REG - Serco Group PLC - 2017 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
22/02/2018 07:05
- Part 2: For the preceding part double click ID:nRSV5870Fa
Cabinet Office and National Audit
Office can see the suppliers' accounts of major contracts, whether they be
performed by public or private operators. There should also be far greater
transparency of operational performance: except in exceptional circumstances,
suppliers, be they private or Government-owned, should be required to publish
every six months their performance against key operational indicators, so they
are held accountable for the delivery of their promises to the taxpayers who
are paying for them and the users who they are serving. And we believe that
there should be a formal, rigorous and transparent decision-making process by
which Government decides what mechanism it should use, be it in-house or by a
third party, to deliver a given project or policy. We call this the
"Transparency Principle".
· Both suppliers and the Government should have the right, on payment
of an agreed break fee, to exit a contract at pre-determined intervals. We
call this the "Orderly Exit Principle". The purpose of this is to give both
Government and supplier the ability to exit contracts which are not working
out as intended. For instance, if the supplier is making greater than
expected profits, or Government policy changes, or performance is
unsatisfactory but still within the bounds of the contract, the Government
should be able, on payment of a break fee, to re-compete or take back in-house
the contract; and likewise if the supplier was making unexpected losses, or
changes in regulation had made it impossible to deliver the contract as
intended, the supplier can exit the contract on payment of a fee which would
compensate the Government for the cost of re-tendering. This would, for both
Government and supplier, significantly reduce the risk of being stuck together
in unhappy marriages.
· Suppliers of sensitive contracts should be obliged to lodge with
Government a "living will", being a set of arrangements to facilitate the
transfer of a contract back to Government or to another supplier if
required. This would significantly reduce the operational risk to Government
of supplier failure. This is the "Security of Supply Principle".
· Government and suppliers should agree to abide by a mutually-agreed
code of conduct, which would set out expected standards of behaviour from
Government and its contractors. This would involve the Government agreeing
not to impose punitive or unfair terms and conditions or transfer unmanageable
state risk; and suppliers would agree to maintain certain metrics of financial
stability; pay their sub-contractors in a timely fashion; and adequately fund
their pensions. We think it would be important to have a process of
independent arbitration built into the code of conduct to ensure that there is
some avenue of redress and calling to account those who do not abide by the
code. We call this the "Fairness Principle".
It is vital to the well-being of any country that public services are
delivered to high standards and offer value for money, and for the most part,
in the UK, private and third-sector providers have done a good job of doing
this. The UK has hundreds of new hospitals and schools, built and maintained
to high standards; thousands of contracts have delivered innovation, improved
services and lowered costs, along with far higher degrees of visibility of
operational performance than is commonly available from public sector
delivery. And as the UK advances towards Brexit, it is clear that there will
be the need for a whole lot more Government as we "take back control". With
this in mind, we believe that there is an urgent need to re-think the
relationship between the UK Government and its suppliers. We believe an
approach based on the Four Principles above would serve to restore trust and
common sense in the market; remove the risk of excessive profits or losses;
and encourage a more vibrant and competitive market for Government services,
one in which Serco would be an enthusiastic participant.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional divisions: UK & Europe
(UK&E); the Americas; the Asia Pacific region (AsPac); and the Middle
East. The Global Services division previously consisted of Serco's private
sector BPO operations, which for statutory reporting purposes were classified
in 2016 as discontinued operations following the previously announced
strategic exit from this market and the subsequent disposals. Serco presents
alternative measures to include the Revenue and Trading Profit of these
discontinued operations in prior periods for consistency with previous
disclosures. Reflecting statutory reporting requirements, Serco's share of
revenue from its joint ventures and associates is not included in revenue,
while Serco's share of joint ventures and associates' profit after interest
and tax is included in Underlying Trading Profit. As previously disclosed
and for consistency with guidance, Serco's Underlying Trading Profit measure
excludes Contract & Balance Sheet Review adjustments (principally OCP
releases or charges), and the benefit in 2016 from not depreciating and
amortising assets held for sale, and other one-time items such as those in
2016 related to the early exit from the Thurrock contract.
Year ended 31 December 2017 UK&E Americas AsPac Middle Corporate costs Total
£m East
Revenue 1,334.7 688.0 579.0 351.9 - 2,953.6
Change (3%) 0% (7%) +8% (2%)
Change at constant currency (4%) (7%) (14%) +2% (6%)
Organic change at constant currency (4%) (7%) (15%) +2% (6%)
Underlying Trading Profit/(Loss) 35.1 36.4 23.7 16.2 (41.6) 69.8
Change (23%) (15%) (5%) (2%) (4%) (19%)
Change at constant currency (25%) (21%) (13%) (10%) (4%) (27%)
Margin 2.6% 5.3% 4.1% 4.6% n/a 2.4%
Contract & Balance Sheet Review adjustments (30.6) 3.4 11.4 - - (15.8)
Trading Profit/(Loss) 4.5 39.8 35.1 16.2 (41.6) 54.0
Amortisation of intangibles arising on acquisition - (3.0) (1.4) - - (4.4)
Operating profit/(loss) before exceptionals 4.5 36.8 33.7 16.2 (41.6) 49.6
Year ended 31 December 2016 UK&E Americas AsPac Middle Corporate costs Sub-total continuing Global Services Total
£m East
Revenue including discontinued operations 1,375.1 691.4 619.7 324.8 - 3,011.0 36.8 3,047.8
Discontinued operations adjustment* - - - - - - (36.8) (36.8)
Revenue 1,375.1 691.4 619.7 324.8 - 3,011.0 - 3,011.0
Underlying Trading Profit/(Loss) 45.7 43.0 24.9 16.6 (43.5) 86.7 (4.6) 82.1
Margin 3.3% 6.2% 4.0% 5.1% n/a 2.9% (12.5%) 2.7%
Contract & Balance Sheet Review adjustments 35.3 (36.6) 9.3 2.2 3.2 13.4 0.8 14.2
Assets held for sale depreciation and amortisation - - - - - - 0.5 0.5
Other one-time items 3.5 - - - - 3.5 - 3.5
Trading Profit/(Loss) 84.5 6.4 34.2 18.8 (40.3) 103.6 (3.3) 100.3
Amortisation of intangibles arising on acquisition (0.3) (2.8) (2.0) - - (5.1) - (5.1)
Discontinued operations adjustment* - - - - - - 3.3 3.3
Operating profit/(loss) before exceptionals 84.2 3.6 32.2 18.8 (40.3) 98.5 - 98.5
* Statutory reporting only includes the post-tax result of discontinued
operations as a single line in the Condensed Consolidated Income Statement.
The trading performance and outlook for each division are described on the
following pages. Reconciliations and further detail of financial performance
are included in the Finance Review on pages 18 to 37. This includes full
definitions and explanations of the purpose of each non-IFRS Alternative
Performance Measure (APM) used by the Group. The Condensed Consolidated
Financial Statements and accompanying notes are on pages 38 to 79.
UK & Europe
Serco's UK & Europe division supports public service delivery and outcomes
across all five of the Group's chosen sectors: our Justice & Immigration
business provides a wide range of services to support safeguarding society and
reducing reoffending, from secure accommodation management through to housing
and welfare services for asylum seekers; in Defence, we are trusted to deliver
critical support services and operate sensitive facilities; we operate complex
public Transport systems and services; our Health business provides primarily
non-clinical support services to hospitals; and the Citizen Services business
provides environmental and leisure services, as well as a wide range of other
front, middle and back-office services to support public sector customers in
the UK or European institutions. Serco's operations in the UK represent
approximately 40% of total Revenue for the Group, and those across the rest of
Europe approximately 5%.
Serco announced in September 2017 that it would merge its UK and European
operating divisions to create a single, integrated business, Serco UK &
Europe. This combined the two previous divisions - UK Central Government and
UK & Europe Local & Regional Government - and will simplify and
improve the efficiencies and capabilities of our operations in the region, in
particular as we continue to drive transformation benefits across the Group as
a whole. Kevin Craven, previously Chief Executive of UK Central Government
became the Chief Executive of Serco UK & Europe. Kevin joined Serco in
September 2014, prior to which he was CEO of Balfour Beatty Services, leading
a business with 16,000 employees and revenues of over £1.6bn, covering
sectors such as facilities management, rail, highways and utilities. Before
joining Balfour Beatty, he was the Managing Director for Healthcare, Education
& Defence at Aramark, and the Managing Director of Transport & Travel
for Sodexo.
