabilities (66.8) (74.3)
Trade and other payables (489.0) (419.7)
Derivative financial instruments (1.9) (3.7)
Current tax liabilities (18.7) (29.2)
Provisions (58.4) (120.1)
Lease obligations (84.6) (5.7)
Loans (56.1) (21.9)
---------------------------------- -------------- --------------
(775.5) (674.6)
--------------------------------- -------------- --------------
Non current liabilities
Contract liabilities (58.2) (86.6)
Trade and other payables (14.5) (23.3)
Deferred tax liabilities (26.7) (21.4)
Provisions (103.4) (119.3)
Lease obligations (285.3) (9.1)
Loans (248.9) (217.6)
Retirement benefit obligations (24.0) (14.9)
---------------------------------- -------------- --------------
(761.0) (492.2)
--------------------------------- -------------- --------------
Total liabilities (1,536.5) (1,166.8)
---------------------------------- -------------- --------------
Net assets 542.9 386.8
---------------------------------- -------------- --------------
Equity
Share capital 24.5 22.0
Share premium account 462.9 327.9
Capital redemption reserve 0.1 0.1
Retained earnings 165.9 111.1
Retirement benefit obligations
reserve (151.8) (137.4)
Share based payment reserve 72.2 75.0
Own shares reserve (4.4) (18.7)
Hedging and translation reserve (28.0) 5.4
---------------------------------- -------------- --------------
Equity attributable to owners
of the Company 541.4 385.4
Non controlling interest 1.5 1.4
---------------------------------- -------------- --------------
Total equity 542.9 386.8
---------------------------------- -------------- --------------
The accompanying notes form an integral part of the condensed
consolidated financial statements.
The financial statements were approved by the Board of Directors
on 25 February 2020 and signed on its behalf by:
Rupert Soames Angus Cockburn
Group Chief Executive Officer Group Chief Financial Officer
Consolidated Cash Flow Statement
For the year ended 31 December
2019 2018
GBPm GBPm
----------------------------------------------------- ------- ------
Net cash inflow from operating activities before
exceptional items 152.1 42.9
Exceptional items (49.2) (40.2)
------------------------------------------------------ ------- ------
Net cash inflow from operating activities 102.9 2.7
------------------------------------------------------ ------- ------
Investing activities
Interest received 0.4 0.6
Increase/(decrease) in security deposits 0.2 (0.3)
Dividends received from joint ventures and
associates 25.4 29.7
Proceeds from disposal of property, plant and
equipment 1.0 5.3
Proceeds from disposal of intangible assets - 0.5
Net cash inflow on disposal of subsidiaries
and operations - 1.5
Acquisition of subsidiaries, net of cash acquired (193.2) (32.8)
Proceeds from loans receivable - 29.9
Exceptional finance income received - 7.5
Purchase of other intangible assets (6.8) (8.9)
Purchase of property, plant and equipment (17.5) (26.4)
------------------------------------------------------ ------- ------
Net cash (outflow)/inflow from investing activities (190.5) 6.6
------------------------------------------------------ ------- ------
Financing activities
Interest paid (21.4) (16.7)
Capitalised finance costs paid (1.2) (2.0)
Advances/(repayment) of loans 72.3 (31.3)
Capital element of lease repayments (70.2) (8.7)
Cash movements on hedging instruments (2.0) 0.2
Issue of share capital 138.7 -
Proceeds received from exercise of share options 0.2 -
Net cash inflow/(outflow) from financing activities 116.4 (58.5)
------------------------------------------------------ ------- ------
Net increase/(decrease) in cash and cash equivalents 28.8 (49.2)
Cash and cash equivalents at beginning of year 62.5 112.1
Net exchange loss (1.8) (0.4)
Cash and cash equivalents at end of year 89.5 62.5
------------------------------------------------------ ------- ------
The accompanying notes form an integral part of the condensed
consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
1. General information, going concern and changes in accounting
standards
The basis of preparation in this preliminary announcement is set
out below.
The financial information in this announcement does not
constitute the Group's or the Company's statutory accounts as
defined in section 434 of the Companies Act 2006 for the years
ended 31 December 2019 or 2018, but is derived from those accounts.
Statutory accounts for 2018 have been delivered to the registrar of
companies, and those for 2019 will be delivered in due course. The
auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to
which the auditor drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under
section 498 (2) or (3) of the Companies Act 2006.
The preliminary announcement has been prepared in accordance
with International Financial Reporting Standards adopted for use in
the European Union (IFRS). Whilst the financial information
included in this preliminary announcement has been computed in
accordance with IFRS, this announcement does not itself contain
sufficient information to comply with IFRS. The Company expects to
publish full Group and parent company only financial statements
that comply with IFRS and FRS101 respectively, in March 2020 and
this includes the Group's and parent company's accounting
policies.
The financial statements have been prepared on the historical
cost basis, except for the revaluation of financial instruments.
Historical cost is generally based on the fair value of the
consideration given in exchange for goods and services. The
following principal accounting policies adopted have been applied
consistently in the current and preceding financial year except as
stated below:
Going concern
The Directors have a reasonable expectation that the Company and
the Group will be able to operate within the level of available
facilities and cash for the foreseeable future, and accordingly
believe that it is appropriate to prepare the financial statements
on a going concern basis.
In assessing the basis of preparation of the financial
statements for the year ended 31 December 2019, 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 31 December
2019 comprised a GBP250m revolving credit facility, a three year
term acquisition facility of GBP45m and GBP213m of US private
placement notes. As at 31 December 2019, the Group had GBP508m of
committed credit facilities and committed headroom of GBP286m. In
undertaking this review the Directors have considered the business
plans which provide financial projections for the foreseeable
future. For the purposes of this review, we consider that to be the
period ending 30 June 2021.
Adoption of new and revised standards
IFRS16 Leases (effective 1 January 2019), specifies how to
recognise, measure, present and disclose leases. The standard
provides a single lessee accounting model, requiring lessees to
recognise assets and liabilities for all leases unless the lease
term is 12 months or less or the underlying asset is of a low
value. Lessors continue to classify leases as operating or finance,
with the IFRS16 approach to lessor accounting remaining
substantially unchanged from its predecessor, IAS 17.
Under the applicable transition rules a lessee shall either
apply IFRS16 with full retrospective effect or alternatively not
restate comparative information but recognise the cumulative effect
of initially applying IFRS16 as an adjustment to opening equity at
the date of initial application, subject to the Group's application
of the following expedients:
No reassessment is required as to whether a contract is, or
contains, a lease at the date of initial application.
No reassessment is required for:
o leases with a lease term end date within one year of the date
of initial application; or
o leases for low value assets, which the Group considers to be
those with an initial cost value less than GBP5,000 except for
circumstances where those assets form part of a bundle of leased
assets accounted for as a single lease contract.
The Group has adopted the modified retrospective transition
approach and as such the valuation of the right of use asset at 1
January 2019 is calculated as if the lease had always existed and
hence the net book value of the asset on 1 January 2019 is based on
the assumption of straight line amortisation.
The lease liability at 1 January 2019 is calculated as the
present value of future payments in relation to the lease,
discounted at the applicable incremental borrowing rate.
The impact for the Group of adopting IFRS16 is as follows:
As at 1 January
2019
GBPm
-------------------------------------------------------------------- ---------------
Retained earnings at 31 December 2018 111.1
Lease liability recognised (129.1)
Right of use asset recognised, net of impairments 104.2
Impact of IFRS16 on opening provisions 12.5
Impact of IFRS16 on other creditors 10.6
Deferred tax asset recognised 5.1
-------------------------------------------------------------------- ---------------
Adjustment to retained earnings due to the implementation of IFRS16 3.3
Impact of IFRS16 on interest in joint ventures at 1 January 2019 (0.3)
-------------------------------------------------------------------- ---------------
Retained earnings at 1 January 2019 114.1
-------------------------------------------------------------------- ---------------
The impact of IFRS16 on the Group's income statement is to
increase finance costs and improve trading profit as lease costs
are replaced with a lower depreciation charge. The impact to 2019
is outlined in the Divisional Reviews on pages 16-21 and to key
metrics in the Finance Review on page 38.
In calculating the lease liability to be recognised on
transition, the Group used a weighted average incremental borrowing
rate on 1 January 2019 of 3.50%. Applying this weighted average
incremental borrowing rate to the operating lease commitments
recognised as at 31 December 2018 gives a liability of GBP187.2m.
This differs from the lease liability recognised as a result of
transitioning to IFRS16 for the following reasons:
GBPm
-------------------------------------------------------- ------
Minimum lease payments under non-cancellable operating
leases recognised in accordance with IAS17 Leases as
at 31 December 2018:
Within one year 73.2
Between one and five years 95.1
After five years 22.1
-------------------------------------------------------- ------
190.4
Finance leases 14.8
Operating lease commitments discounted at the weighted
average incremental borrowing rate 187.2
Less: leases ending within 12 months of the transition
date to IFRS16 covered by the practical expedient (44.8)
Less: leases included in the operating lease commitment
not meeting the recognition criteria of IFRS16 (13.3)
Lease liability on transition to IFRS16 143.9
-------------------------------------------------------- ------
The implementation of IFRS16 Leases has required the Group to
make a number of judgements and estimates. The key judgements
applied relate to the likelihood of lease extension options being
exercised, the certainty of the exercise of termination options and
the identification of leases embedded within other contracts. The
key estimates used in assessing the impact of adopting the new
standard are the incremental borrowing rates applied in calculating
the present value of future lease payments to identify the lease
liability at 1 January 2019.
In addition to the areas where a financial impact has been
identified as a result of adoption of IFRS16 as identified above,
there are certain accounting policies which are new or change
existing policies applied by the Group and may have an impact on
the future financial performance of the Group. The policies in
these areas to be adopted by the Group are set out below:
(i) Lease amendments. Where changes in a lease occur, this will
trigger a reassessment of the lease liability. Changes in the lease
liability will be recognised via an adjustment to the right of use
asset. However, if the carrying amount of the right-of-use asset is
reduced to zero and there is a further reduction in the measurement
of the lease liability, any remaining amount of the remeasurement
will be recognised in profit or loss.
(ii) Lease incentives. Where a lease incentive is received prior
to the commencement of a lease, the amount is offset against the
right of use asset at inception. Where a lease includes a period or
periods of reduced or free rentals, these are included in the
calculation of the present value of the lease liability on
inception.
(iii) Variable lease payments. Where a contract to lease an
asset has a pricing mechanism that allows for changes after the
commencement date, other than those that change simply due to the
passage of time, it is considered to have variable lease payments.
These payments will depend on an index or rate and are included in
the calculated lease liability at the lease commencement date
according to the rate or index as at that date.
(iv) Sub-leases. Where a group entity leases an asset and this
asset is subsequently leased to another entity, this is considered
to be a sub-lease if the original head lease remains in place. In
this instance the entity which has entered into the head lease is
acting as both a lessee and a lessor simultaneously. As a result,
the head lease is accounted for in accordance with the group's
lease accounting policy. When acting as a lessor, there is a
requirement to determine whether the sub-lease is an operating
lease or a finance lease, with the accounting following this
determination.
(v) Separate lease and non-lease components. Lease contracts can
often contain elements related to the use of an asset and elements
that are unrelated, for example where a property lease also
includes a charge for insurance or maintenance. The lease component
and the associated non-lease component are accounted for as a
single lease component.
(vi) Lease terminations. Where a lease is terminated before the
end of the lease term the right of use asset is disposed of with
the carrying value being charged to the income statement whilst the
lease liability is extinguished from the balance sheet resulting in
a credit to the income statement. The net charge or credit to the
income statement is added to any cost of exiting the lease to
result in a profit or loss on lease termination.
As an interpretation, IFRIC23 Uncertainty over Income Tax
Treatments clarifies the application of the recognition and
measurement criteria of IAS12 when there is uncertainty over income
tax treatments yet to be accepted by tax authorities. The
interpretation had an effective date of 1 January 2019 so is
reflected in the Group's financial statements for the period ended
31 December 2019. Application of this interpretation did not have a
significant impact on the Group's financial statements.
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 2 above, management has made the
following judgements that have the most significant effect on the
amounts recognised in the financial statements. As described below,
many of these areas of judgement also involve a high level of
estimation uncertainty.
Key sources of estimation uncertainty
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions
requires assumptions and complex judgements to be made about the
future performance of the Group's contracts. The level of
uncertainty in the estimates made, either in determining whether a
provision is required, or in the measurement 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 in respect
of onerous contract provisions within the next financial year.
Major sources of uncertainty which could result in a material
adjustment within the next financial year are:
-- The ability of the company to maintain or improve operational
performance to ensure costs or performance related penalties are in
line with expected levels.
-- Volume driven revenue and costs being within the expected ranges.
-- The outcome of matters dependent on the behaviour of the
customer, such as a decision to extend a contract where it has the
unilateral right to do so.
-- The outcome of open claims made by or against a customer regarding contractual performance.
-- The ability of suppliers to deliver their contractual obligations on time and on budget.
In the current year, an amount of GBP2.5m was charged to
historic provisions, and releases of GBP9.6m have been made. One
new OCP was recognised during the year with the charge being
GBP1.9m. Further details are provided in the Finance Review within
the Strategic Report. All of these revisions have resulted from
triggering events in the current year, either through changes in
contractual positions or changes in circumstances which could not
have been reasonably foreseen at the previous balance sheet date.
