REG - Serco Group PLC - 2016 Half Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
04/08/2016 07:09
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end of 2018, there are 10 contracts with annual revenue of over £5m within the AsPac division; in aggregate, these
represent approximately 30% of the current level of annual revenue for the division.
Our pipeline of major new bid opportunities due for decision within the next 24 months now includes additional prison
opportunities in New South Wales. The potential opportunity for work related to Australian offshore immigration detention
services has not been included in the pipeline. Looking beyond, further potential opportunities in Justice, Citizen
Services, Defence, Transport and non-clinical health services are expected to be developed over time.
Middle East
Operations in the Middle East division include Transport, Defence, Health and Citizen Services.
Revenue in the period was £153.9m (2015: £143.9m), an increase of 7%. The strengthening of local currency against Sterling
provided growth of £8m or 5%; the organic growth at constant currency was 2%. There was revenue growth from the
annualisation effect of the Saudi Railway Company contract which Serco began operating in late February 2015, from volume
growth on a defence logistics contract and from expansion of healthcare support services; these were broadly offset by
reduced revenue on the Dubai Air Navigation Services contract and a small number of other operations reducing in scope or
ending.
Underlying Trading Profit was £9.7m (2015: £10.0m), representing a margin of 6.3% (2015: 6.9%). There was some improvement
in profitability from higher defence logistics volumes and the £0.6m favourable currency movement; these were more than
offset by the impact of other contract reductions and attrition, together with investment in business development and
bidding. Within Underlying Trading Profit, OCP utilisation was immaterial.
Contract and Balance Sheet Review adjustments resulted in a £1.8m net release in the period. After these adjustments,
Trading Profit was £11.5m.
The Middle East represented a small proportion of the Group's aggregate total value of signed contracts in the period, with
no major new bid pipeline decisions due. Amongst smaller rebids and extensions secured was a further extension for Baghdad
Air Navigation Services.
For 2016 as a whole, we continue to expect the impact from known contract losses or other revenue reductions to be broadly
offset by increases in revenue elsewhere; including the estimated effect of a favourable currency movement, the overall
reported revenue could therefore increase by around £30m or 10%. Of existing work where an extension or rebid will be
required at some point before the end of 2018, there are 7 contracts with annual revenue of over £5m within the Middle East
division; in aggregate, these represent approximately 35% of the current level of annual revenue for the division.
Our pipeline of major new bid opportunities due for decision within the next 24 months includes three major light rail and
tram operations in the region; in aggregate, these represent approximately 30% of the value of the Group's pipeline.
Further opportunities in defence training services and in non-clinical health facilities management support have also been
added in the period under review.
Americas
Our Americas division provides professional, technology and management services focused on Defence, Transport, and Citizen
Services. The US federal government, including the military, civilian agencies and the national intelligence community,
are our largest customers. We also provide services to the Canadian Government and to some US state and municipal
governments.
Revenue in the period was £328.9m (2015: £357.9m), a decline of 8%. In US dollars, the main currency for operations of the
division, revenue for the period was equivalent to approximately US$470m (2015: US$550m). The strengthening of the US
dollar provided growth of £16m or 4%, with the organic decline at constant currency being 12%. The principal drivers of
the revenue reduction were the loss of the rebid for record processing at the National Benefits Centre, some reduced work
areas on the US Affordable Care Act eligibility processing services contract and the transition back to the customer of the
VDOT operations, together with a number of other smaller contract ends, or reductions in the volume of workload or task
orders. There was limited growth elsewhere to offset these reductions.
Underlying Trading Profit was £19.6m (2015: £25.7m), representing a margin of 6.0% (2015: 7.2%). The decline was driven by
contract attrition and the timing of certain costs, which was only partially offset by the £1.1m favourable currency
movement and other cost efficiencies. Within Underlying Trading Profit there was £5m (2015: £1m) of OCP utilisation on the
completed VDOT contract and the Ontario Driver Examination Services contract.
