REG - Serco Group PLC - 2015 full year results <Origin Href="QuoteRef">SRP.L</Origin> - Part 3
25/02/2016 07:12
- Part 3: For the preceding part double click ID:nRSY0914Qb
32.5 34.8
Interest received 3.4 2.7
Interest paid (36.1) (42.3)
Purchase of intangible and tangible assets net of proceeds from disposals (72.5) (36.5)
Free Cash Flow (16.2) 62.2
Net disposal/(acquisition) of subsidiaries 184.9 (4.6)
Costs of equity rights issue - (4.1)
Proceeds from rights issue and share placement 530.3 156.3
Purchase of own shares net of share option proceeds 4.4 2.3
Other movements on investment balances (1.3) (3.5)
Capitalisation and amortisation of loan costs (0.6) 3.6
Impairment of loan receivable - (4.6)
Non-recourse loan disposals, repayments and advances 24.0 (6.8)
New, acquired and disposed finance leases 0.5 (13.7)
Exceptional items (88.4) (40.4)
Dividends paid - (53.1)
Foreign exchange loss on net debt (32.9) (30.4)
Movement in net debt including assets and liabilities held for sale 604.7 63.2
Asset held for sale movement in net debt (44.2) 39.5
Net debt at 1 January (642.7) (745.4)
Net debt at 31 December (82.2) (642.7)
Net debt at 1 January including assets and liabilities held for sale (682.2) (745.4)
Net debt at 31 December including assets and liabilities held for sale (77.5) (682.2)
Average net debt for the year ended 31 December 2015, calculated on a daily basis, was £454.8m a reduction of (£323.8m)
from the 2014 average net debt of £778.6m. The reduction in net debt was predominantly due to the Rights Issue and proceeds
from the disposal of the offshore private sector BPO business.
The table below provides an analysis of trading cash flow and provides the pre-interest and pre-tax cash flows equivalent
to Underlying Trading Profit. This is derived from the cash flow from operating activities excluding tax items and is shown
after net capital expenditure and after dividends received from joint ventures.
The percentage conversion of Underlying Trading Profit into trading cash flow is also provided in this table and this is 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. This measure is impacted by provisions related to onerous contracts, and we would
expect it to be impacted in future periods by the expected utilisation of OCPs.
Trading cash flow: Year ended 31 December 2015 2014
£m £m
Free cash flow from operating activities before exceptional items (16.2) 62.2
Add back:
Tax paid/(received) 3.4 (0.1)
Interest received (3.4) (2.7)
Interest paid 36.1 42.3
Trading Cash Flow 19.9 101.7
Underlying Trading Profit 96.0 113.2
Underlying Trading Profit cash conversion 20.7% 89.8%
The Underlying Trading Profit conversion into trading cash flow was 20.7%. This was due primarily to the cash outflows on
provisions movement, including assets held for sale £116.0m, the outflow of working capital of £22.6m in the year from the
continued normalisation of balances at the end of the statutory period compared to the average for the period, and from the
net purchase of tangible and intangible assets £72.5m. These reductions to cash were largely offset by the impact of
depreciation, amortisation and impairments during the year, including the Underlying Trading Profit benefit relating to
assets held for sale, £83.2m, the cash inflows arising from one-time items and the collection of bad debts provided for
under the Contract and Balance Sheet review £18.4m and other non-cash items £31.3m.
Analysis of net debt
Net debt, including assets held for sale, reduced to £77.5m (2014: £682.8m), predominately due to the proceeds received
from the Rights Issue and from the disposal of the offshore private sector BPO business.
