REG - Serco Group PLC - 2017 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 5
22/02/2018 07:05
- Part 5: For the preceding part double click ID:nRSV5870Fd
current assets* 2017 Revenue 2016 Non current assets* 2016
£m £m £m £m
United Kingdom 1,185.2 340.3 1,244.9 444.7
United States 623.6 273.3 632.9 309.1
Australia 559.3 143.2 593.1 146.0
Middle East 351.9 18.0 324.8 19.7
Other countries 235.3 21.7 215.3 20.4
Total 2,953.6 796.5 3,011.0 939.9
* Non current assets exclude financial instruments, deferred tax
assets and loans to joint ventures and associates
Revenues from external customers are attributed to individual countries on the
basis of the location of the customer.
Information about major customers
The Group has four major governmental customers which each represent more than
10% of Group revenues. The customers' revenues were £1,102.9m for the UK
Government within the UK & Europe segment, £569.7m for the US Government
within the Americas segment, £522.1m for the Australian Government within the
AsPac segment and £238.4m for the Government of the United Arab Emirates
within the Middle East segment.
In 2016 the Group had three major governmental customers which each
represented more than 10% of Group revenues. The customers' revenues were
£1,233.7m for the UK Government within the UK & Europe segment, £623.1m
for the US Government within the Americas segment and £581.4m for the
Australian Government within the AsPac segment.
The following is an analysis of the Group's revenue, results, assets and
liabilities by reportable segment:
Year ended 31 December 2017 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 1,334.7 688.0 579.0 351.9 - 2,953.6
Result
Trading profit / (loss) from continuing operations* 4.5 39.8 35.1 16.2 (41.6) 54.0
Amortisation and impairment of intangibles arising on acquisition - (3.0) (1.4) - - (4.4)
Operating profit / (loss) before exceptional items 4.5 36.8 33.7 16.2 (41.6) 49.6
Exceptional profit / (loss) on disposal of subsidiaries and operations 0.3 - - - - 0.3
Other exceptional operating items** 11.9 (0.3) (7.4) 0.1 (24.2) (19.9)
Operating profit / (loss) 16.7 36.5 26.3 16.3 (65.8) 30.0
Investment revenue 7.6
Finance costs (19.2)
Other gains 0.7
Profit before tax 19.1
Tax charge (14.0)
Tax on exceptional items (5.0)
Profit for the year from continuing operations 0.1
* Trading profit / (loss) is defined as operating profit / (loss)
before exceptional items and amortisation and impairment of intangible assets
arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that will
benefit the wider business.
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 26.6 - 0.8 - (0.1) 27.3
Depreciation of plant, property and equipment (14.0) (3.2) (4.9) (0.8) (1.4) (24.3)
Impairment of plant, property and equipment 0.1 - - - - 0.1
Total depreciation and impairment of plant, property and equipment (13.9) (3.2) (4.9) (0.8) (1.4) (24.2)
Amortisation of intangible assets arising on acquisition - (3.0) (1.4) - - (4.4)
Exceptional impairment and write down of intangible assets arising on - - (6.1) - - (6.1)
acquisition
Amortisation of other intangible assets (1.1) (1.5) (4.8) (0.2) (13.8) (21.4)
Exceptional impairment of other intangible assets - - - - (2.8) (2.8)
Total amortisation and impairment of intangible assets (1.1) (4.5) (12.3) (0.2) (16.6) (34.7)
Segment assets
Interests in joint ventures and associates 13.5 - 0.4 0.4 - 14.3
Other segment assets*** 445.9 391.3 223.4 112.0 133.2 1,305.8
Total segment assets 459.4 391.3 223.8 112.4 133.2 1,320.1
Unallocated assets 192.7
Consolidated total assets 1,512.8
Segment liabilities
Segment liabilities*** (368.5) (128.6) (148.5) (80.7) (142.0) (868.3)
Unallocated liabilities (337.3)
Consolidated total liabilities (1,205.6)
*** The Corporate segment assets and liabilities include balance sheet
items which provide benefit to the wider Group, including defined benefit
pension schemes and corporate intangible assets.
