REG - Serco Group PLC - 2017 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 3
22/02/2018 07:05
- Part 3: For the preceding part double click ID:nRSV5870Fb
Income Statement on page 38, includes exceptional items
charged or credited to the income statement in the year. EPS before
exceptional items aids consistency with historical results and is a metric
used in assessing the performance and remuneration of the Executive Directors.
Underlying EPS from continuing and discontinued operations
Reflecting the same adjustments made to operating profit to calculate UTP as
described above, and including the related tax effects of each adjustment and
any other non underlying tax adjustments as described in the tax charge
section below, an alternative measure of EPS is presented. This aids
consistency with historical results, and enables performance to be evaluated
before the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS from continuing and
discontinued operations is provided in the summary income statements on page
18.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect net cash inflow
from operating activities before exceptional items, which is the measure shown
on the Condensed Consolidated Cash Flow Statement on page 42. This IFRS
measure is adjusted to include dividends we receive from joint ventures and
associates and deducting net interest paid and net capital expenditure on
tangible and intangible asset purchases. FCF is considered relevant to reflect
the cash performance of business operations after meeting usual obligations of
financing and tax. It is therefore a measure that is before all other
remaining cash flows, being those related to exceptional items, acquisitions
and disposals, other equity-related and debt-related funding movements, and
foreign exchange impacts on financing and investing activities. FCF is
therefore a measure to assess the cash flow generated by the business and aids
consistency for comparison to historical results. FCF is a metric used to
determine the performance and remuneration of the Executive Directors.
For the year ended 31 December 2017 2016
£m £m
Free Cash Flow (6.7) (33.0)
Exclude dividends from joint ventures and associates (28.2) (40.0)
Exclude net interest paid 17.0 18.7
Exclude capitalised finance costs paid - 0.3
Exclude purchase of intangible and tangible assets net of proceeds from 34.6 31.6
disposal
Cash flow from operating activities before exceptional items 16.7 (22.4)
Exceptional operating cash flows (32.5) (39.9)
Cash flow from operating activities (15.8) (62.3)
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In order to
calculate an appropriate cash conversion metric equivalent to UTP, Trading
Cash Flow is derived from FCF by excluding tax and interest items. UTP cash
conversion therefore provides 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. As Trading Cash Flow was an outflow in
2016, a conversion percentage of UTP is not presented.
For the year ended 31 December 2017 2016
£m £m
Free Cash Flow (6.7) (33.0)
Add back:
Tax paid 11.4 5.6
Non-cash R&D expenditure 0.2 0.4
Net interest received 17.0 18.7
Capitalised finance costs paid - 0.3
Trading Cash Flow 21.9 (8.0)
Underlying Trading Profit 69.8 82.1
Underlying Trading Profit cash conversion 31% N/A
Net Debt
We present an alternative measure to bring together the various funding
sources that are included on the Group's Condensed Consolidated Balance Sheet
on page 41 and the accompanying notes. Net Debt is a measure to reflect the
net indebtedness of the Group and includes all cash and cash equivalents and
any debt or debt like items, including any derivatives entered into in order
to manage risk exposures on these items.
For the year ended 31 December 2017 2016
£m £m
Cash and cash equivalents 112.1 177.8
Loans receivable 25.7 22.9
Loans payable (271.5) (299.9)
Obligations under finance leases (20.2) (28.2)
Derivatives relating to Net Debt 12.8 18.1
Net Debt (141.1) (109.3)
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used by the Group
and is a metric used to determine the performance and remuneration of the
Executive Directors. ROIC is calculated based on UTP and Trading Profit using
the Condensed Consolidated Income Statement for the year and a two point
average of the opening and closing balance sheets. The composition of Invested
Capital and calculation of ROIC are summarised in the table below.
For the year ended 31 December 2017 2016
£m £m
Non-current assets
Goodwill 551.3 577.9
Other intangible assets 66.7 83.6
Property, plant and equipment 65.2 69.3
Interest in joint ventures and associates 14.3 14.4
Trade and other receivables 57.3 44.4
Current assets
Inventory 17.4 22.4
Trade and other receivables 506.5 543.5
Total invested capital assets 1,278.7 1,355.5
Current liabilities
Trade and other payables (462.8) (524.5)
Non-current liabilities
Trade and other payables (28.7) (16.8)
Total invested capital liabilities (491.5) (541.3)
Invested Capital 787.2 814.2
Two point average of opening and closing Invested Capital 800.7 768.7
Trading Profit 54.0 100.3
ROIC% 6.7% 13.0%
Underlying Trading Profit 69.8 82.1
Underlying ROIC% 8.7% 10.7%
Overview of financial performance
Revenue
Reported Revenue declined by 2% in the year to £2,953.6m (2016: £3,011.0m),
a 6% reduction in constant currency.
No revenue arose in 2017 from operations classified as discontinued, with
total revenues for the year ended 31 December 2016 from continuing and
discontinued operations being £3,047.8m.
Commentary on the revenue performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Trading Profit
Trading Profit for the year was £54.0m (2016: £100.3m). Trading Profit for
the year ended 31 December 2016 included a loss on discontinued operations of
£3.3m.
Commentary on the trading performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Underlying Trading Profit
UTP was £69.8m (2016: £82.1m), down 15%. At constant currency, UTP was
£18.8m lower than 2016 at £63.3m, with a movement of £4.6m relating to the
results of discontinued operations in 2016.
Commentary on the underlying performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Excluded from UTP were net charges from OCPs of £19.0m (2016: net releases of
£9.6m) following the annual reassessment undertaken as part of the budgeting
process. Also excluded from UTP were net releases of £3.2m (2016: net
releases of £4.6m) relating to other provisions and accruals for items
identified during the 2014 Contract & Balance Sheet Review. UTP also
excluded the benefit arising from the non-depreciation and amortisation of
assets classified as held for sale in 2016 of £0.5m; there were no such
assets in 2017. Other one-time items of £3.5m excluded from UTP in 2016
related to a pension scheme settlement arising from the early exit of a UK
Local Authority contract in 2015; there were no such adjustments necessary for
one-time items in 2017.
The cumulative to date improvement to Trading Profit as a result of OCP
charges and releases and adjustments to items identified during the 2014
Contract & Balance Sheet Review is £19.3m (2016: £35.1m). This
represents 3% of the 2014 total charge to Trading Profit arising from the
Contract & Balance Sheet Review.
The tax impact of items in UTP and other non underlying tax items is discussed
in the tax section of this Finance Review.
Discontinued operations
The Global Services division, representing private sector BPO operations, was
classified as a discontinued operation in 2015 and 2016. Disposal of the
offshore BPO business was largely completed in December 2015, with the
disposals of two much smaller remaining elements completed in March 2016 and
December 2016. The residual UK onshore private sector BPO operations were sold
or exited in 2016 with the exception of one business, consisting of a single
contract, the disposal of which completed in July 2017. Total revenues for the
remaining operations were £5.4m and the loss before exceptional items was
£0.6m for the year ended 31 December 2017, therefore the results have been
included in continuing operations in 2017 on the grounds of materiality.
The amounts reported as discontinued operations in the prior year were as
follows:
For the year ended 31 December 2016
£m
Revenue 36.8
Underlying Trading Loss (4.6)
Onerous contract and Contract & Balance Sheet Review adjustments 0.8
Benefit from non-depreciation and non-amortisation of assets held for sale 0.5
Trading Loss (3.3)
Amortisation and impairment of intangibles arising on acquisition -
Operating loss before exceptional items (3.3)
Exceptional loss on disposal of subsidiaries and operations (2.8)
Other exceptional operating items (11.4)
Exceptional operating items (14.2)
Operating loss (17.5)
Exceptional finance costs (0.4)
Loss before tax (17.9)
Tax charge (0.1)
Net loss on discontinued operations (attributable to equity owners of the (18.0)
Company) as presented in the income statement
Joint ventures and associates - share of results
In 2017, the most significant joint ventures and associates in terms of scale
of operations were AWE Management Limited and Merseyrail Services Holding
Company Limited, with dividends received of £17.1m (2016: £19.6m) and £7.3m
(2016: £7.3m) respectively. Total revenues generated by these businesses were
£951.8m (2016: £968.1m) and £155.7m (2016: £150.3m) respectively. From
September 2016, there was a change in the AWE Management Limited shareholding
structure, with the Group's shareholding reducing from 33.3% to 24.5% by way
of a return of shares.
While the revenues and individual line items are not consolidated in the Group
Condensed Consolidated Income Statement, summary financial performance
measures for the Group's proportion of the aggregate of all joint ventures and
associates are set out below for information purposes.
For the year ended 31 December 2017 2016
£m £m
Revenue 356.7 480.8
Operating profit 34.4 40.7
Net investment finance costs (0.1) (0.6)
Income tax expense (7.0) (6.7)
Profit after tax 27.3 33.4
Dividends received from joint ventures and associates 28.2 40.0
The decline in revenue and profits on the prior year is partly due to the
change in shareholding in AWE Management Limited and partly due to the end of
the Northern Rail franchise on 31 March 2016.
Exceptional items
Exceptional items are items of financial performance that are outside normal
operations and are material to the results of the Group either by virtue of
size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the
performance of the Group.
Exceptional items arose on both the continuing and discontinued operations of
the Group in 2016. Exceptional items arising on discontinued operations are
disclosed on the face of the Condensed Consolidated Income Statement within
the profit or loss attributable to discontinued operations. There were no
discontinued operations in 2017.