To mitigate the level of uncertainty in making these estimates
Management regularly compares actual performance of the contracts
against previous forecasts and considers whether there have been
any changes to significant judgements. A detailed bottom up review
of the provisions is performed as part of the Group's formal annual
budgeting process.
The future range of possible outcomes in respect of those
assumptions and significant judgements made to determine the
carrying value of onerous contracts could result in either a
material increase or decrease in the value of onerous contract
provisions in the next financial year. The extent to which actual
results differ from estimates made at the reporting date depends on
the combined outcome and timing of a large number of variables
associated with performance across multiple contracts.
The individual provisions are discounted where the impact is
assessed to be significant. Discount rates used are calculated
based on the estimated risk-free rate of interest for the region in
which the provision is located and matched against the ageing
profile of the provision.
During the year, the Group's existing OCPs have continued to be
utilised with the closing balance being significantly lower than at
the prior year-end. The Group does not expect to enter into new
OCPs, however given the nature of the Group's operations, there is
an inherent risk that a contract can become onerous. The Group
operates a large number of long-term contracts at different phases
of their contract life cycle. Within the Group's portfolio, there
are a small number of contracts where the balance of risks and
opportunities indicates that they might be onerous if
transformation initiatives or contract changes are not successful.
The Group has concluded that these contracts do not require an
onerous contract provision on an individual basis. Following the
individual contract reviews, the Group has also undertaken a top
down assessment which assumes that, whilst the contracts may not be
onerous on an individual basis, as a portfolio there is a risk that
at least some of the transformation programmes or customer
negotiations required to avoid a contract loss, will not be fully
successful, and it is more likely than not that one or more of
these contracts will be onerous. Therefore, in considering the
Group's overall onerous contract provision, the Group has made a
best estimate of the provision required to take into consideration
this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a
critical estimate for the Group. The amount recognised in the year
is GBP6.2m at the Trading Profit level within the Corporate costs
segment, which after this charge is therefore GBP51.7m (2018:
GBP40.1m).
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 2019.
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) which could be material for that period to the
extent that the outcomes differ from the current estimates. 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.
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 and other
pension scheme arrangements are covered in note 31.
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 equal to the full surplus that will ultimately be
available to the Group as a future refund.
-- No foreign exchange item is shown in the disclosures as the
non UK liabilities are not material.
-- No pension assets are invested in the Group's own financial instruments or property.
-- Pension annuity assets are remeasured to fair value at each
reporting date based on the share of the defined benefit obligation
covered by the insurance contract.
Critical accounting judgements
Use of Alternative Performance Measures: Operating profit before
exceptional items
IAS1 requires material items to be disclosed separately in a way
that enables users to assess the quality of a company's
profitability. In practice, these are commonly referred to as
'exceptional' items, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in arriving at an
Alternative Performance Measure which excludes such exceptional
items. We consider items which are material and outside of the
normal operating practice of the company to be suitable for
separate presentation. There is a level of judgement required in
determining which items are exceptional on a consistent basis and
require separate disclosure. Further details can be seen in note
7.
The segmental analysis of operations in note 3 includes the
additional performance measure of Trading Profit on operations
which is reconciled to reported operating profit in that note. The
Group uses Trading Profit as an alternative measure to reported
operating profit by making several adjustments. Firstly, Trading
Profit excludes exceptional items, being those we consider material
and outside of the normal operating practice of the company to be
suitable of separate presentation and detailed explanation.
Secondly, amortisation and impairment of intangibles arising on
acquisitions are excluded, because these charges are based on
judgments about the value and economic life of assets that, in the
case of items such as customer relationships, would not be
capitalised in normal operating practice. The CODM reviews the
segmental analysis for operations.
I nvestigation by the Serious Fraud Office
On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary,
received judicial approval of a Deferred Prosecution Agreement
(DPA) with the UK Serious Fraud Office (SFO). This ruling concludes
the SFO's investigation into Serco companies announced in November
2013. As part of the DPA, the Group has paid a fine of GBP19.2m
during the year and also paid SFO investigation costs of GBP3.7m.
As at the end of 2019, this is no longer a critical accounting
judgement.
Claim for losses in respect of the 2013 share price
reduction
The Group has received a claim seeking damages for alleged
losses following the reduction in Serco's share price in 2013. The
merit, likely outcome and potential impact on the group of any such
litigation that either has been or might potentially be brought
against the group is subject to a number of significant
uncertainties and, therefore, it is not possible to assess the
quantum of any such litigation as at the date of this disclosure.
Given the uncertainties associated with this claim, it has been
disclosed as a contingent liability in note 29.
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 16.
3. Segmental information
The Group's operating segments reflecting the information
reported to the Board in 2019 under IFRS8 Operating Segments are as
set out below.
Reportable segments Operating segments
------------------- -------------------------------------------------------------
UK & Europe Services for sectors including Citizen Services, Defence,
Health, Justice & Immigration and Transport delivered
to UK Government, UK devolved authorities and other
public sector customers in the UK and Europe
------------------- -------------------------------------------------------------
Americas Services for sectors including Citizen Services, Defence
and Transport delivered to US federal and civilian agencies,
selected state and municipal governments and the Canadian
Government
------------------- -------------------------------------------------------------
AsPac Services for sectors including Citizen Services, Defence,
Justice & Immigration, Health and Transport in the Asia
Pacific region including Australia, New Zealand and
Hong Kong
------------------- -------------------------------------------------------------
Middle East Services for sectors including Defence, Health and Transport
in the Middle East region
------------------- -------------------------------------------------------------
Corporate Central and head office costs
------------------- -------------------------------------------------------------
Each operating segment is focused on a narrow group of customers
in a specific geographic region and is run by a local management
team which report directly to the CODM on a regular basis. As a
result of this focus, the sectors in each region have similar
economic characteristics and are aggregated at the operating
segment level in these financial statements. The accounting
policies of the reportable segments are the same as the Group's
accounting policies described in note 2 to the Group's consolidated
financial statements.
Information about major customers
The Group has four major governmental customers which each
represent more than 5% of Group revenues. The customers' revenues
were GBP1,043.3m (2018: GBP1,113.1m) for the UK Government within
the UK & Europe segment, GBP734.9m (2018: GBP522.8m) for the US
Government within the Americas segment, GBP597.5m (2018: GBP498.7m)
for the Australian Government within the AsPac segment and
GBP255.5m (2018: GBP232.9m) for the Government of the United Arab
Emirates within the Middle East segment.
The following is an analysis of the Group's revenue, results,
assets and liabilities by reportable segment:
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
------------------------------------------- ------- -------- ----- ------ --------- -------
Result
------------------------------------------- ------- -------- ----- ------ --------- -------
Trading profit/(loss) from operations* 48.2 91.7 31.2 13.9 (51.6) 133.4
Amortisation and impairment of intangibles
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 47.0 85.5 31.1 13.9 (51.6) 125.9
Other exceptional operating items** (24.8) 15.3 (3.0) - (10.9) (23.4)
Operating profit/(loss) 22.2 100.8 28.1 13.9 (62.5) 102.5
Investment revenue 2.7
Finance costs (24.5)
Profit before tax 80.7
Tax charge (27.4)
Tax on exceptional items (2.7)
------------------------------------------- ------- -------- ----- ------ --------- -------
Profit for the year from operations 50.6
------------------------------------------- ------- -------- ----- ------ --------- -------
* Trading profit/(loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional restructuring costs incurred by the Corporate
segment are not allocated to other segments. Such items may
represent costs that will benefit the wider business.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------- --------- ---------
Supplementary information
------------------------------------------- ------- -------- ------- ------- --------- ---------
Share of profits in joint ventures
and associates, net of interest and
tax 27.3 - 0.2 - - 27.5
------------------------------------------- ------- -------- ------- ------- --------- ---------
Depreciation of plant, property and
equipment (37.3) (17.4) (9.0) (4.7) (6.0) (74.4)
Impairment of plant, property and
equipment (18.9) - - - - (18.9)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Total depreciation and impairment
of plant, property and equipment (56.2) (17.4) (9.0) (4.7) (6.0) (93.3)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Amortisation of intangible assets
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Amortisation of other intangible
assets (0.3) (1.2) (4.8) (0.4) (11.4) (18.1)
Total amortisation and impairment
of intangible assets (1.5) (7.4) (4.9) (0.4) (11.4) (25.6)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Segment assets
Interests in joint ventures and associates 22.4 - 0.8 0.4 - 23.6
Other segment assets*** 645.4 756.3 227.3 132.0 131.6 1,892.6
------------------------------------------- ------- -------- ------- ------- --------- ---------
Total segment assets 667.8 756.3 228.1 132.4 131.6 1,916.2
Unallocated assets 163.2
------------------------------------------- ------- -------- ------- ------- --------- ---------
Consolidated total assets 2,079.4
------------------------------------------- ------- -------- ------- ------- --------- ---------
Segment liabilities
Segment liabilities ***(/) **** (536.3) (232.8) (151.8) (103.0) (160.3) (1,184.2)
Unallocated liabilities (352.3)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Consolidated total liabilities (1,536.5)
------------------------------------------- ------- -------- ------- ------- --------- ---------
*** 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.
**** Following the adoption of IFRS16 Leases all recognised
lease liabilities are included within segment liabilities.
Previously, finance lease liabilities were considered to be
unallocated liabilities.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2018 GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,300.7 645.6 548.2 342.3 - 2,836.8
--------------------------------------------- ------- -------- ----- ------ --------- -------
Result
--------------------------------------------- ------- -------- ----- ------ --------- -------
Trading profit/(loss) from operations* 51.6 43.2 40.5 21.5 (40.1) 116.7
Amortisation and impairment of intangibles
arising on acquisition (0.5) (3.2) (0.6) - - (4.3)
--------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 51.1 40.0 39.9 21.5 (40.1) 112.4
Exceptional loss on disposal of subsidiaries
and operations (0.5) - - - - (0.5)
Other exceptional operating items** (11.0) (2.8) (4.5) - (13.1) (31.4)
--------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) 39.6 37.2 35.4 21.5 (53.2) 80.5
Investment revenue 4.3
Finance costs (18.2)
Other gains 7.5
--------------------------------------------- ------- -------- ----- ------ --------- -------
Profit before tax 74.1
Tax charge (8.8)
Tax on exceptional items 2.1
--------------------------------------------- ------- -------- ----- ------ --------- -------
Profit for the year from operations 67.4
--------------------------------------------- ------- -------- ----- ------ --------- -------
* Trading profit/(loss) is defined as operating (loss)/profit
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional restructuring costs incurred by the Corporate
segment are not allocated to other segments. Such items may
represent costs that will benefit the wider business.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2018 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
------------------------------------------- ------- -------- ------- ------ --------- ---------
Share of profits in joint ventures
and associates, net of interest and
tax 28.6 - 0.2 - - 28.8
------------------------------------------- ------- -------- ------- ------ --------- ---------
Depreciation of plant, property and
equipment (11.4) (3.3) (2.5) (0.7) (1.6) (19.5)
Impairment of plant, property and
equipment (0.7) - - - - (0.7)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total depreciation and impairment
of plant, property and equipment (12.1) (3.3) (2.5) (0.7) (1.6) (20.2)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Amortisation of intangible assets
arising on acquisition (0.5) (3.2) (0.6) - - (4.3)
Amortisation of other intangible
assets (0.4) (1.5) (4.9) (0.3) (11.5) (18.6)
Exceptional impairment of other intangible
assets (0.1) - - - - (0.1)
------- -------- ------- ------ --------- ---------
Total amortisation and impairment
of intangible assets (1.0) (4.7) (5.5) (0.3) (11.5) (23.0)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment assets
Interests in joint ventures and associates 19.6 - 0.6 0.4 - 20.6
Other segment assets*** 487.6 426.4 222.1 123.4 135.0 1,394.5
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total segment assets 507.2 426.4 222.7 123.8 135.0 1,415.1
Unallocated assets 138.5
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total assets 1,553.6
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment liabilities
Segment liabilities*** (339.4) (130.3) (152.1) (93.6) (142.8) (858.2)
Unallocated liabilities (308.6)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total liabilities (1,166.8)
------------------------------------------- ------- -------- ------- ------ --------- ---------
***The Corporate segment assets and liabilities include balance
sheet items which provide benefit to the wider Group, including
defined benefit pension schemes and corporate intangible
assets.
4. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding
Company Limited (MSHCL) were the only equity accounted entities
which were material to the Group during the year or prior year.
Dividends of GBP17.6m (2018: GBP 20.0m ) and GBP7.8m (2018: GBP 8.7
m) respectively were received from these companies in the year.
