REG - Serco Group PLC - 2015 full year results <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
25/02/2016 07:12
- Part 2: For the preceding part double click ID:nRSY0914Qa
public service
delivery markets of Health, primarily hospital facilities management services, and Citizen Services, which includes welfare
and business support operations, BPO services for the public sector, various support operations for European Agencies, and
other direct services such our environmental and leisure services for local authorities.
Revenue for the year was £905.8m (2014: £959.8m), a decline of 6%. At constant currency and excluding the impact of
disposals (the Braintree Community Hospital clinical healthcare services business disposed in March 2014), the organic
decline was 4%. There was modest revenue growth from the start of new contracts such as Lincolnshire County Council BPO
services and Havering environmental services, together with additional volume-related revenues in health procurement
services and a small number of other Citizen Services contracts. These areas of growth were offset by the end of contracts
such as Westminster City Council BPO support, Suffolk Community Healthcare and private sector facilities management for an
aviation industry customer, together with a number of other reductions in volume-related revenue predominantly in other
Citizen Services operations.
Underlying Trading Profit was £4.7m (2014: £3.4m), representing a margin of 0.5% (2014: 0.4%). Within Underlying Trading
Profit there was £11m of non-exceptional OCP utilisation, which was modestly better than our original expectations. The
main movements in Underlying Trading Profit were the removal of loss on the National Citizen Service contract, together
with some initial progress on reducing overhead costs, which were broadly offset by the reduction in profit contribution
from the effect of contracts ending or reducing in scope and the in-year loss on the Lincolnshire County Council contract.
The Contract and Balance Sheet Review charge taken in LRG in 2014 was £93.8m. The net impact of adjustments to key
assumptions and other related changes was a £28.2m net charge in 2015. The principal driver of this was the establishment
of a new OCP, together with related impairments and charges, for our business process and contact centre services contract
with Lincolnshire County Council; there has been significant operational challenge in the first year, predominantly related
to our responsibility to implement a new ERP system, which is now expected to result in losses for the remaining
contractual period. Separately, there was a one-time profit of £9.0m relating to the Thurrock BPO services contract where
settlement on early termination had been mutually agreed with the customer; the one-time profit represents a payment to
Serco in lieu of anticipated profit in future years, net of direct costs, impairments and other charges. After these
Contract and Balance Sheet Review adjustments and the one-time profit on early termination, the Reported Trading Loss for
the year was £14.5m.
LRG represented approximately £400m of the Group's aggregate total value of signed contracts during the year; the largest
items were the successful rebids of Serco's support services to Wishaw General Hospital and Norfolk & Norwich University
Hospital, various IT support services for European agencies, the new win for facilities management services to the new
district general hospital for NHS Dumfries and Galloway, an extension until the end of 2017 for the Child Maintenance Group
(CMG) case management contract and a one-year extension to our operation of the Work Programme.
Looking ahead, the impact of known contract losses or other revenue reductions is currently anticipated to have a gross
impact of around £200m or approximately 25% in 2016. The key drivers of this significant rate of attrition are the end of
the Suffolk Community Healthcare and National Citizen Services contracts which were heavily loss-making and were not rebid,
the early termination of the Thurrock BPO services contract, the ending of certain infrastructure services support to
private sector customers, lower revenues on healthcare procurement operations, the reducing scale of CMG operations and a
number of other smaller contracts ending or reducing in scope.
Additionally, of existing work where an extension or rebid will be required at some point during the next three years due
to a scheduled contract end date before the end of 2018, there are 10 contracts with annual revenue of over £5m within the
LRG division; in aggregate, these represent approximately 20% of the current level of annual revenue for the division.
In terms of areas for future growth, we are focused on building our pipeline of opportunities in the UK in Citizen Services
(which includes Environmental and Leisure) and Health. Sharply reduced Local Authority spending is having some
unpredictable results: some Local Authorities are taking services back in-house, others are outsourcing them. Similar
pressures apply in the Healthcare sector, where we have a strong position in non-clinical services. There are currently a
number of environmental and hospital facilities management opportunities in the pipeline. We are working hard across all
sectors of this market to develop compelling propositions, and are confident that they will appeal to customers. In our
European business we continue to bid for major IT and operational support projects for government agencies, and are also
looking for opportunities to offer other parts of our portfolio, such as immigration services.
Americas
Our Americas division provides professional, technology and management services focused on Defence, Transport, and Citizen
Services (principally process outsourcing for government agencies). The US federal government, including the military,
civilian agencies and the national intelligence community, are our largest customers. We also provide services to the
Canadian Government and to some US state and municipal governments.
Revenue for the year was £693.0m (2014: £708.1m), a decline of 2%. In US dollars, the main currency for operations of the
division, revenue for the year was equivalent to US$1,061m. The strengthening particularly of the US dollar provided
growth of £40m or 6%, with the decline at constant currency being 8%. This decline was driven by contract attrition from
the end of various areas of operations on behalf of the US Federal Retirement Thrift Investment Board (FRTIB), certain US
intelligence agency support services and visa processing work. There was partial offset from expansion in existing
services such as the US Affordable Care Act (ACA) eligibility support services contract and naval installation task order
work under the Sea Enterprise IDIQ framework.