For the year ended 31 December 2017 2016
£m £m
Exceptional items arising on continuing operations
Exceptional profit on disposal of subsidiaries and operations 0.3 2.9
Other exceptional operating items on continuing operations
Impairment of goodwill - (17.8)
Restructuring costs (28.6) (17.2)
Aborted transaction costs - (0.1)
Costs associated with UK Government review (0.4) (0.1)
Release of UK frontline clinical health contract provisions 0.4 0.6
Settlement of defined benefit pension obligations 10.3 (10.7)
Impairment of interest in joint venture and related loan balances 4.5 (13.9)
Impairment of AsPac customer lists (6.1) -
Other exceptional operating items (19.9) (59.2)
Exceptional operating items arising on continuing operations (19.6) (56.3)
Exceptional items arising on discontinued operations
Exceptional loss on disposal of subsidiaries and operations - (2.8)
Other exceptional operating items on discontinued operations
Restructuring costs - (1.1)
Movements in indemnities provided on business disposals - (13.7)
Movement in the fair value of assets transferred to held for sale - 3.4
Other exceptional operating items - (11.4)
Exceptional operating items arising on discontinued operations - (14.2)
Exceptional operating items arising on continuing and discontinued operations (19.6) (70.5)
Exceptional finance costs - discontinued - (0.4)
Exceptional tax - continuing (5.0) 3.1
Total operating and financing exceptional items in continuing and discontinued (24.6) (67.8)
operations
Exceptional profit on disposals
There were no material disposals of continuing operations in 2017.
Other exceptional operating items
The annual impairment testing of CGUs in 2017 has identified no impairment of
goodwill.
The Group is incurring costs in relation to restructuring programmes resulting
from the Strategy Review announced in 2015. These costs include redundancy
payments, provisions, external advisory fees and other incremental costs,
including in 2017 £2.8m of intangible asset impairment (2016: £nil). Due to
the nature and scale of the impact of the transformation phase of the Strategy
Review, the incremental costs associated with this programme are considered to
be exceptional. Costs associated with the restructuring programme resulting
from the Strategy Review must meet the following criteria: that they are
directly linked to the implementation of the Strategy Review; they are
incremental costs as a result of the activity; and they are non business as
usual costs. In 2017, a charge of £28.6m (2016: £17.2m) arose in relation to
the restructuring programme resulting from the Strategy Review.
Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £11.1m (2016: £6.7m)
and were included within operating profit before exceptional items. We expect
restructuring costs of approximately £35m to be incurred in 2018 which will
be treated as exceptional.
There were exceptional costs totalling £0.4m (2016: £0.1m) associated with
the UK Government reviews and the programme of Corporate Renewal. These costs
have historically been treated as exceptional and consistent treatment is
applied in 2017.
There were releases of provisions of £0.4m (2016: £0.6m) which were
previously charged through exceptional items in relation to the exit of the UK
frontline clinical health contracts.
An exceptional charge of £10.7m arose in 2016 in respect of the bulk transfer
of a number of employees that are being transferred from the Serco Pension and
Life Assurance Scheme (SPLAS) to the Principal Civil Service Pension Scheme.
This transfer was legally agreed in December 2016 at which point all
obligations of SPLAS to pay retirement benefits for these individuals were
eliminated and as a result, a settlement charge of £10.7m arose, for which a
provision was made. In 2017 a new agreement was reached with the UK Government
to transfer out the scheme members on an individual basis and the 2016 legal
and commercial arrangements were cancelled by consent of all parties. As a
result of the changes, the impact of the transfer was treated as an experience
gain adjustment through other comprehensive income and the majority of the
provision made in 2016 was reversed, resulting in a £10.3m credit to
exceptional items in 2017.
In 2016, a review of a joint venture's cash flow projections led to the
impairment of certain equity interests and associated receivables balances,
totalling £13.9m. The impairment was outside of the normal course of business
and of a significant value, and was therefore considered to be an exceptional
item. In the year ended 31 December 2017 payments of £4.5m were received
against the impaired loan. The likelihood of further cash receipts against the
receivables remains uncertain.
As a result of contracts coming to the end of their natural lives and no
significant new contracts being awarded by the customer, the remaining
customer relationship intangible assets of the DMS Maritime Pty Limited
business acquired in 2012 were impaired, totalling £6.1m.
Exceptional tax
Exceptional tax for the year was a tax charge of £5.0m (2016: £3.1m credit),
comprising a £2.3m credit on exceptional items within operating profit and a
£7.3m charge in respect of other exceptional tax items.
Exceptional costs of £19.6m only gave rise to a credit of £2.3m, as the
majority of these costs were incurred in the UK where they only impact our
unrecognised deferred tax in relation to losses.
The other exceptional tax items relate to two matters, the first is the impact
on tax of the pension buy-in disclosed in note 18 to the Condensed
Consolidated Financial Statements which led to a £95.0m reduction in the IFRS
valuation of the Group's defined benefit pension schemes and consequently a
deferred tax charge to the income statement of £16.1m. Movements in the
valuation of the Group's defined benefit pension schemes and the associated
deferred tax impact are reported in the Condensed Consolidated Statement of
Comprehensive Income (SOCI) and do not flow through the income statement,
therefore do not impact profit before tax or the tax charge. However, the net
amount of deferred tax recognised in the balance sheet relates to both the
pension accounting and other timing differences, such as recoverable losses.
As the net deferred tax balance sheet position is at the level supported by
future profit forecasts, the decrease in the deferred tax liability associated
with the pension scheme (with the benefit reported in the SOCI) leads to a
corresponding decrease in the deferred tax asset to match the future profit
forecasts. Such a reduction in the deferred tax asset therefore leads to a
charge to tax in the income statement.
The second element is a credit of £8.8m related to legislative changes in the
UK and the US which have impacted the value of deferred tax held on the
balance sheet. There is a reduction in the deferred tax liability that is held
in connection with our US operations of £12.5m, as future US tax liabilities
are expected to crystallise at lower US tax rates. The fall in future expected
US rates is primarily due to the enactment of the Tax Cuts & Jobs Act in
December 2017 which reduces the corporate income tax rate in the US from 35%
to 21% effective from 1 January 2018. In addition, there was a change in UK
tax law in 2017. This UK change will reduce the quantum of loss brought
forward that can be used to offset taxable profits arising in a year, and will
also enable losses carried forward in one company to be used to offset profits
in another. The combined impact of these UK law changes results in a tax
charge of £3.7m.
Pre exceptional finance costs and investment revenue
Investment revenue of £7.6m (2016: £9.3m) includes interest accruing on net
retirement benefit assets of £3.8m (2016: £4.7m), interest earned on
deposits and other receivables of £2.6m (2016: £3.6m) and the movement in
discounting of other receivables of £1.2m (2016: £1.0m).
Finance costs of £19.2m (2016: £21.9m) includes interest incurred on the
USPP loans and the Revolving Credit Facility of £14.0m (2016: £15.6m),
facility fees and other charges of £3.0m (2016: £3.5m), interest payable on
finance leases of £1.3m (2016: £1.6m), the movement in discount on
provisions of £1.3m (2016: £2.4m) and a credit for foreign exchange on
financing activities of £0.4m (2016: £1.2m).
Other gains
On 24 August 2017 the Group acquired 50% of the issued share capital of Serco
Sodexo Defence Services Pty Ltd for £1.6m, obtaining full control. Serco
Sodexo Defence Services Pty Ltd was previously a 50% owned joint venture
accounted for on an equity accounting basis. As a result of the increase in
ownership from 50% to 100%, the Group fair valued the existing 50%
shareholding and the resulting uplift in value of £0.7m was recorded in Other
gains, outside of operating results.
Tax
Tax charge
Underlying tax
In 2017 we recognised a tax charge of £20.6m on underlying trading profits
after finance cost. The effective tax rate in 2017 (35.4%) is at a similar
level to 2016 (35.2%).
Pre exceptional tax
We recognised a tax charge of £14.0m (2016: £15.8m) on pre exceptional
profits which includes £20.6m underlying tax, £1.6m tax impact of
amortisation on intangibles arising on acquisition and £5.0m credit on
non-underlying items. The £5.0m credit consists of the tax impact on
non-underlying items together with tax items that are in themselves considered
to be non-underlying, specifically:
· As noted above with regards to exceptional tax, movements in the
valuation of the Group's defined benefit pension schemes leads to a
corresponding adjustment to the deferred tax asset to match the future profit
forecasts. Such a change in the deferred tax asset impacts tax in the income
statement. Where deferred tax charges or releases are the result of movements
in the pension scheme valuations rather than trading activity, these are
excluded from the calculation of tax on underlying profit and the underlying
effective tax rate, with the prior periods being restated to reflect this.
These amounted to £1.9m for 2017 (2016: £nil).
· During the current period we have recognised an additional £11.1m of
deferred tax asset in relation to UK losses to reflect the improved forecast
profits of our UK operations. This credit nets against the charge (£3.7m)
taken to exceptional tax and described below, which relates to the UK law
change in 2017 to give a net increase in UK deferred tax assets of £7.4m.
· The tax on non-underlying items during the period totalled a credit
of £4.2m reflecting the impact of current or future tax deductions available.