2015 2015 2015
As at 31 December As reported Assets and liabilities held for sale adjustment Including assets and liabilities held for sale
£m £m £m
Cash and cash equivalents 323.6 5.2 328.8
Loans receivable 19.9 - 19.9
Other loans (381.9) - (381.9)
Obligations under finance leases (43.8) (0.5) (44.3)
Recourse net debt (82.2) 4.7 (77.5)
Non-recourse debt - - -
Net debt (82.2) 4.7 (77.5)
2014 2014 2014
As at 31 December As reported Assets and liabilities held for sale adjustment Including assets and liabilities held for sale
£m £m £m
Cash and cash equivalents 180.1 22.4 202.5
Loans receivable 1.0 - 1.0
Other loans (797.3) (0.8) (798.1)
Obligations under finance leases (26.5) (37.1) (63.6)
Recourse net debt (642.7) (15.5) (658.2)
Non-recourse debt - (24.0) (24.0)
Net debt (642.7) (39.5) (682.2)
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign
currency exchange rates, interest rates and credit risk. The Group has a centralised treasury function whose principal
role is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise and that the
financial risk arising from the Group's underlying operations is effectively identified and managed.
Treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed
annually. Financial instruments are only executed for hedging purposes - speculation is not permitted. A monthly report is
provided to senior management outlining performance against the treasury policy and the treasury function is subject to
periodic internal review.
Liquidity and funding
As at 31 December 2015, the Group had committed funding of £855m, comprising a £480m revolving credit facility with a
syndicate of banks and £375m of private placement notes. In addition the Group had a receivables financing facility of
£30m. The principal financial covenants attaching to these facilities are that the ratio of net debt to EBITDA should not
exceed 3.5x and the ratio of EBITDA to interest expense should be greater than 3.0x.
In April 2015 the Group raised gross proceeds of £555m from the Rights Issue, of which £450m was used to reduce gross
indebtedness (see Rights Issue, debt refinancing and covenants below).
Following the disposal of the majority of the offshore private sector BPO operations, the Group was required to offer the
net disposal proceeds to the debt holders in prepayment. Two thirds of the proceeds were offered to private placement note
holders at par and one third to repay any outstanding drawdowns on the revolving credit facility (nil outstanding at 31
December 2015). As a result of this process, £113m of private placement notes were repaid on 16 February 2016, leaving
£262m of private placement notes in issue at that date.
Interest rate risk
Given the nature of the Group's business, we have a preference for fixed rate debt to reduce the volatility of net finance
costs. Our treasury policies require us to maintain a minimum proportion of fixed rate debt as a proportion of overall net
debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 31 December 2015, more
than 100% of the Group's net debt was at fixed rates. Interest on the revolving credit facility is at floating rate,
however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to GBP 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 GBP and USD.
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.
Rights Issue, debt refinancing and covenants
The Group announced in November 2014 plans for new equity to be raised through a Rights Issue and for the proceeds to be
used primarily to reduce the Group's indebtedness. This was launched on 12 March 2015 and received shareholder approval on
30 March 2015. The equity Rights Issue successfully completed in April 2015 raising approximately £555m of gross proceeds
(£530m net after expenses), with trading in new shares commencing on 17 April 2015 and 549,265,547 new shares being
issued.
On 30 April 2015, the Group concluded a refinancing with its lending banks and private placement noteholders. This included
the reduction of gross indebtedness by £450m. The Group's committed revolving credit facility was reduced in size from
£730m to £480m and the maturity date extended by two years to April 2019. Financial covenants across the Group's funding
arrangements are unchanged, reflecting the strengthening of the Group's balance sheet by the Rights Issue. Fees and
expenses relating to the repayment of the Group's borrowings and amendments to the existing finance agreements were £33m,
and these included a premium of £25m on the early settlement of private placement notes. These expenses have been treated
as exceptional finance costs.
In accordance with the amended terms of Serco Group plc's borrowing facilities, compliance certificates for the year to 31
December 2014 and 12 months to 30 June 2015 were submitted to its lenders in May and September 2015 respectively, and these
showed the Group complied with the financial covenants.