Contract and Balance Sheet Review adjustments resulted in a £2.8m net charge in the period. This was driven by estimate
revisions to costs associated with the IT systems implementation on the Ontario Driver Examination Services contract.
After the Contract and Balance Sheet Review adjustments, Trading Profit was £16.8m.
Americas represented over £150m or approximately 20% of the Group's aggregate total value of signed contracts during the
period. Awards for new work included a US Air Force High Altitude Electromagnetic Pulse (HEMP) Protection of Ballistic
Missile Early Warnings Systems radar facility upgrade contract at Thule Air Base in Greenland, and a support contract for
the US State of Louisiana Department of Transportation (LADOT) Motorist Assistance Program. Other ship and shore/base
modernisation services awarded during the period totalled over US$60m.
For 2016 as a whole, we expect the net impact of known contract losses and other revenue movements to result in a revenue
decline of around £70m at constant currency; this decline is expected to be broadly offset by the estimate of beneficial
foreign exchange movements. The estimate remains susceptible to the prevailing volume of task orders and other contracts
where operational scale can change in the short term, as well as any further movement in foreign exchange rates. Of
existing work where an extension or rebid will be required at some point before the end of 2018, there are 3 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, with the relatively high proportion reflecting that the US Affordable Care Act
contract which becomes due in 2018.
Our pipeline of major new bid opportunities due for decision within the next 24 months continues to include passport
processing for the Department of State and an increase in opportunities to provide various support functions to the US
Navy. Other bids in transport operational support, Citizen Services processing and immigration services have also been
added.
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.
Corporate costs in the period, before Contract and Balance Sheet Review adjustments, were £17.8m (2015: £25.5m). The
reduction was driven by the non-recurrence of programme establishment costs and actions taken to improve the efficiency of
our overall operating model.
Contract and Balance Sheet Review adjustments resulted in a £0.7m net charge in the period. After these adjustments,
Corporate Costs within Trading Profit were £18.5m.
Global Services (discontinued operations)
The Global Services division consists of Serco's private sector BPO business, performing middle and back office functions
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
exiting these private sector BPO operations. On 31 December 2015, the transaction to dispose of the majority of the
offshore private sector BPO operations was completed; the businesses sold contributed over £300m of revenue and £23m of
Underlying Trading Profit in 2015, and were sold for a gross consideration of approximately £250m. There were two smaller
associated transactions relating to operations in the Middle East, one of which was completed in the first half of 2016
with the other expected to complete in the coming months. 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 £24.7m (2015: £176.6m), with the decline reflecting the disposals and transfers completed in 2015 and the
managed exit of a further number of smaller loss-making contracts in the UK during the latest period.
Underlying Trading Loss was £4.2m (2015: Underlying Trading Profit of £2.1m). The loss in the period reflects the residual
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. Within Underlying Trading Profit, there was £3m of OCP
utilisation, which was broadly in line with our expectations.
Contract and Balance Sheet Review adjustments resulted in a £0.9m net release in the period. As the division included
assets designated as held for sale, there is a benefit of not charging depreciation and amortisation of £0.2m. After these
Contract and Balance Sheet Review adjustments and held for sale benefits, the Trading Loss was £3.1m.
We are running ahead of our plans to mitigate the losses and stranded costs; with a further reduction in the run-rate
expected in the second half, there should be no material residual effect beyond the end of the year. Having transferred
the Freeman Grattan Holdings and BrightHouse contracts together with the associated Sheffield facilities to a new provider
during the period, the only remaining contracts are those for life and pensions company Aegon and direct home shopping
company JD Williams.
