REG - Serco Group PLC - 2015 half year results <Origin Href="QuoteRef">SRP.L</Origin> - Part 5
11/08/2015 07:01
- Part 5: For the preceding part double click ID:nRSK6452Vd
0.9 - (412.4) (21.5) (275.9)
* Acquisitions represent the net cash /(debt) acquired on acquisition.
15. Provisions
EmployeeRelated & Restructuring£m Property£m Contract£m Other£m Total£m
At 1 January 2014 (audited) 15.7 5.3 25.9 14.2 61.1
Recognised on acquisition of subsidiary - 0.1 - - 0.1
Charged to income statement - exceptional 4.5 2.2 5.5 7.5 19.7
Charged to income statement - other 1.9 0.2 6.5 1.5 10.1
Released to income statement (0.2) (0.4) (3.5) (3.7) (7.8)
Utilised during the year (1.4) (0.8) (10.0) (2.1) (14.3)
Unwinding of discount - 0.1 - - 0.1
Exchange differences (0.3) (0.2) - (0.2) (0.7)
At 30 June 2014 (unaudited) 20.2 6.5 24.4 17.2 68.3
Reclassified from trade and other receivables* - - (3.9) - (3.9)
Recognised on acquisition of subsidiary 0.2 - - - 0.2
Charged to income statement - exceptional 4.3 - 13.9 50.2 68.4
Charged to income statement - other 17.9 14.9 450.2 40.0 523.0
Released to income statement - 0.3 - (0.5) (0.2)
Utilised during the year (6.3) (0.9) (26.3) (3.0) (36.5)
Transferred to trade payables - - - (8.2) (8.2)
Assets held for sale (1.7) - (21.5) (6.8) (30.0)
Exchange differences 0.5 0.7 (6.4) 2.0 (3.2)
At 31 December 2014 (audited) 35.1 21.5 430.4 90.9 577.9
Charged to income statement - exceptional 1.9 - - 0.1 2.0
Charged to income statement - other 4.0 0.2 14.4 6.8 25.4
Released to income statement - exceptional (1.0) - (0.3) - (1.3)
Released to income statement (0.4) (0.2) (9.3) (6.6) (16.5)
Utilised during the year (5.6) (1.6) (68.7) (1.2) (77.1)
Assets held for sale (7.1) - (4.0) - (11.1)
Unwinding of discount - 0.1 2.8 - 2.9
Exchange differences (0.6) 0.2 (8.9) (0.4) (9.7)
At 30 June 2015 (unaudited) 26.3 20.2 356.4 89.6 492.5
Analysed as:
Current 4.6 5.5 80.6 56.5 147.2
Non current 21.7 14.7 275.8 33.1 345.3
*£3.9m has been reclassified from accrued income in 2014.
Total provisions held by the Group at 30 June 2015 amount to £527.9m (30 June 2014: £68.3m; 31 December 2014: £607.9m) and
include £492.5m (30 June 2014: £68.3m; 31 December 2014: £577.9m) shown above and £35.4m (30 June 2014: £nil; 31 December
2014: £30.0m) included within amounts held for sale on the balance sheet.
Contract provisions relate to loss making onerous contracts. The present value of the estimated future cash outflows
required to settle the contract obligations as they fall due over the life of the contracts has been used in determining
the provision. The individual provisions are discounted where the impact is assessed to be material.
There remains a level of uncertainty over the amount and timing of the related cash flows and the judgements relating to
the onerous contract provisions are being reassessed every six months. In the six months to 30 June 2015 there have been
four contract where the provisions have been increased and two where provisions have been released.
Employee related provisions are for long-term service awards and terminal gratuities liabilities which have been accrued
and are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until
retirement and receive all relevant amounts. There are also amounts included in relation to restructuring.
Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs
associated with the lease exceed the economic benefits expected to be generated in the future. The provision has been
calculated based on the discounted cash outflows required to settle the lease obligations as they fall due.
Other provisions are held for legal and other costs that the Group expects to incur over an extended period. These costs
are based on past experience of similar items and other known factors and represent management's best estimate of the
likely outcome.
16. Financial Instruments
The classification of the fair value measurement falls into three levels, based on the degree to which the fair value is
observable. The levels are as follows:
Level 1: derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: derived from other observable market data for the assets or liabilities; and
Level 3: derived from valuation techniques using data that is not based on observable market data.