For covenant purposes the definition of Consolidated Total Net Borrowings (CTNB) represents Group recourse net debt at the
balance sheet date adjusted to exclude encumbered cash, loan receivable amounts, and also adjusted to reflect the impact of
currency hedges associated with recourse loans. The covenant definition of EBITDA is the twelve month operating profit of
the business before exceptional items, deducting profits from joint ventures and after adding back depreciation, intangible
amortisation, share-based payment charges and dividends received from joint ventures. The covenant test for 31 December
2014 was deferred until 31 May 2015. The covenant definition of EBITDA for 31 December 2014 and the 12 months to 30 June
2015 was amended to exclude the impact of charges arising from the Contract and Balance Sheet Review whilst CTNB was
calculated after the proceeds less underwriting charges from the equity Rights Issue. The covenant test for the years ended
31 December 2014 and 2015 are shown below.
As at 31 December 2015£m 2014£m
Operating (loss)/profit before exceptional items 132.7 (655.8)
Less: Joint venture post-tax profits (37.0) (30.0)
Add: Dividends from joint ventures 32.5 34.8
Amortisation of other intangible assets 40.5 38.7
Depreciation of property, plant and equipment 28.9 41.8
Impairment of property, plant and equipment 2.1 -
Share-based payment expense 9.8 5.4
Balance sheet and contract write-downs in 2014 - 757.6
EBITDA per covenant 209.5 192.5
Net finance costs 32.0 36.7
Other adjustments (0.6) 0.2
Net finance costs per covenant 31.4 36.9
Recourse net debt (including assets and liabilities held for sale) 77.5 658.2
Encumbered cash and other items 14.2 -
Proceeds from rights issue less underwriting charge - (543.7)
Consolidated Total Net Borrowings (CTNB) 91.7 114.5
Covenant CTNB/EBITDA (not to exceed 3.5x) 0.44x 0.59x
Covenant EBITDA / Net finance costs (at least 3.0x) 6.67x 5.22x
Balance sheet summary
The balance sheet at 31 December 2015 is summarised below showing the impact of the assets and liabilities held for sale
for each line item. At the year end the balance sheet had net assets of £282.1m, a movement of £348.3m from the 2014
closing net liabilities position of £66.2m. The movement is mainly due to the funds raised through the Rights Issue and a
reduction in provisions due predominantly to utilisation, partially offset by the impairment to goodwill. The balance sheet
is summarised below:
2015 2015 2015 2014 2014 2014
As at 31 December Including assets held for sale Adjustment for assets held for sale As reported Including assets held for sale Adjustment for assets held for sale As reported
£m £m £m £m £m £m
Non-current assets
Goodwill 517.7 (7.8) 509.9 820.6 (279.1) 541.5
Other intangible assets 90.2 (0.4) 89.8 123.8 (5.0) 118.8
Property, plant and equipment 74.1 (0.9) 73.2 132.9 (94.5) 38.4
Other non-current assets 72.0 (0.2) 71.8 73.5 (26.8) 46.7
Deferred tax assets 42.2 - 42.2 48.4 (11.0) 37.4
Retirement benefit assets 127.1 - 127.1 143.9 - 143.9
923.3 (9.3) 914.0 1,343.1 (416.4) 926.7
Current assets
Inventories 26.4 - 26.4 33.9 (2.7) 31.2
Trade and other current assets 549.7 (20.6) 529.1 623.7 (119.0) 504.7
Current tax 11.3 (4.7) 6.6 20.7 (4.2) 16.5
Cash and cash equivalents 328.8 (5.2) 323.6 202.5 (22.4) 180.1
916.2 (30.5) 885.7 880.8 (148.3) 732.5
Assets classified as held for sale - 39.8 39.8 - 564.7 564.7
Total current assets 916.2 9.3 925.5 880.8 416.4 1,297.2
Total assets 1,839.5 - 1,839.5 2,223.9 - 2,223.9
Current liabilities
Trade and other current liabilities (558.6) 7.4 (551.2) (695.7) 96.1 (599.6)