Year ended 31 December 2016 (restated***) UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 1,375.1 691.4 619.7 324.8 - 3,011.0
Result -
Trading profit / (loss) from continuing operations* 84.5 6.4 34.2 18.8 (40.3) 103.6
Amortisation and impairment of intangibles arising on acquisition (0.3) (2.8) (2.0) - - (5.1)
Operating profit / (loss) before exceptional items 84.2 3.6 32.2 18.8 (40.3) 98.5
Exceptional profit / (loss) on disposal of subsidiaries and operations 4.4 - 0.4 - (1.9) 2.9
Other exceptional operating items** (25.9) - (0.9) - (32.4) (59.2)
Operating profit / (loss) 62.7 3.6 31.7 18.8 (74.6) 42.2
Investment revenue 9.3
Finance costs (21.9)
Profit before tax 29.6
Tax charge (15.8)
Tax on exceptional items 3.1
Profit for the year from continuing operations 16.9
* Trading profit / (loss) is defined as operating (loss) / profit
before exceptional items and amortisation and impairment of intangible assets
arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that will
benefit the wider business.
*** During the year two existing divisions, UK Central Government and UK
& Europe Local & Regional Government, were merged to form the new UK
& Europe division. This note has been adjusted to reflect the impact of
this, which has been to add together the results of the two former divisions.
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 31.3 - 2.0 - 0.1 33.4
Depreciation of plant, property and equipment (15.0) (3.1) (4.5) (0.9) (1.3) (24.8)
Impairment of plant, property and equipment (0.3) - (0.4) - - (0.7)
Total depreciation and impairment of plant, property and equipment (15.3) (3.1) (4.9) (0.9) (1.3) (25.5)
Amortisation of intangible assets arising on acquisition (0.3) (2.8) (1.3) - - (4.4)
Impairment and write down of intangible assets arising on acquisition - - (0.7) - - (0.7)
Amortisation of other intangible assets (0.6) (1.5) (3.3) (0.7) (15.7) (21.8)
Total amortisation and impairment of intangible assets (0.9) (4.3) (5.3) (0.7) (15.7) (26.9)
Segment assets
Interests in joint ventures and associates 12.3 - 1.7 0.4 - 14.4
Other segment assets**** 467.0 428.8 252.1 108.7 228.6 1,485.2
Total segment assets 479.3 428.8 253.8 109.1 228.6 1,499.6
Unallocated assets, including assets held for sale 265.0
Consolidated total assets 1,764.6
Segment liabilities
Segment liabilities**** (442.9) (140.7) (182.8) (79.3) (139.7) (985.4)
Unallocated liabilities, including liabilities held for sale (380.4)
Consolidated total liabilities (1,365.8)
****The Corporate segment assets and liabilities include balance sheet items
which provide benefit to the wider Group, including defined benefit pension
schemes and corporate intangible assets.
5. Joint ventures and associates
AWE Management Limited (AWEML), Merseyrail Services Holding Company Limited
(MSHCL) and Northern Rail Holdings Limited (NRHL) were the only equity
accounted entities which were material to the Group during the year or prior
year. Dividends of £17.1m (2016: £19.6m), £7.3m (2016: £7.3m) and £1.8m
(2016: £10.0m) respectively were received from these companies in the year.
The Northern Rail franchise ended on 31 March 2016.