Revenue for 2017 was £1,334.7m (2016: £1,375.1m), a decline of 3%; reported
revenue excludes that from our joint venture and associate holdings which are
predominantly the operations of AWE, Merseyrail and previously Northern Rail,
with these representing the vast majority of the Group's activity in joint
ventures and associates. At constant currency, the decline in revenue was
4%. Drivers of the reduction included: in our Health business, we ceased to
recognise as revenue the value of goods purchased on our customers' behalf
following changes to two procurement services contracts; in our Defence
business, the phased transfer back during 2016 of services that Serco had
previously been providing to the Defence Science & Technology Laboratory
(DSTL) and for Defence Business Services (DBS); we also saw reduced volumes in
our Child Maintenance Group operations, and the ending or reduced scale of
various other BPO and IT support services contracts. These revenue
reductions were partially offset from growth elsewhere, namely the start of
hospital facility management services for Barts Health NHS Trust and
University Hospital Southampton NHS Foundation Trust, as well as some growth
in our European agency operations and from the new Skills Support for the
Workforce (SSW) contracts.
Underlying Trading Profit was £35.1m (2016: £45.7m), representing an implied
margin of 2.6% (2016: 3.3%). Trading Profit includes the profit contribution
(from which tax and interest have already been deducted) of joint ventures and
associates; if the £350m (2016: £474m) proportional share of revenue from
joint ventures and associates was also included and if the £7.0m (2016:
£7.4m) share of interest and tax cost was excluded, the overall divisional
margin would have been 2.5% (2016: 2.9%). The joint venture and associate
profit contribution of £26.6m (2016: £31.3m) was £4.7m lower, reflecting
the end of the Northern Rail franchise in March 2016 and the lower
shareholding of AWE from September 2016. The reduction in Underlying Trading
Profit also included the impact of other contract attrition and in-contract
reductions, and the lower profitability from new contracts in their initial
transition and transformation stages. The non-repeat of certain costs and
impairments that occurred in 2016 and the progress made on cost efficiencies
in 2017 only partially offset these areas of profit reduction. Within
Underlying Trading Profit there was £55m of OCP utilisation (2016: £60m),
which served to offset the Division's loss-making operations, principally
COMPASS UK asylum seeker support services, the Caledonian Sleeper, Future
Provision of Marine Services (FPMS), Lincolnshire Country Council, and the
Prisoner Escort & Custody Services (PECS) contracts.
Contract & Balance Sheet Review adjustments resulted in a £30.6m net
charge, driven by updating the assumptions regarding operational and
maintenance costs of running the Caledonian Sleepers contract, partially
offset by a net £16m of releases across other contracts. The Caledonian
Sleepers charge of £47m reflects a sharp increase in the estimated costs
related to the delayed introduction and operation of the new sleeper
service. We will be examining every option for reducing operating costs; the
position under the contract is expected to improve over time, as the terms of
the Franchise Agreement provide a mechanism that requires Transport Scotland
to bear 50% of contract losses from 1 April 2020. In addition, from 1 April
2022, we have the right to seek adjustments to the financial terms of the
Franchise Agreement that would result either in a small positive profit margin
for Serco from that date, or allow us to exit the contract. A detailed
review of provisions and Contract & Balance Sheet Review items is included
in the Finance Review on pages 18 to 37. After these adjustments, Trading
Profit was £4.5m (2016: £84.5m, reflecting £35.3m net release for Contract
& Balance Sheet Review adjustments and a £3.5m one-time profit arising
from a pension scheme settlement).
The UK & Europe division represented around £0.7bn of the Group's
aggregate total value of signed contracts during 2017. The largest award was
a new contract to transform catering and cleaning for University Hospital
Southampton NHS Foundation Trust, with an estimated value of £125m over the
ten-year term. Other new work included adding patient transport services to
our relationship with Barts Health NHS Trust, and environmental services to
Rushmoor Borough Council. Of large new bids where we were unsuccessful,
these included immigration escorting for the Home Office and the regional MOD
contracts for Technical Support Services Provision to the UK's Royal Air
Force.
The largest rebid or extension that was due during the year was for our
provision of facilities management services at NHS Forth Valley, where we
successfully secured these for a further seven years. Others secured
included contact services for Hertfordshire County Council, specialist
scientific and engineering support for the European Space Agency, our
helicopter aircrew training for the MOD and a number of other defence support
services contracts, parking services for the West London Alliance,
environmental services for Wandsworth Council, and citizen services support to
customers including Invest Northern Ireland, the Department of Health and the
Skills Funding Agency.
Of existing work where an extension or rebid will be required at some point
before the end of 2020, there are 30 contracts with annual revenue of over
£5m within the UK & Europe division; in aggregate, these represent
approximately a third of the current level of annual revenue for the
division. The largest of these are the Northern Isles Ferries operations
that are expected to be extended from April 2018 to the end of 2019; the
COMPASS contract is also due in 2019, along with a large European agency
contract; and in 2020, PECS is now assumed to be rebid if a final extension
option is not exercised by the customer, as well as that year our Anglia
Support Partnership healthcare shared services operations. The Glasgow
ACCESS operations transferred by the end of 2017, therefore representing known
attrition of approximately 4% of divisional revenue.
Our pipeline of new bid opportunities has been significantly reduced following
the removal of wins such the Barts and Southampton NHS contracts, as well as
from losses such as immigration escorting for the Home Office. The Defence
Fire & Risk Management Organisation (DFRMO) tender is still ongoing, as is
that for an immigration removal centre. We have partially reloaded the
pipeline with some other smaller tenders for various defence support, hospital
facilities management and environmental services. For the successor to the
COMPASS arrangements, we are also including in our new bid pipeline the
incremental opportunity beyond the regions where we currently operate.
Americas
Our Americas division accounts for approximately 23% of Serco's overall
revenue, and provides professional, technology and management services focused
on Defence, Transport, and Citizen Services. The US Federal Government,
including the military, civilian agencies and the national intelligence
community, are our largest customers. We also provide services to the
Canadian Government and to some US state and municipal governments.
Revenue for 2017 was £688.0m (2016: £691.4m), a modest reduction in reported
currency. In US dollars, the main currency for operations of the division,
revenue was equivalent to approximately US$890m (2016: US$940m). The
strengthening of local currencies against Sterling increased revenue by £42m
or 7%; the organic change at constant currency was therefore a decline of
7%. The decline was driven by the end of the contracts during 2016 for the
Virginia Department of Transportation (VDOT) and for US Army transition
assistance (SFLTAP). These and other smaller reductions were partially
offset by growth in our support of advanced anti-terrorism systems for ships
and infrastructure at US Navy ports and federal facilities, and some increases
elsewhere in the volume of workload or task orders.
Underlying Trading Profit was £36.4m (2016: £43.0m), representing a margin
of 5.3% (2016: 6.2%). While there was a £2.4m favourable currency movement,
there was the impact of the first half of 2016 benefitting from the longer
running of the VDOT and SFLTAP contracts which were only partially offset by
cost efficiencies in 2017. Within Underlying Trading Profit there was £5m
(2016: £9m) of OCP utilisation, which reflects the offset of losses on the
Ontario Driver Examination Services contract.
Contract & Balance Sheet Review adjustments resulted in a £3.4m net
release. After these adjustments, Trading Profit was £39.8m (2016: £6.4m,
reflecting £36.6m net charge for Contract & Balance Sheet Review
adjustments).
Americas represented around £0.8bn of the Group's aggregate total value of
signed contracts during the year. The largest new award was for US Army base
modernisation services and in particular IT support, valued at a total of
$140m for the five-year base period and five one-year option periods. The
second largest was to provide supply chain management services for hazardous
materials at three US Navy Fleet Readiness Centers, valued at a total of $101m
for the base period and four one-year options. Smaller new awards included
safety service patrol for the Texas Department of Transportation, and numerous
US Navy ship and shore defence equipment modernisation task orders. Of
rebids and extensions secured, the largest was for the US Patent &
Trademark Office (USPTO) for a further ten years, albeit the new contract is
for a reduced volume of work; others secured included fleet services for
Louisville Gas & Electric Company, parking meter management in San
Francisco and support services for the US Federal Retirement Thrift Investment
Board and the US Government Accountability Office. Serco was unsuccessful in
a large new bid opportunity to be prime contractor for US Navy systems
support, but has potential for a share of work through sub-contract
relationships; there were no other major new pipeline decisions or large
rebids or extensions due during the year.
Of existing work where an extension or rebid will be required at some point
before the end of 2020, there are 12 contracts with annual revenue of over
£5m within the Americas division; in aggregate, these represent around 50% of
the current level of annual revenue for the division; this high proportion
reflects that our contract supporting the US Affordable Care Act (ACA), which
currently accounts for around 30% of divisional revenue, requires securing a
rebid from 30 June 2018; the Global Installation Contract covering areas of
our defence ship modernisation work is due for rebid in 2019, while our
support to the Federal Aviation Administration's (FAA) Contract Tower (FCT)
Program will become due for rebid once again in 2020.
Our pipeline of major new bid opportunities due for decision within the next
24 months includes further important opportunities to provide various support
functions to the US Navy. A defence opportunity to support US Air Force
radar systems as well as various other defence support bids were added during
the year, as were other tenders for transport operations and fleet support and
Citizen Services records management. Opportunities for immigration services
were removed from the pipeline due to delays in tender processes.