Current tax liabilities (14.3) 0.1 (14.2) (34.4) 21.8 (12.6)
Provisions (191.2) 22.6 (168.6) (223.8) 18.1 (205.7)
Obligations under finance leases (16.3) 0.5 (15.8) (18.5) 8.9 (9.6)
Loans (132.2) - (132.2) (48.4) 4.5 (43.9)
(912.6) 30.6 (882.0) (1,020.8) 149.4 (871.4)
Amounts classified as held for sale - (32.5) (32.5) - (219.9) (219.9)
Total current liabilities (912.6) (1.9) (914.5) (1,020.8) (70.5) (1,091.3)
Non-current liabilities
Other non-current liabilities (18.3) - (18.3) (37.3) 7.6 (29.7)
Deferred tax liabilities (22.3) - (22.3) (11.7) 2.5 (9.2)
Provisions (315.0) 1.9 (313.1) (384.1) 11.9 (372.2)
Obligations under finance leases (28.0) - (28.0) (45.1) 28.2 (16.9)
Loans (249.7) - (249.7) (773.7) 20.3 (753.4)
Retirement benefit obligations (11.5) - (11.5) (17.4) - (17.4)
(644.8) 1.9 (642.9) (1,269.3) 70.5 (1,198.8)
Total liabilities (1,557.4) - (1,557.4) (2,290.1) - (2,290.1)
Net assets/(liabilities) 282.1 - 282.1 (66.2) - (66.2)
Provisions
The total of current and non-current provisions, excluding provisions related to businesses held for sale, has decreased by
£96.2m since 31 December 2014, the majority of which relates to a reduction in contract provisions as a result of the
utilisation and release of provisions against losses on onerous contracts, offset by new or additional onerous contract
provision charges made in the year. Movements in contract provisions, including those related to businesses held for sale
since the 31 December 2014 balance sheet date, are as follows:
Onerous Contract Provisions Other Contract Provisions Total contract provisions including assets held for sale Held for sale adjustment Total contract provisions as reported
£m £m £m £m £m
At 31 December 2014 (447.1) (4.9) (452.0) 21.6 (430.4)
Charged to income statement (91.8) (10.1) (101.9) 12.8 (89.1)
Released to income statement 88.8 2.7 91.5 (1.3) 90.2
Released to income statement (exceptional) 2.8 - 2.8 - 2.8
Utilised during the year 114.1 16.6 130.7 (24.7) 106.0
Utilised during the year (exceptional) 10.8 - 10.8 - 10.8
Unwinding of discount (5.5) - (5.5) - (5.5)
Disposals 6.5 0.4 6.9 (6.9) -
FX 8.2 0.3 8.5 - 8.5
Transfer to trade payables - (4.5) (4.5) 4.5 -
Assets held for sale - - - 4.9 4.9
Reclassifications 13.3 (13.6) (0.3) - (0.3)
At 31 December 2015 (299.9) (13.1) (313.0) 10.9 (302.1)
Onerous Contract Provisions (OCPs) arising from the Contract and Balance Sheet Review in 2014 accounted for £447.1m of the
31 December 2014 contract provisions balance shown above. A full assessment of the forecasts that form the basis of the
OCPs is conducted annually as part of the budgeting process.
In 2015, additional charges have been made in respect of future forecast losses on onerous contracts of £91.8m. This
increase related to revisions to existing contracts of £53.1m and new provisions raised on contracts of £38.7m. New
contract provisions include charges of £34.0m in respect of the Lincolnshire contract, details of which are provided below.
In 2015, releases to the income statement from OCPs were £91.6m, including a release of £62.7m resulting from the
renegotiation completed in November 2015 of our contract to operate and maintain a fleet of patrol boats for the Royal
Australian Navy. This contract was the single largest OCP charged in 2014.
Utilisation of OCPs in 2015 was £124.9m; of this £10.8m was utilised against OCPs recorded as exceptional items. The OCPs
arising as exceptional items relate solely to contracts within the UK Frontline Clinical Health sector following the
decision in 2013 to exit this sector; this exit was completed in September 2015 when the Suffolk Community Healthcare
contract ended.