Based on the above, the derivative financial instruments held by the Group at 30 June 2015, are considered to fall into
Level 2. There have been no transfers between levels in the year.
The Group held the following financial instruments:
Carrying amount (measurement basis) Comparison fair value Carrying amount (measurement basis) Comparison fair value
Amortised cost Fair value - Level 2 Level 2 Amortised cost Fair value - Level 2 Level 2
6 months ended 30 June 2015(unaudited) 6 months ended 30 June 2015(unaudited) 6 months ended 30 June 2015(unaudited) Year ended 31 December 2014(audited) Year ended 31 December 2014(audited) Year ended 31 December 2014(audited)
£m £m £m £m £m £m
Financial assets - current
Cash and bank balances 157.1 - 157.1 180.1 - 180.1
Derivatives designated as FVTPL
Forward foreign exchange contracts - 2.2 - - 5.6 -
Derivative instruments in designated hedge accounting relationships:
Cross currency swaps - 1.2 - - 0.1 -
Forward foreign exchange contracts - - - - 0.2 -
Trade receivables 201.1 - 201.1 146.8 - 146.8
Loan receivables 0.9 - 0.9 1.0 - 1.0
Security deposits 0.2 - 0.2 0.2 - 0.2
Amounts owed by joint ventures 0.1 - 0.1 0.1 - 0.1
Financial assets - non-current
Derivative instruments in designated hedge accounting relationships:
Cross currency swaps - 3.3 - - 7.0 -
Other investments 3.4 - 3.4 3.9 - 3.9
Amounts owed by joint ventures 8.6 - 8.6 9.0 - 9.0
Financial liabilities - current
Derivatives designated as FVTPL
Forward foreign exchange contracts - (3.3) - - (17.3) -
Derivative instruments in designated hedge accounting relationships:
Cross currency swaps - (0.1) - - (0.3) -
Forward foreign exchange contracts - (10.9) - - (0.1) -
Trade payables (89.9) - (89.9) (99.8) - (99.8)
Loans (34.9) - (35.2) (43.9) - (43.9)
Obligations under finance leases (9.0) - (9.0) (9.6) - (9.6)
Financial liabilities - non-current
Loans (377.5) - (369.4) (753.4) - (762.9)
Obligations under finance leases (12.5) - (12.5) (16.9) - (16.9)
16. Financial instruments (continued)
Carrying amount (measurement basis) Comparison fair value
Amortised cost Fair value - Level 2 Level 2
6 months ended 30 June 2014(unaudited) 6 months ended 30 June 2014(unaudited) 6 months ended 30 June 2014(unaudited)
£m £m £m
Financial assets - current
Cash and bank balances 220.8 - 220.8
Forward foreign exchange contracts designated as FVTPL - 0.8 -
Derivative financial instruments in designated hedge accounting relationships:
Cross currency swaps - 0.6 -
Trade receivables 244.3 - 244.3
Loan receivables 2.4 - 2.4
Security deposits 0.1 - 0.1
Amounts owed by joint ventures 0.1 - 0.1
Financial assets - non-current
Derivative financial instruments in designated hedge accounting relationships:
Cross currency swaps - 0.7 -
Loan receivables 3.1 - 3.1
Other investments 0.6 - 0.6
Amounts owed by joint ventures 9.3 - 9.3
Financial liabilities - current
Forward foreign exchange contracts designated as FVTPL - (3.9) -
Derivative instruments in designated hedge accounting relationships:
Cross currency swaps - (0.7) -
Forward foreign exchange contracts - (12.1) -
Trade payables (160.9) - (160.9)
Loans (34.8) - (36.4)
Obligations under finance leases (15.2) - (15.2)
Financial liabilities - non-current
Derivative instruments in designated hedge accounting relationships:
Cross currency swaps - (4.0) -
Forward foreign exchange contracts - (13.2) -
Loans (709.0) - (715.1)
Obligations under finance leases (48.1) - (48.1)
The Directors estimate that the carrying amounts of cash, trade receivables and trade payables approximate to their fair
value due to the short-term maturity of these instruments.
The fair values of loans and finance lease obligations are based on cash flows discounted using a rate based on the
borrowing rate associated with the tenor of the liability.