The tax rate on profits before exceptional items on continuing operations, at
36.2% is higher than the UK standard corporation tax rate of 19.25%. This is
due to the upward impact of higher rates of tax on profits arising on our
international operations, together with the absence of any deferred tax credit
for current year losses incurred in the UK. This is only partially offset by
the downward impact of our joint ventures whose post-tax results are included
in our pre-tax profit and additional deferred tax assets that have been
recognised in relation to historic UK losses. Our tax charge in future years
will continue to be materially impacted by our accounting for UK deferred
taxes. To the extent that future UK tax losses are incurred and are not
recognised, our effective tax rate will be higher than prevailing standard
corporation tax rates. When our UK business returns to sustainable
profitability our existing UK tax losses will be recognised or utilised, and
the effective rate will be reduced.
The enactment of the Tax Cuts & Jobs Act in the US has not impacted our
pre exceptional tax charge during 2017 with the impact on our valuation of
deferred tax shown as an exceptional item and explained further above. In the
medium term, the new law is expected to have only a marginal impact on our tax
liability in the US. This is because although we will benefit from the fall in
tax rate, our US business bears interest cost, associated with historic
funding put in place to acquire US businesses, an element of which will not
lead to tax deductions in the medium term.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items section
above.
Contingent tax assets
A £17.4m UK tax asset has been recognised at 31 December 2017 (2016: £10.0m)
on the basis of utilisation against forecast taxable profits.
At 31 December 2017, the Group has estimated unrecognised UK deferred tax
assets of an additional £160m which are contingent on further improvement in
the UK profit forecast.
Taxes paid
Net corporation tax of £15.3m was paid during the year, relating primarily to
our operations in AsPac (£5.5m), Europe (£3.2m), Middle East (£1.5m)
and Americas (£5.1m). The Group's UK operations have transferred tax losses
to its profitable joint ventures and associates giving a cash tax inflow in
the UK of £4.4m. In addition there were small cash tax refunds where we have
overpaid tax in previous periods. This results in an overall tax paid figure
in our cash flow statement of £11.4m.
The amount of tax paid (£11.4m) differs from the tax charge in the period
(£19.0m) mainly due to the effect of future expected cash tax outflows for
which a charge has been taken in the current period and the impact of the time
lag on receipts of cash from joint ventures and associates for losses
transferred to them.
Further detail of taxes paid during the year is shown below.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as determined by
local legislation in the countries in which we operate, means that we pay a
variety of taxes across the globe. In order to increase the transparency of
our tax profile, we have shown below the cash taxes that we have paid across
our regional markets.
In total during 2017, Serco globally contributed £578m of tax to government
in the jurisdictions in which we operate.
Taxes by category
For the year ended 31 December 2017 Taxes Taxes collected Total
borne £m £m
£m
Corporation tax 15.3 - 15.3
VAT and similar 9.7 152.2 161.9
People taxes 109.0 284.1 393.1
Other taxes 6.7 0.5 7.2
Total 140.7 436.8 577.5
Taxes by region
For the year ended 31 December 2017 Taxes Taxes collected Total
borne £m £m
£m
UK & Europe 82.8 235.7 318.5
AsPac 25.6 121.5 147.1
Americas 30.2 76.8 107.0
Middle East 2.1 2.8 4.9
Total 140.7 436.8 577.5
Corporation tax, which is the only cost to be separately disclosed in our
Condensed Consolidated Financial Statements, is only one element of our tax
contribution. For every £1 of corporate tax paid directly by the Group (tax
borne), we bear a further £8.20 in other business taxes. The largest
proportion of these is in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect £3.10 on behalf of
national governments (taxes collected). This amount is directly impacted by
the people that we employ and the sales that we make.
Dividends
The Board is not recommending the payment of a dividend in respect of the 2017
financial year. The Board's appraisal of the appropriateness of dividend
payments takes 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 prevailing market outlook. Although the Board
is committed to resuming dividend payments as soon as it believes it prudent
to do so, in assessing whether we should resume dividend payments in respect
of 2017, we have been mindful of the fact there has been a reduction in
earnings, a free cash outflow and an increase in Net Debt. In these
circumstances, the Board believes that it would not be prudent to resume
dividend payments at the current juncture. For 2018, our guidance is for an
improvement in Underlying Trading Profit, but we expect Net Debt to still
increase, largely as a result of cash outflows related to exceptional
restructuring costs and taking opportunities for value-enhancing infill
acquisitions. The Board will continue to keep the dividend policy under close
consideration as we progress with transforming the Group and implementing our
strategy.
Share count and EPS
The weighted average number of shares for EPS purposes was 1,089.7m for the
year ended 31 December 2017 (2016: 1,088.3m). EPS before exceptional items
from both continuing and discontinued operations was 2.24p per share (2016:
6.12p); including the impact of exceptional items, EPS was a loss of 0.02p
(2016: 0.11p). Underlying EPS was 3.42p per share (2016: 4.13p).
Cash flows
The UTP of £69.8m (2016: £82.1m) converts into a trading cash inflow of
£21.9m (2016: outflow of £8.0m). The negative conversion in 2016 was
primarily due to the adverse working capital movement of £23.7m and the cash
outflows arising on the utilisation of contract provisions of £84.2m. In
2017, the working capital outflow is £9.0m and the OCP utilisation is
£69.3m.
The table below shows the operating profit and FCF reconciled to movements in
Net Debt. FCF for the year was an outflow of £6.7m compared to an outflow of
£33.0m in 2016. The improvement in FCF is largely as a result of a reduction
in operating profit before exceptional items on continuing and discontinued
operations from £95.2m in 2016 to £49.6m in 2017, which is more than offset
by an improvement in the net movement in non exceptional provisions from a
reduction in 2016 of £118.4m to a reduction in 2017 of £46.4m. The movement
in non exceptional provisions is partly due to the reduction in total
provision utilisation from £123.4m in 2016 to £82.2m in 2017.
The movement in Net Debt is an increase of £31.8m in 2017, a reconciliation
of which is provided at the bottom of the following table. The movement
includes a net outflow of £5.6m arising on the acquisition and disposal of
subsidiaries, primarily relating to the cash held by Service Glasgow LLP, an
entity disposed of in the year. In 2016 a net cash inflow of £19.2m arose
primarily as a result of the disposal of the private sector BPO business. The
movement in Net Debt for 2017 also includes a net exchange gain of £17.4m,
compared to a £41.8m loss in 2016.
For the year ended 31 December 2017 2016
£m £m
Operating profit on continuing operations 30.0 42.2
Operating loss on discontinued operations - (17.5)
Remove exceptional items 19.6 70.5
Operating profit before exceptional items on continuing and discontinued 49.6 95.2
operations
Less: profit from joint ventures and associates (27.3) (33.4)
Movement in provisions (46.4) (118.4)
Depreciation, amortisation and impairment of property, plant and equipment and 50.0 52.4
intangible assets
Other non-cash movements 11.4 11.5
Operating cash inflow before movements in working capital, exceptional items 37.3 7.3
and tax
Working capital movements (9.0) (23.7)
Tax paid (11.4) (5.6)
Non-cash R&D expenditure (0.2) (0.4)
Cash flow from operating activities before exceptional items 16.7 (22.4)
Dividends from joint ventures and associates 28.2 40.0
Interest received 0.5 1.4
Interest paid (17.5) (20.1)
Capitalised finance costs paid - (0.3)
Purchase of intangible and tangible assets net of proceeds from disposals (34.6) (31.6)
Free Cash Flow (6.7) (33.0)
Net cash (outflow) / inflow on acquisition and disposal of subsidiaries (5.6) 19.2
Other movements on investment balances 0.2 0.7
Capitalisation and amortisation of loan costs (0.8) (0.7)
Unwind of discounting and capitalisation of interest on loans receivable 3.4 2.9
New, acquired and disposed finance leases (4.7) (0.5)
Exceptional items (32.5) (40.2)
Cash movements on hedging instruments (2.5) 47.0
Foreign exchange gain / (loss) on Net Debt 17.4 (41.8)
Movement in Net Debt including assets and liabilities held for sale (31.8) (46.4)
Assets held for sale movement in Net Debt - 4.7
Net Debt at 1 January (109.3) (67.6)
Net Debt at 1 January including assets and liabilities held for sale (109.3) (62.9)
Net Debt at 31 December (141.1) (109.3)
Net Debt
As at 31 December 2017 2016
£m £m
Cash and cash equivalents 112.1 177.8
Loans receivable 25.7 22.9
Loans payable (271.5) (299.9)
Obligations under finance leases (20.2) (28.2)
Derivatives relating to Net Debt 12.8 18.1
Net Debt (141.1) (109.3)
Average Net Debt as calculated on a daily basis for the year ended 31 December
2017, was £184.3m (2016: £119.4m), compared with the opening and closing
positions of £109.3m and £141.1m respectively. Peak Net Debt was £242.7m
(2016: £182.9m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks that include
liquidity, the effects of changes in foreign currency exchange rates, interest
rates and credit risk. The Group has a centralised treasury function whose
principal role is to ensure that adequate liquidity is available to meet the
Group's funding requirements as they arise and that the financial risk arising
from the Group's underlying operations is effectively identified and managed.
Treasury operations are conducted in accordance with policies and procedures
approved by the Board and are reviewed annually. Financial instruments are
only executed for hedging purposes and speculation is not permitted. A monthly
report is provided to senior management outlining performance against the
Treasury Policy and the treasury function is subject to periodic internal
audit review.
Liquidity and funding
As at 31 December 2017, the Group had committed funding of £741m (2016:
£770m), comprising £261m of private placement notes and a £480m revolving
credit facility with a syndicate of banks, which was undrawn. In addition, the
Group had a receivables financing facility of £30.0m which was unutilised at
the year-end (2016: utilisation of £7.7m).