Below is an update for the largest OCP contracts following the reassessment conducted as part of the annual budget
process:
Armidale Class Patrol Boats (ACPB)
The ACPB contract relates to the operations and maintenance of a fleet of patrol boats for the Royal Australian Navy. This
contract was entered into in December 2003 with an initial design and build phase, after which the fleet became operational
in 2007. Serco's key obligation is to have the fleet available for operations for a fixed number of days a year.
In November 2015, agreement was reached with the Australian Government customer to amend the terms of the ACPB contract.
The main changes agreed within the amendment are for an improved service regime under an enhanced maintenance and
remediation scope of works and schedule, for Serco to provide maintenance and remediation work on an agreed cost recovery
basis subject to strict expenditure caps and audit processes, and that the contract will end in June 2017 rather than
running through to 2022. Furthermore, under the terms of the Settlement and Amendment Deed, both parties agreed to a mutual
release of claims they may have had against each other prior to the point of contract amendment. As a result of the
agreement the OCP forecast has been reassessed resulting in a release of £62.7m.
Commercial and Operational Managers Procuring Asylum Support Services (COMPASS)
The COMPASS contract with the UK Home Office is for the provision of accommodation, transportation and subsistence payments
for asylum seekers whilst their claims are being processed. Claim processing can take from a few months to several years.
This contract commenced in 2012 and provides services in two of the six administrative regions of the contract in the UK;
the North West, comprising fourteen Local Authority areas; and Scotland and Northern Ireland. The contract runs to December
2017, with a further extension of up to two years at the option of the customer.
In 2015, the numbers of service users continued to be volatile, however for the year as a whole utilisation of the onerous
contract provision was in line with the forecast expectation. The forecasts for the contract have been reassessed with the
result being that the remaining balance of the provisions as at 31 December 2015 of £89.1m, is considered sufficient to
cover the anticipated losses over the remaining contract term. The final outcome over the contract life will be heavily
dependent on the future number of asylum seekers, the volatility of numbers and our ability to find suitable
accommodation.
Future Provision of Marine Services (FPMS)
The FPMS contract that commenced in 2007, which has a 15-year duration, provides marine support services to the UK Ministry
of Defence (MOD) dockyard ports of Portsmouth, Plymouth and Faslane as well as support to military exercises and training
to the Raasay Ranges.
In 2015 the contract has performed better than expected due largely to lower costs in respect of backfill vessel bookings
and dockings, and the revenues from additional taskings from the customer. The forecasts for the contract have been
reassessed with the result being a net release of £2.1m due to both the favourable performance in the year and savings
expected in future years from a voluntary redundancy programme run in 2015; partially offset by lower RPI inflation on the
contract than previously forecast and costs relating to the purchase of a new vessel.
Prisoner Escort and Custody Services (PECS)
The contract provides prisoner transportation between courts and prisons and for the management of prisoner welfare when at
court for the Ministry of Justice (MOJ). It was awarded in 2011 and runs for seven years.
In 2015, utilisation of the OCP was slightly higher than originally expected. The contract is operated with a very
challenging KPI regime and in order to meet these KPIs we require a larger workforce than previous envisaged, along with
the associated recruitment, training and contract management costs; the forecast for the contact has been reassessed with
the result being an increase to the OCP of £11.3m. In the case of this contract, we have judged that it is unlikely that
the customer will wish to extend this contract beyond its minimum term in 2018 on the current basis. If this judgement
proves to be incorrect, further OCP charges may be required.
HMP Ashfield
The HMP Ashfield PFI contract commenced in 1999 and runs through to 2024. In 2013 the operational role of Ashfield changed
from a Young Offender Institution to an adult male sex offenders' prison, resulting in a changed cost base. Since the
change of operational role of the prison the MoJ has imposed a level of pricing that we dispute, and which would result in
substantial losses over the remaining life of the contract. Discussions with the MoJ around re-pricing proposals are
expected to conclude in 2016.