Summarised financial information of AWEML and MSHCL and an
aggregation of the other equity accounted entities in which the
Group has an interest is as follows:
31 December 2019
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% of (100% of joint ventures arrangements
Summarised financial results) results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ---------------- ---------------- -------
Revenue 1,065.4 177.9 350.0 44.6 394.6
------------------------------ --------- --------- ---------------- ---------------- -------
Operating profit 95.4 18.9 32.7 1.1 33.8
Net investment revenue 0.8 0.2 0.3 - 0.3
Income tax charge (18.8) (3.8) (6.4) (0.2) (6.6)
------------------------------ --------- --------- ---------------- ---------------- -------
Profit from operations 77.4 15.3 26.6 0.9 27.5
------------------------------ --------- --------- ---------------- ---------------- -------
Other comprehensive income - 2.5 1.3 - 1.3
------------------------------ --------- --------- ---------------- ---------------- -------
Total comprehensive income 77.4 17.8 27.9 0.9 28.8
------------------------------ --------- --------- ---------------- ---------------- -------
Non current assets 510.0 23.2 136.6 2.4 139.0
Current assets 186.8 64.6 78.1 18.7 96.8
Current liabilities (163.0) (48.4) (64.1) (14.7) (78.8)
Non current liabilities (509.3) (12.7) (131.2) (2.2) (133.4)
------------------------------ --------- --------- ---------------- ---------------- -------
Net assets 24.5 26.7 19.4 4.2 23.6
Proportion of group ownership 24.5% 50.0% - - -
------------------------------ --------- --------- ---------------- ---------------- -------
Carrying amount of investment 6.0 13.4 19.4 4.2 23.6
------------------------------ --------- --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective proportion of Group ownership.
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% of (100% of joint ventures arrangements
results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ---------------- ---------------- -----
Cash and cash equivalents 101.3 39.9 44.8 7.4 52.2
Current financial liabilities
excluding trade and other
payables and provisions (7.6) (7.3) (5.6) (0.2) (5.8)
Non current financial
liabilities excluding
trade and other payables
and provisions (0.1) (12.5) (6.3) (2.3) (8.6)
Depreciation and amortisation - (1.6) (0.8) (0.9) (1.7)
Interest income 0.8 0.2 0.3 - 0.3
------------------------------ --------- --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective proportion of Group ownership.
The Group's share of liabilities within joint ventures is
GBP212.2m. Of this, an amount of GBP124.8m relates to a defined
benefit pension obligation, against which Serco is fully
indemnified, and a further GBP69.6m is trade and other payables
which arise as part of the day to day operations carried out by
those entities. The Group has no material exposure to third party
debt or other financing arrangements within any of its joint
ventures and associates.
The financial statements of MSHCL are for a period which is
different from that of the Group, being for the 52 week period
ended 4 January 2020 (2018: 52 week period ended 5 January 2019).
The 52 week period reflects the joint venture's internal reporting
structure and is sufficiently close so as to not require adjustment
to match that of the Group.
Certain employees of the groups headed by AWEML and MSHCL are
members of sponsored defined benefit pension schemes. Given the
significance of the schemes to understanding the position of the
entities, the following key disclosures are made:
Main assumptions: 2019 AWEML MSHCL
------------------------------------------------- ----- -----
Rate of salary increases (%) 2.1% 3.1%
Inflation assumption (CPI %) 2.1% 2.2%
Discount rate (%) 2.1% 2.1%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.9 N/A
Future male industrial pensioners at 65 (years) 25.0 N/A
------------------------------------------------- ----- -----
Retirement benefit funding position (100% of results) GBPm GBPm
------------------------------------------------------ --------- -------
Present value of scheme liabilities (2,213.6) (374.5)
Fair value of scheme assets 1,716.6 218.5
------------------------------------------------------ --------- -------
Net amount recognised (497.0) (156.0)
Members' share of deficit - 62.4
Franchise adjustment* - 93.6
Related asset, right to reimbursement 497.0 -
------------------------------------------------------ --------- -------
Net retirement benefit obligation - -
------------------------------------------------------ --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
31 December 2018
Group
portion Group portion
of material of other
AWEML MSHCL joint joint venture
(100% of (100% of ventures arrangements
Summarised financial results) results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ---------------- ---------------- -------
Revenue 1,024.7 160.8 331.5 43.6 375.1
------------------------------ --------- --------- ---------------- ---------------- -------
Operating profit before
exceptional items 100.4 17.1 33.2 1.4 34.6
Exceptional items - (0.6) (0.3) - (0.3)
Operating profit 100.4 16.5 32.9 1.4 34.3
Net investment revenue 0.6 0.2 0.2 0.1 0.3
Income tax (charge)/credit (18.6) (3.3) (6.2) 0.1 (6.1)
------------------------------ --------- --------- ---------------- ---------------- -------
Profit from operations 82.4 13.4 26.9 1.6 28.5
Profit from operations
before exceptional items 82.4 14.0 27.2 1.6 28.8
--------- --------- ----------------
Other comprehensive income - 4.1 2.0 - 2.0
------------------------------ --------- --------- ---------------- ---------------- -------
Total comprehensive income 82.4 17.5 28.9 1.6 30.5
------------------------------ --------- --------- ---------------- ---------------- -------
Non current assets 518.5 8.0 131.0 2.6 133.6
Current assets 210.1 45.7 74.3 15.4 89.7
Current liabilities (190.6) (28.0) (60.7) (12.5) (73.2)
Non current liabilities (517.6) (0.8) (127.2) (2.3) (129.5)
------------------------------ --------- --------- ---------------- ---------------- -------
Net assets 20.4 24.9 17.4 3.2 20.6
Proportion of group ownership 24.5% 50.0% - - -
------------------------------ --------- --------- ---------------- ---------------- -------
Carrying amount of investment 5.0 12.4 17.4 3.2 20.6
------------------------------ --------- --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective proportion of Group ownership.
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% of (100% of joint ventures arrangements
results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ---------------- ---------------- -----
Cash and cash equivalents 98.1 34.3 41.2 5.1 46.3
Current financial liabilities
excluding trade and other
payables and provisions (9.7) (2.0) (3.4) (0.2) (3.6)
Non current financial
liabilities excluding
trade and other payables
and provisions - - - (2.3) (2.3)
Depreciation and amortisation - (2.0) (1.0) (1.0) (2.0)
Interest income 0.6 0.2 0.2 0.1 0.3
------------------------------ --------- --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective proportion of Group ownership.
In 2018, the cost associated with the Group's share of MSHCL's
obligation in respect of the equalisation of guaranteed minimum
pension (GMP) payments was recorded as exceptional to ensure
consistent treatment across all defined benefit pension schemes the
Group is liable for. There was no equivalent charge in 2019. More
information is provided in note 11.
Key disclosures with respect of the defined benefit pension
schemes of material joint ventures and associates:
Main assumptions: 2018 AWEML MSHCL
------------------------------------------------------ --------- -------------
Rate of salary increases 2.2% 3.1%
Inflation assumption (CPI) 2.2% 2.2%
Discount rate 3.0% 2.9%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 23.0 N/A
Future male industrial pensioners at 65 (years) 25.6 N/A
------------------------------------------------------ --------- -------------
MSHCL
AWEML (**restated)
Retirement benefit funding position (100% of results) GBPm GBPm
------------------------------------------------------ --------- -------------
Present value of scheme liabilities (2,030.4) (290.3)
Fair value of scheme assets 1,512.8 193.3
------------------------------------------------------ --------- -------------
Net amount recognised (517.6) (97.0)
Members' share of deficit - 38.8
Franchise adjustment* - 58.2
Related asset, right to reimbursement 517.6 -
------------------------------------------------------ --------- -------------
Net retirement benefit obligation - -
------------------------------------------------------ --------- -------------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
** An adjustment has been made to the relative amounts of the
Members' share of deficit and the Franchise adjustment for MSHCL as
at 31 December 2018. The amounts previously disclosed had been
transposed meaning the Members' share of deficit was incorrectly
disclosed as GBP58.2m and the Franchise adjustment was incorrectly
disclosed as GBP38.8m.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
5. Acquisitions
On 1 August 2019, the Group acquired the Naval Systems Business
Unit and a small number of related contracting entities
(collectively, 'NSBU'), from Alion Science & Technology
Corporation. Serco acquired the net assets of the business as well
as the Alion Canada and Alion IPS legal entities. The acquired
business contributed GBP109.8m of revenue and GBP7.2m of operating
profit before exceptional items to the Group's results during the
year to 31 December 2019. As a result of the acquisition, Alion
Canada, now known as Serco Canada Marine, and Alion IPS are 100%
owned, indirect subsidiaries of Serco Group plc.
NSBU is a leading provider of naval design, systems engineering,
as well as production and lifecycle support services to the US
Navy, US Army and Royal Canadian Navy. The combined business will
be a top tier supplier of services to the US Navy and increases our
exposure to US Navy fleet expansion, which is one of the
fastest-growing areas of public procurement. The US Navy has
announced plans to increase the fleet from 280 to 355 ships by
2034, and we see a long-term and growing demand for the
capabilities that the combination of Serco and NSBU will be able to
provide.
The total annual revenue of NSBU in 2020 is expected to be
around $370m (GBP285m) and the estimated operating profit before
exceptional items, including an appropriate allocation of charges
for shared support services and fully allocated overheads, of
around $27m (GBP20m).
The total consideration payable in relation to the acquisition
of NSBU was GBP186.3m.
Fair value
NSBU
GBPm
---------------------------------------------------- ----------
Goodwill 115.3
Acquisition related intangible assets 52.6
Property, plant and equipment 3.6
Trade and other receivables 46.6
Cash and cash equivalents 0.4
Deferred tax asset 0.9
Trade and other payables (30.7)
Deferred tax liability (2.4)
----------------------------------------------------- ----------
Acquisition date fair value of consideration
transferred 186.3
----------------------------------------------------- ----------
Satisfied by:
Cash 184.3
Deferred consideration - working capital adjustment 2.0
Total consideration 186.3
----------------------------------------------------- ----------
The net cash outflow as a result of acquisitions made during the
year was GBP197.9m made up of GBP184.3m consideration paid on the
acquisition of NSBU, costs related to the acquisition of NSBU of
GBP4.7m, consideration related to historic acquisitions of GBP9.3m
and GBP0.4m of cash acquired.
Goodwill on the acquisition of NSBU represents the premium
associated with taking over the operations which are considered to
enhance Serco's ability to deliver in the growth areas of US Navy
fleet expansion within our US Defence business. The acquisition is
considered to be accretive to the Group's financial performance.
All goodwill on the acquisition is deductible for tax purposes over
fifteen years. Future US tax deductions will be available for
GBP76.0m of acquired goodwill. The acquisition related intangible
represents customer relationships which have been valued using our
best estimate of forecast cashflows discounted to present
value.
Based on estimates made of the full year impact of the
acquisition of NSBU, had the acquisition taken place on 1 January
2019, Group revenue and operating profit before exceptional items
for the period would have increased by approximately GBP153m and
GBP10m respectively, taking total Group revenue to GBP3,401m and
total Group operating profit before exceptional items to
GBP136m.
The total impact of acquisitions to the Group's cash flow
position in the period was as follows:
GBPm
----------------------------------------------------- -----
Net cash outflow on acquisition of NSBU 183.9
Deferred consideration paid in respect of historic
acquisition:
Clarence Correctional Centre 8.0
Anglia Support Partnership 1.3
----------------------------------------------------- -----
Net cash outflow arising in the year on acquisitions 193.2
Exceptional acquisition related costs - NSBU 4.7
Net cash impact in the year on acquisitions 197.9
----------------------------------------------------- -----
Costs associated with the acquisition of NSBU which were not
directly related to the issue of shares or arrangement of the
acquisition facility are shown as exceptional costs in the
Consolidated Income Statement for the year. The total acquisition
related costs recognised in exceptional items for the year ended 31
December 2019 was GBP4.7m.
6. Revenue from contracts with customers
Revenue
Information regarding the Group's major customers and a
segmental analysis of revenue is provided in note 4.
An analysis of the Group's revenue from its key market sectors,
together with the timing of revenue recognition across the Group's
revenue from contracts with customers, is as follows:
Middle
UK&E Americas AsPac East Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm
------------------------------------------ ------- -------- ----- ------ -------
Key sectors
Defence 215.9 575.5 89.5 28.1 909.0
Justice & Immigration 311.9 - 279.6 - 591.5
Transport 143.5 99.7 19.7 215.3 478.2
Health 259.9 - 94.8 30.2 384.9
Citizen Services 430.5 240.5 137.8 76.0 884.8
------------------------------------------- ------- -------- ----- ------ -------
1,361.7 915.7 621.4 349.6 3,248.4
------------------------------------------ ------- -------- ----- ------ -------
Timing of revenue recognition
Revenue recognised from performance
obligations satisfied in previous
periods 3.3 - (0.4) - 2.9
Revenue recognised at a point in
time 19.0 - 2.6 - 21.6
Products and services transferred
over time 1,339.4 915.7 619.2 349.6 3,223.9
------------------------------------------- ------- -------- ----- ------ -------
1,361.7 915.7 621.4 349.6 3,248.4
------------------------------------------ ------- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Year ended 31 December 2018 (restated*) GBPm GBPm GBPm GBPm GBPm
------------------------------------------ ------- -------- ----- ------ -------
Key sectors
Defence 213.5 337.6 56.2 40.8 648.1
Justice & Immigration 269.8 - 271.4 - 541.2
Transport 141.6 90.2 18.3 204.6 454.7
Health 232.4 - 96.4 28.5 357.3
Citizen Services 443.4 217.8 105.9 68.4 835.5
------------------------------------------- ------- -------- ----- ------ -------
1,300.7 645.6 548.2 342.3 2,836.8
------------------------------------------ ------- -------- ----- ------ -------
Timing of revenue recognition
Revenue recognised from performance
obligations satisfied in previous
periods 1.6 - 3.2 - 4.8
Revenue recognised at a point in
time 38.9 - 1.8 - 40.7
Products and services transferred
over time 1,260.2 645.6 543.2 342.3 2,791.3
------------------------------------------- ------- -------- ----- ------ -------
1,300.7 645.6 548.2 342.3 2,836.8
------------------------------------------ ------- -------- ----- ------ -------
Transaction price allocated to remaining performance
obligations
The following table shows the transaction price allocated to
remaining performance obligations. This represents revenue expected
to be recognised in subsequent periods arising on existing
contractual arrangements. The Group has not taken the practical
expedient in IFRS15.121 not to disclose information about
performance obligations that have original expected durations of
one year or less and therefore no consideration from contracts with
customers is excluded from the amounts included below. Forecast
variable revenue is included only to the extent that it is
measurable and highly probable that a significant reversal will not
occur.