Underlying Trading Profit was £44.3m (2014: £43.2m), representing a margin of 6.4% (2014: 6.1%). Within Underlying Trading
Profit there was £10m of OCP utilisation, which was more than our original expectations. The main movements in Underlying
Trading Profit were the benefits of cost reduction initiatives and the £2m favourable currency movement, which were largely
offset by the reduction in profit contribution from contract attrition.
The Contract and Balance Sheet Review charge taken in the Americas division in 2014 was £26.7m. The net impact of
adjustments to key assumptions and other related changes was a £17.3m net charge in 2015. The principal drivers of this
were the required provision, together with related impairments and charges, for the Virginia Department of Transport (VDOT)
operations following operational challenges on the sub-contract related to implementing a new IT system, and an increase in
the existing provision for the Ontario Driver Examination Services contract. After these Contract and Balance Sheet Review
adjustments, Trading Profit for the year reduced to £27.0m.
Americas represented approximately £750m of the Group's aggregate total value of signed contracts and order book progress
during the year. The largest were: the successful re-compete of air traffic control services for the Federal Aviation
Administration and rebid of classification services for the US Patent and Trademark Office; securing a third year of the
expanded services providing eligibility support to the US Affordable Care Act (ACA); and winning a new contract to support
the US Naval Facilities Engineering Command (NAVFAC). Amongst a large number of other smaller contract awards were a
one-year extension to the 5 Wing Canadian Forces Base in Goose Bay contract, and rebids of cost analysis support to the US
military and personnel identification support to the US Navy.
Looking ahead, the impact of known contract losses or other revenue reductions is currently anticipated to have a gross
impact of around £100m or approximately 15% in 2016. The key drivers of this significant rate of attrition are the early
end of the VDOT contract, and the loss of the rebid for record processing at the National Benefits Center. Additionally,
of existing work where an extension or rebid will be required at some point during the next three years due to a scheduled
contract end date before the end of 2018, there are five contracts with annual revenue of over £5m within the Americas
division; in aggregate, these represent approximately 40% of the current level of annual revenue for the division.
In terms of areas for future growth, our pipeline for the Americas division has remained more buoyant than the UK
divisions. Major new bid opportunities due for decision over the next two years include passport processing for the
Department of State and Department of Homeland Security and several opportunities to provide various support functions to
the US Navy. Looking beyond, the market for defence services remains attractive in size and growth potential and other
potential bids in transport operational support and Citizen Services are expected to progress through our longer term
prospects list. Options to develop Serco's involvement in non-clinical health support and parts of the Justice &
Immigration market will also be evaluated over the longer term.
AsPac
Operations in the Asia Pacific division include Justice, Immigration, Defence, Health, Transport and Citizen Services.
With Serco's operations in Australia being by far the largest element of the division, the country represents 16% of total
Revenue for the Group.
Revenue for the year was £544.7m (2014: £706.0m), a decline of 23% in reported currency and 15% at constant currency. In
Australian dollars, the main currency for operations of the division, revenue for the year was equivalent to A$1,106m.
Local currency weakness, particularly the Australian dollar, contributed a decline of £57m or 8%. Excluding the impact of
disposals (the Great Southern Rail business disposed in May 2015), the organic decline was 9%. This decline was driven
almost entirely by a further reduction in the volume of work in Australian immigration services, which more than offset
growth from the Fiona Stanley Hospital in Perth and the Auckland South Corrections Facility which both became fully
operational in 2015, as well as some growth from other areas of scope expansion to existing services such as Acacia
prison.
Underlying Trading Profit was £11.9m (2014: £35.5m), representing a margin of 2.2% (2014: 5.0%). Within Underlying Trading
Profit, there was £20m of OCP utilisation, relating principally to the Armidale Class Patrol Boat (ACPB) contract and which
was lower than our original expectations; in 2014, the losses on ACPB were not included within Underlying Trading Profit as
they were included as part of the Contract and Balance Sheet Review charge. The main drivers of the reduction in
Underlying Trading Profit reflect the impact of the significant scale reduction in Australian immigration services, the
in-year loss incurred at Mount Eden Correctional Facility, together with a £2m adverse currency impact.
The Contract and Balance Sheet Review charge taken in 2014 was £237.1m. The net impact of adjustments to key assumptions
and other related changes was a £46.9m net release in 2015. The agreement reached with the Australian Government to amend
the terms of the ACPB contract, which was the Group's single-largest OCP, resulted in a release of £63m, principally due to
the contract now ending in June 2017 rather than running through to 2022. There was partial offset to this release from
OCP charges being required on Serco's operations in Hong Kong and in relation to the operational challenges faced on the
Mount Eden Correctional Facility contract. After these Contract and Balance Sheet Review adjustments, Reported Trading
Profit for the year increased to £58.8m.
AsPac represented approximately £300m of the Group's aggregate total value of signed contracts and order book progress
during the year; the single largest element of this reflects the order book increase to account for a rolling one-year
estimate of volumes for Australian immigration services; additionally, a three-year extension for our traffic camera
services contract in Victoria was awarded, while most of the other progress represented contracts for various Citizen
Services processing support work.
Looking ahead, the impact of known contract losses or other revenue reductions is currently anticipated to have a gross
impact of up to £50m or 10% in 2016; this includes the annualisation effect of the GSR disposal and a number of other small
losses or reductions, though the result for 2016 will still be susceptible to the prevailing volume of work in Australian
immigration services as this single contract represents more than a quarter of the total revenue for the division.