Following the further small disposals relating to the private sector BPO
business, the Group was required to offer two thirds of the net disposal
proceeds to the debt holders in prepayment. As a result of this process,
£3.7m ($4.9m) of private placement notes were repaid at par on 29 June 2017.
Interest rate risk
Given the nature of the Group's business, we have a preference for fixed rate
debt to reduce the volatility of net finance costs. Our Treasury Policy
requires us to maintain a minimum proportion of fixed rate debt as a
proportion of overall Net Debt and for this proportion to increase as the
ratio of EBITDA to interest expense falls. As at 31 December 2017, more than
100% of the Group's Net Debt was at fixed rates. Interest on the revolving
credit facility is at floating rate, however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of
its net investments in overseas subsidiaries. The Group manages this risk
where appropriate, by borrowing in the same currency as those investments.
Group borrowings are predominantly denominated in Sterling and US Dollar. The
Group manages its currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward contracts
where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk
on the amounts due from counterparties. The Group manages this risk by
adhering to counterparty exposure limits based on external credit ratings of
the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private
placement loan notes, receivables financing facility and 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. A reconciliation of the basis of calculation is
set out in the table below.
For the year ended 31 December 2017 2016
£m £m
Operating profit before exceptional items on continuing and discontinued 49.6 95.2
operations
Remove: Amortisation and impairment of intangibles arising on acquisition 4.4 5.1
Trading Profit 54.0 100.3
Exclude: Share of joint venture post-tax profits (27.3) (33.4)
Include: Dividends from joint ventures 28.2 40.0
Add back: Net non-exceptional charges to OCPs 19.0 -
Add back: Depreciation, amortisation and impairment of property, plant and 45.6 47.3
equipment and non acquisition intangible assets
Add back: Foreign exchange credit on investing and financing arrangements 0.4 1.2
Add back: Share based payment expense 11.4 9.7
Covenant EBITDA 131.3 165.1
Net finance costs on continuing and discontinued operations 11.6 12.6
Exclude: Net interest receivable on retirement benefit obligations 3.8 4.7
Exclude: Movement in discount on other debtors 1.2 1.0
Exclude: Foreign exchange on investing and financing arrangements 0.4 1.2
Add back: Movement in discount on provisions (1.3) (2.4)
Covenant net finance costs 15.7 17.1
Recourse Net Debt 141.1 109.3
Exclude: Disposal vendor loan note, encumbered cash and other adjustments 30.3 28.5
Covenant adjustment for average FX rates 7.8 (23.0)
CTNB 179.2 114.8
CTNB / covenant EBITDA (not to exceed 3.5x) 1.36x 0.70x
Covenant EBITDA / covenant net finance costs (at least 3.0x) 8.4x 9.7x
Net assets summary
As at 31 December 2017 2016
£m £m
Non-current assets
Goodwill 551.3 577.9
Other intangible assets 66.7 83.6
Property, plant and equipment 65.2 69.3
Other non-current assets 75.3 73.0
Deferred tax assets 55.0 50.8
Retirement benefit assets 41.8 150.4
855.3 1,005.0
Current assets
Inventories 17.4 22.4
Trade and other current assets 516.8 548.4
Current tax assets 11.2 11.0
Cash and cash equivalents 112.1 177.8
Total current assets 657.5 759.6
Total assets 1,512.8 1,764.6
Current liabilities
Trade and other current liabilities (464.0) (525.1)
Current tax liabilities (25.3) (25.9)
Provisions (148.5) (172.3)
Obligations under finance leases (8.5) (12.3)
Loans (31.8) (9.7)
Total current liabilities (678.1) (745.3)
Non-current liabilities
Other non-current liabilities (28.7) (16.8)
Deferred tax liabilities (20.4) (30.5)
Provisions (211.5) (249.4)
Obligations under finance leases (11.7) (15.9)
Loans (239.7) (290.2)
Retirement benefit obligations (15.5) (17.7)
(527.5) (620.5)
Total liabilities (1,205.6) (1,365.8)
Net assets 307.2 398.8
At 31 December 2017 the balance sheet had net assets of £307.2m, a movement
of £91.6m from the closing net asset position of £398.8m as at 31 December
2016. The decrease in net assets is mainly due to the following movements:
· A decrease in the net retirement benefit assets of Group funded
defined benefit pension schemes of £106.4m. In June 2017, the Trustees of the
Group's primary defined benefit pension scheme entered into a bulk annuity
purchase whereby an insurer will fund future benefit payments to the relevant
members. The liability to pay the members remains with the pension scheme
which continues to include the relevant pension liabilities, but an insurance
asset is held which is an equal and opposite amount to the liability. This
removes the risk of longevity and investment movements for this portion of the
scheme on a funding basis, and also removes the accounting risk of movements
in underlying assumptions on the liabilities. The transaction resulted in a
significant reduction in the surplus of the pension scheme under IFRS
accounting convention, but resulted in a reduction in the deficit that is
actuarially assessed for funding purposes of approximately £12m. As at 31
December 2017 the estimated actuarial deficit of this scheme was £33.7m
(2016: £42.6m).
· A decrease in provisions of £61.7m. Further details on provision
movements is provided below.
· The combined position of trade and other current assets and trade and
other current liabilities increased by £29.5m and Net Debt increased by
£31.8m. Further details of these movements are provided in the cash flow and
Net Debt sections above.
· A decrease in goodwill of £26.6m, caused by movements in foreign
exchange rates.
Provisions
The total of current and non-current provisions has decreased by £61.7m since
31 December 2016. The movement is due to a decrease in onerous contract
provisions of £52.0m, an increase in employee-related provisions of £10.6m,
a decrease in property provisions of £0.9m and a reduction in other
provisions of £19.4m.
The £10.6m increase in employee-related provisions is partly due to the
ongoing Strategy Review restructuring programme and partly relating to
obligations arising at the end of certain contracts. The decrease in other
provisions is primarily due to the release of £10.3m of exceptional
provisions relating to pensions, with the remaining movement comprised of
contract settlements and releases for potential claims.
Movements in contract provisions since the 31 December 2016 balance sheet
date, are as follows:
Onerous Contract Provisions
£m
At 1 January 2017 220.2
Charged to the income statement during the year - trading 62.0
Released to the income statement - trading (43.0)
Released to the income statement - exceptional (0.4)
Utilisation during the year (69.3)
Unwinding of discount 1.3
Foreign exchange (2.6)
At 31 December 2017 168.2
The balance of OCPs at 31 December 2017 was £168.2m (2016: £220.2m). OCP
balances are subject to ongoing review and a full bottom-up assessment of the
forecasts that form the basis of the OCPs is conducted as part of the annual
budgeting process. The net non-exceptional charge to OCPs was £19.0m in 2017
and utilisation was £69.3m.
In 2017, additional charges have been made in respect of future losses on a
number of onerous contracts totalling £62.0m. This increase related to
revisions to existing OCPs of £61.5m and a new provision raised on one
contract totalling £0.5m. The new contract has been operating for a number
of years and is expected to be terminated in 2018.
Included within additional charges made to existing OCPs is £47.0m relating
to the Caledonian Sleepers contract. This increase is partly due to revised
assumptions for the higher costs of running the contract and the impact from
delays in the delivery of new trains, which includes the higher cost of the
running old trains for longer, associated penalties and the forecast benefit
of revenue growth from the new trains being pushed back. In addition, we have
revised our revenue forecast for the contract based on the 2017 performance,
where even a modest reduction in annual revenue can have a significant impact
on a multi-year OCP. There continue to be a number of assumptions underpinning
the provision that have a range of potential outcomes, including the train
manufacturer delivering the new trains to the latest timetable and volume and
pricing increases driven by the improved passenger service from the new
trains. 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.
In addition to the Caledonian Sleepers contract, there have been net OCP
releases of £16.4m in UK & Europe and £11.4m in AsPac.
Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share capital of BTP
Systems, LLC, for consideration of US Dollar $20.5m in cash. Further details
on this post year end transaction are provided in note 21 to the Condensed
Consolidated Financial Statements.
The Group signed a revised Business Purchase Agreement (BPA) on 13 February
2018 with the Special Managers and Provisional Liquidators acting on behalf of
the relevant Carillion plc subsidiaries to acquire a portfolio of selected UK
health facilities management contracts. The portfolio has annual revenues of
approximately £90m and a weighted average remaining term of 14 years. Upon
the receipt by the Special Managers and Provisional Liquidators of the
requisite third party consents, each individual contract will be transferred
to Serco on a cash-free, debt-free basis, with the consideration to be paid in
instalments and to be satisfied using Serco's existing financing facilities.
If all the contracts are transferred to Serco under the revised BPA process,
the total consideration payable would be £29.7m. The consideration payable is
lower than the amount of £47.7m announced on 13 December 2017 in respect of
substantially the same contracts that were subject to the initial BPA signed
with Carillion plc at that date. The change in consideration reflects the
Group's re-evaluation of potential liabilities, indemnities, warranties and
the additional working capital investment required as a result of Carillion's
liquidation. The financial effects of this transaction have not been
recognised at 31 December 2017. As consents are required for each individual
contract to be transferred and therefore acquired, at the time the financial
statements were authorised for issue, no legal transfer or control of assets
had taken place and so no disclosures have been made in respect of the assets
and liabilities being acquired. The fair values of the assets and liabilities
will be determined at the date when contracts are acquired. It is also not yet
possible to provide detailed information about each class of acquired
receivables and any contingent liabilities in respect of the acquired
contracts.