Future profitability will as usual be shaped by the outcomes of the major new
bid opportunities in the region, but in particular by the rebid outcome due by
30 June 2018 and the future scale of operation of the ACA contract and its
absorption of overhead costs.
Serco was pleased to announce in June 2017 that David J. Dacquino would become
Chief Executive Officer of the Americas division, with Dan Allen having
informed the business back in February of his intention to retire. Dave
Dacquino joined Serco in 2015 to lead the Americas' Defence business, bringing
deep knowledge and experience from across the defence, aeronautics, logistics
and technical services industries.
AsPac
Operations in the Asia Pacific division include Justice, Immigration, Defence,
Health, Transport and Citizen Services in Australia, New Zealand and Hong
Kong. Serco's operations in Australia are by far the largest element of the
division; the country represents approximately 19% of total Revenue for the
Group.
Revenue for 2017 was £579.0m (2016: £619.7m), a decline of 7%. In
Australian dollars, the main currency for operations of the division, revenue
for the year was equivalent to approximately A$980m (2016: A$1,140m). The
movements in local currencies against Sterling increased revenue by £48m or
7%; the acquisition of the other 50% of a small defence services joint venture
added 1% to revenue; the organic change at constant currency was therefore a
decline of 15%. This reduction was driven by the end of the Armidale Class
Patrol Boats (ACPB), Western Australia Court Security & Custodial Services
(WACSCS) and Mount Eden contracts, together with some smaller reductions from
other contracts ending or reducing in scope; there was some growth in Citizen
Services contact and processing support which partially offset this attrition.
Underlying Trading Profit was £23.7m (2016: £24.9m), representing a margin
of 4.1% (2016: 4.0%). While there was a favourable currency movement of
£2.1m, the net of other movements reflected contract attrition and other
margin pressures with only partial offset from progress on cost efficiencies
and growth from new work. Within Underlying Trading Profit there was £9m of
OCP utilisation (2016: £12m).
Contract & Balance Sheet Review adjustments resulted in a £11.4m net
release, the largest element of which was a further OCP release on ACPB
reflecting revised assumptions of the residual liability after the contract
transferred to a new operator during the year. The ACPB contract was the
largest of the OCP contracts, and is the first of the major OCP contracts to
come to an end. After these adjustments, Trading Profit was £35.1m (2016:
£34.2m, reflecting £9.3m net release for Contract & Balance Sheet Review
adjustments).
AsPac represented around £1.8bn of the Group's aggregate total value of
signed contracts during the year. By far the largest element of this was
approximately £1.5bn for the 20-year contract valued at A$2.6bn for the
operation of New Grafton Correctional Centre (NGCC) which is expected to
commence in 2020; NGCC will be the largest correctional centre in Australia,
consisting of a total of 1,700 beds in three individual security categories,
and draws upon Serco's experience of managing correctional facilities in the
UK, New Zealand and elsewhere in Australia, which includes Australia's current
largest facility, Acacia Prison. Other smaller new wins included contact
services support in Australia for the Department of Human Services.
Extensions and rebids awarded in the year included traffic camera support in
the Victoria, and passenger and integrated transport information services for
transport authorities in Western Australia and New South Wales. There were
no other larger rebids or major new bid pipeline decisions made in the year.
Of existing work where an extension or rebid will be required at some point
before the end of 2020, there are 10 contracts with annual revenue of over
£5m within the AsPac division; in aggregate, these represent just over half
of the current level of annual revenue for the division; this high proportion
reflects that the Australia onshore immigration services contract requires
rebid or extension at the end of 2019, with this accounting for over 30% of
current divisional revenue.
Our pipeline of major new bid opportunities due for decision within the next
24 months includes some further (but far smaller than Grafton) Justice &
Immigration opportunities, as well as in Defence support services. We will
look to build the pipeline further in these sectors as well as Citizen
Services, Transport and Health.
Middle East
Operations in the Middle East division include Transport, Defence, Health and
Citizen Services, with the region accounting for approximately 12% of the
Group's total revenue.
Revenue for 2017 was £351.9m (2016: £324.8m), an increase of 8%. The
strengthening of local currencies against Sterling provided growth of £21m or
6%; the organic change at constant currency was therefore growth of 2%.
Growth came from new contracts for facilities management at Dubai Airport and
for a financial services company in Abu Dhabi, though these were partially
offset by reductions related to the Dubai Air Navigation Services and Staff
College training for the Qatar Armed Forces contracts, as well as a small
number of other operations reducing in scope or volume including the Middle
East Logistics & Base Support (MELABS) contract that supports the
Australian Defence Force in the region.
Underlying Trading Profit was £16.2m (2016: £16.6m), representing a margin
of 4.6% (2016: 5.1%). While there was a £1.2m favourable currency movement,
there was an overall reduction in profitability due in large part to the
non‑repeat of the higher defence logistics volumes experienced in the first
half of 2016, together with the impact of other contract scope reductions and
attrition. There are no OCP contracts in the division and therefore no OCP
utilisation within Underlying Trading Profit.
There were no Contract & Balance Sheet Review adjustments in the year,
therefore Trading Profit was also £16.2m (2016: £18.8m, reflecting £2.2m
net release for Contract & Balance Sheet Review adjustments).
The Middle East represented around £0.1bn of the Group's aggregate total
value of signed contracts during the year. Amongst smaller contract awards
were new wins to provide facilities management in Abu Dhabi and defence
training support in Qatar. Serco was unsuccessful however in pursuing the
very large tenders for light rail and tram operations in the region.
Extensions to existing work included facilities management for Cleveland
Clinic Abu Dhabi, and air navigation services and training in Bahrain and
Iraq; there were no other large rebid or extension decisions due in the year.
Of existing work where an extension or rebid will be required at some point
before the end of 2020, there are 13 contracts with annual revenue of over
£5m within the Middle East division; in aggregate, these represent well over
half of the current level of annual revenue for the division. There is a
high proportion of work to secure in 2019, when the Dubai Metro, MELABS and
Cleveland Clinic Abu Dhabi contracts each require extending or rebidding; by
2020, our Dubai Air Navigation Services will also become due for further
extension or rebid.
Our pipeline of major new bid opportunities in the region has reduced very
significantly following the outcome of the light rail and tram bids. There
are some other smaller opportunities in transport and defence support
services, and effort is ongoing to rebuild a stronger pipeline.
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.
Benefiting from actions to deliver savings and improve efficiencies of our
central functions, corporate costs in 2017 reduced to £41.6m (2016: £43.5m).
Finance Review
For the year ended Underlying Non underlying items Trading Amortisation and impairment of intangibles arising on acquisition Less discontinued pre exceptional* Statutory pre exceptional Continuing and discontinued exceptional items Less discontinued exceptional items* Statutory
31 December 2017 £m £m £m £m £m £m £m £m £m
Revenue 2,953.6 - 2,953.6 - - 2,953.6 - - 2,953.6
Cost of sales (2,688.9) (15.8) (2,704.7) - - (2,704.7) - - (2,704.7)
Gross profit 264.7 (15.8) 248.9 - - 248.9 - - 248.9
Administrative expenses (222.2) - (222.2) (4.4) - (226.6) (19.6) - (246.2)
Share of profits in joint ventures and associates, net of interest and tax 27.3 - 27.3 - - 27.3 - - 27.3
Profit before interest and tax 69.8 (15.8) 54.0 (4.4) - 49.6 (19.6) - 30.0
Margin 2.4% 1.8% 1.7% 1.0%
Net finance costs (11.6) - (11.6) - - (11.6) - - (11.6)
Other gains - 0.7 0.7 - - 0.7 - - 0.7
Profit before tax 58.2 (15.1) 43.1 (4.4) - 38.7 (19.6) - 19.1
Tax charge (20.6) 5.0 (15.6) 1.6 - (14.0) (5.0) - (19.0)
Effective tax rate (35.4%) (36.2%) (36.2%) (99.5%)
Profit / (loss) for the period 37.6 (10.1) 27.5 (2.8) - 24.7 (24.6) - 0.1
Minority interest 0.3 0.3 0.3 0.3
Earnings / (loss) per share (pence) 3.42 2.50 2.24 (0.02)
* No amounts are recorded as discontinued operations for the year ended 31
December 2017.