Finance Review
Overview of Financial Performance
Six months ended 30 June 2016 Six months ended 30 June 2015(restated*) Year ended 31 December 2015
£m £m £m
Revenue - including discontinued operations 1,517.9 1,789.3 3,514.6
Less: Revenue from discontinued operations (24.7) (176.6) (337.6)
Revenue 1,493.2 1,612.7 3,177.0
Underlying Trading Profit 51.0 46.9 96.0
Onerous contract and Balance Sheet Review adjustments 17.0 5.5 20.9
Benefit from non-depreciation and non-amortisation of assets held for sale 0.2 10.3 11.7
Other one-time items 3.5 - 9.0
Trading Profit on continuing and discontinued operations 71.7 62.7 137.6
Other expenses - amortisation and impairment of intangibles arising on acquisition (2.0) (2.9) (4.9)
Operating profit before exceptional items on continuing and discontinued operations 69.7 59.8 132.7
Less: Operating loss/(profit) before exceptional items arising on discontinued operations 3.2 (6.4) (26.5)
Operating profit before exceptional items 72.9 53.4 106.2
Exceptional loss on disposal of subsidiaries and operations (0.9) (4.9) (2.6)
Other exceptional operating items (6.8) (11.7) (107.3)
Exceptional operating items (7.7) (16.6) (109.9)
Operating profit/(loss) 65.2 36.8 (3.7)
Investment income 4.7 2.8 6.1
Other finance costs (11.8) (22.8) (39.0)
Exceptional finance costs - (32.8) (32.8)
Total net finance costs (7.1) (52.8) (65.7)
Profit/(loss) before tax 58.1 (16.0) (69.4)
Tax on profit before exceptional items (3.7) (9.6) (17.9)
Tax on exceptional items (0.1) 0.3 0.4
Tax (3.8) (9.3) (17.5)
Profit/(loss) for the period from continuing operations 54.3 (25.3) (86.9)
Discontinued operations
Loss from discontinued operations for the period (7.9) (66.4) (66.2)
Profit/(loss) for the period 46.4 (91.7) (153.1)
Underlying trading margin from continuing and discontinued operations 3.4% 2.6% 2.7%
Underlying earnings per share from continuing and discontinued operations 3.70p 1.57p 3.44p
Earnings per share before exceptional items from continuing and discontinued operations 5.40p 2.89p 6.55p
Earnings/(loss) per share from continuing and discontinued operations 4.27p (10.32p) (15.47p)
*restated to reflect discontinued operations.
Revenue
Revenue declined by 7.4% in the six months ended 30 June 2016 to £1,493.2m (six month ended June 2015: £1,612.7m), a 9.0%
reduction in constant currency.
Revenue including that arising from operations classified as discontinued declined by 15.2% in the six months ended 30 June
2016 to £1,517.9m (six month ended June 2015: £1,789.3m), a 16.6% reduction in constant currency.
Commentary on the revenue performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews
sections above.
Trading Profit
Trading Profit is defined as operating profit as shown on the face of the Consolidated Income Statement before amortisation
and impairment costs of intangibles arising on acquisitions and exceptional items, adjusted to include the Trading Profit
arising on discontinued operations. By their nature, neither of the items are driven by the trading performance of the
business and while discontinued operations will not form part of future trading performance, inclusion is necessary to
understand historic trends.
Trading Profit increased in the six months ended 30 June 2016 to £71.7m (six month ended June 2015: £62.7m) and includes
the Trading Loss on discontinued operations of £3.1m (six month ended June 2015: Trading Profit £6.4m).
Underlying Trading Profit
Underlying Trading Profit is defined as Trading Profit adjusted to exclude charges and releases made to Onerous Contract
Provisions (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. OCP movements and the impact of the 2014 Contract and Balance Sheet Review items reflect the management of historic
issues rather than the underlying performance of the business, while adding back depreciation and amortisation on assets
classified as held for sale removes an artificial benefit. These adjustments aid the understanding of historic trends.