The fair value of derivatives is calculated using a discounted cash flow approach applying discount factors derived from
observable market data to actual and estimated future cash flows. Credit risk is considered in the calculation of these
fair values.
17. Defined Benefit Schemes
The cost included in operating profit in the period is £7.0m (30 June 2014: £12.5m, 31 December 2014: £24.6m). Included in
investment income and finance costs is a credit of £2.5m (30 June 2014: £1.5m, 31 December 2014: £3.1m) relating to the net
interest income on our consolidated pension schemes.
Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The estimated
actuarial deficit of SPLAS as at 30 June 2015 was approximately £9.0m (30 June 2014: £2.0m; 31 December 2014: £5.0m). The
most recent full actuarial valuation of this scheme was undertaken as at 5 April 2012 and resulted in an actuarially
assessed deficit of £24m. Following this review, the Group agreed with the Trustees to a small increase in contributions,
bringing cash contributions up to 33% of members' pensionable salaries until 2021. The level of benefits and contributions
under the scheme is kept under continual review in light of the needs of the business and changes to pension legislation.
Contract specific Non-contract specific Total
At 30 June 2015 (unaudited) £m £m £m
Fair value of scheme assets 30.3 1,327.4 1,357.7
Present value of scheme liabilities (33.5) (1,204.9) (1,238.4)
Net retirement benefit (obligation)/asset (3.2) 122.5 119.3
Analysed as:
Retirement benefit obligations (3.2) (11.3) (14.5)
Retirement benefit assets - 133.8 133.8
Contract specific Non-contract specific Total
At 31 December 2014 (audited) £m £m £m
Fair value of scheme assets 134.4 1,361.8 1,496.2
Present value of scheme liabilities (161.3) (1,231.3) (1,392.6)
Net amount recognised (26.9) 130.5 103.6
Franchise adjustment 22.9 - 22.9
Net retirement benefit (obligation)/asset (4.0) 130.5 126.5
Analysed as:
Retirement benefit obligations (4.0) (13.4) (17.4)
Retirement benefit assets - 143.9 143.9
Contract specific Non-contract specific Total
At 30 June 2014 (unaudited) £m £m £m
Fair value of scheme assets 239.4 1,201.7 1,441.1
Present value of scheme liabilities (287.3) (1,126.5) (1,413.8)
Net amount recognised (47.9) 75.2 27.3
Members' share of deficit - 3.7 3.7
Franchise adjustment 44.4 - 44.4
Net retirement benefit (obligation)/asset (3.5) 78.9 75.4
Analysed as:
Retirement benefit obligations (3.5) (5.9) (9.4)
Retirement benefit assets - 84.8 84.8
Related assets:
Intangible assets 0.3 - 0.3
17. Defined Benefit Schemes (continued)
At 30 June 2015(unaudited)% At 31 December 2014(audited)% At 30 June 2014(unaudited)%
Main assumptions:
Rate of salary increases 2.70 2.70 3.00
Rate of increase in pensions in payment (CPI) 2.10 2.00 2.30
Rate of increase in pensions in payment (RPI) 3.10 3.00 3.30
Rate of increase in deferred pensions (CPI) 2.20 2.10 2.40
Rate of increase in deferred pensions (RPI) 3.20 3.10 3.40
Inflation assumption (CPI) 2.20 2.10 2.40
Inflation assumption (RPI) 3.20 3.10 3.30
Discount rate 3.80 3.60 4.30
At 30 June 2015(unaudited)Years At 31 December 2014 (audited)Years At 30 June 2014(unaudited)Years
Post-retirement mortality:
Current pensioners at 65 - male 22.5 22.5 22.5
Current pensioners at 65 - female 25.0 25.0 25.0
Future pensioners at 65 - male 24.3 24.3 24.3
Future pensioners at 65 - female 27.0 27.0 27.0
Pension assumption sensitivities
Assumption Change in assumption Change in present value of scheme liabilities 30 June 2015 Change in present value of scheme Liabilities 31 December 2014 Change in present value of scheme liabilities 30 June 2014
Discount rate 3.8% +0.5% (8%) (9%) (8%)
(0.5%) +9% +10% +9%
Inflation 3.2% (RPI) and 2.2% (CPI) +0.5% +8% +9% +8%
(0.5%) (8%) (8%) (8%)
Rate of salary increase 2.7% +0.5% +1% +1% +1%
(0.5%) (1%) (1%) (1%)
Mortality 22.5 - 27.0 Increase by one year +2% +2% +2%
*Post retirement mortality range for male and female, current and future pensioners.