In 2015 performance has been slightly better than expected due to the benefit of in year cost savings. The forecast for the
contract has been reassessed with the result being a release of £8.7m due to the expected future ongoing benefits of the
cost reductions and efficiencies delivered in 2015.
Lincolnshire County Council
The Lincolnshire contract commenced in April 2014 with a transition phase expected to complete in March 2015 before full
operational services were due to commence in April 2015. The contract is for an initial five year term, commencing April
2015, with a further two extension periods of two years each exercisable at the customer's option.
The contract scope is to provide the following outsourced services: information management and technology services and
support; back office services including finance, HR and payroll services; and customer services acting as the internal and
external point of contact for Lincolnshire County Council and all Council services.
In 2015 the contract had difficulties implementing a new Enterprise Resource Planning (ERP) system and resolving these
issues has been more complex and protracted than originally anticipated. While we are making good progress, the full
implementation of the new system is not expected until later this year. The delay has impacted our ability to make the
wider service transformation changes needed to make the contract more efficient and also led to operational service
difficulties, triggering service credits. The issues have also resulted in the requirement to increase and maintain
additional management and support resources on the contract to remediate the problems faced.
As a result of these factors a charge totalling £34.0m was taken in 2015, comprising a provision for future losses over the
remaining term of the contract. In 2015 £5.3m of the provision was utilised against the impairment of assets. The in-year
losses incurred on the contract, of £5.2m, were recorded within Underlying Trading Profit.
The OCPs referred to above account for 76% of the total OCP balance as at 31 December 2015.
Other OCP movements in the year occurred across multiple sectors and geographies in which Serco operates and at 31 December
2015 there were no other OCPs that have expected cumulative future losses in excess of £15m.
The other movements include additional charges made in the Americas in respect of revised expectations and contract exits,
additional charges relating to our Hong Kong operations, a further provision on a UK Transport contract and new charges
made in respect of a Justice and Immigration contract in AsPac.
Other Contract and Balance Sheet Review items
In addition to the net charge of £3.0m impacting non-exceptional OCPs, there were other adjustments arising in the period
on items identified during the Contract and Balance Sheet Review. These adjustments relate to a number of items including:
· The releases of other provisions and accruals of £26.5m where liabilities have either been settled for less than
the amount provided or accrued or have lapsed due to the passage of time.
· The release of allowances for bad debts of £8.5m following the receipt of payments in respect of old outstanding
balances.
· Additional charges made in the year of £11.1m to increase provisions or settle further liabilities arising on
items identified during the Contract and Balance Sheet Review.
The overall net improvement to Trading Profit from OCPs and other Contract and Balance Sheet Review adjustments was
therefore £20.9m in the year.
Pensions
At 31 December 2015, the net retirement benefit asset included in the balance sheet arising from our defined benefit
pension scheme obligations was £94.8m (2014: £101.1m). The pension scheme asset base is £1.3bn (2014: £1.5bn).
Defined Benefit Pension SchemesAs at 31 December 2015£m 2014£m
Group schemes - non contract specific 115.6 130.5
Contract specific schemes (including franchise adjustment) - (4.0)
Net retirement benefit asset 115.6 126.5
Retirement benefit assets 127.1 143.9
Retirement benefit obligations (11.5) (17.4)
Deferred tax liabilities (20.8) (25.4)
Net retirement benefit asset (after tax) 94.8 101.1
Key assumptions:
Discount rate 3.80% 3.60%
Inflation rate of increase in pensions in payment 2.0% CPI and 3.0% RPI 2.0% CPI and 3.0% RPI
Life expectancy (years)
Current pensioners at 65 - male 87.6 87.5
Current pensioners at 65 - female 90.1 90.0
Future pensioners at 65 - male 89.4 89.3
Future pensioners at 65 - female 92.1 92.0
The Group provides a number of occupational defined benefit and defined contribution schemes for its employees. The
Group's principal defined benefit pension scheme is the Serco Pension and Life Assurance Scheme (SPLAS) and this had a
surplus of £127.1m (2014: £143.9m) calculated under IAS19 rules and is shown in the non-contract specific section of the
above table.