Underlying Trading Profit for the six months ended 30 June 2016 was £51.0m, an increase of 8.7%. At constant currency,
Underlying Trading Profit was £49.6m. 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 for the six months ended 30 June 2016 were net releases from OCPs of £13.4m (six
months ended 30 June 2015: net charge £7.7m). Also excluded from Underlying Trading Profit were net releases of £3.6m (six
month ended June 2015: £13.2m) that related 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
the six months ended 30 June 2016 depreciation and amortisation of £0.2m (six month ended June 2015: £10.3m) on assets
classified as held for sale were not charged to operating profit.
Other one-time items relate to the early termination of a UK Local Authority contract in 2015 in lieu of anticipated
profits in future years, net of direct costs, impairments and other charges. In the six months ended 30 June 2016 the
other one time profit recorded relates to a pension scheme settlement in respect of the same contract which was agreed in
the period.
Discontinued Operations
The Global Services division, representing UK onshore and offshore private sector BPO operations, was classified as a
discontinued operation in 2015. The completion of the sale of the majority of the offshore private sector BPO business
occurred on 31 December 2015. Disposal of one of the two remaining elements of the offshore business was completed in March
2016 with the final element expected to complete prior to 31 December 2016.
The UK onshore private sector BPO businesses have either been sold, are planned to be sold, or have been exited early.
Those businesses remaining at 30 June 2016 are expected to be disposed of within the next twelve months.
The results of discontinued operations were as follows:
Six months ended 30 June 2016 Six months ended 30 June 2015 Year ended 31 December 2015
£m £m £m
Revenue 24.7 176.6 337.6
Underlying Trading (Loss)/Profit (4.2) 2.1 14.3
Onerous contract and Balance Sheet Review adjustments 0.9 (1.9) 0.6
Benefit from non-depreciation and non-amortisation of assets held for sale 0.2 6.2 11.7
Trading (Loss)/Profit (3.1) 6.4 26.6
Other expenses - amortisation and impairment of intangibles arising on acquisition (0.1) - (0.1)
Operating (loss)/profit before exceptional items (3.2) 6.4 26.5
Exceptional (loss)/gain on disposal of subsidiaries and operations (0.3) - 5.4
Other exceptional operating items (3.9) (68.0) (83.0)
Operating loss (7.4) (61.6) (51.1)
Investment revenue - 1.5 2.1
Finance costs - (0.1) (1.2)
Exceptional finance costs (0.4) - -
Loss before tax (7.8) (60.2) (50.2)
Tax on loss before exceptional items (0.1) (6.2) (18.7)
Tax on exceptional items - - 2.7
Net loss on discontinued operations (attributable to equity owners of the Company) as presented in the income statement (7.9) (66.4) (66.2)
Joint Ventures - Share of Results
During the six months ended 30 June 2016 the most significant joint ventures were AWE Management Limited and Northern Rail
Holdings Limited. In the six months ended 30 June 2016 dividends of £12.2m (six months ended 30 June 2015: £9.8m) and £4.0m
(six months ended 30 June 2015: £2.0m) respectively were received from these companies. The Northern Rail franchise ended
on 1 April 2016.
In March 2016 it was agreed in principle that there would be a change in the AWE Management Limited shareholding structure,
with the Group's shareholding reducing from 33.3% to 24.5% and Lockheed Martin taking a majority holding. The legal process
is expected to complete in the second half of 2016.
While the revenues and individual line items are not consolidated in the Group Consolidated Income Statement, summary
financial performance measures of the aggregate of all joint ventures are set out below for information purposes.
Six months ended 30 June 2016 Six months ended 30 June 2015 Year ended 31 December 2015
£m £m £m
Revenue 293.6 363.9 737.2
Operating profit 21.4 15.9 42.6
Net finance costs (0.3) (0.2) (0.4)
Tax expense (3.4) (1.8) (5.2)
Profit after tax 17.7 13.9 37.0
Dividends received from joint ventures 19.7 15.8 32.5
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 their size or nature. As such, the items set out below require separate
disclosure on the face of the Consolidated 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.