For the year ended Underlying Non underlying items Trading Amortisation and impairment of intangibles arising on acquisition Less discontinued pre exceptional Statutory pre exceptional Continuing and discontinued exceptional items Less discontinued exceptional items Statutory
31 December 2016 (restated*) £m £m £m £m £m £m £m £m £m
Revenue 3,047.8 - 3,047.8 - (36.8) 3,011.0 - - 3,011.0
Cost of sales* (2,782.9) 18.2 (2,764.7) - 40.1 (2,724.6) - - (2,724.6)
Gross profit* 264.9 18.2 283.1 - 3.3 286.4 - - 286.4
Administrative expenses* (216.2) - (216.2) (5.1) - (221.3) (70.5) 14.2 (277.6)
Share of profits in joint ventures and associates, net of interest and tax 33.4 - 33.4 - - 33.4 - - 33.4
Profit before interest and tax 82.1 18.2 100.3 (5.1) 3.3 98.5 (70.5) 14.2 42.2
Margin 2.7% 3.3% 3.3% 1.4%
Net finance costs (12.6) - (12.6) - - (12.6) (0.4) 0.4 (12.6)
Profit before tax 69.5 18.2 87.7 (5.1) 3.3 85.9 (70.9) 14.6 29.6
Tax charge (24.4) 6.7 (17.7) 1.8 0.1 (15.8) 3.1 - (12.7)
Effective tax rate 35.2% 20.2% 18.4% 42.9%
Profit for the period from continuing operations 45.1 24.9 70.0 (3.3) 3.4 70.1 (67.8) 14.6 16.9
Loss for the period from discontinued operations - - - - (3.4) (3.4) - (14.6) (18.0)
Profit / (loss) for the period 45.1 24.9 70.0 (3.3) - 66.7 (67.8) - (1.1)
Minority interest 0.1 0.1 0.1 0.1
Earnings / (loss) per share (pence) 4.13 6.42 6.12 (0.11)
* Costs included within cost of sales and administrative expenses have
been reallocated, resulting in a restatement. See note 1 to the Condensed
Consolidated Financial Statements.
Change regarding the classification of cost items within cost of sales and
administrative expenses
The Group has undergone a programme of work on its financial data structures
to appropriately allocate and charge costs to the relevant divisions and
between cost of sales and administrative expenses. As a result of the
activities performed in this area, the Group's classification of cost items in
the income statement has changed. The prior year's results have been restated
to reflect the cost items identified which should have been reallocated in
2016. This resulted in increasing administrative expenses by £43.0m and
decreasing cost of sales by the same amount. The change in policy has no
impact on operating profit, any other item below this on the income statement,
or any of the Group's key performance measures.
Cost of sales are considered to be the costs of operating contracts. This
includes the unavoidable costs of servicing contracts and all costs that a
contract would incur purely on its own without a parent company, regardless of
how those services are delivered within the wider Group, such as IT or Human
Resource management services provided centrally.
Alternative Performance Measures (APMs) and other related definitions
Overview
APMs used by the Group are reviewed below to provide a definition and
reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain
the purpose and usefulness of each APM.
In general, APMs are presented externally to meet investors' requirements for
further clarity and transparency of the Group's financial performance. The
APMs are also used internally in the management of our business performance,
budgeting and forecasting, and for determining Directors' remuneration and
that of other management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being included in an
APM, this reflects revenues presented elsewhere within the reported financial
information, except where amounts are recalculated to reflect constant
currency. Where items of profits or costs are being excluded in an APM, these
are included elsewhere in our reported financial information as they represent
actual profits or costs of the Group, except where amounts are recalculated to
reflect constant currency. As a result, APMs allow investors and other readers
to review different kinds of revenue, profits and costs and should not be used
in isolation. Other commentary within the preliminary announcement, including
the other sections of this Finance Review, as well as the Condensed
Consolidated Financial Statements and the accompanying notes, should be
referred to in order to fully appreciate all the factors that affect our
business. We strongly encourage readers not to rely on any single financial
measure, but to carefully review our reporting in its entirety.
The methodology applied to calculating the APMs has not changed during the
year for any measure.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated Income
Statement on page 38, reflects revenue translated at the average exchange
rates. In order to provide a comparable movement on the previous year's
results, reported revenue is recalculated by translating non-Sterling values
for the year to 31 December 2017 into Sterling at the average exchange rate
for the year ended 31 December 2016. All revenue in 2017 arose from continuing
activities.
For the year ended 31 December 2017
£m
Reported revenue at constant currency 2,832.0
Foreign exchange differences 121.6
Reported revenue at reported currency 2,953.6
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses acquired during a
particular year and/or generated by businesses sold during a particular year
up to the date of disposal. In order to provide a comparable movement which
ignores the effect of both acquisitions and disposals on the previous year's
results, Organic Revenue at constant currency is recalculated by excluding the
impact of any relevant acquisitions or disposals.
For the year ended 31 December 2017, an adjustment was required for the
disposal of the remaining element of the UK private sector BPO business,
consisting of a single contract, sold on 3 July 2017. This business was
previously reported within discontinued operations but included as continuing
in 2017 as it does not have a material impact on the Group's results. The
Group disposed of Service Glasgow LLP on 1 December 2017, which also consisted
of a single contract. However, this disposal arose as a result of normal
contract attrition rather than as a result of the disposal of a wider business
and hence this is not excluded for the Organic Revenue calculation.
The only acquisition excluded for the calculation of Organic Revenue in the
year relates to the acquisition of 50% of the issued share capital of Serco
Sodexo Defence Services Pty Ltd, resulting in full control being obtained.
Serco Sodexo Defence Services Pty Ltd was previously a 50% owned joint venture
accounted for on an equity accounting basis and therefore no revenues had
previously been recorded in the Group's results.
Organic Revenue growth is calculated by comparing the current year Organic
Revenue at constant currency exchange rates with the prior year Organic
Revenue at reported currency exchange rates.
For the year ended 31 December 2017
£m
Organic Revenue at constant currency 2,823.1
Foreign exchange differences 121.3
Organic Revenue at reported currency 2,944.4
Impact of any relevant acquisitions or disposals 9.2
Reported revenue at reported currency 2,953.6
For the year ended 31 December 2016
£m
Organic Revenue at reported currency (continuing activities only) 3,011.0
Impact of any relevant acquisitions or disposals -
Reported revenue at reported currency (continuing activities only) 3,011.0
Revenue from continuing and discontinued operations
Reported revenue, as shown on the Group's Condensed Consolidated Income
Statement on page 38, reflects only that from continuing operations, with the
post tax result of discontinued operations consolidated as a single line at
the bottom of the Condensed Consolidated Income Statement. The alternative
measure includes discontinued operations for the benefit of consistency with
previously reported results and to reflect the overall change in scale of the
Group's operations. The alternative measure allows the performance of the
discontinued operations themselves, and their impact on the Group as a whole,
to be evaluated on measures other than just the post tax result. No operations
were classified as discontinued in 2017 as there was a single remaining
business as at 1 January 2017 which generated insignificant revenue and profit
up to the date of disposal of 3 July 2017. Discontinued operations in the
prior year reflect the former Global Services division which consisted of the
Group's private sector BPO operations.
For the year ended 31 December 2017 2016
£m £m
Revenue from continuing and discontinued operations 2,953.6 3,047.8
Exclude revenue from discontinued operations - (36.8)
Reported revenue (continuing activities only) 2,953.6 3,011.0
Revenue from continuing operations, including share of joint ventures and
associates
Reported revenue, as shown on the Group's Condensed Consolidated Income
Statement on page 38, excludes the Group's share of revenue from joint
ventures and associates, with Serco's share of profits in joint ventures and
associates (net of interest and tax) consolidated within Reported Operating
Profit as a single line further down the Condensed Consolidated Income
Statement. The alternative measure includes the share of joint ventures and
associates for the benefit of reflecting the overall change in scale of the
Group's ongoing operations, which is particularly relevant for evaluating
Serco's presence in market sectors such as Defence and Transport. The
alternative measure allows the performance of the joint venture and associate
operations themselves, and their impact on the Group as a whole, to be
evaluated on measures other than just the post tax result.
For the year ended 31 December 2017 2016
£m £m
Revenue from continuing operations, including share of joint ventures and 3,310.3 3,491.8
associates
Exclude share of revenue from joint ventures and associates (356.7) (480.8)
Reported revenue (continuing activities only) 2,953.6 3,011.0
Alternative profit measures
For the year ended 31 December 2017 2016
£m £m
Underlying Trading Profit 69.8 82.1
Non-underlying items:
Include OCP charges and releases (19.0) 9.6
Include other Contract & Balance Sheet Review adjustments 3.2 4.6
Include benefit from non-depreciation and amortisation of assets held for sale - 0.5
Include other one-time items - 3.5
(15.8) 18.2
Trading Profit 54.0 100.3
Include operating exceptional items (continuing operations only) (19.6) (56.3)
Include amortisation and impairment of intangibles arising on acquisition from (4.4) (5.1)
continuing and discontinued operations
Exclude operating loss from discontinued operations - 3.3
Operating profit (continuing activities only) 30.0 42.2
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading Profit, to make
adjustments for unusual items that occur within Trading Profit and remove the
impact of historical issues. UTP therefore provides a measure of the
underlying performance of the business in the current year. For 2016 there
were four items excluded from UTP, only two of which required adjustment in
2017.