The decrease in the surplus was driven principally by a decrease in the value of Liability Driven Investment (LDI) assets
in the year. Certain LDI assets were transferred to a separate gilt portfolio in late December to back the longevity swap
and those gilts (£50m) still contribute to the Scheme's overall interest rate and inflation protection but do not fall
under the classification of LDI. Assets have also been disinvested to meet cashflow requirements (particularly member
benefits) over the year.
Of the total net retirement benefit asset of £115.6m (2014: £130.5m), of that related to non-contract specific schemes
there was a surplus of £127.1m (2014: £143.9m) in SPLAS, a deficit of £11.1m (2014: £13.1m) in the Serco Section of the
Railways Pension Scheme and a deficit of £0.4m (2014: £0.3m) in a small German pension scheme.
The last formal actuarial valuation of SPLAS was undertaken as at 5 April 2012 and showed a deficit of £24m. The estimated
actuarial deficit at 31 December 2015 was approximately £28m (2014: deficit £5m). The principal difference between the
actuarial valuation and the IAS19 valuation relates to the use of a lower discount rate applied to measure the scheme
liabilities for the actuarial basis. The main investments of this scheme are LDI assets that seek to reduce volatility by
matching the liabilities of the scheme for changes in interest and inflation rates through a combination of gilts and
corporate bonds with inflation and interest swap overlays.
In the period, Serco Caledonian Sleepers Ltd began to trade and the Serco Caledonian Sleeper Shared Cost Section of the
Railways Scheme became part of the Group. As at 31 December 2015 there was a nil deficit on the Serco Caledonian Sleeper
Shared Cost Section of the Railways Scheme contract after the franchise adjustment.
Pre-tax ROIC
Pre-tax ROIC is calculated as Trading Profit divided by the Invested Capital balance. Invested Capital represents the
assets and liabilities considered to be deployed in delivering the trading performance of the business. Of the total
assets on the balance sheet, Invested Capital assets are: goodwill and other intangible assets; property, plant and
equipment; interests in joint ventures; trade and other receivables; inventories; and assets classified as held for sale.
All other assets are excluded from Invested Capital, being: retirement benefit assets; tax assets; derivative financial
instruments; and cash and cash equivalents. Of the total liabilities on the balance sheet, Invested Capital liabilities
are trade and other payables and liabilities classified as held for sale. All other liabilities are excluded from Invested
Capital being: retirement benefit obligations; tax liabilities; provisions; obligations under finance leases; derivative
financial instruments; and loans.
In 2015 Invested Capital is calculated using the two-point average of the opening and closing balance sheets for the year.
For 2014 a single point was utilised due to the significant reduction in net assets during the year.
For 2015 the return from Underlying Trading Profit was 11.1%. The composition of Invested Capital and calculation of ROIC
is summarised in the table below.
Invested Capital and Pre-tax ROIC %
As at 31 December 2015 2014
£m £m
Non-current assets
Goodwill 509.9 541.5
Other intangible assets 89.8 118.8
Property, plant and equipment 73.2 38.4
Interest in joint ventures 13.8 1.6
Trade and other receivables 50.2 38.1
736.9 738.4
Current assets
Inventory 26.4 31.2
Trade and other receivables 519.7 498.8
Assets classified as held for sale 39.8 564.7
585.9 1,094.7
Total invested capital assets 1,322.8 1,833.1
Current liabilities
Trade and other payables (548.8) (581.9)
Assets classified as held for sale (32.5) (219.9)
Non-current liabilities
Trade and other payables (18.3) (29.7)
Total invested capital liabilities (599.6) (831.5)
Invested capital 723.2 1,001.6
Trading profit/(loss) 137.6 (632.1)
ROIC % 16.0% n/a
Underlying Trading Profit 96.0 113.2
ROIC % 11.1% 11.3%
Profit Forecast
On 11 March 2015, we issued profit forecast guidance based on a number of forecasting assumptions that were published in
the Group's Rights Issue Prospectus. Our Trading Profit results for the year, prepared on a comparable basis to the profit
forecast assumptions, are consistent with our reported Underlying Trading Profit of £96m. Hence, our results for the year
are broadly in line with the published Trading Profit forecast of around £90m.