18. Contingent Liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value
of £25.7m (30 June 2014; £26.5m: 31 December 2014: £26.2m). The actual commitment outstanding at 30 June 2015 was £20.9m
(30 June 2014: £22.7m; 31 December 2014: £21.4m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 30 June
2015 was £196.6m (30 June 2014: £224.8m; 31 December 2014: £192.1m).
The Group is aware of other claims and potential claims which involve or may involve legal proceedings against the Group.
The Directors are of the opinion, having regard to legal advice received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material effect on the Group's financial position.
On 31 May 2011, a claim was filed with the Authority for Advance Rulings to seek to confirm that Serco was not required to
withhold Indian income tax from the purchase price on the acquisition of Intelenet. The AAR declined to rule on the
matter. Serco has therefore filed a claim with the High Court to decide on the matter or direct the AAR to rule on the
matter. The High Court has currently reserved judgment. Should the matter be decided against Serco, it would be liable for
unprovided tax of £27m together with accrued interest to 30 June 2015 of £12.5m. Having taken appropriate professional
advice, Serco considers it likely that it will ultimately be successful in this matter.
19. Notes to the Consolidated Cash Flow Statement
Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
Six months ended 30 June 2015Before Exceptional Items(unaudited)£m Six months ended 30 June 2015Exceptional Items(unaudited)£m Six months ended 30 June 2015Total(unaudited)£m Six months ended 30 June 2014Before Exceptional Items(restated)(unaudited)£m Six months ended 30 June 2014Exceptional Items (unaudited)£m Six months ended 30 June 2014Total(restated)(unaudited)£m
Operating profit/(loss) for the year 59.8 (84.6) (24.8) 57.5 (29.4) 28.1
Adjustments for:
Share of profits in joint ventures (13.9) - (13.9) (13.8) - (13.8)
Non cash items:
Share-based payment expense 4.1 - 4.1 3.1 - 3.1
Exceptional impairment of assets held for sale - 70.7 70.7 - - -
Exceptional impairment of property, plant and equipment - 0.8 0.8 - 4.6 4.6
Impairment of property, plant and equipment - other 1.6 - 1.6 - - -
Exceptional impairment of other intangibles - 0.4 0.4 - - -
Depreciation of property, plant and equipment 10.8 - 10.8 22.8 - 22.8
Amortisation of intangible assets 14.5 - 14.5 19.1 - 19.1
Exceptional loss/(profit) on disposal of subsidiariesand operations - 4.9 4.9 - (2.2) (2.2)
Impairment of loan receivable (0.2) - (0.2) - - -
Loss/(profit) on disposal of property, plant and equipment 0.2 - 0.2 (0.2) - (0.2)
Loss on disposal of intangible assets 0.6 - 0.6 0.1 - 0.1
(Decrease)/increase in provisions (53.3) (18.5) (71.8) 0.2 11.3 11.5
Other non cash movements 14.5 - 14.5 (19.6) - (19.6)
Total non cash items (7.2) 58.3 51.1 25.5 13.7 39.2
Operating cash inflow/(outflow) before movements in working capital 38.7 (26.3) 12.4 69.2 (15.7) 53.5
Increase in inventories (3.9) - (3.9) (3.6) - (3.6)
Increase in receivables (96.9) 3.4 (93.5) (68.7) - (68.7)
Increase/(decrease) in payables 29.3 (18.6) 10.7 74.8 (1.1) 73.7
Movements in working capital (71.5) (15.2) (86.7) 2.5 (1.1) 1.4
Cash generated by operations (32.8) (41.5) (74.3) 71.7 (16.8) 54.9
Tax (paid)/repaid (7.7) - (7.7) 4.1 - 4.1
Non cash R&D expenditure credit (0.3) - (0.3) - - -
Net cash (outflow)/inflow from operating activities (40.8) (41.5) (82.3) 75.8 (16.8) 59.0
19. Notes to the Consolidated Cash Flow Statement (continued)
Year ended 31 December 2014Before Exceptional Items(audited)£m Year ended 31 December 2014Exceptional Items(audited)£m Year ended 31 December 2014Total(audited)£m
Operating loss for the year (655.8) (661.5) (1,317.3)
Adjustments for:
Share of profits in joint ventures (30.0) - (30.0)
Non cash items:
Share-based payment expense 5.4 - 5.4
Exceptional impairment of goodwill - 466.0 466.0
Exceptional impairment of property, plant and equipment - 18.6 18.6
Exceptional impairment of intangible assets - 6.0 6.0
Impairment and write down of intangible assets - other 38.6 - 38.6
Impairment of property, plant and equipment - other 22.1 - 22.1
Depreciation of property, plant and equipment 41.8 - 41.8
Amortisation of intangible assets 38.7 - 38.7
Exceptional loss on disposal of subsidiariesand operations - 0.8 0.8
Exceptional impairment of loan receivable - 4.6 4.6
Loss on disposal of intangible assets 0.2 - 0.2
Increase in provisions 472.6 85.5 558.1
Increase in deferred consideration in relationto prior year acquisition 4.0 - 4.0
Impairment of working capital items (non-cash) 148.8 - 148.8
Total non cash items 772.2 581.5 1,353.7
Operating cash inflow/(outflow) before movements in working capital 86.4 (80.0) 6.4
Increase in inventories (1.4) - (1.4)
Decrease in receivables 8.7 18.8 27.5
Increase in payables 9.7 20.8 30.5
Movements in working capital 17.0 39.6 56.6
Cash generated by operations 103.4 (40.4) 63.0
Tax repaid 0.6 - 0.6
Non cash R&D expenditure credit (0.5) - (0.5)
Net cash inflow/(outflow) from operating activities 103.5 (40.4) 63.1
20. 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 are
disclosed below.
Six months ended30 June 2015(unaudited)£m Six months ended30 June 2014(unaudited)£m Year ended 31 December 2014(audited)£m
Royalties and management fees receivable 1.6 0.9 1.7
Dividends receivable 15.8 14.7 34.8
17.4 15.6 36.5
The following receivable balances were held relating to joint ventures:
At 30 June2015(unaudited)£m At 30 June2014(unaudited)£m At 31 December2014(audited)£m
Current:
Loans and other receivables 0.1 0.1 0.1
Non-current:
Loans and other receivables 8.6 9.3 9.0
21. Assets Held For Sale
As part of the Strategic Review, certain assets and liabilities have been designated as non-core and are held for sale. As
at 30 June 2015, the following businesses have been disclosed as held for sale: the UK environmental and leisure
businesses, the offshore private sector BPO business and the majority of the UK private sector BPO business.
While a significant portion of the Global Services CGU has been transferred to held for sale, as it does not represent the
whole of a separate line of business, it is not appropriate to treat as a discontinued operation.
At 30 June2015 At 31 December 2014
£m £m
Assets
Goodwill 206.8 279.1
Other intangible assets 24.9 5.0
Property, plant and equipment 74.3 94.5
Deferred tax assets 10.4 11.0
Other non current assets 18.6 26.8
Inventories 1.1 2.7
Current tax - 4.2
Cash and cash equivalents 18.9 22.4
Other current assets 118.3 119.0
Assets classified as held for sale 473.3 564.7
Liabilities
Other current liabilities (72.5) (96.1)
Current tax liabilities (21.9) (21.8)
Provisions (35.4) (30.0)
Obligations under finance leases (33.3) (37.1)
Loans - (24.8)
Deferred tax liabilities (2.5) (2.5)
Other non current liabilities (0.5) (7.6)
Liabilities directly associated with assets classified as held for sale (166.1) (219.9)
22. Post Balance Sheet Events
On 20 July 2015, a termination agreement was signed with Thurrock Council, under the terms of which both parties are
working towards a termination date of 30 November 2015 and Thurrock Council will pay £9.9m compensation for asset
impairments, stranded and committed costs and lost future profits. The impact of the settlement will be reflected when the
transition has been completed, after taking into account the transfer of the obligations under the related defined benefit
pension scheme.
Directors' responsibilities
Sir Roy Gardner Non-Executive Chairman
Rupert Soames OBE Group Chief Executive
Edward J Casey, Jr Group Chief Operating Officer
Angus Cockburn Group Chief Financial
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