Charges and releases on all Onerous Contract Provisions (OCPs) are excluded in
the current and prior years. OCPs reflect the future multiple year cost of
delivering onerous contracts and do not reflect only the current cost of
operating the contract in the latest individual year. It should be noted that,
as for operating profit, UTP benefits from OCP utilisation of £69.3m in 2017
(2016: £84.2m) which neutralises the in-year losses on previously identified
onerous contracts, therefore it is only charges or releases of OCPs that are
adjusted for.
Revisions to accounting estimates and judgements which arose during the 2014
Contract & Balance Sheet Review are separately reported where the impact
of an individual item is material. Only one such item was noted in 2017,
relating to a release of a provision made during the Contract & Balance
Sheet Review which has been released following a change in the Group's
obligations.
Both OCP adjustments and other Contract & Balance Sheet Review adjustments
are identified and separated from the APM in order to give clarity of the
underlying performance of the Group and to separately disclose the progress
made on these items.
The benefit of depreciation and amortisation charges not being taken in the
Group accounts in relation to assets held for sale were excluded in the prior
year. Such charges were being taken in the subsidiary accounts to reflect the
reduction in value of the underlying assets, and we consider it relevant to
show the effect this would have on the Group performance measure. No assets
are included as held for sale in 2017 and therefore no adjustment is required
in 2017.
Finally, any other significant items that have a one-time financial impact are
excluded, which for 2016 related to the one-time pension settlement associated
with the early exit of a UK local authority contract in 2015. This item was
distinct from exceptional items in that it arose from normal contract exit
conditions. No such material one-time items occurred in 2017.
Underlying trading margin is calculated as UTP divided by revenue from
continuing and discontinued operations.
The non-underlying column in the summary income statement on page 18 includes
the tax impact of the above items and tax items that, in themselves, are
considered to be non-underlying. Further detail of such items is provided in
the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to operating profit,
as shown on the Group's Condensed Consolidated Income Statement on page 38, by
making three adjustments. Trading Profit is a metric used to determine the
performance and remuneration of the Executive Directors.
First, Trading Profit excludes exceptional items, being those considered
material and outside of the normal operating practice of the Group to be
suitable of separate presentation and detailed explanation.
Second, amortisation and impairment of intangibles arising on acquisitions are
excluded, because these charges are based on judgements about the value and
economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating practice.
Third, the Trading Profit of discontinued operations is included as this
benefits from consistency with previously reported results, reflects the
overall change in scale of the Group's operations and takes account of the
performance of the discontinued operations themselves. This allows their
impact on the Group as a whole to be evaluated on measures other than just the
post tax result. There were no discontinued operations in 2017.
UTP at constant currency
UTP disclosed above has been translated at the average foreign exchange rates
for the year. In order to provide a comparable movement on the previous year's
results, UTP is recalculated by translating non-Sterling values for the year
to 31 December 2017 into Sterling at the average exchange rate for the year
ended 31 December 2016.
For the year ended 31 December 2017
£m
Underlying Trading Profit at constant currency 63.3
Foreign exchange differences 6.5
Underlying Trading Profit at reported currency 69.8
Alternative Earnings or Loss Per Share (EPS) measures
For the year ended 31 December 2017 2016
pence pence
Underlying EPS from continuing and discontinued operations, basic 3.42 4.13
Impact of non-underlying items and amortisation and impairment of intangibles (1.18) 1.99
arising on acquisition
EPS from continuing and discontinued operations before exceptional items 2.24 6.12
Impact of exceptional items (2.26) (6.23)
Reported EPS from continuing and discontinued operations, basic (0.02) (0.11)
EPS from continuing and discontinued operations before exceptional items
EPS from continuing and discontinued operations, as shown on the Group's
Condensed Consolidated
- More to follow, for following part double click ID:nRSV5870Fc 4.0% 5.1% n/a 2.9% (12.5%) 2.7%
Contract & Balance Sheet Review adjustments 35.3 (36.6) 9.3 2.2 3.2 13.4 0.8 14.2
Assets held for sale depreciation and amortisation - - - - - - 0.5 0.5
Other one-time items 3.5 - - - - 3.5 - 3.5
Trading Profit/(Loss) 84.5 6.4 34.2 18.8 (40.3) 103.6 (3.3) 100.3
Amortisation of intangibles arising on acquisition (0.3) (2.8) (2.0) - - (5.1) - (5.1)
Discontinued operations adjustment* - - - - - - 3.3 3.3
Operating profit/(loss) before exceptionals 84.2 3.6 32.2 18.8 (40.3) 98.5 - 98.5
* Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Condensed
Consolidated Income Statement.
The trading performance and outlook for each division are described on the following pages. Reconciliations and further
detail of financial performance are included in the Finance Review on pages 18 to 37. This includes full definitions and
explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group. The Condensed
Consolidated Financial Statements and accompanying notes are on pages 38 to 79.
UK & Europe
Serco's UK & Europe division supports public service delivery and outcomes across all five of the Group's chosen sectors:
our Justice & Immigration business provides a wide range of services to support safeguarding society and reducing
reoffending, from secure accommodation management through to housing and welfare services for asylum seekers; in Defence,
we are trusted to deliver critical support services and operate sensitive facilities; we operate complex public Transport
systems and services; our Health business provides primarily non-clinical support services to hospitals; and the Citizen
Services business provides environmental and leisure services, as well as a wide range of other front, middle and
back-office services to support public sector customers in the UK or European institutions. Serco's operations in the UK
represent approximately 40% of total Revenue for the Group, and those across the rest of Europe approximately 5%.
Serco announced in September 2017 that it would merge its UK and European operating divisions to create a single,
integrated business, Serco UK & Europe. This combined the two previous divisions - UK Central Government and UK & Europe
Local & Regional Government - and will simplify and improve the efficiencies and capabilities of our operations in the
region, in particular as we continue to drive transformation benefits across the Group as a whole. Kevin Craven,
previously Chief Executive of UK Central Government became the Chief Executive of Serco UK & Europe. Kevin joined Serco in
September 2014, prior to which he was CEO of Balfour Beatty Services, leading a business with 16,000 employees and revenues
of over £1.6bn, covering sectors such as facilities management, rail, highways and utilities. Before joining Balfour
Beatty, he was the Managing Director for Healthcare, Education & Defence at Aramark, and the Managing Director of Transport
& Travel for Sodexo.
Revenue for 2017 was £1,334.7m (2016: £1,375.1m), a decline of 3%; reported revenue excludes that from our joint venture
and associate holdings which are predominantly the operations of AWE, Merseyrail and previously Northern Rail, with these
representing the vast majority of the Group's activity in joint ventures and associates. At constant currency, the decline
in revenue was 4%. Drivers of the reduction included: in our Health business, we ceased to recognise as revenue the value
of goods purchased on our customers' behalf following changes to two procurement services contracts; in our Defence
business, the phased transfer back during 2016 of services that Serco had previously been providing to the Defence Science
& Technology Laboratory (DSTL) and for Defence Business Services (DBS); we also saw reduced volumes in our Child
Maintenance Group operations, and the ending or reduced scale of various other BPO and IT support services contracts.
These revenue reductions were partially offset from growth elsewhere, namely the start of hospital facility management
services for Barts Health NHS Trust and University Hospital Southampton NHS Foundation Trust, as well as some growth in our
European agency operations and from the new Skills Support for the Workforce (SSW) contracts.
Underlying Trading Profit was £35.1m (2016: £45.7m), representing an implied margin of 2.6% (2016: 3.3%). Trading Profit
includes the profit contribution (from which tax and interest have already been deducted) of joint ventures and associates;
if the £350m (2016: £474m) proportional share of revenue from joint ventures and associates was also included and if the
£7.0m (2016: £7.4m) share of interest and tax cost was excluded, the overall divisional margin would have been 2.5% (2016:
2.9%). The joint venture and associate profit contribution of £26.6m (2016: £31.3m) was £4.7m lower, reflecting the end of
the Northern Rail franchise in March 2016 and the lower shareholding of AWE from September 2016. The reduction in
Underlying Trading Profit also included the impact of other contract attrition and in-contract reductions, and the lower
profitability from new contracts in their initial transition and transformation stages. The non-repeat of certain costs
and impairments that occurred in 2016 and the progress made on cost efficiencies in 2017 only partially offset these areas
of profit reduction. Within Underlying Trading Profit there was £55m of OCP utilisation (2016: £60m), which served to
offset the Division's loss-making operations, principally COMPASS UK asylum seeker support services, the Caledonian
Sleeper, Future Provision of Marine Services (FPMS), Lincolnshire Country Council, and the Prisoner Escort & Custody
Services (PECS) contracts.