Summarised financial information of AWEML, MSHCL, NRHL and an aggregation of
the other equity accounted entities in which the Group has an interest is as
follows:
31 December 2017
Summarised financial information AWEML MSHCL NRHL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) (100% of results) £m £m £m
£m £m £m
Revenue 951.8 155.7 0.3 311.2 45.5 356.7
Operating profit 90.8 17.8 3.8 33.0 1.4 34.4
Net investment revenue / (finance costs) 0.2 (0.2) - (0.1) - (0.1)
Income tax charge (18.8) (3.9) (0.5) (6.9) (0.1) (7.0)
Profit from continuing operations 72.2 13.7 3.3 26.0 1.3 27.3
Other comprehensive income - 2.0 - 1.0 (0.1) 0.9
Total comprehensive income 72.2 15.7 3.3 27.0 1.2 28.2
Non current assets 665.6 8.7 - 167.5 2.2 169.7
Current assets 197.3 43.5 5.2 72.7 14.5 87.2
Current liabilities (179.0) (37.0) (2.0) (63.4) (13.0) (76.4)
Non current liabilities (664.3) (1.6) - (163.5) (2.7) (166.2)
Net assets 19.6 13.6 3.2 13.3 1.0 14.3
Proportion of group ownership 24.5% 50.0% 50.0% - - -
Carrying amount of investment 4.8 6.8 1.6 13.3 1.0 14.3
* Total results of the entity multiplied by the respective
proportion of Group ownership.
AWEML MSHCL NRHL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) (100% of results) £m £m £m
£m £m £m
Cash and cash equivalents 77.2 33.6 6.0 38.7 2.5 41.2
Current financial liabilities excluding trade and other payables and (8.3) (1.9) 0.1 (2.9) (0.6) (3.5)
provisions
Non current financial liabilities excluding trade and other payables and - - - - (2.7) (2.7)
provisions
Depreciation and amortisation - (2.2) - (1.1) (1.4) (2.5)
Interest income 0.2 0.1 - 0.1 - 0.1
Interest expense - (0.3) - (0.2) - (0.2)
* Total results of the entity multiplied by the respective
proportion of Group ownership.
The financial statements of MSHCL are for a period which is different from
that of the Group, being for the 52 week period ended 6 January 2018 (2016: 52
week period ended 7 January 2017). The 52 week period reflects the joint
venture's internal reporting structure and is sufficiently close so as to not
require adjustment to match that of the Group. The NRHL franchise ended on 31
March 2016, with the results reflected in year ended 31 December 2017
reflecting the ongoing post contract negotiations.
Certain employees of the groups headed by AWEML and MSHCL are members of
sponsored defined benefit pension schemes. Given the significance of the
schemes to understanding the position of the entities the following key
disclosures are made:
Main assumptions: 2017 AWEML MSHCL
Rate of salary increases (%) 2.2% 3.1%
Inflation assumption (CPI %) 2.2% 2.2%
Discount rate (%) 2.6% 2.5%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.9 N/A
Future male industrial pensioners at 65 (years) 25.2 N/A
Retirement benefit funding position (100% of results) £m £m
Present value of scheme liabilities (2,233.3) (304.4)
Fair value of scheme assets 1,569.1 193.9
Net amount recognised (664.2) (110.5)
Members' share of deficit - 44.2
Franchise adjustment* - 66.3
Related asset, right to reimbursement 664.2 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit
that is expected to be funded outside the contract period.
AWEML is not liable for any deficiency in the defined benefit pension scheme
under current contractual arrangements. The deficit reflected in the financial
statements of MSHCL covers only that portion of the deficit that is expected
to be funded over the term of the franchise arrangement the entity operates
under. In addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
31 December 2016
Summarised financial information AWEML MSHCL NRHL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) (100% of results) £m £m £m
£m £m £m
Revenue 968.1 150.3 132.7 437.5 43.3 480.8
Operating profit 72.9 18.9 13.2 37.4 3.3 40.7
Net investment revenue / (finance costs) 0.2 (1.3) 0.1 (0.5) (0.1) (0.6)
Income tax (charge) / credit (11.3) (3.7) (3.4) (6.8) 0.1 (6.7)
Profit from continuing operations 61.8 13.9 9.9 30.1 3.3 33.4
Other comprehensive income - 34.0 0.8 17.4 (1.6) 15.8
Total comprehensive income 61.8 47.9 10.7 47.5 1.7 49.2
Non current assets 1,097.0 12.5 - 275.1 3.2 278.3
Current assets 149.3 32.8 14.2 60.1 16.0 76.1
Current liabilities (133.9) (31.9) (10.7) (54.2) (14.0) (68.2)
Non current liabilities (1,095.2) (0.9) - (268.7) (3.1) (271.8)
Net assets 17.2 12.5 3.5 12.3 2.1 14.4
Proportion of group ownership 33% / 24.5% 50% 50% - - -
Carrying amount of investment 4.2 6.3 1.8 12.3 2.1 14.4
* Total results of the entity multiplied by the respective
proportion of Group ownership.