Additionally, of existing work where an extension or rebid will be required at some point during the next three years due
to a scheduled contract end date before the end of 2018, there are seven contracts with annual revenue of over £5m within
the AsPac division; in aggregate, these represent approximately 15% of the current level of annual revenue for the
division.
During the year, Serco was unsuccessful in the major new bid opportunities for Wellington's metro rail service and
Australian offshore immigration detention services. It should be noted that in early February 2016, the Australian
Government decided to re-tender the offshore immigration services contract, and as Reserve Bidder in the original tender,
has invited Serco and the originally selected Preferred Bidder to re-tender for this opportunity, though as yet we have not
included the opportunity in our pipeline as at the time of reporting we have not decided whether to participate in this
tender. A third opportunity in the pipeline, the Icebreaker vessel to be used by the Australian Antarctic Division (AAD),
saw Serco selected as Preferred Tenderer, but, as this contract is yet to be signed, it has not been included in the value
of signed contracts and remains in the Group's major bids pipeline. In the short-term, there are few bids due for
decision, however over the course of 2016 we expect more to enter the pipeline particularly in the areas of Justice and
Immigration services. Looking beyond, other potential opportunities are expected to be developed in Transport, Citizen
Services and non-clinical health services.
Middle East
Operations in the Middle East division include Transport, Defence, Health and other Direct Services such as facilities
management.
Revenue for the year was £291.4m (2014: £260.4m), an increase of 12%. Stronger local currency provided growth of 6% and a
small health support services acquisition added 2%; organic growth at constant currency was therefore 4%. This revenue
growth was driven by the start of the new contract for the Saudi Railway Company as well as growth from the annualisation
of contracts won during 2014 or increases in scope of existing operations, which was partially offset by a small number of
operations reducing in scope and the end of air traffic control operations in Erbil.
Underlying Trading Profit was £18.9m (2014: £19.1m), representing a margin of 6.5% (2014: 7.3%). Within Underlying Trading
Profit, OCP utilisation was immaterial. While Underlying Trading Profit was held level with the prior year, there was
margin pressure as a result of attrition and scope reductions being concentrated in areas that were higher margin.
The Contract and Balance Sheet Review charge taken in 2014 was £19.3m. The net impact of adjustments to key assumptions
and other related changes was an £8.5m net release in 2015. This related to allowances for doubtful debts that had been
charged in 2014 but subsequently collected in 2015. After these Contract and Balance Sheet Review adjustments, Reported
Trading Profit for the year increased to £27.4m.
The Middle East represented approximately £200m of the Group's aggregate total value of signed contracts during the year;
the largest of these was the new win to support the Saudi Railway Company in the operation of the North-South Railway.
Other wins included successfully securing existing work for logistics and base support services provided to the Australian
Defence Force (ADF) in the region, facilities management at Abu Dhabi Global Market Square (formerly Sowwah Square), for
Baghdad Air Navigation Services (ANS) and to operate and maintain the Palm Jumeirah Monorail System in Dubai.
Looking ahead, known contract losses or other revenue reductions are currently not anticipated to have a material impact in
2016. There is though some pressure resulting from the planned transition of certain ANS roles to customers in the region.
Additionally, of existing work where an extension or rebid will be required at some point during the next three years due
to a scheduled contract end before the end of 2018, there are seven contracts with annual revenue of over £5m within the
Middle East division; in aggregate, these represent approximately 30% of the current level of annual revenue for the
division.
In terms of areas for future growth, there remains a vibrant public service outsourcing market in the region and Serco has
strong references to continue expanding; whilst the recent reductions in the oil price may lead to some projects being
delayed, we, as operators, tend to get involved only when the infrastructure build is at or near completion. Major
pipeline opportunities due for award in 2016 or 2017 now include three major light rail and tram operations in the region,
as well as further developments in defence training services and in non-clinical health and other facilities management
support.
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, and these include the costs of
the Corporate Renewal Programme.
Corporate costs in 2015, before Contract and Balance Sheet Review adjustments, were £51.2m (2014: £52.8m). While there was
some one-time Corporate Renewal implementation work that occurred in 2014, and the benefit of actions taken during 2015 to
reduce costs at the centre, these were partially offset by some increased costs in 2015 associated with implementing the
Strategy Review and investment in improved management information, systems and processes.
The Balance Sheet Review charge taken in 2014 was £37.3m. The net impact of adjustments to key assumptions and other
related changes was a £3.3m net release in 2015, reducing Corporate Costs within Reported Trading Profit to £47.9m.
Global Services (discontinued operations)
The Global Services division consists of Serco's private sector BPO business, predominantly for customers in the UK, India
and North America, following the transfer of public sector BPO operations to our other divisions. The operations consist
of middle and back office skills and capabilities across customer contact, transaction and financial processing, and
related consulting and technology services.
As part of Serco's previously announced strategy to exit non-core markets and to focus on the provision of public services,
Serco is seeking to exit its private sector BPO operations. On 31 December 2015, the transaction to dispose of the
majority of the offshore private sector BPO operations was completed. Two smaller but separate transactions relating to
some operations in the Middle East are expected to complete in 2016. The remaining private sector operations, which are
predominantly UK onshore operations, will be exited either by further disposals, transfers, early termination or
running-off the contracts over their remaining contractual period.