Contract & Balance Sheet Review adjustments resulted in a £30.6m net charge, driven by updating the assumptions regarding
operational and maintenance costs of running the Caledonian Sleepers contract, partially offset by a net £16m of releases
across other contracts. The Caledonian Sleepers charge of £47m reflects a sharp increase in the estimated costs related to
the delayed introduction and operation of the new sleeper service. We will be examining every option for reducing
operating costs; the position under the contract is expected to improve over time, as the terms of the Franchise Agreement
provide a mechanism that requires Transport Scotland to bear 50% of contract losses from 1 April 2020. In addition, from 1
April 2022, we have the right to seek adjustments to the financial terms of the Franchise Agreement that would result
either in a small positive profit margin for Serco from that date, or allow us to exit the contract. A detailed review of
provisions and Contract & Balance Sheet Review items is included in the Finance Review on pages 18 to 37. After these
adjustments, Trading Profit was £4.5m (2016: £84.5m, reflecting £35.3m net release for Contract & Balance Sheet Review
adjustments and a £3.5m one-time profit arising from a pension scheme settlement).
The UK & Europe division represented around £0.7bn of the Group's aggregate total value of signed contracts during 2017.
The largest award was a new contract to transform catering and cleaning for University Hospital Southampton NHS Foundation
Trust, with an estimated value of £125m over the ten-year term. Other new work included adding patient transport services
to our relationship with Barts Health NHS Trust, and environmental services to Rushmoor Borough Council. Of large new bids
where we were unsuccessful, these included immigration escorting for the Home Office and the regional MOD contracts for
Technical Support Services Provision to the UK's Royal Air Force.
The largest rebid or extension that was due during the year was for our provision of facilities management services at NHS
Forth Valley, where we successfully secured these for a further seven years. Others secured included contact services for
Hertfordshire County Council, specialist scientific and engineering support for the European Space Agency, our helicopter
aircrew training for the MOD and a number of other defence support services contracts, parking services for the West London
Alliance, environmental services for Wandsworth Council, and citizen services support to customers including Invest
Northern Ireland, the Department of Health and the Skills Funding Agency.
Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 30 contracts
with annual revenue of over £5m within the UK & Europe division; in aggregate, these represent approximately a third of the
current level of annual revenue for the division. The largest of these are the Northern Isles Ferries operations that are
expected to be extended from April 2018 to the end of 2019; the COMPASS contract is also due in 2019, along with a large
European agency contract; and in 2020, PECS is now assumed to be rebid if a final extension option is not exercised by the
customer, as well as that year our Anglia Support Partnership healthcare shared services operations. The Glasgow ACCESS
operations transferred by the end of 2017, therefore representing known attrition of approximately 4% of divisional
revenue.
Our pipeline of new bid opportunities has been significantly reduced following the removal of wins such the Barts and
Southampton NHS contracts, as well as from losses such as immigration escorting for the Home Office. The Defence Fire &
Risk Management Organisation (DFRMO) tender is still ongoing, as is that for an immigration removal centre. We have
partially reloaded the pipeline with some other smaller tenders for various defence support, hospital facilities management
and environmental services. For the successor to the COMPASS arrangements, we are also including in our new bid pipeline
the incremental opportunity beyond the regions where we currently operate.
Americas
Our Americas division accounts for approximately 23% of Serco's overall revenue, and provides professional, technology and
management services focused on Defence, Transport, and Citizen Services. The US Federal Government, including the
military, civilian agencies and the national intelligence community, are our largest customers. We also provide services
to the Canadian Government and to some US state and municipal governments.
Revenue for 2017 was £688.0m (2016: £691.4m), a modest reduction in reported currency. In US dollars, the main currency
for operations of the division, revenue was equivalent to approximately US$890m (2016: US$940m). The strengthening of
local currencies against Sterling increased revenue by £42m or 7%; the organic change at constant currency was therefore a
decline of 7%. The decline was driven by the end of the contracts during 2016 for the Virginia Department of
Transportation (VDOT) and for US Army transition assistance (SFLTAP). These and other smaller reductions were partially
offset by growth in our support of advanced anti-terrorism systems for ships and infrastructure at US Navy ports and
federal facilities, and some increases elsewhere in the volume of workload or task orders.
Underlying Trading Profit was £36.4m (2016: £43.0m), representing a margin of 5.3% (2016: 6.2%). While there was a £2.4m
favourable currency movement, there was the impact of the first half of 2016 benefitting from the longer running of the
VDOT and SFLTAP contracts which were only partially offset by cost efficiencies in 2017. Within Underlying Trading Profit
there was £5m (2016: £9m) of OCP utilisation, which reflects the offset of losses on the Ontario Driver Examination
Services contract.
Contract & Balance Sheet Review adjustments resulted in a £3.4m net release. After these adjustments, Trading Profit was
£39.8m (2016: £6.4m, reflecting £36.6m net charge for Contract & Balance Sheet Review adjustments).
Americas represented around £0.8bn of the Group's aggregate total value of signed contracts during the year. The largest
new award was for US Army base modernisation services and in particular IT support, valued at a total of $140m for the
five-year base period and five one-year option periods. The second largest was to provide supply chain management services
for hazardous materials at three US Navy Fleet Readiness Centers, valued at a total of $101m for the base period and four
one-year options. Smaller new awards included safety service patrol for the Texas Department of Transportation, and
numerous US Navy ship and shore defence equipment modernisation task orders. Of rebids and extensions secured, the largest
was for the US Patent & Trademark Office (USPTO) for a further ten years, albeit the new contract is for a reduced volume
of work; others secured included fleet services for Louisville Gas & Electric Company, parking meter management in San
Francisco and support services for the US Federal Retirement Thrift Investment Board and the US Government Accountability
Office. Serco was unsuccessful in a large new bid opportunity to be prime contractor for US Navy systems support, but has
potential for a share of work through sub-contract relationships; there were no other major new pipeline decisions or large
rebids or extensions due during the year.
Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 12 contracts
with annual revenue of over £5m within the Americas division; in aggregate, these represent around 50% of the current level
of annual revenue for the division; this high proportion reflects that our contract supporting the US Affordable Care Act
(ACA), which currently accounts for around 30% of divisional revenue, requires securing a rebid from 30 June 2018; the
Global Installation Contract covering areas of our defence ship modernisation work is due for rebid in 2019, while our
support to the Federal Aviation Administration's (FAA) Contract Tower (FCT) Program will become due for rebid once again in
2020.
Our pipeline of major new bid opportunities due for decision within the next 24 months includes further important
opportunities to provide various support functions to the US Navy. A defence opportunity to support US Air Force radar
systems as well as various other defence support bids were added during the year, as were other tenders for transport
operations and fleet support and Citizen Services records management. Opportunities for immigration services were removed
from the pipeline due to delays in tender processes.
Future profitability will as usual be shaped by the outcomes of the major new bid opportunities in the region, but in
particular by the rebid outcome due by 30 June 2018 and the future scale of operation of the ACA contract and its
absorption of overhead costs.
Serco was pleased to announce in June 2017 that David J. Dacquino would become Chief Executive Officer of the Americas
division, with Dan Allen having informed the business back in February of his intention to retire. Dave Dacquino joined
Serco in 2015 to lead the Americas' Defence business, bringing deep knowledge and experience from across the defence,
aeronautics, logistics and technical services industries.
AsPac
Operations in the Asia Pacific division include Justice, Immigration, Defence, Health, Transport and Citizen Services in
Australia, New Zealand and Hong Kong. Serco's operations in Australia are by far the largest element of the division; the
country represents approximately 19% of total Revenue for the Group.
Revenue for 2017 was £579.0m (2016: £619.7m), a decline of 7%. In Australian dollars, the main currency for operations of
the division, revenue for the year was equivalent to approximately A$980m (2016: A$1,140m). The movements in local
currencies against Sterling increased revenue by £48m or 7%; the acquisition of the other 50% of a small defence services
joint venture added 1% to revenue; the organic change at constant currency was therefore a decline of 15%. This reduction
was driven by the end of the Armidale Class Patrol Boats (ACPB), Western Australia Court Security & Custodial Services
(WACSCS) and Mount Eden contracts, together with some smaller reductions from other contracts ending or reducing in scope;
there was some growth in Citizen Services contact and processing support which partially offset this attrition.
Underlying Trading Profit was £23.7m (2016: £24.9m), representing a margin of 4.1% (2016: 4.0%). While there was a
favourable currency movement of £2.1m, the net of other movements reflected contract attrition and other margin pressures
with only partial offset from progress on cost efficiencies and growth from new work. Within Underlying Trading Profit
there was £9m of OCP utilisation (2016: £12m).
Contract & Balance Sheet Review adjustments resulted in a £11.4m net release, the largest element of which was a further
OCP release on ACPB reflecting revised assumptions of the residual liability after the contract transferred to a new
operator during the year. The ACPB contract was the largest of the OCP contracts, and is the first of the major OCP
contracts to come to an end. After these adjustments, Trading Profit was £35.1m (2016: £34.2m, reflecting £9.3m net
release for Contract & Balance Sheet Review adjustments).