As noted in the overview of performance above, the Group obtained full control
of Serco Sodexo Defence Services Pty Ltd by acquiring the remaining 50% of
issued share capital for £1.6m.
IFRS15
The Group has undertaken a robust assessment to determine the impact of IFRS15
on the opening balance sheet at 1 January 2017 and for the year ended 31
December 2017. The impact on opening retained earnings will be a reduction of
£32.8m and the impact on the opening OCP balance will be a reduction of
£21.7m. Underlying Trading Profit will decrease by £0.3m and, as a result of
a lower OCP release, Trading Profit will decrease by £8.7m for the year ended
31 December 2017. This low adjustment is reflective of the prudent accounting
practices adopted by the Group following the Contract & Balance Sheet
Review undertaken in 2014 and the repeat nature of the services provided.
Further detail on the adjustment is provided in note 1 of the Group's
Condensed Consolidated Financial Statements.
Financial Statements
Condensed Consolidated Income Statement
For the year ended 31 December
Continuing operations 2017 2016
£m (restated *)
£m
Revenue 2,953.6 3,011.0
Cost of sales* (2,704.7) (2,724.6)
Gross profit* 248.9 286.4
Administrative expenses*
General and administrative expenses (222.2) (216.2)
Exceptional profit on disposal of subsidiaries and operations 0.3 2.9
Other exceptional operating items (19.9) (59.2)
Other expenses - amortisation and impairment of intangibles arising on (4.4) (5.1)
acquisition
Total administrative expenses* (246.2) (277.6)
Share of profits in joint ventures and associates, net of interest and tax 27.3 33.4
Operating profit 30.0 42.2
Operating profit before exceptional items 49.6 98.5
Investment revenue 7.6 9.3
Finance costs (19.2) (21.9)
Total net finance costs (11.6) (12.6)
Other gains 0.7 -
Profit before tax 19.1 29.6
Tax on profit before exceptional items (14.0) (15.8)
Exceptional tax (5.0) 3.1
Tax charge (19.0) (12.7)
Profit for the year from continuing operations 0.1 16.9
Loss for the year from discontinued operations - (18.0)
Profit / (loss) for the year 0.1 (1.1)
Attributable to:
Equity owners of the Company (0.2) (1.2)
Non controlling interests 0.3 0.1
Earnings per share (EPS)
Basic EPS from continuing operations (0.02p) 1.55p
Diluted EPS from continuing operations (0.02p) 1.50p
Basic EPS from discontinued operations - (1.66p)
Diluted EPS from discontinued operations - (1.66p)
Basic EPS from continuing and discontinued operations (0.02p) (0.11p)
Diluted EPS from continuing and discontinued operations (0.02p) (0.11p)
* Costs included within cost of sales and general and administrative
expenses have been reallocated, resulting in a restatement. See note 1.
Condensed Consolidated Statement of Comprehensive Income
For the year ended 31 December
2017 2016
£m £m
Profit / (loss) for the year 0.1 (1.1)
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial (loss) / gain on defined benefit pension schemes* (106.5) 9.0
Actuarial (loss) / gain on reimbursable rights* (0.6) 2.9
Tax relating to items not reclassified* 18.1 (1.7)
Share of other comprehensive income in joint ventures and associates 0.9 14.8
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss) / gain on translation of foreign operations** (14.6) 80.3
Fair value (loss) / gain on cash flow hedges during the year** (0.2) 2.3
Tax relating to items that may be reclassified - -
Share of other comprehensive income in joint ventures and associates - 1.0
Total other comprehensive income for the year (102.9) 108.6
Total comprehensive income for the year (102.8) 107.5
Attributable to:
Equity owners of the Company (102.9) 107.1
Non controlling interest 0.1 0.4
* Recorded in retirement benefit obligations reserve in the
Condensed Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Condensed
Consolidated Statement of Changes in Equity.
Condensed Consolidated Statement of Changes in Equity
Share capital Share premium account Capital redemption reserve Retained earnings Retirement benefit obligations reserve Share based payment reserve Own shares reserve Hedging and translation reserve Total shareholders' equity Non controlling interest
- More to follow, for following part double click ID:nRSV5870Fd in the year to £2,953.6m (2016: £3,011.0m), a 6% reduction in constant currency.
No revenue arose in 2017 from operations classified as discontinued, with total revenues for the year ended 31 December
2016 from continuing and discontinued operations being £3,047.8m.
Commentary on the revenue performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews
sections.
Trading Profit
Trading Profit for the year was £54.0m (2016: £100.3m). Trading Profit for the year ended 31 December 2016 included a loss
on discontinued operations of £3.3m.
Commentary on the trading performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews
sections.
Underlying Trading Profit
UTP was £69.8m (2016: £82.1m), down 15%. At constant currency, UTP was £18.8m lower than 2016 at £63.3m, with a movement of
£4.6m relating to the results of discontinued operations in 2016.
Commentary on the underlying performance of the Group is provided in the Chief Executive's Review and the Divisional
Reviews sections.
Excluded from UTP were net charges from OCPs of £19.0m (2016: net releases of £9.6m) following the annual reassessment
undertaken as part of the budgeting process. Also excluded from UTP were net releases of £3.2m (2016: net releases of
£4.6m) relating to other provisions and accruals for items identified during the 2014 Contract & Balance Sheet Review. UTP
also excluded the benefit arising from the non-depreciation and amortisation of assets classified as held for sale in 2016
of £0.5m; there were no such assets in 2017. Other one-time items of £3.5m excluded from UTP in 2016 related to a pension
scheme settlement arising from the early exit of a UK Local Authority contract in 2015; there were no such adjustments
necessary for one-time items in 2017.
The cumulative to date improvement to Trading Profit as a result of OCP charges and releases and adjustments to items
identified during the 2014 Contract & Balance Sheet Review is £19.3m (2016: £35.1m). This represents 3% of the 2014 total
charge to Trading Profit arising from the Contract & Balance Sheet Review.
The tax impact of items in UTP and other non underlying tax items is discussed in the tax section of this Finance Review.
Discontinued operations
The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in
2015 and 2016. Disposal of the offshore BPO business was largely completed in December 2015, with the disposals of two much
smaller remaining elements completed in March 2016 and December 2016. The residual UK onshore private sector BPO operations
were sold or exited in 2016 with the exception of one business, consisting of a single contract, the disposal of which
completed in July 2017. Total revenues for the remaining operations were £5.4m and the loss before exceptional items was
£0.6m for the year ended 31 December 2017, therefore the results have been included in continuing operations in 2017 on the
grounds of materiality.
The amounts reported as discontinued operations in the prior year were as follows:
For the year ended 31 December 2016£m
Revenue 36.8
Underlying Trading Loss (4.6)
Onerous contract and Contract & Balance Sheet Review adjustments 0.8
Benefit from non-depreciation and non-amortisation of assets held for sale 0.5
Trading Loss (3.3)
Amortisation and impairment of intangibles arising on acquisition -
Operating loss before exceptional items (3.3)
Exceptional loss on disposal of subsidiaries and operations (2.8)
Other exceptional operating items (11.4)
Exceptional operating items (14.2)
Operating loss (17.5)
Exceptional finance costs (0.4)
Loss before tax (17.9)
Tax charge (0.1)
Net loss on discontinued operations (attributable to equity owners of the Company) as presented in the income statement (18.0)
Joint ventures and associates - share of results
In 2017, the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited and
Merseyrail Services Holding Company Limited, with dividends received of £17.1m (2016: £19.6m) and £7.3m (2016: £7.3m)
respectively. Total revenues generated by these businesses were £951.8m (2016: £968.1m) and £155.7m (2016: £150.3m)
respectively. From September 2016, there was a change in the AWE Management Limited shareholding structure, with the
Group's shareholding reducing from 33.3% to 24.5% by way of a return of shares.
While the revenues and individual line items are not consolidated in the Group Condensed Consolidated Income Statement,
summary financial performance measures for the Group's proportion of the aggregate of all joint ventures and associates are
set out below for information purposes.
For the year ended 31 December 2017£m 2016£m
Revenue 356.7 480.8
Operating profit 34.4 40.7
Net investment finance costs (0.1) (0.6)
Income tax expense (7.0) (6.7)
Profit after tax 27.3 33.4
Dividends received from joint ventures and associates 28.2 40.0
The decline in revenue and profits on the prior year is partly due to the change in shareholding in AWE Management Limited
and partly due to the end of the Northern Rail franchise on 31 March 2016.
Exceptional items
Exceptional items are items of financial performance that are outside normal operations and are material to the results of
the Group either by virtue of size or nature. As such, the items set out below require separate disclosure on the face of
the income statement to assist in the understanding of the performance of the Group.
Exceptional items arose on both the continuing and discontinued operations of the Group in 2016. Exceptional items arising
on discontinued operations are disclosed on the face of the Condensed Consolidated Income Statement within the profit or
loss attributable to discontinued operations. There were no discontinued operations in 2017.