For statutory reporting purposes, the Global Services division is classified as discontinued operations, therefore only the
post-tax result of these operations is included as a single line in the reporting of the Group's Income Statement.
However, for consistency with previous guidance, Serco's underlying measures include the Revenue and Trading Profit of
these discontinued operations.
Revenue was £337.6m (2014: £359.3m), a decline of 6%. Stronger local currency provided growth of 2%, with the decline at
constant currency being 8%. The start of the new contract won in 2014 for multi-channel contact services for a major UK
retailer provided revenue growth, as did expansion in domestic Indian BPO operations; however, this was more than offset by
contract attrition, largely as a result of our managed exit of a number of smaller loss-making contracts in the UK.
Underlying Trading Profit was £14.3m (2014: £6.8m), representing a margin of 4.2% (2014: 1.9%). Within Underlying Trading
Profit, there was £15m of onerous contract provision utilisation. Drivers of the improvement in Underlying Trading Profit
include the benefit of provision utilisation and other actions taken to reduce the impact of loss-making operations.
The Contract and Balance Sheet Review charge taken in 2014 was £30.3m. The net impact of adjustments to key assumptions
and other related changes was a £0.6m net release in 2015. As the division included assets designated as held for sale,
there is a benefit of not charging depreciation and amortisation of £11.7m. After these Contract and Balance Sheet Review
adjustments and held for sale benefits, Reported Trading Profit for the year increased to £26.6m.
Given the disposal of the majority of the offshore operations completed on 31 December 2015, and because there was also
good progress during 2015 in managing the exit from the loss-making contracts in the remaining UK onshore operations, the
Revenue of £337.6m in 2015 reduces very substantially; Serco's budget for 2016 includes approximately £20m of residual
revenue contribution, which will vary depending on the timing of exiting remaining contracts. The residual operations are
expected to contribute an Underlying Trading Loss of around £10m in 2016, reflecting contract losses up to the point of
exit together with the effect of 'stranded' shared service centre costs and other overheads previously absorbed by the
Global Services division. Serco is targeting to make progress reducing these stranded costs through additional cost
savings over the course of 2016 and beyond.
Finance Review
Overview of Financial Performance
For the year ended 31 December 2015 2014
£m £m
Revenue - including discontinued operations 3,514.6 3,955.0
Less: Revenue from discontinued operations (337.6) (359.3)
Revenue 3,177.0 3,595.7
Underlying Trading Profit 96.0 113.2
Onerous contract and Balance Sheet Review adjustments 20.9 (745.3)
Benefit from non-depreciation and non-amortisation of assets held for sale 11.7 -
Other one-time items 9.0 -
Trading Profit/(Loss) 137.6 (632.1)
Other expenses - amortisation and impairment of intangibles arising on acquisition (4.9) (23.7)
Operating profit/(loss) before exceptional items on continuing and discontinued operations 132.7 (655.8)
Less: Operating (loss)/profit before exceptional items arising on discontinued operations (26.5) 29.0
Operating profit/(loss) before exceptional items 106.2 (626.8)
Exceptional loss on disposal of subsidiaries and operations (2.6) (2.3)
Other exceptional operating items (107.3) (323.4)
Exceptional operating items (109.9) (325.7)
Operating loss (3.7) (952.5)
Investment income 6.1 4.6
Other finance costs (39.0) (42.6)
Exceptional finance costs (32.8) -
Total net finance costs (65.7) (38.0)
Loss before tax (69.4) (990.5)
Tax on profit/(loss) before exceptional items (17.9) (7.2)
Tax on exceptional items 0.4 8.2
Tax (17.5) 1.0
Loss for the year from continuing operations (86.9) (989.5)
Discontinued operations
Profit/(loss) for the year from discontinued operations (66.2) (357.6)
Loss for the year (153.1) (1,347.1)
Underlying earnings/(loss) per share (restated)* from continuing and discontinued operations 3.44p 4.73p
Underlying trading margin from continuing and discontinued operations 2.7% 2.9%
Earnings/(loss) per share before exceptional items (restated)* from continuing and discontinued operations 6.55p (107.43p)
Earnings/(loss) per share (restated)* from continuing and discontinued operations (15.47p) (205.66p)
Dividend per share - 3.10p
*Restatement of earnings per share reflects adjustment to the weighted average number of shares associated with the Rights
Issue
Revenue
Revenue declined by 11.6% in the year to £3,177.0m (2014: £3,595.7m), an 11.2% reduction in constant currency.
Revenue including that arising from operations classified as discontinued declined by 11.1% in the year to £3,514.6m (2014:
£3,955.0m), an 11.1% reduction in constant currency.
Commentary on the revenue performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews
sections above.
Trading Profit
Trading Profit is defined as operating profit as shown on the face of the Consolidated Income Statement before i)
amortisation and impairment costs of intangibles arising on acquisitions and ii) exceptional items, adjusted to include the
Trading Profit arising on discontinued operations.
Trading Profit increased in the year to £137.6m (2014: Trading Loss £632.1m). The improvement from 2014 is primarily
attributable to the 2014 impact of the Contract and Balance Sheet Review that resulted in significant asset impairments,
onerous contract provisions (OCPs) and other charges of £745.3m being recorded in that year.