AsPac represented around £1.8bn of the Group's aggregate total value of signed contracts during the year. By far the
largest element of this was approximately £1.5bn for the 20-year contract valued at A$2.6bn for the operation of New
Grafton Correctional Centre (NGCC) which is expected to commence in 2020; NGCC will be the largest correctional centre in
Australia, consisting of a total of 1,700 beds in three individual security categories, and draws upon Serco's experience
of managing correctional facilities in the UK, New Zealand and elsewhere in Australia, which includes Australia's current
largest facility, Acacia Prison. Other smaller new wins included contact services support in Australia for the Department
of Human Services. Extensions and rebids awarded in the year included traffic camera support in the Victoria, and
passenger and integrated transport information services for transport authorities in Western Australia and New South Wales.
There were no other larger rebids or major new bid pipeline decisions made in the year.
Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 10 contracts
with annual revenue of over £5m within the AsPac division; in aggregate, these represent just over half of the current
level of annual revenue for the division; this high proportion reflects that the Australia onshore immigration services
contract requires rebid or extension at the end of 2019, with this accounting for over 30% of current divisional revenue.
Our pipeline of major new bid opportunities due for decision within the next 24 months includes some further (but far
smaller than Grafton) Justice & Immigration opportunities, as well as in Defence support services. We will look to build
the pipeline further in these sectors as well as Citizen Services, Transport and Health.
Middle East
Operations in the Middle East division include Transport, Defence, Health and Citizen Services, with the region accounting
for approximately 12% of the Group's total revenue.
Revenue for 2017 was £351.9m (2016: £324.8m), an increase of 8%. The strengthening of local currencies against Sterling
provided growth of £21m or 6%; the organic change at constant currency was therefore growth of 2%. Growth came from new
contracts for facilities management at Dubai Airport and for a financial services company in Abu Dhabi, though these were
partially offset by reductions related to the Dubai Air Navigation Services and Staff College training for the Qatar Armed
Forces contracts, as well as a small number of other operations reducing in scope or volume including the Middle East
Logistics & Base Support (MELABS) contract that supports the Australian Defence Force in the region.
Underlying Trading Profit was £16.2m (2016: £16.6m), representing a margin of 4.6% (2016: 5.1%). While there was a £1.2m
favourable currency movement, there was an overall reduction in profitability due in large part to the non-repeat of the
higher defence logistics volumes experienced in the first half of 2016, together with the impact of other contract scope
reductions and attrition. There are no OCP contracts in the division and therefore no OCP utilisation within Underlying
Trading Profit.
There were no Contract & Balance Sheet Review adjustments in the year, therefore Trading Profit was also £16.2m (2016:
£18.8m, reflecting £2.2m net release for Contract & Balance Sheet Review adjustments).
The Middle East represented around £0.1bn of the Group's aggregate total value of signed contracts during the year.
Amongst smaller contract awards were new wins to provide facilities management in Abu Dhabi and defence training support in
Qatar. Serco was unsuccessful however in pursuing the very large tenders for light rail and tram operations in the region.
Extensions to existing work included facilities management for Cleveland Clinic Abu Dhabi, and air navigation services and
training in Bahrain and Iraq; there were no other large rebid or extension decisions due in the year.
Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 13 contracts
with annual revenue of over £5m within the Middle East division; in aggregate, these represent well over half of the
current level of annual revenue for the division. There is a high proportion of work to secure in 2019, when the Dubai
Metro, MELABS and Cleveland Clinic Abu Dhabi contracts each require extending or rebidding; by 2020, our Dubai Air
Navigation Services will also become due for further extension or rebid.
Our pipeline of major new bid opportunities in the region has reduced very significantly following the outcome of the light
rail and tram bids. There are some other smaller opportunities in transport and defence support services, and effort is
ongoing to rebuild a stronger pipeline.
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.
Benefiting from actions to deliver savings and improve efficiencies of our central functions, corporate costs in 2017
reduced to £41.6m (2016: £43.5m).
Finance Review
For the year ended 31 December 2017 Underlying £m Non underlying items£m Trading £m Amortisation and impairment of intangibles arising on acquisition£m Less discontinued pre exceptional*£m Statutory pre exceptional£m Continuing and discontinued exceptional items£m Less discontinued exceptional items*£m Statutory£m
Revenue 2,953.6 - 2,953.6 - - 2,953.6 - - 2,953.6
Cost of sales (2,688.9) (15.8) (2,704.7) - - (2,704.7) - - (2,704.7)
Gross profit 264.7 (15.8) 248.9 - - 248.9 - - 248.9
Administrative expenses (222.2) - (222.2) (4.4) - (226.6) (19.6) - (246.2)
Share of profits in joint ventures and associates, net of interest and tax 27.3 - 27.3 - - 27.3 - - 27.3
Profit before interest and tax 69.8 (15.8) 54.0 (4.4) - 49.6 (19.6) - 30.0
Margin 2.4% 1.8% 1.7% 1.0%
Net finance costs (11.6) - (11.6) - - (11.6) - - (11.6)
Other gains - 0.7 0.7 - - 0.7 - - 0.7
Profit before tax 58.2 (15.1) 43.1 (4.4) - 38.7 (19.6) - 19.1
Tax charge (20.6) 5.0 (15.6) 1.6 - (14.0) (5.0) - (19.0)
Effective tax rate (35.4%) (36.2%) (36.2%) (99.5%)
Profit / (loss) for the period 37.6 (10.1) 27.5 (2.8) - 24.7 (24.6) - 0.1
Minority interest 0.3 0.3 0.3 0.3
Earnings / (loss) per share (pence) 3.42 2.50 2.24 (0.02)
* No amounts are recorded as discontinued operations for the year ended 31 December 2017.
For the year ended31 December 2016 (restated*) Underlying £m Non underlying items£m Trading £m Amortisation and impairment of intangibles arising on acquisition£m Less discontinued pre exceptional£m Statutory pre exceptional£m Continuing and discontinued exceptional items£m Less discontinued exceptional items£m Statutory£m
Revenue 3,047.8 - 3,047.8 - (36.8) 3,011.0 - - 3,011.0
Cost of sales* (2,782.9) 18.2 (2,764.7) - 40.1 (2,724.6) - - (2,724.6)
Gross profit* 264.9 18.2 283.1 - 3.3 286.4 - - 286.4
Administrative expenses* (216.2) - (216.2) (5.1) - (221.3) (70.5) 14.2 (277.6)
Share of profits in joint ventures and associates, net of interest and tax 33.4 - 33.4 - - 33.4 - - 33.4
Profit before interest and tax 82.1 18.2 100.3 (5.1) 3.3 98.5 (70.5) 14.2 42.2
Margin 2.7% 3.3% 3.3% 1.4%
Net finance costs (12.6) - (12.6) - - (12.6) (0.4) 0.4 (12.6)
Profit before tax 69.5 18.2 87.7 (5.1) 3.3 85.9 (70.9) 14.6 29.6
Tax charge (24.4) 6.7 (17.7) 1.8 0.1 (15.8) 3.1 - (12.7)
Effective tax rate 35.2% 20.2% 18.4% 42.9%
Profit for the period from continuing operations 45.1 24.9 70.0 (3.3) 3.4 70.1 (67.8) 14.6 16.9
Loss for the period from discontinued operations - - - - (3.4) (3.4) - (14.6) (18.0)
Profit / (loss) for the period 45.1 24.9 70.0 (3.3) - 66.7 (67.8) - (1.1)
Minority interest 0.1 0.1 0.1 0.1
Earnings / (loss) per share (pence) 4.13 6.42 6.12 (0.11)
* Costs included within cost of sales and administrative expenses have been reallocated, resulting in a restatement. See
note 1 to the Condensed Consolidated Financial Statements.
Change regarding the classification of cost items within cost of sales and administrative expenses
The Group has undergone a programme of work on its financial data structures to appropriately allocate and charge costs to
the relevant divisions and between cost of sales and administrative expenses. As a result of the activities performed in
this area, the Group's classification of cost items in the income statement has changed. The prior year's results have been
restated to reflect the cost items identified which should have been reallocated in 2016. This resulted in increasing
administrative expenses by £43.0m and decreasing cost of sales by the same amount. The change in policy has no impact on
operating profit, any other item below this on the income statement, or any of the Group's key performance measures.
Cost of sales are considered to be the costs of operating contracts. This includes the unavoidable costs of servicing
contracts and all costs that a contract would incur purely on its own without a parent company, regardless of how those
services are delivered within the wider Group, such as IT or Human Resource management services provided centrally.