Six months ended 30 June 2016 Six months ended 30 June 2015 Year ended 31 December 2015
£m £m £m
Exceptional items arising on continuing operations
Exceptional loss on disposal of subsidiaries and operations (0.9) (4.9) (2.6)
Other exceptional operating items
Impairment of goodwill - - (87.5)
Restructuring costs (6.2) (6.9) (19.7)
Aborted transaction costs 0.3 - (1.7)
Costs associated with UK Government reviews (0.9) (0.1) (1.2)
UK frontline clinical health contract provisions - - 2.8
Impairment of assets transferred to held for sale - (4.7) -
Other exceptional operating items (6.8) (11.7) (107.3)
Exceptional operating items arising on continuing operations (7.7) (16.6) (109.9)
Exceptional items arising on discontinued operations
Exceptional (loss)/gain on disposal (0.3) - 5.4
Other exceptional operating items
Restructuring costs (0.4) (2.6) (2.2)
Impairment of goodwill - (65.4) (65.9)
Impairment of other assets transferred to held for sale 4.3 - (14.9)
Movements in indemnities provided on business disposals (7.8) - -
Other exceptional operating items (3.9) (68.0) (83.0)
Exceptional operating items arising on discontinued operations (4.2) (68.0) (77.6)
Exceptional operating items arising on continuing and discontinued operations (11.9) (84.6) (187.5)
Exceptional Loss on Disposal of Businesses Arising on Continuing Operations
The loss on disposal of £0.9m in the six months ended 30 June 2016 arose from a profit of £0.4m on disposal of a 10%
investment in a company relating to an expired customer contract, offset by £1.3m of charges relating to transactions
completed in prior years.
The exceptional loss on disposal in the six months ended 30 June 2015 was £4.9m. In May 2015, the Group completed the sale
of its Great Southern Rail (GSR) business in Australia for a cash consideration of £2.6m, with a loss on disposal of £4.2m
being charged in the six month period to 30 June 2015. 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. Both these businesses
were classified as held for sale as at 31 December 2014. In June 2015, the Group also disposed of its Serco India Private
Limited business, representing the Group's frontline public services operation in the Indian transport sector, for a
consideration of £1.0m, resulting in a loss on disposal of £0.7m.
Other Exceptional Operating Items Arising on Continuing Operations
In the six months ended 30 June 2016, a charge of £6.2m (six months to 30 June 2015: £6.9m) has arisen in relation to the
restructuring programme resulting from the Strategy Review being implemented across the Group. This includes redundancy
payments, external advisory fees and other incremental costs.
The disposal of the Environmental and Leisure businesses was aborted in 2015 and during the current period costs related to
the aborted transaction were finalised, resulting in the release of a £0.3m credit.
In the six months ended 30 June 2016, there were exceptional costs totalling £0.9m (six months to 30 June 2015: £0.1m)
associated with the UK Government reviews, reflecting external adviser costs related to these reviews.
In the six months ended 30 June 2015 there was a charge of £4.7m in respect of the carrying value of assets held for sale.
This reflected the latest indicative offers received, together with movements of the assets held for sale since the prior
balance sheet date. In the six months ended 31 December 2015 this was reversed following the decision to cancel the sales
process for these businesses.
Exceptional Loss on Disposal of Discontinued Operations
Disposal of one of the final two elements of the offshore private sector BPO business was completed in March 2016,
resulting in a loss on disposal of £0.3m.
Other Exceptional Operating Items Arising on Discontinued Operations
In the six months ended 2016 a charge of £0.4m (six months ended 30 June 2015: £2.6m) is reported in discontinued
operations relating to the exit of the UK private sector BPO business. This includes redundancy payments, external
advisory fees and other incremental costs.
In the six months ended 30 June 2016 the value assets held for sale increased by £4.3m, reflecting the latest estimate of
likely sale proceeds and movements of the assets held for sale since the prior balance sheet date.