Trading Profit for the Group includes that arising on discontinued operations of £26.6m.
Underlying Trading Profit
Underlying Trading Profit is defined as Trading Profit adjusted to exclude charges and releases made to OCPs, charges and
releases made in respect of other items identified during the 2014 Contract and Balance Sheet Review, the beneficial
treatment of depreciation and amortisation on assets held for sale and any other one-time items.
Underlying Trading Profit was £96.0m, a decline of 15.2% from 2014. At constant currency Underlying Trading Profit was
£95.9m. Commentary on the trading performance of the Group is provided in the Chief Executive's Review and the Divisional
Reviews sections above.
Excluded from Underlying Trading Profit were net charges to OCPs of £3.0m following the annual reassessment undertaken as
part of the budgeting process, which would have been a net release of £5.4m at constant currency. Also excluded from
Underlying Trading Profit were net releases of £23.9m relating to other provisions and accruals for items identified during
the 2014 Contract and Balance Sheet Review.
Underlying Trading Profit excludes the benefit arising from the non-depreciation of assets classified as held for sale. In
2015 depreciation and amortisation of £10.0m and £1.7m respectively was not charged to operating profit on assets
classified as held for sale relating to those businesses classified as discontinued operations.
Other one-time items relate to the early termination of a UK Local Authority contract where settlement has been mutually
agreed with the customer. The one-time profit represents a payment to Serco in lieu of anticipated profits in future years,
net of direct costs, impairments and other charges.
In 2014, Underlying Trading Profit of £113.2m excludes non-exceptional charges made in respect of OCPs, asset impairments
and other provisions arising from the 2014 Contract and Balance Sheet Review of £745.3m.
Discontinued operations
Completion of the sale of the majority of the offshore private sector BPO business, which accounted for the bulk of the
Global Services division, occurred on 31 December 2015. The disposal of operations based in the Middle East to the same
purchaser is expected to complete in two tranches during 2016 following receipt of the necessary approvals; the balance
sheet items associated with these operations remain within assets and liabilities held for sale at 31 December 2015.
During the course of 2015 the other predominantly UK onshore private sector BPO operations have either been sold or exited
early, or will be in the near future. As a result, in 2015 the Global Services division is deemed to be a discontinued
operation in accordance with IFRS. Those onshore BPO businesses which have not yet been exited are treated as assets held
for sale and segregated from the other assets and liabilities on the balance sheet.
The results of discontinued operations were as follows:
For the year ended 31 December 2015£m 2014£m
Revenue 337.6 359.3
Underlying Trading Profit 14.3 6.8
Onerous contract and balance sheet review adjustments 0.6 (30.3)
Benefit from non-depreciation and non-amortisation of assets held for sale 11.7 -
Trading Profit/(Loss) 26.6 (23.5)
Other expenses - amortisation and impairment of intangibles arising on acquisition (0.1) (5.5)
Operating profit/(loss) before exceptional items 26.5 (29.0)
Exceptional gain/(loss) on disposal of subsidiaries and operations 5.4 (3.1)
Other exceptional operating items (83.0) (332.7)
Operating loss (51.1) (364.8)
Investment revenue 2.1 1.6
Finance costs (1.2) (0.3)
Loss before tax (50.2) (363.5)
Tax on profit/(loss) before exceptional items (18.8) (3.9)
Tax on exceptional items 2.8 9.8
Net loss of discontinued operations (attributable to equity owners of the Company) as presented in the income statement (66.2) (357.6)
Joint ventures - share of results
The most significant joint ventures are the Atomic Weapons Establishment (AWE) and Northern Rail. Serco manages AWE in a
consortium with Lockheed Martin and Jacobs Engineering Group in a 25-year contract that runs to 2025. In 2015 Serco's share
of revenue was £326.1m (2014: £329.8m) and profit after tax was £18.6m (2014: £16.9m). Northern Rail is a 50% joint venture
with Abellio to operate a rail franchise that runs until 31 March 2016. In 2015 Serco's share of revenue was £292.7m (2014:
£288.7m) and profit after tax was £8.2m (2014: £6.5m). While the revenues and individual line items are not consolidated in
the Group Income Statement, summary financial performance measures of the aggregate of all joint ventures are set out below
for information purposes.
For the year ended 31 December 2015£m 2014£m
Revenue 737.2 798.3
Operating profit 42.6 37.9
Net finance cost (0.4) (0.3)
Tax expense (5.2) (7.6)
Profit after tax 37.0 30.0
Dividends received from joint ventures 32.5 34.8
Exceptional items
Exceptional items are non-recurring items of financial performance that are outside normal operations and are material to
the results of the Group either by virtue of size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the underlying performance of the Group.
Exceptional items have arisen on both the continuing and discontinuing operations of the Group. Exceptional items arising
on discontinued operations are disclosed on the face of the Consolidated Income Statement within the profit or loss
attributable to discontinued operations. Those arising on continuing operations are disclosed on the face of the
Consolidated Income Statement within exceptional operating items.