Middle
UK&E Americas AsPac East Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------- -------- ------- ------ --------
Within 1 year (2020) 1,149.4 592.9 559.6 297.3 2,599.2
Between 2 - 5 years (2021 - 2024) 3,507.8 173.1 1,097.6 294.9 5,073.4
5 years and beyond (2025+) 4,648.5 - 1,571.7 173.5 6,393.7
9,305.7 766.0 3,228.9 765.7 14,066.3
---------------------------------- ------- -------- ------- ------ --------
7. Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the underlying
performance of the Group.
Other exceptional operating items
2019 2018
For the year ended 31 December GBPm GBPm
------------------------------------------------- ------- -------
Exceptional items arising
Exceptional loss on disposal of subsidiaries
and operations - (0.5)
Other exceptional operating items
Restructuring costs (12.8) (32.3)
Increase in onerous lease provision - (1.8)
Costs associated with SFO investigation (25.2) 0.4
Reversal of impairment of interest in joint
venture and related loan balances - 0.8
Reversal of impairment on loan balances - 13.9
Cost of Guaranteed Minimum Pension equalisation - (9.6)
Release of/(increase in) other provisions
and other items 19.3 (2.8)
Cost associated with the acquisition of Naval (4.7) -
Systems Business Unit
Other exceptional operating items (23.4) (31.4)
------------------------------------------------- ------- -------
Exceptional operating items (23.4) (31.9)
------------------------------------------------- ------- -------
Exceptional finance income - 7.5
Exceptional tax (2.7) 2.1
------------------------------------------------- ------- -------
Total operating and financing exceptional
items net of tax (26.1) (22.3)
------------------------------------------------- ------- -------
Exceptional loss on disposals
There were no material disposals of operations in 2019 (2018:
none).
Other exceptional operating items
The Group is incurring costs in relation to restructuring
programmes resulting from the Strategy Review. These costs include
redundancy payments, provisions (including onerous leases),
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 2019, a charge of GBP12.8m (2018: GBP32.3m) arose in
relation to the restructuring programme resulting from the Strategy
Review . The Strategy Review is discussed in more detail in the
Group's Strategic Report which forms part of the Consolidated
Annual Report and Accounts. The transformation activities
associated with this are complete and, as such, all exceptional
restructuring costs related to this programme have ended in 2019.
Non-exceptional restructuring charges are incurred by the business
as part of normal operational activity, which in the year totalled
GBP8.9m (2018: GBP6.3m) and were included within operating profit
before exceptional items .
There was an exceptional charge totalling GBP25.2m (2018: credit
of GBP0.4m) associated with the SFO's investigation and the
programme of Corporate Renewal. These costs have historically been
treated as exceptional and consistent treatment is applied in 2019.
During the year, the Group paid GBP22.9m in penalties and legal
costs associated with the SFO's investigation. The final judgement
was provided on 4 July 2019. The credit in 2018 reflects the
recovery of costs from the Group's insurance providers. The
remaining GBP2.3m relates to legal costs incurred by the Group in
respect of the investigation.
In 2018, an exceptional charge of GBP9.6m was recorded to
recognise the Group's obligations associated with equalising the
Guaranteed Minimum Pension (GMP) payments between male and female
employees for the Group's defined benefit pension schemes following
a High Court ruling made in October 2018. The Serco Pension and
Life Assurance Scheme (SPLAS) recorded the largest charge being
GBP9.0m. There was no equivalent charge in 2019.
The decrease in other provisions and other items of GBP19.3m
(2018: increase of GBP2.8m) predominantly relates to a commercial
dispute which was settled in 2019. The treatment of the reduction
as exceptional is consistent with the recognition of the original
charge associated with the same matter in 2014.
The Group completed the acquisition of the Naval Systems
Business Unit (NSBU) from Alion Science and Technology in 2019. The
acquisition achieved final regulatory approvals and completed in
August 2019. The transaction and implementation costs of GBP4.7m
have been treated as exceptional costs in line with the Group's
accounting policy.
An exceptional profit of GBP13.9m was recognised in 2018 for the
settlement of consideration associated with the sale of Serco GmbH
in 2012 through the offsetting of outstanding loan balances, the
receivable of which had been impaired. An exceptional loss on
disposal of GBP27.7m was recorded in 2012 in respect of the sale.
No such transactions took place in 2019.
Exceptional finance costs
There were no exceptional finance costs in the year ended 31
December 2019. During 2018, part of the consideration for the sale
of the Group's private sector BPO business in 2015, was a loan note
with a face value of GBP30m accruing compound interest of 7%. The
receivable associated with this loan note was recorded at a fair
value of GBP19.5m. The discount on the loan note had been unwinding
through the Group's net finance cost on an annual basis. During
October 2018, the Intelenet business was sold and therefore
repayment of the loan note was triggered resulting in a gain of
GBP7.5m. As this gain was outside the normal financing arrangements
of the Group and significant in size it was recorded as exceptional
finance income.
Exceptional tax
Exceptional tax for the year was a charge of GBP2.7m (2018:
GBP2.1m credit) which arises on exceptional items within operating
profit. This charge arises mainly in connection with the decrease
in provisions in respect of commercial disputes and legal claims
for which a tax credit had been recorded when the provisions were
originally recognised. This charge is offset by tax deductions in
respect of the global restructuring programme and in the US on
acquisition costs.
No tax credit arises on the exceptional charge associated with
the costs in connection with the SFO investigation.
8. Investment revenue
2019 2018
Year ended 31 December GBPm GBPm
---------------------------------------------------------- ----- -----
Interest receivable on other loans and deposits 0.5 2.3
Net interest receivable on retirement benefit obligations
(note 31) 2.1 0.8
Movement in discount on other debtors 0.1 1.2
---------------------------------------------------------- ----- -----
2.7 4.3
---------------------------------------------------------- ----- -----
9. Finance costs
2019 2018
Year ended 31 December GBPm GBPm
----------------------------------------- ----- -----
Interest payable on lease liabilities 6.9 0.6
Interest payable on other loans 13.9 13.8
Facility fees and other charges 1.7 3.1
Movement in discount on provisions 1.2 0.5
----------------------------------------- ----- -----
23.7 18.0
Foreign exchange on financing activities 0.8 0.2
----------------------------------------- ----- -----
24.5 18.2
----------------------------------------- ----- -----
10. Tax
10 (a) Income tax recognised in the income statement
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
2019 2019 2019 2018 2018 2018
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------ ----------- ----- ------------ ----------- ------
Current income tax
Current income tax charge/(credit) 22.7 (1.1) 21.6 23.6 (1.4) 22.2
Adjustments in respect of
prior years (0.2) - (0.2) (0.9) - (0.9)
Deferred tax
Current year charge / (credit) 4.7 3.8 8.5 (13.8) (0.7) (14.5)
Adjustments in respect of
prior years 0.2 - 0.2 (0.1) - (0.1)
----------------------------------- ------------ ----------- ----- ------------ ----------- ------
27.4 2.7 30.1 8.8 (2.1) 6.7
----------------------------------- ------------ ----------- ----- ------------ ----------- ------
The tax expense for the year can be reconciled to the profit in
the consolidated income statement as follows:
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
2019 2019 2019 2018 2018 2018
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ ----------- ----- ------------ ----------- ------
Profit before tax 104.1 (23.4) 80.7 98.5 (24.4) 74.1
---------------------------------- ------------ ----------- ----- ------------ ----------- ------
Tax calculated at a rate of
19.00% (2018: 19.00%) 19.7 (4.4) 15.3 18.7 (4.6) 14.1
Expenses not deductible for
tax purposes* 0.9 4.4 5.3 5.3 - 5.3
UK unprovided deferred tax** 3.5 2.1 5.6 (7.5) 3.5 (4.0)
Other unprovided deferred
tax 3.0 - 3.0 2.5 - 2.5
Effect of the use of unrecognised
tax losses - - - (0.3) - (0.3)
Impact of changes in statutory
tax rates on current income
tax (0.2) - (0.2) 1.7 - 1.7
Overseas rate differences 5.9 0.6 6.5 7.3 (0.7) 6.6
Statutory tax benefits (0.2) - (0.2) - - -
Other non taxable income (3.1) - (3.1) (2.5) (0.4) (2.9)
Adjustments in respect of
prior years - - - (1.0) - (1.0)
Adjustments in respect of
deferred tax on pensions 3.0 - 3.0 (10.1) - (10.1)
Adjustments in respect of
equity accounted investments (5.1) - (5.1) (5.3) 0.1 (5.2)
---------------------------------- ------------ ----------- ----- ------------ ----------- ------
Tax charge 27.4 2.7 30.1 8.8 (2.1) 6.7
---------------------------------- ------------ ----------- ----- ------------ ----------- ------
* Relates to costs that are not allowable for tax deduction under local tax law.
** Arises due to timing differences between when an amount is
recognised in the income statement and when the amount is subject
to UK tax. In the current year, the Group has received tax credits
for amounts which have been charged to the income statement in
previous periods in connection with items such as fixed assets.
Additional tax credit is recognised in relation to brought forward
losses as shown in the deferred tax note below. UK unprovided
deferred tax in relation to exceptional items relates to amounts
which have been charged to the income statement in the current
period for which no tax credit has yet been taken, for items such
as restructuring costs.
The income tax charge for the year is based on the UK statutory
rate of corporation tax for the period of 19.00% (2018:19.00%).
Taxation for other jurisdictions is calculated at the rates
prevailing in the respective jurisdictions.
10 (b) Income tax recognised in the SOCI
2019 2018
Year ended 31 December GBPm GBPm
------------------------------------------------ ----- -----
Current tax
Taken to retirement benefit obligations reserve - -
Deferred tax
Relating to cash flow hedges 0.1 -
Taken to retirement benefit obligations reserve 2.7 (9.2)
------------------------------------------------ ----- -----
2.8 (9.2)
------------------------------------------------ ----- -----
11. Deferred tax
Deferred income taxes are calculated in full on temporary
differences under the liability method using local substantively
enacted tax rates.
The movement in net deferred tax assets during the year was as
follows:
2019 2018
GBPm GBPm
------------------------------------------------------ ------ ------
At 1 January - asset (39.5) (39.3)
IFRS16 restatement (5.1) -
Opening asset restated (44.6) (39.3)
Income statement charge/(credit) 8.7 (14.7)
Items recognised in equity and in other comprehensive
income (2.8) 9.2
Arising on acquisition 1.5 2.3
Exchange differences - 3.0
At 31 December - asset (37.2) (39.5)
------------------------------------------------------ ------ ------
The movement in deferred tax assets and liabilities during the
year was as follows:
Share
Temporary based
differences payment Retirement Derivative Other
on and employee benefit financial Tax temporary
assets/intangibles benefits schemes OCPs instruments losses differences Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------------ ------------ ---------- ----- ------------- ------- ------------ ------
At 1 January 2019 24.6 (13.7) 9.9 (7.4) - (20.6) (32.3) (39.5)
IFRS16 restatement (5.1) - - - - - - (5.1)
Opening asset
restated 19.5 (13.7) 9.9 (7.4) - (20.6) (32.3) (44.6)
Charged/(credited)
to income
statement
(note 15a) 4.1 (1.6) (0.4) 5.4 - (0.4) 1.6 8.7
Items recognised
in equity and in
other
comprehensive
income (note 15b) - - (2.7) - (0.1) - - (2.8)
Arising on
acquisition 2.4 (0.9) - - - - 1.5
Exchange
differences (1.6) 0.6 - 0.1 0.1 - 0.8 -
------------------- ------------------ ------------ ---------- ----- ------------- ------- ------------ ------
At 31 December 2019 24.4 (15.6) 6.8 (1.9) - (21.0) (29.9) (37.2)
------------------- ------------------ ------------ ---------- ----- ------------- ------- ------------ ------
Of the amount credited to the income statement, GBPnil ( 2018:
credit of GBP0.1m) has been taken to cost of sales in respect of
the R&D Expenditure credit.