AWEML MSHCL NRHL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) (100% of results) £m £m £m
£m £m £m
Cash and cash equivalents 72.4 21.1 14.5 35.4 4.7 40.1
Current financial liabilities excluding trade and other payables and (7.0) (2.3) (0.5) (3.1) (0.9) (4.0)
provisions
Non current financial liabilities excluding trade and other payables and - (0.6) - (0.3) (3.0) (3.3)
provisions
Depreciation and amortisation - (2.3) (1.7) (2.1) (1.0) (3.1)
Interest income 0.2 - 0.1 0.2 - 0.2
Interest expense - (1.3) - (0.6) (0.1) (0.7)
* Total results of the entity multiplied by the respective
proportion of Group ownership.
Key disclosures with respect of the defined benefit pension schemes of
material joint ventures and associates:
Main assumptions: 2016 AWEML MSHCL
Rate of salary increases (%) 2.3% 2.3%
Inflation assumption (CPI %) 2.3% 2.3%
Discount rate (%) 2.7% 2.7%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.8 N/A
Future male industrial pensioners at 65 (years) 24.9 N/A
Retirement benefit funding position (100% of results) AWEML MSHCL
£m £m
Present value of scheme liabilities (2,556.0) (275.7)
Fair value of scheme assets 1,460.9 171.1
Net amount recognised (1,095.1) (104.6)
Members' share of deficit - 62.8
Franchise adjustment* - 41.8
Related asset, right to reimbursement 1,095.1 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit
that is expected to be funded outside the contract period.
AWEML is not liable for any deficiency in the defined benefit pension scheme
under current contractual arrangements. The deficit reflected in the financial
statements of MSHCL covers only that portion of the deficit that is expected
to be funded over the term of the franchise arrangement the entity operates
under. In addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
6. 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.
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.
On 24 August 2017 the Group acquired 50% of the issued share capital of Serco
Sodexo Defence Services Pty Ltd (SSDS) for £1.6m, obtaining full control.
SSDS was previously a 50% owned joint venture accounted for on an equity
accounting basis. The business has a contract with the Australian Defence
Forces Joint Logistics Command relating to the operation of the Defence Forces
national clothing stores and strengthens the financial performance of the
AsPac division. As a result of the increase in ownership from 50% to 100% the
Group fair valued the existing 50% shareholding held at £0.2m, with the
resulting uplift in value of £0.7m being recorded in Other gains, outside of
operating results. The amounts recognised in respect of the identifiable
assets acquired and the liabilities assumed are as set out in the table below:
Provisional fair value
£m
Intangible assets, excluding goodwill 0.9
Trade and other receivables 1.6
Deferred tax assets 1.0
Cash and cash equivalents 3.1
Trade and other payables (3.3)
Provisions (1.7)
Acquisition date fair value of consideration transferred 1.6
Satisfied by:
Cash 0.4
Deferred consideration 1.2
Total consideration 1.6
The net cash inflow as a result of the acquisition was £2.7m, being £3.1m
cash acquired less £0.4m consideration paid.
No acquisition related costs were incurred.
The additional stake in SSDS contributed £3.8m and £0.7m to operating profit
before exceptional items in the period from acquisition to 31 December 2017.