For the year ended 31 December 2015 2014
£m £m
Exceptional items arising on continuing operations
Exceptional loss on disposal of subsidiaries and operations (2.6) (2.3)
Other exceptional operating items
Impairment of goodwill (87.5) (181.2)
Restructuring costs (19.7) (24.0)
Aborted transaction costs (1.7) -
Costs associated with UK Government review (1.2) (9.2)
UK frontline clinical health contract provisions 2.8 (16.1)
Provision for settlement relating to DLR pension deficit funding dispute - (35.6)
Other provision for legal claims - (20.1)
Impairment and related charges of Australian rail business - (37.2)
Other exceptional operating items (107.3) (323.4)
Exceptional operating items arising on continuing operations (109.9) (325.7)
Exceptional items arising on discontinued operations
Loss on disposal of discontinued operations prior to reserve recycling (45.6) (3.1)
Recycling of gains in hedging and translation reserves 51.0 -
Exceptional gain/(loss) on disposal 5.4 (3.1)
Other exceptional operating items
Restructuring costs (2.2) (8.7)
Impairment of goodwill (65.9) (284.8)
Impairment of other assets transferred to held for sale (14.9) (39.2)
Other exceptional operating items (83.0) (332.7)
Exceptional operating items arising on discontinued operations (77.6) (335.8)
Exceptional items arising on continuing and discontinued operations (187.5) (661.5)
Exceptional loss on disposal of businesses arising on continuing operations
The total exceptional loss on disposal of businesses in 2015, excluding profits or losses arising on the disposal of
business classified as discontinued operations, was £2.6m (2014: £2.3m). In May 2015 the Group completed the sale of its
Great Southern Rail (GSR) business in Australia for a cash consideration of £2.9m, resulting in a loss on disposal of
£2.8m. The transaction was part of the disposal programme of businesses identified as not being core to Serco's future
strategy, as announced initially in November 2014. In addition, in January 2015, the Group disposed of its National
Physical Laboratory (NPL) business for a consideration of £12.1m, with no gain or loss on disposal. AgPlus was a
subsidiary of NPL which was retained and sold separately with a gain of £0.5m being recognised. In June 2015, the Group
also disposed of its Serco India Private Limited business, representing the Group's frontline public services operations in
the Indian transport sector, for a consideration of £1.0m, resulting in a loss on disposal of £0.8m. All of these
businesses were classified as held for sale as at 31 December 2014. In 2015 there was also an exceptional gain of £0.5m
recognised relating to transactions completed in prior periods.
Other exceptional operating items arising on continuing operations
Goodwill is tested for impairment annually or more frequently if there are indications that there is a risk that it could
be impaired. The recoverable amount of each Cash Generating Unit (CGU) is based on value in use calculations derived from
forecast cash flows based on past experience, adjusted to reflect market trends, economic conditions, the Group's strategy
and key risks. These forecasts include an estimated level of new business wins and contract attrition and an assumption
that the final year forecast continues into perpetuity at a CGU-specific terminal growth rate. The terminal growth rates
are provided by external sources and are based on long-term inflation rates of the geographic market in which the CGUs
operate and therefore do not exceed the average long-term growth rates forecast for the individual markets.
In 2015, we conducted impairment testing of our CGUs that has identified a non-cash exceptional impairment to continuing
operations of £87.5m (2014: £181.2m), primarily due to a higher level of contract attrition than previously forecast and
the associated impact on future cash flows. The impairments arose in the following CGUs.
For the year ended 31 December 2015 2014
£m £m
Local & Regional Government: Direct Services and Europe - (57.6)
Local & Regional Government: UK Health - (22.9)
Americas (87.5) (100.7)
Total exceptional goodwill impairment charge (87.5) (181.2)
In 2015, a charge of £19.7m (2014: £24.0m) arose in relation to the restructuring programme resulting from the Strategy
Review. This included redundancy payments, provisions, external advisory fees and other incremental costs.
The disposal of the Environmental and Leisure businesses was aborted in the year and as a result the one-off costs of £1.7m
associated with the aborted sale have been treated as exceptional.
In 2015, there were exceptional costs totalling £1.2m associated with the UK Government reviews, this reflected external
costs incurred and included external adviser costs related to these reviews. In 2014 costs totalling £9.2m were incurred
associated with both the UK Government reviews and the programme of corporate renewal.
In 2015, the exit of the UK Frontline Clinical Health contracts was completed with the Cornwall Out of Hours contract being
exited in May and the Suffolk Community Healthcare contract ended in September. On completion of the contract exits,
existing OCPs of £2.8m that are no longer required were released and recorded as a credit in exceptional items.
In November 2014 the Group agreed to settle a dispute with the Trustees of the Docklands Light Railway (DLR) Pension Scheme
over the extent of its liability to fund the deficit on the scheme. The settlement resulted in a total exceptional charge
inclusive of costs of £35.6m, consisting of the full and final settlement amount of £33.0m and costs of £2.6m. The
settlement is to be paid over four equal annual instalments from January 2015 to January 2018 covering all past and any
future DLR associated pension liabilities.
In 2014 an exceptional provision of £20.1m was recognised for legal claims made against Serco for commercial disputes. This
provision was based on legal advice received by the Company. There have been no further charges in 2015 in relation to
these disputes.
In 2014 an impairment review was performed on the Australian rail business, Great Southern Rail (GSR), resulting in a
charge totalling £37.2m. This consisted of an impairment of £23.1m to reduce the carrying value of its net assets to the
estimated recoverable amount and a charge of £14.1m in relation to the break costs of leases relating to the business. The
GSR business was exited in May 2015, with the loss on disposal of £2.8m, included within loss on disposal of businesses.