A charge of £7.8m has arisen in the six months ended 30 June 2016 in relation to the movement in the value of indemnities
provided on business disposals made in previous years. This relates to changes in exchange rates where indemnities were
provided in foreign currencies and increases to provisions for interest and penalties on any indemnities.
Finance Costs and Investment Income on Continuing and Discontinuing Operations
Investment income of £4.7m (six months to 30 June 2015: £4.3m) relates to interest earned on deposits and other receivables
of £1.9m, the movement in discounting of other receivables of £0.5m and interest accruing on net retirement benefit assets
of £2.3m.
Other finance costs of £11.8m (six months to 30 June 2015: £22.9m) relate to interest incurred on the USPP loans and the
Revolving Credit Facility of £7.9m, facility fees and other charges of £2.0m, interest payable on finance leases of £1.0m,
and the movement in discount on provisions of £0.9m.
Pre-exceptional net finance costs were £7.1m (six months to 30 June 2015: £18.6m).
In the six months ended 30 June 2016 costs of £0.4m (six months ended 30 June 2015: £32.8m) were incurred for external fees
as a result of early settlement of payments to the US Private Placement (USPP) Noteholders following the disposal of the
offshore private sector BPO business. These charges are treated as exceptional finance costs as they are directly linked
to the restructuring resulting from the Strategy Review.
Taxation on Continuing and Discontinuing Operations
The Group's tax strategy continues to be 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.
The tax charge on pre-exceptional profit from continuing activity of £65.8m was £3.7m. Tax related to Underlying Trading
Profit after deducting pre-exceptional net finance costs was £3.7m, equivalent to an effective rate of 8.4%. The principal
reasons why the effective rate is lower than the UK rate of 20% is due to taxable profits being made in the UK in the half
year, but tax losses forecast for the year as a whole, the presentation of joint ventures which are consolidated after tax
within Trading Profit and the impact of the deferred tax movement related to defined benefit pension schemes. These
effects have countered the impact of profits being made in jurisdictions where the tax rate is higher than that in the UK.
In the period, a £0.1m tax charge is reflected on the exceptional cost of £12.3m, resulting in a £12.4m net exceptional
charge. Only limited deductions are available for many of the costs incurred, as most are associated with disposals for
which no tax deduction is available.
Net corporate income tax of £6.6m was paid during the period, relating mainly to non UK operations.
Dividend
The Board is not recommending the payment of an interim dividend. The Board is committed to resuming dividend payments and
adopting a progressive dividend policy 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 weighted average number of shares for earnings per share (EPS) purposes was 1,088.8m at 30 June 2016 (30 June 2015:
886.2m).
EPS before exceptional items from both continuing and discontinuing operations was 5.40p per share (30 June 2015: 2.89p);
including the impact of exceptional items EPS was 4.27p (30 June 2015: loss of 10.32p).
Underlying EPS was 3.70p per share at 30 June 2016 (30 June 2015: 1.57p). This measure reflects Underlying Trading Profit
of £51.0m, adding back non controlling interests of £0.1m, deducting pre-exceptional net finance costs of £7.1m (including
those for discontinued operations) and related tax effects of £3.7m (30 June 2015: £46.9m add £0.2m, less £18.6m, less
£14.6m).
Cash Flow and Reconciliation to Net Debt
The table below shows the operating profit and Free Cash Flow reconciled to movements in net debt. Free Cash Flow is the
net cash flow from operating activities before exceptional items as shown on the face of the Group's Consolidated Cash Flow
Statement, adding dividends we receive from joint ventures and deducting net interest paid and net capital expenditure on
tangible and intangible asset purchases. Free Cash Flow in the six months ended 30 June 2016 was an inflow £1.5m compared
to an outflow of £77.5m in the six months ended 30 June 2015. This movement is largely driven by a reduction in the
purchases of intangibles and tangible assets, a reduction in interest payments as a result of a reduction in interest
bearing debt and a realignment of working capital management practices which took place in the first half of 2015.