For the year ended 31 December 2017£m 2016£m
Exceptional items arising on continuing operations
Exceptional profit on disposal of subsidiaries and operations 0.3 2.9
Other exceptional operating items on continuing operations
Impairment of goodwill - (17.8)
Restructuring costs (28.6) (17.2)
Aborted transaction costs - (0.1)
Costs associated with UK Government review (0.4) (0.1)
Release of UK frontline clinical health contract provisions 0.4 0.6
Settlement of defined benefit pension obligations 10.3 (10.7)
Impairment of interest in joint venture and related loan balances 4.5 (13.9)
Impairment of AsPac customer lists (6.1) -
Other exceptional operating items (19.9) (59.2)
Exceptional operating items arising on continuing operations (19.6) (56.3)
Exceptional items arising on discontinued operations
Exceptional loss on disposal of subsidiaries and operations - (2.8)
Other exceptional operating items on discontinued operations
Restructuring costs - (1.1)
Movements in indemnities provided on business disposals - (13.7)
Movement in the fair value of assets transferred to held for sale - 3.4
Other exceptional operating items - (11.4)
Exceptional operating items arising on discontinued operations - (14.2)
Exceptional operating items arising on continuing and discontinued operations (19.6) (70.5)
Exceptional finance costs - discontinued - (0.4)
Exceptional tax - continuing (5.0) 3.1
Total operating and financing exceptional items in continuing and discontinued operations (24.6) (67.8)
Exceptional profit on disposals
There were no material disposals of continuing operations in 2017.
Other exceptional operating items
The annual impairment testing of CGUs in 2017 has identified no impairment of goodwill.
The Group is incurring costs in relation to restructuring programmes resulting from the Strategy Review announced in 2015.
These costs include redundancy payments, provisions, external advisory fees and other incremental costs, including in 2017
£2.8m of intangible asset impairment (2016: £nil). Due to the nature and scale of the impact of the transformation phase of
the Strategy Review, the incremental costs associated with this programme are considered to be exceptional. Costs
associated with the restructuring programme resulting from the Strategy Review must meet the following criteria: that they
are directly linked to the implementation of the Strategy Review; they are incremental costs as a result of the activity;
and they are non business as usual costs. In 2017, a charge of £28.6m (2016: £17.2m) arose in relation to the restructuring
programme resulting from the Strategy Review. Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £11.1m (2016: £6.7m) and were included within operating profit
before exceptional items. We expect restructuring costs of approximately £35m to be incurred in 2018 which will be treated
as exceptional.
There were exceptional costs totalling £0.4m (2016: £0.1m) associated with the UK Government reviews and the programme of
Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied in 2017.
There were releases of provisions of £0.4m (2016: £0.6m) which were previously charged through exceptional items in
relation to the exit of the UK frontline clinical health contracts.
An exceptional charge of £10.7m arose in 2016 in respect of the bulk transfer of a number of employees that are being
transferred from the Serco Pension and Life Assurance Scheme (SPLAS) to the Principal Civil Service Pension Scheme. This
transfer was legally agreed in December 2016 at which point all obligations of SPLAS to pay retirement benefits for these
individuals were eliminated and as a result, a settlement charge of £10.7m arose, for which a provision was made. In 2017 a
new agreement was reached with the UK Government to transfer out the scheme members on an individual basis and the 2016
legal and commercial arrangements were cancelled by consent of all parties. As a result of the changes, the impact of the
transfer was treated as an experience gain adjustment through other comprehensive income and the majority of the provision
made in 2016 was reversed, resulting in a £10.3m credit to exceptional items in 2017.
In 2016, a review of a joint venture's cash flow projections led to the impairment of certain equity interests and
associated receivables balances, totalling £13.9m. The impairment was outside of the normal course of business and of a
significant value, and was therefore considered to be an exceptional item. In the year ended 31 December 2017 payments of
£4.5m were received against the impaired loan. The likelihood of further cash receipts against the receivables remains
uncertain.
As a result of contracts coming to the end of their natural lives and no significant new contracts being awarded by the
customer, the remaining customer relationship intangible assets of the DMS Maritime Pty Limited business acquired in 2012
were impaired, totalling £6.1m.
Exceptional tax
Exceptional tax for the year was a tax charge of £5.0m (2016: £3.1m credit), comprising a £2.3m credit on exceptional items
within operating profit and a £7.3m charge in respect of other exceptional tax items.
Exceptional costs of £19.6m only gave rise to a credit of £2.3m, as the majority of these costs were incurred in the UK
where they only impact our unrecognised deferred tax in relation to losses.
The other exceptional tax items relate to two matters, the first is the impact on tax of the pension buy-in disclosed in
note 18 to the Condensed Consolidated Financial Statements which led to a £95.0m reduction in the IFRS valuation of the
Group's defined benefit pension schemes and consequently a deferred tax charge to the income statement of £16.1m. Movements
in the valuation of the Group's defined benefit pension schemes and the associated deferred tax impact are reported in the
Condensed Consolidated Statement of Comprehensive Income (SOCI) and do not flow through the income statement, therefore do
not impact profit before tax or the tax charge. However, the net amount of deferred tax recognised in the balance sheet
relates to both the pension accounting and other timing differences, such as recoverable losses. As the net deferred tax
balance sheet position is at the level supported by future profit forecasts, the decrease in the deferred tax liability
associated with the pension scheme (with the benefit reported in the SOCI) leads to a corresponding decrease in the
deferred tax asset to match the future profit forecasts. Such a reduction in the deferred tax asset therefore leads to a
charge to tax in the income statement.
The second element is a credit of £8.8m related to legislative changes in the UK and the US which have impacted the value
of deferred tax held on the balance sheet. There is a reduction in the deferred tax liability that is held in connection
with our US operations of £12.5m, as future US tax liabilities are expected to crystallise at lower US tax rates. The fall
in future expected US rates is primarily due to the enactment of the Tax Cuts & Jobs Act in December 2017 which reduces the
corporate income tax rate in the US from 35% to 21% effective from 1 January 2018. In addition, there was a change in UK
tax law in 2017. This UK change will reduce the quantum of loss brought forward that can be used to offset taxable profits
arising in a year, and will also enable losses carried forward in one company to be used to offset profits in another. The
combined impact of these UK law changes results in a tax charge of £3.7m.
Pre exceptional finance costs and investment revenue
Investment revenue of £7.6m (2016: £9.3m) includes interest accruing on net retirement benefit assets of £3.8m (2016:
£4.7m), interest earned on deposits and other receivables of £2.6m (2016: £3.6m) and the movement in discounting of other
receivables of £1.2m (2016: £1.0m).
Finance costs of £19.2m (2016: £21.9m) includes interest incurred on the USPP loans and the Revolving Credit Facility of
£14.0m (2016: £15.6m), facility fees and other charges of £3.0m (2016: £3.5m), interest payable on finance leases of £1.3m
(2016: £1.6m), the movement in discount on provisions of £1.3m (2016: £2.4m) and a credit for foreign exchange on financing
activities of £0.4m (2016: £1.2m).
Other gains
On 24 August 2017 the Group acquired 50% of the issued share capital of Serco Sodexo Defence Services Pty Ltd for £1.6m,
obtaining full control. Serco Sodexo Defence Services Pty Ltd was previously a 50% owned joint venture accounted for on an
equity accounting basis. As a result of the increase in ownership from 50% to 100%, the Group fair valued the existing 50%
shareholding and the resulting uplift in value of £0.7m was recorded in Other gains, outside of operating results.
Tax
Tax charge
Underlying tax
In 2017 we recognised a tax charge of £20.6m on underlying trading profits after finance cost. The effective tax rate in
2017 (35.4%) is at a similar level to 2016 (35.2%).
Pre exceptional tax
We recognised a tax charge of £14.0m (2016: £15.8m) on pre exceptional profits which includes £20.6m underlying tax, £1.6m
tax impact of amortisation on intangibles arising on acquisition and £5.0m credit on non-underlying items. The £5.0m credit
consists of the tax impact on non-underlying items together with tax items that are in themselves considered to be
non-underlying, specifically:
· As noted above with regards to exceptional tax, movements in the valuation of the Group's defined benefit pension
schemes leads to a corresponding adjustment to the deferred tax asset to match the future profit forecasts. Such a change
in the deferred tax asset impacts tax in the income statement. Where deferred tax charges or releases are the result of
movements in the pension scheme valuations rather than trading activity, these are excluded from the calculation of tax on
underlying profit and the underlying effective tax rate, with the prior periods being restated to reflect this. These
amounted to £1.9m for 2017 (2016: £nil).
· During the current period we have recognised an additional £11.1m of deferred tax asset in relation to UK losses to
reflect the improved forecast profits of our UK operations. This credit nets against the charge (£3.7m) taken to
exceptional tax and described below, which relates to the UK law change in 2017 to give a net increase in UK deferred tax
assets of £7.4m.
· The tax on non-underlying items during the period totalled a credit of £4.2m reflecting the impact of current or
future tax deductions available.
The tax rate on profits before exceptional items on continuing operations, at 36.2% is higher than the UK standard
corporation tax rate of 19.25%. This is due to the upward impact of higher rates of tax on profits arising on our
international operations, together with the absence of any deferred tax credit for current year losses incurred in the UK.
This is only partially offset by the downward impact of our joint ventures whose post-tax results are included in our
pre-tax profit and additional deferred tax assets that have been recognised in relation to historic UK losses. Our tax
charge in future years will continue to be materially impacted by our accounting for UK deferred taxes. To the extent that
future UK tax losses are incurred and are not recognised, our effective tax rate will be higher than prevailing standard
corporation tax rates. When our UK business returns to sustainable profitability our existing UK tax losses will be
recognised or utilised, and the effective rate will be reduced.
The enactment of the Tax Cuts & Jobs Act in the US has not impacted our pre exceptional tax charge during 2017 with the
impact on our valuation of deferred tax shown as an exceptional item and explained further above. In the medium term, the
new law is expected to have only a marginal impact on our tax liability in the US. This is because although we will benefit
from the fall in tax rate, our US business bears interest cost, associated with historic funding put in place to acquire US
businesses, an element of which will not lead to tax deductions in the medium term.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items section above.