Alternative Performance Measures (APMs) and other related definitions
Overview
APMs used by the Group are reviewed below to provide a definition and reconciliation from each non-IFRS APM to its IFRS
equivalent, and to explain the purpose and usefulness of each APM.
In general, APMs are presented externally to meet investors' requirements for further clarity and transparency of the
Group's financial performance. The APMs are also used internally in the management of our business performance, budgeting
and forecasting, and for determining Directors' remuneration and that of other management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being included in an APM, this reflects revenues presented
elsewhere within the reported financial information, except where amounts are recalculated to reflect constant currency.
Where items of profits or costs are being excluded in an APM, these are included elsewhere in our reported financial
information as they represent actual profits or costs of the Group, except where amounts are recalculated to reflect
constant currency. As a result, APMs allow investors and other readers to review different kinds of revenue, profits and
costs and should not be used in isolation. Other commentary within the preliminary announcement, including the other
sections of this Finance Review, as well as the Condensed Consolidated Financial Statements and the accompanying notes,
should be referred to in order to fully appreciate all the factors that affect our business. We strongly encourage readers
not to rely on any single financial measure, but to carefully review our reporting in its entirety.
The methodology applied to calculating the APMs has not changed during the year for any measure.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 38, reflects revenue translated
at the average exchange rates. In order to provide a comparable movement on the previous year's results, reported revenue
is recalculated by translating non-Sterling values for the year to 31 December 2017 into Sterling at the average exchange
rate for the year ended 31 December 2016. All revenue in 2017 arose from continuing activities.
For the year ended 31 December 2017£m
Reported revenue at constant currency 2,832.0
Foreign exchange differences 121.6
Reported revenue at reported currency 2,953.6
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses acquired during a particular year and/or generated by
businesses sold during a particular year up to the date of disposal. In order to provide a comparable movement which
ignores the effect of both acquisitions and disposals on the previous year's results, Organic Revenue at constant currency
is recalculated by excluding the impact of any relevant acquisitions or disposals.
For the year ended 31 December 2017, an adjustment was required for the disposal of the remaining element of the UK private
sector BPO business, consisting of a single contract, sold on 3 July 2017. This business was previously reported within
discontinued operations but included as continuing in 2017 as it does not have a material impact on the Group's results.
The Group disposed of Service Glasgow LLP on 1 December 2017, which also consisted of a single contract. However, this
disposal arose as a result of normal contract attrition rather than as a result of the disposal of a wider business and
hence this is not excluded for the Organic Revenue calculation.
The only acquisition excluded for the calculation of Organic Revenue in the year relates to the acquisition of 50% of the
issued share capital of Serco Sodexo Defence Services Pty Ltd, resulting in full control being obtained. Serco Sodexo
Defence Services Pty Ltd was previously a 50% owned joint venture accounted for on an equity accounting basis and therefore
no revenues had previously been recorded in the Group's results.
Organic Revenue growth is calculated by comparing the current year Organic Revenue at constant currency exchange rates with
the prior year Organic Revenue at reported currency exchange rates.
For the year ended 31 December 2017£m
Organic Revenue at constant currency 2,823.1
Foreign exchange differences 121.3
Organic Revenue at reported currency 2,944.4
Impact of any relevant acquisitions or disposals 9.2
Reported revenue at reported currency 2,953.6
For the year ended 31 December 2016£m
Organic Revenue at reported currency (continuing activities only) 3,011.0
Impact of any relevant acquisitions or disposals -
Reported revenue at reported currency (continuing activities only) 3,011.0
Revenue from continuing and discontinued operations
Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 38, reflects only that from
continuing operations, with the post tax result of discontinued operations consolidated as a single line at the bottom of
the Condensed Consolidated Income Statement. The alternative measure includes discontinued operations for the benefit of
consistency with previously reported results and to reflect the overall change in scale of the Group's operations. The
alternative measure allows the performance of the discontinued operations themselves, and their impact on the Group as a
whole, to be evaluated on measures other than just the post tax result. No operations were classified as discontinued in
2017 as there was a single remaining business as at 1 January 2017 which generated insignificant revenue and profit up to
the date of disposal of 3 July 2017. Discontinued operations in the prior year reflect the former Global Services division
which consisted of the Group's private sector BPO operations.
For the year ended 31 December 2017£m 2016£m
Revenue from continuing and discontinued operations 2,953.6 3,047.8
Exclude revenue from discontinued operations - (36.8)
Reported revenue (continuing activities only) 2,953.6 3,011.0
Revenue from continuing operations, including share of joint ventures and associates
Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 38, excludes the Group's share of
revenue from joint ventures and associates, with Serco's share of profits in joint ventures and associates (net of interest
and tax) consolidated within Reported Operating Profit as a single line further down the Condensed Consolidated Income
Statement. The alternative measure includes the share of joint ventures and associates for the benefit of reflecting the
overall change in scale of the Group's ongoing operations, which is particularly relevant for evaluating Serco's presence
in market sectors such as Defence and Transport. The alternative measure allows the performance of the joint venture and
associate operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the
post tax result.
For the year ended 31 December 2017£m 2016£m
Revenue from continuing operations, including share of joint ventures and associates 3,310.3 3,491.8
Exclude share of revenue from joint ventures and associates (356.7) (480.8)
Reported revenue (continuing activities only) 2,953.6 3,011.0
Alternative profit measures
For the year ended 31 December 2017£m 2016£m
Underlying Trading Profit 69.8 82.1
Non-underlying items:
Include OCP charges and releases (19.0) 9.6
Include other Contract & Balance Sheet Review adjustments 3.2 4.6
Include benefit from non-depreciation and amortisation of assets held for sale - 0.5
Include other one-time items - 3.5
(15.8) 18.2
Trading Profit 54.0 100.3
Include operating exceptional items (continuing operations only) (19.6) (56.3)
Include amortisation and impairment of intangibles arising on acquisition from continuing and discontinued operations (4.4) (5.1)
Exclude operating loss from discontinued operations - 3.3
Operating profit (continuing activities only) 30.0 42.2
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur within
Trading Profit and remove the impact of historical issues. UTP therefore provides a measure of the underlying performance
of the business in the current year. For 2016 there were four items excluded from UTP, only two of which required
adjustment in 2017.
Charges and releases on all Onerous Contract Provisions (OCPs) are excluded in the current and prior years. OCPs reflect
the future multiple year cost of delivering onerous contracts and do not reflect only the current cost of operating the
contract in the latest individual year. It should be noted that, as for operating profit, UTP benefits from OCP utilisation
of £69.3m in 2017 (2016: £84.2m) which neutralises the in-year losses on previously identified onerous contracts, therefore
it is only charges or releases of OCPs that are adjusted for.
Revisions to accounting estimates and judgements which arose during the 2014 Contract & Balance Sheet Review are separately
reported where the impact of an individual item is material. Only one such item was noted in 2017, relating to a release of
a provision made during the Contract & Balance Sheet Review which has been released following a change in the Group's
obligations.
Both OCP adjustments and other Contract & Balance Sheet Review adjustments are identified and separated from the APM in
order to give clarity of the underlying performance of the Group and to separately disclose the progress made on these
items.
The benefit of depreciation and amortisation charges not being taken in the Group accounts in relation to assets held for
sale were excluded in the prior year. Such charges were being taken in the subsidiary accounts to reflect the reduction in
value of the underlying assets, and we consider it relevant to show the effect this would have on the Group performance
measure. No assets are included as held for sale in 2017 and therefore no adjustment is required in 2017.
Finally, any other significant items that have a one-time financial impact are excluded, which for 2016 related to the
one-time pension settlement associated with the early exit of a UK local authority contract in 2015. This item was distinct
from exceptional items in that it arose from normal contract exit conditions. No such material one-time items occurred in
2017.
Underlying trading margin is calculated as UTP divided by revenue from continuing and discontinued operations.
The non-underlying column in the summary income statement on page 18 includes the tax impact of the above items and tax
items that, in themselves, are considered to be non-underlying. Further detail of such items is provided in the tax section
below.
Trading Profit
The Group uses Trading Profit as an alternative measure to operating profit, as shown on the Group's Condensed Consolidated
Income Statement on page 38, by making three adjustments. Trading Profit is a metric used to determine the performance and
remuneration of the Executive Directors.
First, Trading Profit excludes exceptional items, being those considered material and outside of the normal operating
practice of the Group to be suitable of separate presentation and detailed explanation.
Second, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on
judgements about the value and economic life of assets that, in the case of items such as customer relationships, would not
be capitalised in normal operating practice.
Third, the Trading Profit of discontinued operations is included as this benefits from consistency with previously reported
results, reflects the overall change in scale of the Group's operations and takes account of the performance of the
discontinued operations themselves. This allows their impact on the Group as a whole to be evaluated on measures other than
just the post tax result. There were no discontinued operations in 2017.
UTP at constant currency
UTP disclosed above has been translated at the average foreign exchange rates for the year. In order to
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