Exceptional profit or loss on disposal of discontinued operations
Completion of the sale of the majority of the offshore private sector BPO business occurred on 31 December 2015. During the
year the Group also disposed of businesses in relation to the predominantly UK onshore private sector BPO business. The net
assets at the date of disposal of discontinued operations were:
Offshore £m UK onshore £m Total£m
Goodwill 156.7 - 156.7
Other intangible assets 30.4 - 30.4
Property, plant and equipment 35.1 0.8 35.9
Trade and other receivables 82.8 0.5 83.3
Deferred tax assets 3.1 - 3.1
Cash and cash equivalents 31.0 0.8 31.8
Trade and other payables (51.5) (0.5) (52.0)
Obligations under finance leases (1.1) (0.1) (1.2)
Provisions (16.8) (4.9) (21.7)
Corporation tax liabilities (26.0) (0.3) (26.3)
Deferred tax liabilities (5.1) - (5.1)
Minority interest disposed 0.4 - 0.4
Net assets/(liabilities) disposed 239.0 (3.7) 235.3
The loss on disposal is calculated as follows:
Offshore £m UK onshore £m Total£m
Cash consideration 212.8 (1.6) 211.2
Face value of loan note received 30.0 - 30.0
Gross consideration 242.8 (1.6) 241.2
Loan note fair value adjustment (10.5) - (10.5)
Indemnities provided (30.7) (2.3) (33.0)
Net consideration 201.6 (3.9) 197.7
Less:
Net (assets)/liabilities disposed (239.0) 3.7 (235.3)
Disposal related costs (7.5) (0.5) (8.0)
Loss on disposal of discontinued operations prior to reserve recycling (44.9) (0.7) (45.6)
Recycling of gains on translation of foreign operations 43.0 - 43.0
Recycling of gains on hedged derivative financial instruments from reserves 8.0 - 8.0
Exceptional gain/(loss) on disposal 6.1 (0.7) 5.4
The offshore disposal reflects the majority of the offshore BPO operations, which excludes the consideration and net assets
related to the smaller but separate disposal transactions of operations in the Middle East that are subject to separate
completion in 2016. As at 31 December 2015 the net assets relating to the Middle East were £15.0m and expected
consideration in respect of the disposal was £15.0m.
The UK onshore business is being sold or transferred as components to various different purchasers. One element was sold
in the year and the elements remaining at the year-end are expected to be sold or transferred during 2016.
Other exceptional operating items arising on discontinued operations
In 2015 a charge of £2.2m (2014: £8.7m) has arisen in discontinued operations in relation to the restructuring programme
resulting from the Strategy Review.
During 2015, an impairment test of the Global Services business was conducted as a result of the offers received in the
year together with movements of the assets held for sale since the end of 2014. The impairment testing identified a non
cash exceptional impairment of goodwill relating to discontinued operations of £65.9m (2014: £284.8m) as a result of a
reduction in the carrying value of net assets due to a decrease in the estimated recoverable amount of the CGU; this was
recorded at the half year. Assets other than goodwill have also been impaired by a total of £14.9m (2014: £39.2m). The
impairment of goodwill relates primarily to the offshore Global Services business, the majority of which was disposed of on
31 December 2015, and the other asset impairments to the UK onshore business.
Exceptional finance costs
In December 2014, agreement was reached for the Group to defer its December 2014 covenant test until 31 May 2015. As a
result, costs were incurred in 2015 to preserve the existing finance facilities. In addition, payments were made to the US
Private Placement (USPP) Noteholders as a result of early settlement following the Group refinancing. Total charges of
£32.8m have been treated as exceptional items as they are outside of the normal financing arrangements of the Group and are
significant in size.
Other finance costs and investment income on continuing and discontinuing operations
Investment income of £8.2m (2014: £6.2m) principally relates to interest earned on deposits during the period of £3.2m and
interest accruing on net retirement benefit assets of £4.9m.
Other finance costs of £40.2m (2014: £42.9m) principally relate to interest incurred on the USPP loans and the Revolving
Credit Facility (£24.7m), facility fees and other charges (£7.2m) and the movement in discount on provisions (£5.6m).
In total, pre-exceptional net finance costs were £32.0m (2014: £36.7m).
Taxation on continuing and discontinuing operations
Our tax strategy is to manage all taxes to ensure that we pay the appropriate amount in the countries in which we operate,
while both respecting applicable tax legislation and utilising appropriate legislative reliefs. Our strategy is aligned
with the Group's business strategy and endorsed by the Board. Responsibility for tax strategy and risk management sits
with the Chief Financial Officer. Day to day delivery of the strategy is executed by a global team of tax professionals
who are aligned with our businesses and who work closely with local tax authorities and local advisers.
Tax charge
In 2015, we recognised a tax charge of £36.7m on a pre-tax and pre-exceptional profit of £100.7m representing an effective
tax rate of 36.4%. The tax charge on an underlying basis, reflecting Underlying Trading Profit of £96.0m less
pre-exceptional net finance costs of £32.0m, was £30.5m, representing an effective tax rate of 47.7%.