The movement in deferred tax assets and liabilities during the
previous year was as follows:
Share
based
Temporary payment Retirement Other
differences and employee benefit Tax temporary
on assets/intangibles benefits schemes OCPs losses differences Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------------------- ------------- ---------- ----- ------- ------------- ------
At 1 January 2018 25.8 (12.2) 2.5 (7.9) (18.7) (28.8) (39.3)
(Credited)/charged
to income statement
(note 15a) (4.7) (1.8) (1.7) 0.8 (1.9) (5.4) (14.7)
Items recognised
in equity and in
other comprehensive
income (note 15b) - - 9.2 - - - 9.2
Arising on acquisition 2.3 - - - - - 2.3
Exchange differences 1.2 0.3 (0.1) (0.3) - 1.9 3.0
----------------------- ---------------------- ------------- ---------- ----- ------- ------------- ------
At 31 December 2018 24.6 (13.7) 9.9 (7.4) (20.6) (32.3) (39.5)
----------------------- ---------------------- ------------- ---------- ----- ------- ------------- ------
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to set off current tax assets
against current tax liabilities and when the deferred income taxes
relate to the same fiscal authority. The following is the analysis
of the deferred tax balances (after offset) for financial reporting
purposes:
2019 2018
GBPm GBPm
------------------------- ------ ------
Deferred tax liabilities 26.7 21.4
Deferred tax assets (63.9) (60.9)
------------------------- ------ ------
(37.2) (39.5)
------------------------- ------ ------
As at the balance sheet date, the UK has a potential deferred
tax asset of GBP180.8m (2018: GBP168.8m) available for offset
against future profits. A deferred tax asset has currently been
recognised of GBP21.1m (2018: GBP20.3m). Recognition has been based
on forecast future taxable profits. No deferred tax asset has been
recognised in respect of the remaining asset (net GBP159.7m) based
on current forecasts; additional asset recognition is contingent on
further improvement in the UK profit forecast. Measures enacted
during 2016 cut the future tax rate from April 2020 from 19% to
17%. These measures will reduce the Group's future current tax
charge accordingly. The deferred tax balance at 31 December 2019
has been calculated reflecting the reduced rate.
Losses of GBP0.1m (2018: GBP0.2m) expire within 5 years, losses
of GBP0.1m (2018 GBP0.1m) expire within 6-10 years, losses of
GBP0.7m (2018 GBP0.7m) expire within 20 years and losses of
GBP1,063.9m (2018 GBP1,015.2m) may be carried forward
indefinitely.
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:
2019 2018
Number of shares millions Millions
---------------------------------------------------- --------- ---------
Weighted average number of ordinary shares for the
purpose of basic EPS 1,171.4 1,094.4
Effect of dilutive potential ordinary shares: Share
options 27.6 31.0
---------------------------------------------------- --------- ---------
Weighted average number of ordinary shares for the
purpose of diluted EPS 1,199.0 1,125.4
---------------------------------------------------- --------- ---------
At 31 December 2019 options over nil (2018: 145,238) shares were
excluded from the weighted average number of shares used for
calculating diluted earnings per share in accordance with IFRS2
Share Based Payment because their exercise price was above the
average share price for the year and they were, therefore,
anti-dilutive.
Earnings per share
Per share Per share
Earnings amount Earnings amount
2019 2019 2018 2018
Basic EPS GBPm pence GBPm Pence
--------------------------------------------- -------- --------- -------- ---------
Earnings for the purpose of basic EPS 50.4 4.31 67.4 6.16
Effect of dilutive potential ordinary shares - (0.10) - (0.17)
--------------------------------------------- -------- --------- -------- ---------
Diluted EPS 50.4 4.21 67.4 5.99
--------------------------------------------- -------- --------- -------- ---------
Basic EPS excluding exceptional items
--------------------------------------------- -------- --------- -------- ---------
Earnings for the purpose of basic EPS 50.4 4.31 67.4 6.16
Add back exceptional items 23.4 2.00 24.4 2.23
Add back tax on exceptional items 2.7 0.23 (2.1) (0.19)
--------------------------------------------- -------- --------- -------- ---------
Earnings excluding exceptional items for
the purpose of basic EPS 76.5 6.54 89.7 8.20
Effect of dilutive potential ordinary shares - (0.15) - (0.23)
--------------------------------------------- -------- --------- -------- ---------
Excluding exceptional items, diluted 76.5 6.39 89.7 7.97
--------------------------------------------- -------- --------- -------- ---------
13. Goodwill
Accumulated
impairment Carrying
Cost losses amount
GBPm GBPm GBPm
------------------------------------------------- ---------- ------------- --------------------------------
At 1 January 2018 878.0 (326.7) 551.3
Exchange differences 24.4 (12.9) 11.5
Acquisitions 16.8 - 16.8
At 1 January 2019 919.2 (339.6) 579.6
Exchange differences (31.5) 7.8 (23.7)
Acquisitions 115.3 - 115.3
At 31 December 2019 1,003.0 (331.8) 671.2
------------------------------------------------- ---------- ------------- --------------------------------
Goodwill Goodwill Headroom Headroom
balance Exchange balance on impairment on impairment
1 January Additions differences Impairment 31 December analysis analysis
2019 2019 2019 2019 2019 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ---------- --------- ------------ ---------- ------------- -------------- --------------
UK & Europe 184.3 - (1.1) - 183.2 799.2 593.6
Americas 278.9 115.3 (18.1) - 376.1 420.3 159.4
AsPac 105.9 - (4.2) - 101.7 162.7 307.8
Middle East 10.5 - (0.3) - 10.2 63.3 57.9
------------ ---------- --------- ------------ ---------- ------------- -------------- --------------
579.6 115.3 (23.7) - 671.2 1,445.5 1,118.7
------------ ---------- --------- ------------ ---------- ------------- -------------- --------------
Movements in the balance since the prior year end can be seen as
follows:
Included above is the detail of the headroom on the CGUs
existing at the year-end which reflects where future discounted
cash flows are greater than the underlying assets and includes all
relevant cash flows, including where provisions have been made for
future costs and losses. The increase in headroom compared to 2018
is predominantly due to a reduction in discounts rates in 2019 and
additionally from higher forecast cashflows partially offset by an
increase in underlying assets.
The key assumptions applied in the impairment review are set out
below:
Terminal Terminal
Discount Discount growth growth
rate rate rates rates
2019 2018 2019 2018
% % % %
------------ -------- -------- -------- --------
UK & Europe 9.4 10.0 1.7 2.0
Americas 10.4 10.6 2.2 2.4
AsPac 9.7 10.0 2.3 2.4
Middle East 11.9 11.8 1.8 2.5
------------ -------- -------- -------- --------
Discount rate
Pre-tax discount rates derived from the Group's post-tax
weighted average cost of capital have been used in discounting the
projected cash flows. These rates are reviewed annually with
external advisers and are adjusted for risks specific to the market
in which the CGU operates.
Short term growth rates
The annual impairment test is performed immediately prior to the
year end, based initially on five-year cash flow forecasts approved
by senior management. Short term revenue growth rates used in each
CGU five-year plan are based on internal data regarding our current
contracted position, the pipeline of opportunities and forecast
growth for the relevant market.
Short term profitability and cash conversion is based on our
historic experiences and a level of judgement is applied to
expected changes in both. Where businesses have been poor
performers in recent history, turnaround has only been assumed
where a detailed and achievable plan is in place and all forecasts
include cash flows relating to contracts where onerous contract
provisions have been made.
Terminal growth rates
The calculations include a terminal value based on the
projections for the fifth year of the short-term plan, with a
growth rate assumption applied which extrapolates the business into
perpetuity. The terminal growth rates are based on long term
inflation rates of the geographic market in which the CGUs operate
and therefore do not exceed the average long-term growth rates
forecast for the individual markets. These are provided by external
sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption,
a 1% movement in discount rates and a 1% movement in terminal
growth rates are considered to be reasonably possible. No
impairment results from these changes being made to the key
assumptions either individually or in combination.
In the CGU with the lowest and most sensitive headroom, a
reduction in short term growth rates of approximately 50% would be
required to reduce the headroom to nil.
14. Lease obligations
Minimum Minimum
lease payments lease payments
2019 2018
Amounts payable under leases GBPm GBPm
------------------------------------------------------- --------------- ---------------
Within one year 93.3 6.1
Between one and five years 226.5 8.6
After five years 69.7 0.9
------------------------------------------------------- --------------- ---------------
389.5 15.6
Less: future finance charges (19.6) (0.8)
------------------------------------------------------- --------------- ---------------
Present value of lease obligations 369.9 14.8
Less: amount due for settlement within one year (shown
within current liabilities) (84.6) (5.7)
------------------------------------------------------- --------------- ---------------
Amount due for settlement after one year 285.3 9.1
------------------------------------------------------- --------------- ---------------
On 1 January 2019, the Group implemented IFRS16 Leases,
replacing IAS17 Leases. In applying the modified retrospective
approach to transition, comparative financial information has not
been restated. As a result, the amounts shown as being payable
under leases in the table above as at 31 December 2018 represent
amounts payable on leases that were classified as finance leases in
accordance with IAS17.
The Directors estimate that the fair value of the Group's lease
obligations approximates their carrying amount. The Group uses
leases in the delivery of its contractual obligations and the
services required to support the delivery of those contracts,
including administrative functions. There are no material future
cash flows relating to leases in place as at 31 December 2019 that
are not reflected in the minimum lease payments disclosed above and
the Group does not have any leases to which it is contracted but
which are not yet reflected in the minimum lease payments.
No lease liability is recognised in respect of leases which have
a lease term of less than twelve months in duration at the point of
entering into the lease, or where the purchase price of the
underlying right of use asset is less than GBP5,000.
15. Analysis of Net Debt
The analysis below provides a reconciliation between the opening
and closing positions in the balance sheet for liabilities arising
from financing activities together with movements in derivatives
relating to the items included in Net Debt. There were no changes
in fair value noted in either the current or prior year.
At 1 Opening At 31
January adjustment Cash Exchange Non cash December
2019 - IFRS16** flow Acquisitions* differences movements 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- -------- ----------- ------ ------------- ------------ ----------- ---------
Loans payable (239.5) - (72.3) - 6.7 0.1 (305.0)
Lease obligations (14.8) (129.1) 70.2 - 4.7 (300.9) (369.9)
---------------------------- -------- ----------- ------ ------------- ------------ ----------- ---------
Liabilities arising
from financing activities (254.3) (129.1) (2.1) - 11.4 (300.8) (674.9)
Cash and cash equivalents 62.5 - 28.4 0.4 (1.8) - 89.5
Derivatives relating
to Net Debt 3.8 - - - (2.8) - 1.0
---------------------------- -------- ----------- ------ ------------- ------------ ----------- ---------
Net Debt (188.0) (129.1) 26.3 0.4 6.8 (300.8) (584.4)
---------------------------- -------- ----------- ------ ------------- ------------ ----------- ---------
** The opening Net Debt balance has been adjusted to include
lease liabilities recognised on the adoption of IFRS16 Leases.
At 1 At 31
January Cash Exchange Non cash December
2018 flow Acquisitions* differences movements 2018
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- -------- ------ ------------- ------------ ----------- ---------
Loans payable (271.5) 33.3 - (12.9) 11.6 (239.5)
Lease obligations (20.2) 8.7 - 0.1 (3.4) (14.8)
---------------------------- -------- ------ ------------- ------------ ----------- ---------
Liabilities arising
from financing activities (291.7) 42.0 - (12.8) 8.2 (254.3)
Cash and cash equivalents 112.1 (50.4) 1.2 (0.4) - 62.5
Loan receivables 25.7 (37.4) - - 11.7 -
Derivatives relating
to Net Debt 12.8 - - (9.0) - 3.8
---------------------------- -------- ------ ------------- ------------ ----------- ---------
Net Debt (141.1) (45.8) 1.2 (22.2) 19.9 (188.0)
---------------------------- -------- ------ ------------- ------------ ----------- ---------
* Acquisitions represent the net cash/(debt) acquired on acquisition.
16. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- -------- --------- --------- ------ ------
At 1 January 2019 59.5 12.4 82.1 85.4 239.4
Opening adjustment - IFRS16
(note 2) - 0.8 (13.3) - (12.5)
Charged to income statement
- exceptional 0.4 - - - 0.4
Charged to income statement
- other 18.2 2.1 10.6 12.9 43.8
Released to income statement
- exceptional (0.3) - - (19.1) (19.4)
Released to income statement
- other (1.1) (1.9) (9.6) (4.8) (17.4)
Utilised during the year (12.4) (1.1) (53.6) (4.0) (71.1)
Unwinding of discount - 1.1 0.2 - 1.3
Exchange differences (2.2) (0.1) 0.1 (0.5) (2.7)
----------------------------- -------- --------- --------- ------ ------
At 31 December 2019 62.1 13.3 16.5 69.9 161.8
----------------------------- -------- --------- --------- ------ ------
Analysed as:
Current 8.7 6.7 15.9 27.1 58.4
Non-current 53.4 6.6 0.6 42.8 103.4
----------------------------- -------- --------- --------- ------ ------
62.1 13.3 16.5 69.9 161.8
----------------------------- -------- --------- --------- ------ ------
Contract provisions relate to onerous contracts which will be
utilised over the life of each individual contract. The present
value of the estimated future cash outflow required to settle the
contract obligations as they fall due over the respective contracts
has been used in determining the provision. The individual
provisions are discounted where the impact is assessed to be
significant. Discount rates used are calculated based on the
estimated risk free rate of interest for the region in which the
provision is located and matched against the ageing profile of the
provision. In 2019, the release from OCPs is reflective of the
Group's ability to forecast the final years of contracts which are
nearing completion. Additional charges of GBP10.6m (2018: GBP3.4m)
have been made in respect of future losses on new and existing
onerous contract provisions to reflect the updated forecasts as
settlements are agreed and contracts near completion. The
additional charges represent certain operational issues and the
associated risks which arise as a result.
The Group operates a large number of long-term contracts at
different phases of their contract life cycle. Within the Group's
portfolio, there are a small number of contracts where the balance
of risks and opportunities indicates that they might be onerous if
transformation initiatives or contract changes are not successful.