Operating cash flow (before movements in working capital, exceptional items and tax) is calculated by removing the non cash
items included within operating profit (before exceptional items on continuing and discontinued operations) and in the six
months ended 30 June 2016 was £27.6m. These non cash items include profit from joint ventures of £17.7m, the reduction in
total provisions including those in held for sale of £77.8m and a total of other non cash movements of £53.4m. Of the
total reduction in provisions, £61.2m relates to OCPs and £12.5m relates to other contract provisions. Other non cash
movements include the removal of non cash foreign exchange charges of £23.9m that are included within operating profit, of
which £8.9m relates to movements on US Private Placement foreign currency loans and derivatives hedging these loans. The
net value of foreign exchange relating to realised and unrealised gains and losses on transactions included within
operating profit, including both cash and non cash items, in the six months to 30 June 2016 was £0.5m. Also included in
other non cash movements are £24.0m of depreciation and amortisation charges.
Six months ended 30 June 2016 Six months ended 30 June 2015 Year ended 31 December 2015
£m £m £m
Operating profit/(loss) on continuing operations 65.2 36.8 (3.7)
Operating loss on discontinued operations (7.4) (61.6) (51.1)
Less: exceptional items 11.9 84.6 187.5
Operating profit before exceptional items on continuing and discontinued operations 69.7 59.8 132.7
Less: profit from joint ventures (17.7) (13.9) (37.0)
Movement in provisions (77.8) (53.3) (116.0)
Other non cash movements 53.4 46.1 102.8
Operating cash inflow before movements in working capital, exceptional items and tax 27.6 38.7 82.5
Working capital movements (14.2) (71.5) (22.6)
Tax paid (6.6) (7.7) (2.7)
Non cash R&D expenditure credit (0.1) (0.3) (0.7)
Cash flow from operating activities before exceptional items 6.7 (40.8) 56.5
Dividends from joint ventures 19.7 15.8 32.5
Interest received 0.9 1.6 3.4
Interest paid (11.4) (21.2) (36.1)
Purchase of intangible and tangible assets net of proceeds from disposals (14.4) (32.9) (72.5)
Free Cash Flow 1.5 (77.5) (16.2)
Net disposal/(acquisition) of subsidiaries 11.1 (4.5) 184.9
Proceeds from share placement - 530.1 530.3
Purchase of own shares net of share option proceeds 0.1 4.3 4.4
Other movements on investment balances 0.2 (0.6) (1.3)
Capitalisation and amortisation of loan costs 0.2 - (0.6)
Non recourse loan disposals, repayments and advances - 24.0 24.0
New, acquired and disposed finance leases - (1.0) 0.5
Exceptional items (32.4) (72.8) (88.4)
Foreign exchange loss on net debt (23.4) (10.1) (32.9)
Movement in net debt including assets and liabilities held for sale (42.7) 391.9 604.7
Asset held for sale movement in net debt 2.3 (25.1) (44.2)
Net debt at 1 January (82.2) (642.7) (642.7)
Net debt at end of period (122.6) (275.9) (82.2)
Net debt at 1 January including assets and liabilities held for sale (77.5) (682.2) (682.2)
Net debt at end of period including assets and liabilities held for sale (120.2) (290.3) (77.5)
Average net debt as calculated on a daily basis for the six months ended 30 June 2016 was £123.9m, compared with the
opening and closing positions of £77.5m and £120.2m respectively. The movement in closing net debt including assets and
liabilities held for sale was primarily driven by Exceptional items of £32.1m and exchange differences of £23.4m, largely
arising on the Group's USPPs, offset by Free Cash Flow of £1.5m and net disposal proceeds of £11.1m. Cash outflows of
£32.1m on exceptional items includes the settlement of brought forward liabilities for the exit of the Group's private
sector BPO business and the Docklands Light Railway pension scheme settlement recognised as exceptional charges in prior
periods.