Consolidated Income StatementFor the year ended 31 December
Continuing operations 2015 2014
Note £m £m
Revenue 3,177.0 3,595.7
Cost of sales (2,849.1) (3,661.4)
Gross profit/(loss) 327.9 (65.7)
Administrative expenses
General and administrative expenses (253.9) (573.0)
Exceptional loss on disposal of subsidiaries and operations 5,6 (2.6) (2.3)
Other exceptional operating items 6 (107.3) (323.4)
Other expenses - amortisation and impairment of intangibles arising on acquisition (4.8) (18.1)
Share of profits in joint ventures, net of interest and tax 4 37.0 30.0
Operating loss (3.7) (952.5)
Operating profit/(loss) before exceptional items 106.2 (626.8)
Investment revenue 7 6.1 4.6
Finance costs 8 (39.0) (42.6)
Exceptional finance costs 6 (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 credit on exceptional items 0.4 8.2
Tax (charge)/credit (17.5) 1.0
Loss for the year from continuing operations (86.9) (989.5)
Loss for the year from discontinued operations 2 (66.2) (357.6)
Loss for the year (153.1) (1,347.1)
Attributable to:
Equity owners of the Company (152.6) (1,347.3)
Non controlling interests (0.5) 0.2
Earnings per share (EPS)
Basic EPS from continuing operations 11 (8.78p) (151.12p)
Diluted EPS from continuing operations 11 (8.78p) (151.12p)
Basic EPS from discontinued operations 11 (6.69p) (54.54p)
Diluted EPS from discontinued operations 11 (6.69p) (54.54p)
Basic EPS from continuing and discontinued operations 11 (15.47p) (205.66p)
Diluted EPS from continuing and discontinued operations 11 (15.47p) (205.66p)
Consolidated Statement of Comprehensive IncomeFor the year ended 31 December
Note 2015£m 2014£m
Loss for the year (153.1) (1,347.1)
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 schemes1 (15.8) 52.8
Actuarial (loss)/gain on reimbursable rights1 (0.4) 13.5
Tax relating to items not reclassified1 4.1 (12.9)
Share of other comprehensive income in joint ventures 4 5.0 1.9
Items that may be reclassified subsequently to profit or loss:
Net exchange gain on translation of foreign operations2 (40.9) 24.9
Fair value gain/(loss) on cash flow hedges during the year2 2.2 (2.7)
Share of other comprehensive expense in joint ventures 4 2.6 (3.8)
Total other comprehensive income for the year (43.2) 73.7
Total comprehensive expense for the year (196.3) (1,273.4)
Attributable to:
Equity owners of the Company (195.9) (1,273.7)
Non-controlling interest (0.4) 0.3
Notes:
1 Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.
2 Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.
Consolidated Statement of Changes in Equity
Share capital Share premium account Capital redemption reserve Retained earnings Retirement benefit obligations reserve Share-based payment reserve Own shares reserve Hedging and translation reserve Total share Non-controlling interest
holders' equity
£m £m £m £m £m £m £m £m £m £m
At 1 January 2014 10.0 327.8 0.1 941.0 (142.4) 70.2 (70.5) (41.0) 1,095.2 0.7
Total comprehensive (expense) for the year - - - (1,349.2) 53.4 - - 22.1 (1,273.7) 0.3
Issue of share capital 1.0 - - 155.3 - - - - 156.3 -
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