Contingent tax assets
A £17.4m UK tax asset has been recognised at 31 December 2017 (2016: £10.0m) on the basis of utilisation against forecast
taxable profits.
At 31 December 2017, the Group has estimated unrecognised UK deferred tax assets of an additional £160m which are
contingent on further improvement in the UK profit forecast.
Taxes paid
Net corporation tax of £15.3m was paid during the year, relating primarily to our operations in AsPac (£5.5m), Europe
(£3.2m), Middle East (£1.5m) and Americas (£5.1m). The Group's UK operations have transferred tax losses to its profitable
joint ventures and associates giving a cash tax inflow in the UK of £4.4m. In addition there were small cash tax refunds
where we have overpaid tax in previous periods. This results in an overall tax paid figure in our cash flow statement of
£11.4m.
The amount of tax paid (£11.4m) differs from the tax charge in the period (£19.0m) mainly due to the effect of future
expected cash tax outflows for which a charge has been taken in the current period and the impact of the time lag on
receipts of cash from joint ventures and associates for losses transferred to them.
Further detail of taxes paid during the year is shown below.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as determined by local legislation in the countries in which we
operate, means that we pay a variety of taxes across the globe. In order to increase the transparency of our tax profile,
we have shown below the cash taxes that we have paid across our regional markets.
In total during 2017, Serco globally contributed £578m of tax to government in the jurisdictions in which we operate.
Taxes by category
For the year ended 31 December 2017 Taxes borne£m Taxes collected£m Total£m
Corporation tax 15.3 - 15.3
VAT and similar 9.7 152.2 161.9
People taxes 109.0 284.1 393.1
Other taxes 6.7 0.5 7.2
Total 140.7 436.8 577.5
Taxes by region
For the year ended 31 December 2017 Taxes borne£m Taxes collected£m Total£m
UK & Europe 82.8 235.7 318.5
AsPac 25.6 121.5 147.1
Americas 30.2 76.8 107.0
Middle East 2.1 2.8 4.9
Total 140.7 436.8 577.5
Corporation tax, which is the only cost to be separately disclosed in our Condensed Consolidated Financial Statements, is
only one element of our tax contribution. For every £1 of corporate tax paid directly by the Group (tax borne), we bear a
further £8.20 in other business taxes. The largest proportion of these is in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect £3.10 on behalf of national governments (taxes collected). This
amount is directly impacted by the people that we employ and the sales that we make.
Dividends
The Board is not recommending the payment of a dividend in respect of the 2017 financial year. The Board's appraisal of the
appropriateness of dividend payments takes 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 prevailing market outlook.
Although the Board is committed to resuming dividend payments as soon as it believes it prudent to do so, in assessing
whether we should resume dividend payments in respect of 2017, we have been mindful of the fact there has been a reduction
in earnings, a free cash outflow and an increase in Net Debt. In these circumstances, the Board believes that it would not
be prudent to resume dividend payments at the current juncture. For 2018, our guidance is for an improvement in Underlying
Trading Profit, but we expect Net Debt to still increase, largely as a result of cash outflows related to exceptional
restructuring costs and taking opportunities for value-enhancing infill acquisitions. The Board will continue to keep the
dividend policy under close consideration as we progress with transforming the Group and implementing our strategy.
Share count and EPS
The weighted average number of shares for EPS purposes was 1,089.7m for the year ended 31 December 2017 (2016: 1,088.3m).
EPS before exceptional items from both continuing and discontinued operations was 2.24p per share (2016: 6.12p); including
the impact of exceptional items, EPS was a loss of 0.02p (2016: 0.11p). Underlying EPS was 3.42p per share (2016: 4.13p).
Cash flows
The UTP of £69.8m (2016: £82.1m) converts into a trading cash inflow of £21.9m (2016: outflow of £8.0m). The negative
conversion in 2016 was primarily due to the adverse working capital movement of £23.7m and the cash outflows arising on the
utilisation of contract provisions of £84.2m. In 2017, the working capital outflow is £9.0m and the OCP utilisation is
£69.3m.
The table below shows the operating profit and FCF reconciled to movements in Net Debt. FCF for the year was an outflow of
£6.7m compared to an outflow of £33.0m in 2016. The improvement in FCF is largely as a result of a reduction in operating
profit before exceptional items on continuing and discontinued operations from £95.2m in 2016 to £49.6m in 2017, which is
more than offset by an improvement in the net movement in non exceptional provisions from a reduction in 2016 of £118.4m to
a reduction in 2017 of £46.4m. The movement in non exceptional provisions is partly due to the reduction in total provision
utilisation from £123.4m in 2016 to £82.2m in 2017.
The movement in Net Debt is an increase of £31.8m in 2017, a reconciliation of which is provided at the bottom of the
following table. The movement includes a net outflow of £5.6m arising on the acquisition and disposal of subsidiaries,
primarily relating to the cash held by Service Glasgow LLP, an entity disposed of in the year. In 2016 a net cash inflow of
£19.2m arose primarily as a result of the disposal of the private sector BPO business. The movement in Net Debt for 2017
also includes a net exchange gain of £17.4m, compared to a £41.8m loss in 2016.
For the year ended 31 December 2017£m 2016£m
Operating profit on continuing operations 30.0 42.2
Operating loss on discontinued operations - (17.5)
Remove exceptional items 19.6 70.5
Operating profit before exceptional items on continuing and discontinued operations 49.6 95.2
Less: profit from joint ventures and associates (27.3) (33.4)
Movement in provisions (46.4) (118.4)
Depreciation, amortisation and impairment of property, plant and equipment and intangible assets 50.0 52.4
Other non-cash movements 11.4 11.5
Operating cash inflow before movements in working capital, exceptional items and tax 37.3 7.3
Working capital movements (9.0) (23.7)
Tax paid (11.4) (5.6)
Non-cash R&D expenditure (0.2) (0.4)
Cash flow from operating activities before exceptional items 16.7 (22.4)
Dividends from joint ventures and associates 28.2 40.0
Interest received 0.5 1.4
Interest paid (17.5) (20.1)
Capitalised finance costs paid - (0.3)
Purchase of intangible and tangible assets net of proceeds from disposals (34.6) (31.6)
Free Cash Flow (6.7) (33.0)
Net cash (outflow) / inflow on acquisition and disposal of subsidiaries (5.6) 19.2
Other movements on investment balances 0.2 0.7
Capitalisation and amortisation of loan costs (0.8) (0.7)
Unwind of discounting and capitalisation of interest on loans receivable 3.4 2.9
New, acquired and disposed finance leases (4.7) (0.5)
Exceptional items (32.5) (40.2)
Cash movements on hedging instruments (2.5) 47.0
Foreign exchange gain / (loss) on Net Debt 17.4 (41.8)
Movement in Net Debt including assets and liabilities held for sale (31.8) (46.4)
Assets held for sale movement in Net Debt - 4.7
Net Debt at 1 January (109.3) (67.6)
Net Debt at 1 January including assets and liabilities held for sale (109.3) (62.9)
Net Debt at 31 December (141.1) (109.3)
Net Debt
As at 31 December 2017£m 2016£m
Cash and cash equivalents 112.1 177.8
Loans receivable 25.7 22.9
Loans payable (271.5) (299.9)
Obligations under finance leases (20.2) (28.2)
Derivatives relating to Net Debt 12.8 18.1
Net Debt (141.1) (109.3)
Average Net Debt as calculated on a daily basis for the year ended 31 December 2017, was £184.3m (2016: £119.4m), compared
with the opening and closing positions of £109.3m and £141.1m respectively. Peak Net Debt was £242.7m (2016: £182.9m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign
currency exchange rates, interest rates and credit risk. The Group has a centralised treasury function whose principal role
is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise and that the
financial risk arising from the Group's underlying operations is effectively identified and managed.
Treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed
annually. Financial instruments are only executed for hedging purposes and speculation is not permitted. A monthly report
is provided to senior management outlining performance against the Treasury Policy and the treasury function is subject to
periodic internal audit review.
Liquidity and funding
As at 31 December 2017, the Group had committed funding of £741m (2016: £770m), comprising £261m of private placement notes
and a £480m revolving credit facility with a syndicate of banks, which was undrawn. In addition, the Group had a
receivables financing facility of £30.0m which was unutilised at the year-end (2016: utilisation of £7.7m).
Following the further small disposals relating to the private sector BPO business, the Group was required to offer two
thirds of the net disposal proceeds to the debt holders in prepayment. As a result of this process, £3.7m ($4.9m) of
private placement notes were repaid at par on 29 June 2017.
Interest rate risk
Given the nature of the Group's business, we have a preference for fixed rate debt to reduce the volatility of net finance
costs. Our Treasury Policy requires us to maintain a minimum proportion of fixed rate debt as a proportion of overall Net
Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 31 December 2017, more
than 100% of the Group's Net Debt was at fixed rates. Interest on the revolving credit facility is at floating rate,
however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of its net investments in overseas subsidiaries.
The Group manages this risk where appropriate, by borrowing in the same currency as those investments. Group borrowings are
predominantly denominated in Sterling and US Dollar. The Group manages its currency flows to minimise foreign exchange risk
arising on transactions denominated in foreign currencies and uses forward contracts where appropriate to hedge net
currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk on the amounts due from counterparties. The
Group manages this risk by adhering to counterparty exposure limits based on external credit ratings of the relevant
counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private placement loan notes, receivables financing
facility and 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. A reconciliation of the basis of
calculation is set out in the table below.