Total cash outflows for the Group, including assets held for sale, amounted to a total outflow of £163.5m. This is after
accounting for loan repayments of £135.8m and finance lease repayments of £8.6m. The cash impact included in the movement
in net debt therefore amounted to £19.1m.
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 Free Cash Flow excluding tax and interest items.
The percentage conversion of Underlying Trading Profit into trading cash flow is also provided in this table. 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.
Six months ended 30 June 2016 Six months ended 30 June 2015 Year ended 31 December 2015
£m £m £m
Free Cash Flow 1.5 (77.5) (16.2)
Add back:
Tax paid 6.6 7.7 2.7
Interest received (0.9) (1.6) (3.4)
Interest paid 11.4 21.2 36.1
Trading Cash Flow 18.6 (50.2) 19.2
Underlying Trading Profit 51.0 46.9 96.0
Underlying Trading Profit cash conversion 36.5% n/a 20.0%
The Underlying Trading Profit conversion into trading cash flow was 36.5%. The low conversion was primarily due to the cash
outflows on onerous contracts excluded from Underlying Trading Profit but included in Trading Cash Flows and the outflow of
working capital resulting from the normalisation of balances following the end of the statutory reporting period, offset by
depreciation and amortisation charges being greater than expenditure on property, plant and equipment and intangible
assets.
Net Debt
2016 2016 2016 2015
As at 30 June As reported Assets and liabilities held for sale adjustment Including assets and liabilities held for sale Including assets and liabilities held for sale
£m £m £m £m
Cash and cash equivalents 166.2 2.7 168.9 176.0
Loans receivable 20.4 - 20.4 0.9
Other loans (273.5) - (273.5) (412.4)
Obligations under finance leases (35.7) (0.3) (36.0) (54.8)
Net debt (122.6) 2.4 (120.2) (290.3)
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)
Net debt (82.2) 4.7 (77.5)
Debt Covenants
Following the disposal of the majority of the offshore private sector BPO operations, the Group was required to offer a
proportion of the net disposal proceeds to prepay the debt holders. As a result of this process, £117m (US$167m) of private
placement notes were repaid at par on 16 February 2016.
The principal financial covenant ratios are consistent across the private placement loan notes and the Group's £480m
revolving credit facility, with a maximum Consolidated Total Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and
minimum covenant EBITDA to net finance costs of 3.0 times, tested semi-annually.
For covenant purposes the definition of CTNB represents Group recourse net debt determined 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. CTNB expressed in a currency other than Sterling is calculated at average exchange rates
per the facility documentation. 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 ratio of CTNB to EBITDA as at 30 June 2016 was 0.5 times (31 December 2015: 0.4 times) and the ratio of EBITDA to net
finance costs was 9.8 times (31 December 2015: 6.7 times).
As at 30 June 2016 As at 31 December 2015 As at 30 June 2015
£m £m £m
Operating profit/(loss) before exceptional items 142.6 132.7 (653.5)
Less: Joint venture post-tax profits (40.8) (37.0) (30.1)
Add: Dividends from joint ventures 36.4 32.5 35.9
Amortisation of other intangible assets 37.8 40.5 34.1
Depreciation of property, plant and equipment 30.3 28.9 29.8
Impairment of property, plant and equipment 0.8 2.1 1.6
Share based payment expense 10.6 9.8 6.4
Balance sheet and contract write-downs in 2014 - - 752.1
EBITDA per covenant 217.7 209.5 176.3
Net finance costs 20.5 32.0 38.1
Other adjustments 1.7 (0.6) (1.2)
Net finance costs per covenant 22.2 31.4 36.9
Recourse net debt (including assets and liabilities held for sale) 120.2 77.5 290.3
Loans receivable, foreign exchange adjustments and other items (4.6) 14.2 2.4
Consolidated Total Net Borrowings (CTNB) 115.6 91.7
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