Had the acquisition taken place on 1 January 2017 Group revenue and operating
profit before exceptional items for the year would have increased by £4.2m
and £0.6m respectively, taking total Group revenue to £2,957.8m and total
Group operating profit before exceptional items to £50.2m.
Cash payments were made in the year relating to historic acquisitions. The
total impact of acquisitions in the year to the Group's cash flow position was
as follows:
£m
Cash and cash equivalents in SSDS 3.1
Cash payments in respect of SSDS consideration (0.4)
Deferred consideration paid in respect of Anglia Support Partnership (1.2)
Net cash inflow arising on acquisitions in the year 1.5
7. Disposals
A summary of the disposals taking place in the year ended 31 December 2017
were as follows:
Profit / (loss) on disposal Cash flow
£m £m
Disposal of Service Glasgow LLP - (6.7)
Disposal of final remaining UK onshore private sector BPO contract - (0.5)
Impact of historic transactions 0.3 0.1
0.3 (7.1)
There were no disposals of continuing operations in 2016, the profit on
disposal of £2.9m related to transactions completing in prior years.
In December 2017 the Group's interest in Service Glasgow LLP was disposed of,
resulting in a net cash outflow of £6.7m with no profit or loss on disposal.
Further details are provided below.
Service Glasgow LLP
£m
Inventories 0.9
Trade and other receivables 4.7
Cash and cash equivalents 6.7
Trade and other payables (9.9)
Provisions (0.5)
Net assets disposed 1.9
No profit or loss was made on the disposal:
Service Glasgow LLP
£m
Consideration 1.6
Less:
Net assets disposed (1.9)
Non controlling interests disposed of 0.3
Income statement impact of disposal -
The net cash inflow arising on disposal of discontinued operations and the
impact on Net Debt is as follows:
Service Glasgow LLP
£m
Consideration 1.6
Less:
Deferred consideration (1.6)
Cash and cash equivalents disposed (6.7)
Net cash flow on disposal and movement in Net Debt (6.7)
8. 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
underlying performance of the Group.
Exceptional items arising on discontinued operations are disclosed on the face
of the income statement within the loss attributable to discontinued
operations, of which there are none in 2017 (2016: charge of £3.4m), whereas
those arising on continuing operations are disclosed on the face of the income
statement within exceptional operating items. Further information regarding
the exceptional items arising on discontinued operations in 2016 can be seen
in note 3.
Exceptional gain on disposal of subsidiaries and operations
The exceptional net gain on disposals is included in note 7.
Other exceptional operating items arising on continuing operations
For the year ended 31 December 2017 2016
£m £m
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)
Goodwill is tested for impairment annually or more frequently if there are
indications that there is a risk that it could be impaired. The recoverable
amount of each cash generating unit (CGU) is based on value in use
calculations derived from forecast cash flows based on past experience,
adjusted to reflect market trends, economic conditions, the Group's strategy
and key risks. These forecasts include an estimated level of new business wins
and contract attrition and an assumption that the final year forecast
continues into perpetuity at a CGU specific terminal growth rate. The terminal
growth rates are provided by external sources and are based on the long-term
inflation rates of the geographic market in which the CGUs operate and
therefore do not exceed the average long-term growth rates forecast for the
individual markets.
In 2016, goodwill of £17.8m arose following the acquisition of Orchard &
Shipman (Glasgow) Limited, the Group's subcontractor on the COMPASS contract,
providing accommodation to asylum seekers in Scotland and Northern Ireland on
behalf of the Home Office. This goodwill was then immediately impaired as the
CGU is forecast to be loss making and therefore the asset cannot be supported.
The annual impairment testing of CGUs in 2017 has identified no other
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). We expect restructuring costs of approximately £35m to be incurred
in 2018 which will be treated as exceptional.
The disposal of the Environmental and Leisure businesses was aborted in 2015
and during 2016 costs related to the aborted transaction were finalised,
resulting in a charge of £nil (2016: £0.1m).