The Group has concluded that these contracts do not require an
onerous contract provision on an individual basis. Following the
individual contract reviews, the Group has also undertaken a top
down assessment which assumes that, whilst the contracts may not be
onerous on an individual basis, as a portfolio there is a risk that
at least some of the transformation programmes or customer
negotiations required to avoid a contract loss, will not be fully
successful, and it is more likely than not that one or more of
these contracts will be onerous. Therefore, in considering the
Group's overall onerous contract provision, the Group has made a
best estimate of the provision required to take into consideration
this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a
critical estimate for the Group. The amount recognised in the year
is GBP6.2m at the Trading Profit level within the Corporate costs
segment, which after this charge is therefore GBP51.7m (2018:
GBP40.1m).
A full analysis is performed at least annually of the future
profitability of all contracts with marginal performances and of
the balance sheet items directly linked to these contracts.
Due to the significant size of the balance and the inherent
level of uncertainty over the amount and timing of the related cash
flows upon which onerous contract provisions are based, if the
expected operational performance varies from the best estimates
made at the year end, a material change in estimate may be
required. The key drivers behind operational performance is the
level of activity required to be serviced, which is often directed
by the actions of the UK Government, and the efficiency of Group
employees and resources.
Employee related provisions are for long-term service awards and
terminal gratuity liabilities which have been accrued and are based
on contractual entitlement, together with an estimate of the
probabilities that employees will stay until rewards fall due and
receive all relevant amounts. There are also amounts included in
relation to restructuring. The provisions will be utilised over
various periods driven by local legal or regulatory requirements,
the timing of which is not certain.
The majority of property provisions relate to leased properties
and are associated with the requirement to return properties to
either their original condition, or to enact specific improvement
activities in advance of exiting the lease. Dilapidations
associated with leased properties are held as a provision until
such time as they fall due, with the longest running lease ending
in April 2039.
Other provisions are held for indemnities given on disposed
businesses, legal and other costs that the Group expects to incur
over an extended period, in respect of past events. These costs are
based on past experience of similar items and other known factors
and represent management's best estimate of the likely outcome and
will be utilised with reference to the specific facts and
circumstances. The timing of utilisation is dependent on future
events which could occur within the next twelve months or over a
longer period with the majority expected to be settled by 31 March
2023. The exceptional release has been recorded in respect of a
commercial dispute which was settled in 2019. T he treatment as
exceptional is consistent with the recognition of the original
charge associated with the same matter in 2014.
17. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and
bonding facilities of its joint ventures and associates up to a
maximum value of GBP4.3m (2018: GBP4.3m). The actual commitment
outstanding at 31 December 2019 was GBP4.3m (2018: 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 31 December 2019
was GBP257.5m (2018: GBP225.3m).
The Group has received a claim seeking damages for alleged
losses following the reduction in Serco's share price in 2013. The
merit, likely outcome and potential impact on the group of any such
litigation that either has been or might potentially be brought
against the group is subject to a number of significant
uncertainties and, therefore, it is not possible to reliably assess
the quantum of any such litigation as at the date of this
disclosure.
The Group is also aware of other claims and potential claims
which involve or may involve legal proceedings against the Group
although the timing of settlement of these claims remains
uncertain. The Directors are of the opinion, having regard to legal
advice received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material
effect on the Group's financial position.
18. Defined benefit schemes
Characteristics
The Group contributes to defined benefit schemes for qualifying
employees of its subsidiaries in the UK and Europe. The normal
contributions expected to be paid during the financial year ending
31 December 2020 are GBP12.7m (2019: GBP4.9m).
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 2018 and resulted in an actuarially assessed deficit of
GBP26.0m for funding purposes. Pension obligations are valued
separately for accounting and funding purposes and there is often a
material difference between these valuations. As at 31 December
2019 the estimated actuarial deficit of SPLAS was GBP27.0m (2018:
GBP27.8m) based on the actuarial assessment on the funding basis
whereas the accounting valuation resulted in an asset of GBP78.3m
(2018: GBP85.8m). 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 2019, with 30.8% of
pensionable salaries due to be paid from 1 November 2019, changing
to 30.3% from 1 November 2020. The schedule of contributions also
determined that additional shortfall contributions were required -
a total of GBP5.2m of these have already been made, with further
amounts of GBP4m due in both March 2020 and March 2021 then GBP1.7m
for the years 2022 to 2028.
Events in the year
In June 2019, the company and the Trustees of SPLAS finalised
the 2018 valuation. This led to a new schedule of contributions.
Following a 60-day consultation, most active SPLAS members agreed
to a small increase in their own contributions, enabling a
reduction in employer contributions.
Values recognised in total comprehensive income in the year
The amounts recognised in the financial statements for the year
are analysed as follows:
Contract Non contract
specific specific Total
2019 2019 2019
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- --------- ------------ -------
Current service cost - employer 1.1 3.2 4.3
Past service cost 0.2 1.2 1.4
Administrative expenses and taxes - 2.0 2.0
----------------------------------------------- --------- ------------ -------
Recognised in arriving at operating profit
after exceptionals 1.3 6.4 7.7
----------------------------------------------- --------- ------------ -------
Interest income on scheme assets - employer (0.4) (37.5) (37.9)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.5 35.4 35.9
----------------------------------------------- --------- ------------ -------
Finance income - (2.1) (2.1)
----------------------------------------------- --------- ------------ -------
Contract Non contract
specific specific Total
2019 2019 2019
Included within the SOCI GBPm GBPm GBPm
----------------------------------------------- --------- ------------ -------
Actual return on scheme assets 2.8 125.3 128.1
Less: interest income on scheme assets (0.5) (37.6) (38.1)
----------------------------------------------- --------- ------------ -------
2.3 87.7 90.0
Effect of changes in demographic assumptions (0.7) 40.6 39.9
Effect of changes in financial assumptions (4.8) (143.8) (148.6)
Effect of experience adjustments - (1.6) (1.6)
----------------------------------------------- --------- ------------ -------
Remeasurements (3.2) (17.1) (20.3)
----------------------------------------------- --------- ------------ -------
Change in franchise adjustment 2.0 - 2.0
Change in members' share 1.1 0.1 1.2
----------------------------------------------- --------- ------------ -------
Actuarial profit on reimbursable rights 3.1 0.1 3.2
----------------------------------------------- --------- ------------ -------
Total pension gain recognised in the SOCI (0.1) (17.0) (17.1)
----------------------------------------------- --------- ------------ -------
Contract Non contract
specific specific Total
2018 2018 2018
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- --------- ------------ ------
Current service cost - employer 1.1 4.6 5.7
Past service cost - 9.3 9.3
Administrative expenses and taxes - 3.9 3.9
----------------------------------------------- --------- ------------ ------
Recognised in arriving at operating profit 1.1 17.8 18.9
----------------------------------------------- --------- ------------ ------
Interest income on scheme assets - employer (0.4) (33.3) (33.7)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.4 32.6 33.0
----------------------------------------------- --------- ------------ ------
Finance income (0.1) (0.7) (0.8)
----------------------------------------------- --------- ------------ ------
Contract Total
Non contract
specific specific 2018
2018 2018 (restated*) (restated*)
Included within the SOCI GBPm GBPm GBPm
--------------------------------------------- ---------- ------------------ ------------
Actual return on scheme assets (0.5) 40.7 40.2
Less: interest income on scheme assets (0.4) (33.4) (33.8)
--------------------------------------------- ---------- ------------------ ------------
(0.9) 7.3 6.4
Effect of changes in demographic assumptions - (48.9) (48.9)
Effect of changes in financial assumptions 1.7 74.0 75.7
Effect of experience adjustments - 18.9 18.9
--------------------------------------------- ---------- ------------------ ------------
Remeasurements 0.8 51.3 52.1
Change in members' share (0.3) 0.1 (0.2)
--------------------------------------------- ---------- ------------------ ------------
Actuarial losses on reimbursable rights (0.3) 0.1 (0.2)
--------------------------------------------- ---------- ------------------ ------------
Total pension gain recognised in the SOCI 0.5 51.4 51.9
--------------------------------------------- ---------- ------------------ ------------
* For the year ended 31 December 2018 a reassessment of the
causes of changes in the liability associated with the SPLAS scheme
Identified that the previously disclosed effect of experience
adjustments contained a component that related to a change in
demographic assumptions. There is no impact on the closing
liability associated with the SPLAS scheme and no Impact on the
Group's gross or net pension assets or obligations.
Balance sheet values
The assets and liabilities of the schemes at 31 December
are:
Contract Non contract
specific specific Total
2019 2019 2019
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- ------------ ---------
Equities 10.8 43.9 54.7
Bonds except LDIs 4.1 298.1 302.2
LDIs - 447.4 447.4
Property 1.7 - 1.7
Cash and other 4.1 5.1 9.2
Annuity policies - 614.0 614.0
----------------------------------------- --------- ------------ ---------
Fair value of scheme assets 20.7 1,408.5 1,429.2
Present value of scheme liabilities (31.1) (1,353.4) (1,384.5)
----------------------------------------- --------- ------------ ---------
Net amount recognised (10.4) 55.1 44.7
Franchise adjustment* 5.8 - 5.8
Members' share of deficit 3.8 - 3.8
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (0.8) 55.1 54.3
----------------------------------------- --------- ------------ ---------
Net pension liability (0.8) (23.2) (24.0)
Net pension asset - 78.3 78.3
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (0.8) 55.1 54.3
Deferred tax liabilities - (9.2) (9.2)
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (after tax) (0.8) 45.9 45.1
----------------------------------------- --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Contract Non contract
specific specific Total
2018 2018 2018
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- ------------ ---------
Equities 9.7 39.9 49.6
Bonds except LDIs 3.8 93.4 97.2
LDIs - 580.7 580.7
Property 1.2 - 1.2
Cash and other 2.9 8.7 11.6
Private debt mandates - 11.4 11.4
Annuity policies - 600.2 600.2
----------------------------------------- --------- ------------ ---------
Fair value of scheme assets 17.6 1,334.3 1,351.9
Present value of scheme liabilities (23.8) (1,263.2) (1,287.0)
----------------------------------------- --------- ------------ ---------
Net amount recognised (6.2) 71.1 64.9
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.3 - 2.3
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (0.2) 71.1 70.9
----------------------------------------- --------- ------------ ---------
Net pension liability (0.2) (14.7) (14.9)
Net pension asset - 85.8 85.8
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (0.2) 71.1 70.9
Deferred tax liabilities - (9.9) (9.9)
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (after tax) (0.2) 61.2 61.0
----------------------------------------- --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
The SPLAS Trust Deed gives the Group an unconditional right to a
refund of surplus assets, assuming the full settlement of plan
liabilities in the event of a plan wind-up. Pension assets are
deemed to be recoverable and there are no adjustments in respect of
minimum funding requirements as economic benefits are available to
the Group either in the form of future refunds or, for plans still
open to benefit accrual, in the form of possible reductions in
future contributions.
As required by IAS19, the Group has considered the extent to
which the pension plan assets should be classified in accordance
with the fair value hierarchy of IFRS13. Virtually all equity and
debt instruments have quoted prices in active markets. Annuity
policies, private debt mandates and property assets can be
classified as Level 3 instruments, and LDIs are classified as Level
2.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 91%
of total liabilities and 94% of total assets of the defined benefit
pension scheme in which the Group participates. The significant
actuarial assumptions with regards to the determination of the
defined benefit obligation are set out below.
The Group has updated its approach to setting RPI and CPI
inflation assumptions in light of the RPI reform proposals
published on the 4th September 2019 by the UK Chancellor and UK
Statistics Authority.
The Group continued to set RPI inflation in line with the market
break even expectations less an inflation risk premium. The
inflation risk premium has been increased from 0.2% at 31 December
2018 to 0.4% at 31 December 2019, reflecting an allowance for
additional market distortions caused by the RPI reform proposals.
For CPI, the Group reduced the assumed difference between the RPI
and CPI by 0.4% to an average of 0.6% per annum.
The estimated impact of the change in the methodology is an
approximately GBP20m increase in the defined benefit obligation in
respect of the SPLAS scheme.
The average duration of the benefit obligation at the end of the
reporting period is 16.8 years (2018: 16.1 years).
2019 2018
Main assumptions % %
---------------------------------------- -------------- --------------
Rate of salary increases 2.70 2.80
Rate of increase in pensions in payment 2.20 (CPI) and 2.20 (CPI) and
3.00 (RPI) 3.00 (RPI)
Rate of increase in deferred pensions 2.30 (CPI) and 2.30 (CPI) and
3.30 (RPI) 3.30 (RPI)
Inflation assumption 2.20 (CPI) and 2.30 (CPI) and
3.20 (RPI) 3.30 (RPI)
Discount rate 2.10 2.90
---------------------------------------- -------------- --------------
2019 2018
Post retirement mortality years years
---------------------------------- ------ ------
Current pensioners at 65 - male 21.6 22.6
Current pensioners at 65 - female 24.1 25.1
Future pensioners at 65 - male 23.8 24.4
Future pensioners at 65 - female 26.2 27.0
---------------------------------- ------ ------
Sensitivity analysis is provided below, based on reasonably
possible changes of the assumptions occurring at the end of the
reporting period, assuming all other assumptions are held constant.