For the year ended 31 December 2017£m 2016£m
Operating profit before exceptional items on continuing and discontinued operations 49.6 95.2
Remove: Amortisation and impairment of intangibles arising on acquisition 4.4 5.1
Trading Profit 54.0 100.3
Exclude: Share of joint venture post-tax profits (27.3) (33.4)
Include: Dividends from joint ventures 28.2 40.0
Add back: Net non-exceptional charges to OCPs 19.0 -
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non acquisition intangible assets 45.6 47.3
Add back: Foreign exchange credit on investing and financing arrangements 0.4 1.2
Add back: Share based payment expense 11.4 9.7
Covenant EBITDA 131.3 165.1
Net finance costs on continuing and discontinued operations 11.6 12.6
Exclude: Net interest receivable on retirement benefit obligations 3.8 4.7
Exclude: Movement in discount on other debtors 1.2 1.0
Exclude: Foreign exchange on investing and financing arrangements 0.4 1.2
Add back: Movement in discount on provisions (1.3) (2.4)
Covenant net finance costs 15.7 17.1
Recourse Net Debt 141.1 109.3
Exclude: Disposal vendor loan note, encumbered cash and other adjustments 30.3 28.5
Covenant adjustment for average FX rates 7.8 (23.0)
CTNB 179.2 114.8
CTNB / covenant EBITDA (not to exceed 3.5x) 1.36x 0.70x
Covenant EBITDA / covenant net finance costs (at least 3.0x) 8.4x 9.7x
Net assets summary
As at 31 December 2017£m 2016£m
Non-current assets
Goodwill 551.3 577.9
Other intangible assets 66.7 83.6
Property, plant and equipment 65.2 69.3
Other non-current assets 75.3 73.0
Deferred tax assets 55.0 50.8
Retirement benefit assets 41.8 150.4
855.3 1,005.0
Current assets
Inventories 17.4 22.4
Trade and other current assets 516.8 548.4
Current tax assets 11.2 11.0
Cash and cash equivalents 112.1 177.8
Total current assets 657.5 759.6
Total assets 1,512.8 1,764.6
Current liabilities
Trade and other current liabilities (464.0) (525.1)
Current tax liabilities (25.3) (25.9)
Provisions (148.5) (172.3)
Obligations under finance leases (8.5) (12.3)
Loans (31.8) (9.7)
Total current liabilities (678.1) (745.3)
Non-current liabilities
Other non-current liabilities (28.7) (16.8)
Deferred tax liabilities (20.4) (30.5)
Provisions (211.5) (249.4)
Obligations under finance leases (11.7) (15.9)
Loans (239.7) (290.2)
Retirement benefit obligations (15.5) (17.7)
(527.5) (620.5)
Total liabilities (1,205.6) (1,365.8)
Net assets 307.2 398.8
At 31 December 2017 the balance sheet had net assets of £307.2m, a movement of £91.6m from the closing net asset position
of £398.8m as at 31 December 2016. The decrease in net assets is mainly due to the following movements:
· A decrease in the net retirement benefit assets of Group funded defined benefit pension schemes of £106.4m. In June
2017, the Trustees of the Group's primary defined benefit pension scheme entered into a bulk annuity purchase whereby an
insurer will fund future benefit payments to the relevant members. The liability to pay the members remains with the
pension scheme which continues to include the relevant pension liabilities, but an insurance asset is held which is an
equal and opposite amount to the liability. This removes the risk of longevity and investment movements for this portion of
the scheme on a funding basis, and also removes the accounting risk of movements in underlying assumptions on the
liabilities. The transaction resulted in a significant reduction in the surplus of the pension scheme under IFRS accounting
convention, but resulted in a reduction in the deficit that is actuarially assessed for funding purposes of approximately
£12m. As at 31 December 2017 the estimated actuarial deficit of this scheme was £33.7m (2016: £42.6m).
· A decrease in provisions of £61.7m. Further details on provision movements is provided below.
· The combined position of trade and other current assets and trade and other current liabilities increased by £29.5m
and Net Debt increased by £31.8m. Further details of these movements are provided in the cash flow and Net Debt sections
above.
· A decrease in goodwill of £26.6m, caused by movements in foreign exchange rates.
Provisions
The total of current and non-current provisions has decreased by £61.7m since 31 December 2016. The movement is due to a
decrease in onerous contract provisions of £52.0m, an increase in employee-related provisions of £10.6m, a decrease in
property provisions of £0.9m and a reduction in other provisions of £19.4m.
The £10.6m increase in employee-related provisions is partly due to the ongoing Strategy Review restructuring programme and
partly relating to obligations arising at the end of certain contracts. The decrease in other provisions is primarily due
to the release of £10.3m of exceptional provisions relating to pensions, with the remaining movement comprised of contract
settlements and releases for potential claims.
Movements in contract provisions since the 31 December 2016 balance sheet date, are as follows:
Onerous Contract Provisions£m
At 1 January 2017 220.2
Charged to the income statement during the year - trading 62.0
Released to the income statement - trading (43.0)
Released to the income statement - exceptional (0.4)
Utilisation during the year (69.3)
Unwinding of discount 1.3
Foreign exchange (2.6)
At 31 December 2017 168.2
The balance of OCPs at 31 December 2017 was £168.2m (2016: £220.2m). OCP balances are subject to ongoing review and a full
bottom-up assessment of the forecasts that form the basis of the OCPs is conducted as part of the annual budgeting process.
The net non-exceptional charge to OCPs was £19.0m in 2017 and utilisation was £69.3m.
In 2017, additional charges have been made in respect of future losses on a number of onerous contracts totalling £62.0m.
This increase related to revisions to existing OCPs of £61.5m and a new provision raised on one contract totalling £0.5m.
The new contract has been operating for a number of years and is expected to be terminated in 2018.
Included within additional charges made to existing OCPs is £47.0m relating to the Caledonian Sleepers contract. This
increase is partly due to revised assumptions for the higher costs of running the contract and the impact from delays in
the delivery of new trains, which includes the higher cost of the running old trains for longer, associated penalties and
the forecast benefit of revenue growth from the new trains being pushed back. In addition, we have revised our revenue
forecast for the contract based on the 2017 performance, where even a modest reduction in annual revenue can have a
significant impact on a multi-year OCP. There continue to be a number of assumptions underpinning the provision that have a
range of potential outcomes, including the train manufacturer delivering the new trains to the latest timetable and volume
and pricing increases driven by the improved passenger service from the new trains. 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.
In addition to the Caledonian Sleepers contract, there have been net OCP releases of £16.4m in UK & Europe and £11.4m in
AsPac.
Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share capital of BTP Systems, LLC, for consideration of US Dollar
$20.5m in cash. Further details on this post year end transaction are provided in note 21 to the Condensed Consolidated
Financial Statements.
The Group signed a revised Business Purchase Agreement (BPA) on 13 February 2018 with the Special Managers and Provisional
Liquidators acting on behalf of the relevant Carillion plc subsidiaries to acquire a portfolio of selected UK health
facilities management contracts. The portfolio has annual revenues of approximately £90m and a weighted average remaining
term of 14 years. Upon the receipt by the Special Managers and Provisional Liquidators of the requisite third party
consents, each individual contract will be transferred to Serco on a cash-free, debt-free basis, with the consideration to
be paid in instalments and to be satisfied using Serco's existing financing facilities. If all the contracts are
transferred to Serco under the revised BPA process, the total consideration payable would be £29.7m. The consideration
payable is lower than the amount of £47.7m announced on 13 December 2017 in respect of substantially the same contracts
that were subject to the initial BPA signed with Carillion plc at that date. The change in consideration reflects the
Group's re-evaluation of potential liabilities, indemnities, warranties and the additional working capital investment
required as a result of Carillion's liquidation. The financial effects of this transaction have not been recognised at 31
December 2017. As consents are required for each individual contract to be transferred and therefore acquired, at the time
the financial statements were authorised for issue, no legal transfer or control of assets had taken place and so no
disclosures have been made in respect of the assets and liabilities being acquired. The fair values of the assets and
liabilities will be determined at the date when contracts are acquired. It is also not yet possible to provide detailed
information about each class of acquired receivables and any contingent liabilities in respect of the acquired contracts.
As noted in the overview of performance above, the Group obtained full control of Serco Sodexo Defence Services Pty Ltd by
acquiring the remaining 50% of issued share capital for £1.6m.
IFRS15
The Group has undertaken a robust assessment to determine the impact of IFRS15 on the opening balance sheet at 1 January
2017 and for the year ended 31 December 2017. The impact on opening retained earnings will be a reduction of £32.8m and the
impact on the opening OCP balance will be a reduction of £21.7m. Underlying Trading Profit will decrease by £0.3m and, as a
result of a lower OCP release, Trading Profit will decrease by £8.7m for the year ended 31 December 2017. This low
adjustment is reflective of the prudent accounting practices adopted by the Group following the Contract & Balance Sheet
Review undertaken in 2014 and the repeat nature of the services provided. Further detail on the adjustment is provided in
note 1 of the Group's Condensed Consolidated Financial Statements.
Financial Statements
Condensed Consolidated Income Statement
For the year ended 31 December
Continuing operations 2017£m 2016(restated *)£m
Revenue 2,953.6 3,011.0
Cost of sales* (2,704.7) (2,724.6)
Gross profit* 248.9 286.4
Administrative expenses*
General and administrative expenses (222.2) (216.2)
Exceptional profit on disposal of subsidiaries and operations 0.3 2.9
Other exceptional operating
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