In 2017, there were exceptional costs totalling £0.4m (2016: £0.1m)
associated with the UK Government reviews and the programme of Corporate
Renewal. These costs were treated as exceptional when the matter first arose
and consistent treatment is applied in 2017.
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. 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 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 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.
Tax impact of above items
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 in the year 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 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. 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).
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.
9. Investment revenue
Year ended 31 December 2017 2016
£m £m
Interest receivable on other loans and deposits 2.6 3.6
Net interest receivable on retirement benefit obligations (note 18) 3.8 4.7
Movement in discount on other debtors 1.2 1.0
7.6 9.3
10. Finance costs
Year ended 31 December 2017 2016
£m £m
Interest payable on obligations under finance leases 1.3 1.6
Interest payable on other loans 14.0 15.6
Facility fees and other charges 3.0 3.5
Movement in discount on provisions 1.3 2.4
19.6 23.1
Foreign exchange on financing activities (0.4) (1.2)
19.2 21.9
11. Tax
11 (a) Income tax recognised in the income statement
Year ended 31 December Before exceptional items Exceptional items Total Before exceptional items Exceptional items Total
2017 2017 2017 2016 2016 2016
£m £m £m £m £m £m
Current income tax
Current income tax charge / (credit) 14.6 (2.3) 12.3 12.1 (1.3) 10.8
Adjustments in respect of prior years (0.8) - (0.8) 3.6 - 3.6
Deferred tax
Current year charge / (credit) 2.1 7.3 9.4 1.2 (1.8) (0.6)
Adjustments in respect of prior years (1.9) - (1.9) (1.1) - (1.1)
14.0 5.0 19.0 15.8 (3.1) 12.7
The tax expense for the year can be reconciled to the profit in the Condensed
Consolidated Income Statement as follows:
Year ended 31 December Before exceptional items Exceptional items Total Before exceptional items Exceptional items Total
2017 2017 2017 2016 2016 2016
£m £m £m £m £m £m
Profit before tax 38.7 (19.6) 19.1 85.9 (56.3) 29.6
Tax calculated at a rate of 19.25% (2016: 20.00%) 7.5 (3.8) 3.7 17.1 (11.2) 5.9
Expenses not deductible for tax purposes* 5.9 0.3 6.2 5.7 9.2 14.9
UK unprovided deferred tax** (4.6) 2.9 (1.7) (3.9) - (3.9)
Other unprovided deferred tax 2.3 0.1 2.4 0.3 1.0 1.3
Effect of the use of unrecognised tax losses (1.2) (0.5) (1.7) (3.1) - (3.1)
Impact of changes in statutory tax rates on current income tax 1.3 (2.2) (0.9) - - -
Change in deferred tax as a result of legislative changes - (8.8) (8.8) - - -
Overseas rate differences 9.6 (0.8) 8.8 4.6 - 4.6
Other non taxable income (0.9) (0.5) (1.4) (0.7) (0.4) (1.1)
Adjustments in respect of prior years (2.9) - (2.9) 2.5 - 2.5
Adjustments in respect of deferred tax on pensions 2.2 18.3 20.5 - (1.7) (1.7)
Adjustments in respect of equity accounted investments (5.2) - (5.2) (6.7) - (6.7)
Tax charge 14.0 5.0 19.0 15.8 (3.1) 12.7
* Relates to costs that are not allowable for tax deduction under
local tax law. Non deductible expenses in relation to exceptional items relate
mainly to capital expenses, such as the impairments that are not deductible
for tax.
** Arises due to timing differences between when an amount is
recognised in the income statement and when the amount is subject to UK tax.
In the current year, the Group has received tax deductions for amounts which
have been charged to the income statement in previous periods in connection
with items such as fixed assets.
The income tax charge for the year is based on the blended UK statutory rate
of corporation tax for the period of 19.25% (2016: 20.00%). Taxation for other
jurisdictions is calculated at the rates prevailing in the respective
jurisdictions.