The sensitivities have been derived in the same manner as the
defined benefit obligation as at 31 December 2019 where the defined
benefit obligation is estimated using the Projected Unit Credit
method. Under this method each participant's benefits are
attributed to years of service, taking into consideration future
salary increases and the scheme's benefit allocation formula. Thus,
the estimated total pension to which each participant is expected
to become entitled at retirement is broken down into units, each
associated with a year of past or future credited service. The
defined benefit obligation as at 31 December 2019 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.
(Increase)/decrease in defined benefit 2019 2018
obligation GBPm GBPm
---------------------------------------- ------- -------
Discount rate - 0.5% increase (108.5) (102.8)
Discount rate - 0.5% decrease 122.9 112.2
Inflation - 0.5% increase 88.9 66.9
Inflation - 0.5% decrease (83.3) (64.7)
Rate of salary increase - 0.5% increase 3.2 2.4
Rate of salary increase - 0.5% decrease (3.1) (2.3)
Mortality - one-year age rating 48.6 39.9
---------------------------------------- ------- -------
Management acknowledges that the method used of presuming that
all other assumptions remaining constant has inherent limitation
given that it is more likely for a combination of changes, but
highlights the value of each individual risk and is therefore a
suitable basis for providing this analysis.
Assumptions in respect of the expected return on scheme assets
are required when calculating the franchise adjustment for the
contract-specific plans. These assumptions are based on market
expectations of returns over the life of the related obligation.
Due consideration has been given to current market conditions as at
31 December 2019 in respect to inflation, interest, bond yields and
equity performance when selecting the expected return on assets
assumptions.
The expected yield on bond investments with fixed interest rates
is derived from their market value. The yield on equity investments
contains an additional premium (an 'equity risk premium') to
compensate investors for the additional anticipated risks of
holding this type of investment, when compared to bond yields. The
Group applies an equity risk premium of 4.6% (2018: 4.6%).
The overall expected return on assets is calculated as the
weighted average of the expected returns for the principal asset
categories held by the scheme.
19. Related party transactions
Transactions between the Company and its wholly owned
subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions
between the Group and its joint venture undertakings and associates
are disclosed below.
Transactions
During the year, Group companies entered into the following
transactions with joint ventures and associates:
Current Non current
outstanding outstanding
Transactions at 31 December at 31 December
2019 2019 2019
GBPm GBPm GBPm
------------------------------------------- ------------ --------------- ---------------
Sale of goods and services
Joint ventures 1.3 0.1 -
Associates 8.4 0.5 -
Other
Dividends received - joint ventures 7.8 - -
Dividends received - associates 17.6 - -
Receivable from consortium for tax - joint
ventures 4.4 4.8 -
Total 39.5 5.4 -
------------------------------------------- ------------ --------------- ---------------
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.
Current Non current
outstanding outstanding
Transactions at 31 December at 31 December
2018 2018 2018
GBPm GBPm GBPm
------------------------------------------- -------------- --------------- ---------------
Sale of goods and services
Joint ventures 0.4 0.1 -
Associates 7.3 0.6 -
Other
Dividends received - joint ventures 9.7 - -
Dividends received - associates 20.0 - -
Receivable from consortium for tax - joint
ventures 4.8 5.3 -
------------------------------------------- -------------- --------------- ---------------
Total 42.2 6.0 -
------------------------------------------- -------------- --------------- ---------------
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions
with the Group during the year other than service contracts and
Directors' liability insurance.
The remuneration of the key management personnel of the Group is
set out below in aggregate for each of the categories specified in
IAS24 Related Party Disclosures:
2019 2018
GBPm GBPm
----------------------------- ----- -----
Short-term employee benefits 8.9 9.5
Share based payment expense 5.3 5.3
----------------------------- ----- -----
14.2 14.8
----------------------------- ----- -----
The key management personnel comprise the Executive Directors,
Non-Executive Directors and members of the Executive Committee
(2019: 17 individuals, 2018: 17 individuals).
Aggregate directors' remuneration
The total amounts for directors' remuneration in accordance with
Schedule 5 to the Accounting Regulations were as follows:
2019 2018
GBPm GBPm
----------------------------------------------------- ----- -----
Salaries, fees, bonuses and benefits in kind 3.9 4.0
Amounts receivable under long-term incentive schemes 3.0 3.1
Gains on exercise of share options 5.1 1.8
----------------------------------------------------- ----- -----
12.0 8.9
----------------------------------------------------- ----- -----
None of the directors are members of the company's defined
benefit pension scheme.
One director is a member of the money purchase scheme.
20. Notes to the consolidated cash flow statement
2019 2018
Before Before
exceptional 2019 Exceptional 2019 exceptional 2018 Exceptional 2018
items items Total items items Total
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Operating profit for the year 125.9 (23.4) 102.5 112.4 (31.9) 80.5
Adjustments for:
Share of profits in joint ventures
and associates (27.5) - (27.5) (28.8) - (28.8)
Share based payment expense 11.6 - 11.6 14.7 - 14.7
Impairment of property, plant
and equipment 18.9 - 18.9 0.7 - 0.7
Impairment of intangible assets - - - 0.1 - 0.1
Depreciation of property, plant
and equipment 74.4 - 74.4 19.5 - 19.5
Amortisation of intangible assets 25.6 - 25.6 22.9 - 22.9
Exceptional loss on disposal
of subsidiaries and operations - - - - 0.5 0.5
Reversal of impairment on loan
balances - - - - (13.9) (13.9)
Profit on early termination
of leases (0.9) - (0.9) - - -
(Profit)/loss on disposal of
property, plant and equipment (0.6) - (0.6) 0.5 - 0.5
Loss on disposal of intangible
assets 0.4 - 0.4 1.5 - 1.5
Exceptional Interest in JV - - - - 0.3 0.3
Decrease in provisions (43.1) (20.5) (63.6) (68.1) (13.8) (81.9)
Other non cash movements (1.2) - (1.2) (0.2) - (0.2)
Total non cash items 57.6 (20.5) 37.1 (37.2) (26.9) (64.1)
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Operating cash inflow/(outflow)
before movements in working
capital 183.5 (43.9) 139.6 75.2 (58.8) 16.4
Decrease/(increase) in inventories 4.4 - 4.4 (5.0) - (5.0)
(Increase)/decrease in receivables (36.7) - (36.7) (22.9) 0.4 (22.5)
Increase/(decrease) in payables 32.2 (5.3) 26.9 6.3 18.2 24.5
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Movements in working capital (0.1) (5.3) (5.4) (21.6) 18.6 (3.0)
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Cash generated by operations 183.4 (49.2) 134.2 53.6 (40.2) 13.4
Tax paid (31.2) - (31.2) (10.6) - (10.6)
Non cash R&D expenditure (0.1) - (0.1) (0.1) - (0.1)
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Net cash inflow/(outflow) from
operating activities 152.1 (49.2) 102.9 42.9 (40.2) 2.7
----------------------------------- ------------ ---------------- ------ ------------ ---------------- ------
Additions to property, plant and equipment during the year
amounting to GBP304.3m (2018: GBP3.6m) were financed by new
leases.
21. Post balance sheet events
Subsequent to the year-end, the Board has recommended the
payment of a final dividend in respect of the year ended 31
December 2019 of 1.0p. The dividend remains subject to shareholder
approval at the Annual General Meeting and therefore no amounts
have been recognised in respect of a dividend in these financial
statements.
Following the balance sheet date the UK formally left the
European Union, which happened as expected following the result of
the General Election in December 2019. The transition period is
expected to end on 31 December 2020 and the current shape of the
economic and political partnership between the UK and EU is not
known. Notwithstanding this, as outlined in the Chief Executive's
review on page 13 the Group's direct exposure to Brexit is small as
Serco neither exports nor imports to any significant degree; our
business in continental Europe is conducted through
long-established local subsidiaries, and we employ relatively few
continental European citizens in the UK.
REPORT OF KPMG LLP TO SERCO GROUP PLC ("THE COMPANY") IN
RELATION TO THE COMPANY'S PRELIMINARY ANNOUNCEMENT OF RESULTS FOR
THE YEARED 31 DECEMBER 2019
The UK Listing Rules require that we, as independent auditor,
agree to the publication of the Company's preliminary announcement
of results for the year ended 31 December 2019 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 Cash
Flow Statement and the Notes to the Condensed Consolidated
Financial Statements as well as the Stock Exchange Announcement
including the Chief Executive's Review, the Divisional Reviews and
the Finance Review.
At your request we have provided this report to set out the
procedures performed by us to agree to the publication, the status
of the audit report on the statutory financial statements, and the
key audit matters addressed in that audit report in respect of the
consolidated financial statements of the group.
Our audit of the statutory financial statements is complete and
we have issued an unmodified audit opinion
The annual report and statutory financial statements of Serco
Group plc for the year ended 31 December 2019 were approved by the
board on 25 February 2020.
Our audit of those financial statements is complete and we
signed our auditor's report on 25 February 2020. Our opinion in
that report is not modified and does not include a material
uncertainty related to going concern, or emphasis of matter,
paragraph.
This report is in addition to, should not be regarded as a
substitute for, our auditor's report on the statutory financial
statements, which has been released to the Company and will be
available when the Company publishes its annual report.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the
consolidated financial statements and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) identified by us, including those which had the greatest
effect on: the overall audit strategy; the allocation of resources
in the audit; and directing the efforts of the engagement team.
Key audit matters were addressed, and our findings are based on
procedures undertaken, in the context of, and solely for the
purpose of, our audit of the consolidated financial statements as a
whole, and in forming our opinion thereon, and consequently are
incidental to that opinion, and we do not provide a separate
opinion on these matters. The overall materiality applied in the
audit of the consolidated financial statements as a whole was
GBP5.0 million.
In our auditor's report on the statutory financial statements of
the Company, we reported on the key audit matters in respect of the
consolidated financial statements of the group described below. No
additional work in relation to key audit matters has been
undertaken for the purpose of this report.
The impact of uncertainties due to Britain exiting the European Union
on our audit
Assessment of risk vs. prior year: Unchanged
----------------------------------------------------------------------------------------------------------------
The risk Our response
---------------------------------------------- -------------------------------------------------------------------
Unprecedented levels of uncertainty We developed a standardised firm-wide
approach to the consideration of
All audits assess and challenge the uncertainties arising from
the reasonableness of estimates, Brexit in planning and performing
in particular as described in Recoverability our audits. Our procedures included:
of group goodwill and of parent's * Our Brexit knowledge: We considered the directors'
investment in subsidiaries below, assessment of Brexit-related sources of risk for the
and related disclosures and the Group's business and financial resources compared
appropriateness of the going concern with our own understanding of the risks. We
basis of preparation of the financial considered the directors' plans to take action to
statements (see below). All of mitigate the risks.
these depend on assessments of
the future economic environment
and the Group's future prospects * Sensitivity analysis: When addressing Recoverability
and performance. of group goodwill and of parent's investment in
In addition, we are required to subsidiaries and other areas that depend on forecasts,
consider the other information we compared the directors' sensitivity analysis to
presented in the Annual Report our assessment of the full range of reasonably
including the principal risks disclosure possible scenarios resulting from Brexit uncertainty
and the viability statement and and, where forecast cash flows are required to be
to consider the directors' statement discounted, considered adjustments to discount rates
that the annual report and financial for the level of remaining uncertainty.
statements taken as a whole is
fair, balanced and understandable
and provides the information necessary * Assessing transparency: As well as assessing
for shareholders to assess the individual disclosures as part of our procedures on
Group's position and performance, Recoverability of group goodwill and of parent's
business model and strategy. investment in subsidiaries we considered all of the
Brexit is one of the most significant Brexit related disclosures together, including those
economic events for the UK and in the strategic report, comparing the overall
its effects are subject to unprecedented picture against our understanding of the risks.
levels of uncertainty of consequences,
with the full range of possible
effects unknown.
Our findings
As reported under Recoverability
of group goodwill and of parent's
investment in subsidiaries, Valuation
of acquired intangibles, we found
the resulting estimates and related
disclosures of the carrying value
of goodwill and disclosures in
relation to going concern to be
balanced (2018: balanced). However,
no audit should be expected to
predict the unknowable factors
or all possible future implications
for a Group and this is particularly
the case in relation to Brexit.
---------------------------------------------- --------------------------------------------------------------
Revenue and margin recognition
Revenue GBP3,248.4m (2018: GBP2,836.8m), operating profit GBP102.5m
(2018: GBP80.5m) and Onerous Contract Provisions GBP16.5m (2018: GBP82.1m)
Assessment of risk vs. prior year: Unchanged
Refer to note 2 Critical accounting judgements and key sources of
estimation uncertainty and note 16 Provisions
----------------------------------------------------------------------------
The risk Our response
---------------------------------------------- -------------------------------------------------------------
Accounting application Our audit procedures included:
Revenue is the most material account Contracts were selected for substantive
in the financial statements and audit procedures based on qualitative
is considered to be a main driver factors, such as commercial complexity,
of results, and as such had the and quantitative factors, such as
greatest effect on our allocation financial significance and profitability
of resources in planning and completing that we considered to be indicative
the audit. of risk. Our audit testing for the
In addition, the contractual arrangements contracts selected included the
that underpin the measurement and following:
recognition of revenue by the Group * Assessing application: We inspected customer
can be complex, with judgements contracts to assess the method of revenue recognition
involved in the assessment of current to determine that it is in accordance with IFRS 15,
and estimation of future financial including the appropriate recognition of revenue as
performance of those contracts. the performance obligation is satisfied on service
Our key areas of focus have been: contracts.