A £3.1m tax credit was also recognised on exceptional losses of £220.3m. The principal reasons for the absence of a tax
credit on these exceptional costs is that no UK deferred tax asset is being recognised in respect of UK costs and no tax
deduction is available for the impairment of goodwill in any territory. The credit of £3.1m represents tax relief on
restructuring costs in overseas territories and the benefit of a tax credit from losses sold to joint venture partners.
The principal reasons why the effective tax rates are higher than the UK standard corporation tax rate of 20.25% are due to
higher rates of tax on profits arising on our international operations, together with the absence of any deferred tax
credit for losses incurred in the UK (which includes the result of UK divisions, the majority of corporate costs and
certain interest costs). The increase in the effective tax rate has been partially offset by a tax credit on the
recognition of additional deferred tax assets that were not previously recognised on provisions in Australia.
Our tax charge in future years will continue to be materially impacted by our accounting for UK deferred taxes. To the
extent that future UK tax losses are not recognised, our effective tax rate will be higher than prevailing standard
corporation tax rates as we will not be able to recognise the associated tax benefits arising. To the extent that our
existing UK tax losses are subsequently recognised or utilised, our effective rate will be impacted by the associated tax
benefit and will reduce accordingly.
Contingent tax assets
At 31 December 2015, the Group has gross estimated unrecognised deferred tax assets of £1.05bn (£195m net), which are
potentially available to offset against future taxable profits. These principally relate to tax losses of £890m. Of these
tax losses, £761m arise in the UK business (net £137m) - £584m arising in Serco Limited, the Group's principal UK trading
entity; the remaining £177m of tax losses arise in other UK group companies. Of the net £137m of UK tax assets in respect
of losses, only £10.5m is recognised on the balance sheet on the basis of forecast utilisation against future taxable
profits, with the remaining £126.5m being a contingent asset not recognised.
Taxes paid
Net corporate income tax of £9.4m was paid during the year, relating primarily to our operations in Americas (£2.2m), India
(£6.7m), Middle East (£1.3m), Europe (£3.6m) and offset by tax refunds arising in AsPac (£4.4m) in respect of prior years.
The Group's UK operations have been loss making overall and accordingly no tax payments have been due. During the year the
Group has transferred tax losses to its profitable joint ventures in return for cash payments from the joint ventures of
£6.7m, resulting in an overall tax paid figure in our cash flow of £2.7m.
Dividend
As indicated in March, the Board is not recommending the payment of a dividend in respect of the 2015 financial year. The
Board is committed to resuming dividend payments when it is prudent to do so. The Directors' decision as to when to
declare a dividend and the amount to be paid will take into account the Group's underlying earnings, cash flows and
financial leverage, together with the requirement to maintain an appropriate level of dividend cover and the market outlook
at the time.
Share count and earnings per share
The equity placing conducted in May 2014 and Rights Issue in April 2015 increased the weighted average number of shares for
earnings per share ('EPS') purposes to 986.5m (2014: 655.1m). The annualising effect of the Rights Issue will further
increase the weighted average number of shares to approximately 1,099m for 2016.
EPS before exceptional items from both continuing and discontinuing operations was 6.55p per share; including the impact of
exceptional items there was a loss of 15.47p per share.
Underlying EPS was 3.44p per share. This measure reflects the Underlying Trading Profit £96.0m and deducts pre-exceptional
net finance costs (including those for discontinued operations) and related tax effects.
Cash flow and reconciliation to net debt
The table below shows the operating loss and Free Cash Flow reconciled to movements in net debt. Free Cash Flow is the
cash flow from subsidiaries and dividends received from joint ventures and is stated before exceptional items which are
considered non-recurring in nature. Free Cash Flow for 2015 was an outflow of £16.2m compared to an inflow of £62.2m in
2014.
Operating cash flow (before movements in working capital, exceptional items and tax) was £82.5m, a reduction of £3.9m from
the prior year; included within this are movements in provisions that in the year predominantly reflect the cash outflows
in relation to onerous contracts whilst in the prior year the movement reflects the establishing of provisions for onerous
contracts identified following the 2014 Contract and Balance Sheet Review. The year-on-year decrease in other non-cash
movements is principally due to the 2014 impairment of working capital items that arose following the Contract and Balance
Sheet Review.
2015 free cash flow reflects a £22.6m outflow in working capital from the continued normalisation of balances at the end of
the statutory period compared to the average for the period, tax returning to a paid position compared with a small net
refund received in 2014 and higher net purchases of tangible and intangibles assets of £36.0m.
The impact of the Contract and Balance Sheet Review was mostly non-cash in nature in 2014, relating principally to
provision movements and other impairments.
Cash Flow: Year ended 31 December 2015 2014
£m £m
Operating loss on continuing operations (3.7) (952.5)
Operating loss on discontinued operations (51.1) (364.8)
Less: exceptional items 187.5 661.5
Operating profit/(loss) before exceptional items on continuing and discontinued operations 132.7 (655.8)
Less: profit from joint ventures (37.0) (30.0)
Movement in provisions (116.0) 472.6
Other non-cash movements 102.8 299.6
Operating cash inflow before movements in working capital, exceptional items and tax 82.5 86.4
Working capital movements (22.6) 17.0
Tax (paid)/received (2.7) 0.6
Non-cash R&D expenditure (0.7) (0.5)
Cash flow from operating activities before exceptional items 56.5 103.5
Dividends from joint ventures
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