-- Interpretations of terms and
conditions in relation to the required * Accounting analysis: We inspected and challenged
service obligations in accordance accounting papers prepared by the Group to understand
with contractual arrangements; the support and assess the position provided in
-- The identification of performance respect of key contract judgements and onerous
obligations within contracts and contract provisions.
the allocation of revenue and costs
to performance obligations where
multiple deliverables exist; * Tests of details: We inspected customer contracts for
-- Assessment of the stage of completion the sample which we selected for testing and where
by reference to the estimate of applicable, obtained evidence of correspondence with
cost to complete, where the input customers and third parties, in instances where
method of accounting is used to contractual variations and claims have arisen, to
determine percentage completion; inform our assessment of the revenue (including
-- Consideration of the Group's variable revenue) and costs recorded up to the
performance against contractual balance sheet date.
obligations and the impact on revenue
(including variable revenue) and
costs of delivery; and * Test of details: We assessed a sample of unbilled
-- The recognition and recoverability revenue against documents such as post year end
assessments of contract related invoices or purchase orders, or customer agreements
assets, including those recognised for the work performed
as direct incremental costs prior
to service commencement, are reliant
on the estimation of future profitability * Site visits and enquiry: We met with contract
of the contract. management and Business Unit management teams
responsible for the contracts we selected for testing
Subjective estimate as well as attending a sample of monthly Divisional
and Business Unit Performance Reviews used to assess
Where an onerous contract provision business performance in order to inform our
is required, judgement is required assessment of operational and financial performance
in assessing the level of provision, of the contracts. We also visited a number of key
including estimated cost to complete contract locations to observe the contract operations
taking into account contractual and meet with contract delivery teams to further
obligations to the end of the contract, assess the operational performance. For onerous and
extension periods and customer negotiations. potentially onerous contracts identified through
application of quantitative or qualitative selection
The effect of these matters is that, criteria, our procedures also included:
as part of our risk assessment,
we determined that the assessment
of onerous contract provisions has * Benchmarking assumptions: We compared contract level
a high degree of estimation uncertainty, forecast revenues and costs to the Group's annual
with a potential range of reasonable budgets and longer-term forecasts approved by the
outcomes greater than our materiality directors. We challenged key assumptions made by the
for the financial statements as Group in preparing these forecasts, including those
a whole, and possibly many times in relation to revenue growth and cost reductions,
that amount. checking to external evidence where possible and
assessing against business plans.
-- Our sector experience: We assessed
the contractual terms and conditions
to identify the key obligations
of the contract and compare these
with common industry risk factors
to inform our challenge of completeness
of forecast costs and cost accruals
recorded at the balance sheet date.
For a specific contract we used
our own major project specialists
to assess the reasonableness of
the contract projections.
* Historical comparisons: We compared the contract
forecasts to historic and in year performance to
assess the historical accuracy of the forecasts.
* Test of details: for contracts assessed as
potentially onerous, we compared the allocation of
central costs to the group's policy and challenged
the underlying assumptions using our understanding of
the contract operations.
For selected contract related assets,
representing capitalised bid and
phase in costs, our procedures included:
* Assessing application: We assessed whether these had
been recognised in accordance with the Group's
accounting policy and relevant accounting standards.
* Comparing valuations: We inspected actual and
forecast contractual cash flows and profits to assess
whether these supported the carrying value of the
assets.
* Historical comparisons: We inspected the underlying
contracts to inform our assessment of the forecast
cash flows, and compared actual cash flows to
forecasts to assess reasonableness.
* Independent reperformance: We compared the
amortisation period with the duration of the contract
and checked that the amortisation had been calculated
correctly.
Assessing transparency: We also
assessed whether the Group's disclosures
about the estimates and judgements
applied reflected the risks related
to the estimation of onerous contracts.
Our findings
We found no material errors in the
group's application of its revenue
accounting policy (2018: no material
errors). We found the resulting
estimate of onerous contract provision
to be balanced (2018: balanced).
---------------------------------------------- -------------------------------------------------------------
Recoverability of group goodwill and of parent's investment in subsidiaries
Group: GBP671.2m (2018: GBP579.6m)
Assessment of risk vs. prior year: reduced
Refer to note 13 Goodwill
----------------------------------------------------------------------------
The risk Our response
-------------------------------------------- ------------------------------------------------------------------------
Forecast-based valuation Our procedures included:
Goodwill in the Group and the carrying * Benchmarking assumptions: With the assistance of our
amount of the parent Company's investments valuation specialists, we challenged the growth rate
in subsidiaries are significant and discount rate for each CGU used in the value in
and at risk of irrecoverability use calculation by comparing certain of the key
due to uncertainty regarding forecast inputs to these assumptions to external data (such as
contract extensions and new contract bond yields and gearing). We challenged forecast
wins. assumptions around new contract wins or extensions,
contract attrition as well as cost reductions on
The estimated recoverable amount existing contracts.
of these balances through value
in use calculations is subjective
due to the inherent uncertainty * Historical comparisons: We compared current year
involved in forecasting and discounting actual cash flows to historic forecasts to assess the
future cash flows. We considered historical accuracy of the forecasts in the
the risk of recoverability of the impairment model and we have also compared forecast
goodwill to have reduced due to cash flows against budgets.
the re-organisation of cash generating
units (CGUs) in the last year and
consequently the higher levels of * Sensitivity analysis: We tested the sensitivity of
headroom of the value in use of impairment calculations to changes in key underlying
the business compared to the carrying assumptions, which were discount rate and terminal
amounts. growth rate for all CGUs. For CGUs that had the
lowest headroom, which were: AsPac and Middle East,
The CGUs which were most sensitive we challenged the projected win probabilities
to a deterioration in the division's (including contract extensions) on key contracts
cash flow projections or an increase within the pipeline and sensitised the five year cash
in discount rate were the AsPac flow forecasts by reducing new wins and extensions
CGU and Middle East CGU. As at year within the pipeline.
end 31 December 2019, the AsPac
CGU has headroom of GBP169m and
Middle East has headroom of GBP77m. * Comparing valuations: We considered whether the
forecast cash flow assumptions used in the value in
The effect of these matters is that, use calculation were consistent with the assumptions
as part of our risk assessment, used to calculate the expected loss on onerous
we determined that the value in contract provisions, the recognition of deferred tax
use of goodwill and value in use assets and the Directors' assessment of going concern
of investments in subsidiaries have and viability.
a high degree of estimation uncertainty,
with a potential range of reasonable
outcomes greater than our materiality * Assessing transparency: We also assessed whether the
for the financial statements as Group's disclosures about the sensitivity of outcomes
a whole, and possibly many times reflected the risks inherent in the valuation of
that amount. The financial statements goodwill.
(note 13) disclose the sensitivity
for goodwill estimated by the Group.
Our findings:
We found the Group's assessment
that there is no impairment of the
carrying amount of the Group's goodwill
and of parent's investment in subsidiaries
to be balanced (2018: balanced),
and the related sensitivity disclosures
to be proportionate (2018: proportionate).
-------------------------------------------- ------------------------------------------------------------------------
Classification of Exceptional Items GBP23.4m (2018: GBP 31.9m)
Assessment of risk vs. prior year: unchanged
Refer to note 2 Critical accounting judgements and key sources of
estimation uncertainty and note 7 Exceptional items
-------------------------------------------------------------------
The risk Our response
------------------------------------------ -------------------------------------------------------------
Presentation appropriateness Our procedures included:
Significant judgement is involved * Assessing principle : We assessed the Group's
in determining the classification accounting policies and principles for recognised
of costs and income as exceptional elements of costs and income as exceptional.
items in the financial statements.
We consider this area to be particularly
susceptible to the generic risk * Assessing application : We assessed the
of management bias. classification of items selected by the Group as
exceptional against the Group policy. We inspected
accounting papers prepared by the Group to understand
the key factors considered and judgements made. We
also evaluated whether other material items should be
classified as exceptional items in line with the
Group's policy.
* Consistency of Application : We compared the
classification of exceptional items where these
relate to, or bear similar characteristics to,
historical items to check that these are treated in a
consistent manner.
* Assessing transparency : We also assessed whether the
Group's disclosures regarding the classification of
exceptional items appropriately reflects the
judgements made.
Our findings:
In determining the presentation
of profit or loss items as exceptional
under the Group's accounting policy,
there is room for judgement. We
found that the Group's judgement
was balanced (2018: balanced).
------------------------------------------ -------------------------------------------------------------
Valuation of acquired intangibles (GBP52.6 million)
A new key audit matter identified in 2019. Refer to note 5 Acquisitions
---------------------------------------------------------------------------------------------------------
The risk Our response
------------------------------------------- -------------------------------------------------------------
Forecast-based valuation Our procedures included:
The Group has recognised significant * Test of details: For the businesses acquired in the
customer relationship intangible year (NSBU's US and Canadian businesses), we compared
assets as part of the NSBU acquisition. the forecast revenue and profit margins, used as the
There is inherent uncertainty involved basis for the calculation of the fair value of the
in forecasting the cash flows of acquired intangibles at the acquisition date, with
the acquired businesses and discounting the forecasts included in the due diligence reports
them to the present day, which determines obtained prior to the acquisition, current year
the fair value of the intangibles performance of the business and current forecasts.
at the acquisition date.
The effect of these matters is that, * Our sector experience: We compared the identified
as part of our risk assessment, intangible assets with our expectation of the
we determined that the fair value categories of assets we would expect based on similar
of the acquired intangibles has acquisitions in the industry.
a high degree of estimation uncertainty,
with a potential range of reasonable
outcomes greater than our materiality * Assessing valuer's credentials: We assessed the
for the financial statements as competence and objectivity of the external experts
a whole. who prepared the due diligence reports used to
support the valuation methodology and assumptions
used within the forecasts.
* Our valuation expertise: We used our internal
specialists to assess the reasonableness of valuation
methodologies used and to benchmark key assumptions
used in setting the discount rate to market data. We
also compared the discount rate set by the Group with
our own expectations of an appropriate discount rate.
* Sensitivity analysis: We calculated the impact of
increasing and decreasing certain key assumptions on
the valuation of the acquired intangible assets.
Our findings:
As a result of our work we found
the valuation of the acquired intangible
assets to be balanced.
------------------------------------------- -------------------------------------------------------------
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement, we conducted procedures having regard to the
Financial Reporting Council's Bulletin: The auditors' association
with preliminary announcements made in accordance with the
requirements of the UK Listing Rules. Our work included considering
whether:
-- the financial information included in the preliminary
announcement has been accurately extracted from the audited
statutory financial statements, and that it reflects the
presentation adopted in the audited statutory financial
statements;
-- based on our statutory financial statements audit work, the
financial information included in the preliminary announcement is
materially misstated;
-- the information included in the preliminary announcement
(including the management commentary) is materially consistent with
the content of the annual report;
-- based on our statutory financial statements audit work, the
assessment of the Company's position and prospects in the
preliminary announcement is fair, balanced and understandable;
and
-- the preliminary announcement includes the disclosures
required under the UK Listing Rules and s435 of the Companies Act
2006.
Directors' responsibilities
The preliminary announcement is the responsibility of, and has
been approved by, the directors. The directors are responsible for:
preparing, presenting and publishing the preliminary announcement
in accordance with the Listing Rules of the UK FCA; ensuring that
its content is consistent with the information included in the
annual report and audited statutory financial statements; and, as
required under the UK Corporate Governance Code, for ensuring that
the assessment of the Company's position and prospects in the
preliminary announcement is fair, balanced and understandable.
Our responsibility
Our responsibility under the Listing Rules is to agree to the
publication of the preliminary announcement based on our work. In
addition, under the terms of our engagement our responsibility is
to report to the Company setting out the procedures performed by us
to agree to the publication, the status of the audit report on the
statutory financial statements, and the key audit matters addressed
in that audit report.
We do not express an audit opinion on the preliminary
announcement.
We are not required to agree to the publication of presentations
to analysts or webcasts.
This report is made solely to the Company in accordance with the
terms of our engagement. Our work has been undertaken so that we
might state to the Company those matters we have agreed 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 work, for this report, or for
the conclusions we have reached.
This report is not the auditor's report on the Company's
statutory financial statements. It relates only to the matters
specified and does not extend to the Company's statutory financial
statements taken as a whole.
John Luke
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London E14 5GL
25 February 2020
Forward looking statements:
This announcement contains statements which are, or may be
deemed to be, "forward-looking statements" which are prospective in
nature. All statements other than statements of historical fact are
forward-looking statements. Generally, words such as "expect",
"anticipate", "may", "could", "should", "will", "aspire", "aim",
"plan", "target", "goal", "ambition", "intend" and similar
expressions identify forward-looking statements. By their nature,
these forward-looking statements are subject to a number of known
and unknown risks, uncertainties and contingencies, and actual
results and events could differ materially from those currently
being anticipated as reflected in such statements. Factors which
may cause future outcomes to differ from those foreseen or implied
in forward-looking statements include, but are not limited to:
general economic conditions and business conditions in Serco's
markets; contracts awarded to Serco; customers' acceptance of
Serco's products and services; operational problems; the actions of
competitors, trading partners, creditors, rating agencies and
others; the success or otherwise of partnering; changes in laws and
governmental regulations; regulatory or legal actions, including
the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or
regulatory approvals; exchange rate fluctuations; the development
and use of new technology; changes in public expectations and other
changes to business conditions; wars and acts of terrorism; 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.
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
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