11 (b) Income tax recognised in the SOCI
Year ended 31 December 2017 2016
£m £m
Current tax
Taken to retirement benefit obligations reserve - -
Deferred tax
Taken to retirement benefit obligations reserve 18.1 (1.7)
18.1 (1.7)
12. Deferred tax
Deferred income taxes are calculated in full on temporary differences under
the liability method using local substantively enacted tax rates.
The movement in net deferred tax assets during the year was as follows:
2017 2016
£m £m
At 1 January - asset (20.3) (19.9)
Income statement charge/(credit) 7.6 (2.0)
Items recognised in equity and in other comprehensive income (18.1) 1.7
Arising on acquisition (1.0) -
Exchange differences (2.8) (0.1)
At 31 December - asset (34.6) (20.3)
The movement in deferred tax assets and liabilities during the year was as
follows:
Temporary differences on assets / intangibles Share based payment and employee benefits Retirement benefit schemes OCPs Tax losses Other temporary differences Total
£m £m £m £m £m £m £m
At 1 January 2017 36.5 (12.0) 17.6 (17.8) (10.3) (34.3) (20.3)
(Credited) / charged to income statement (note 11a) (6.7) 0.3 2.8 9.2 (8.4) 10.4 7.6
Items recognised in equity and in other comprehensive income (note 11b) - - (18.1) - - - (18.1)
Arising on acquisition (0.1) (0.9) - - - - (1.0)
Exchange differences (3.9) 0.4 0.2 0.7 - (0.2) (2.8)
At 31 December 2017 25.8 (12.2) 2.5 (7.9) (18.7) (24.1) (34.6)
Of the amount credited to the income statement, £0.1m (2016: £0.3m) has been
taken to costs of sales in respect of the R&D Expenditure credit. Other
temporary differences include a deferred tax asset of £nil in respect of
derivative financial instruments (2016: £0.1m).
The movement in deferred tax assets and liabilities during the previous year
was as follows:
Temporary differences on assets / intangibles Share based payment and employee benefits Retirement benefit schemes OCPs Tax losses Other temporary differences Total
£m £m £m £m £m £m £m
At 1 January 2016 26.8 (9.7) 17.8 (28.3) (10.8) (15.7) (19.9)
(Credited) / charged to income statement (note 11a) 0.9 (0.5) (1.5) 14.7 0.6 (16.2) (2.0)
Items recognised in equity and in other comprehensive income (note 11b) - - 1.7 - - - 1.7
Exchange differences 8.8 (1.8) (0.4) (4.2) (0.1) (2.4) (0.1)
At 31 December 2016 36.5 (12.0) 17.6 (17.8) (10.3) (34.3) (20.3)
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal
authority. The following is the analysis of the deferred tax balances (after
offset) for financial reporting purposes:
2017 2016
£m £m
Deferred tax liabilities 20.4 30.5
Deferred tax assets (55.0) (50.8)
(34.6) (20.3)
As at the balance sheet date, the UK has a potential deferred tax asset of
£177m (2016: £147m) available for offset against future profits. A deferred
tax asset has currently been recognised of £17.4m. Recognition has been based
on forecast future taxable profits. No deferred tax asset has been recognised
in respect of the remaining asset (net £160m) based on current forecasts;
additional asset recognition is contingent on further improvement in the UK
profit forecast. In the summer of 2016, UK Government announced a reduction in
the UK corporation tax rate from 20% to 19% effective from April 2017. Further
measures enacted during 2016 cut the rate further from April 2020 to 17%.
These measures have reduced the UK 2017 current tax credit and will reduce the
Group's future current tax charge accordingly. The deferred tax balance at 31
December 2017 has been calculated reflecting these rates. In addition, the
fall in the future expected US tax rates due to the enactment of the Tax Cuts
& Jobs Act in December 2017 has generated a £12.5m deferred tax credit in
2017 due to the calculation of the US deferred tax liability at 31 December
2017 using these reduced rates.
Losses of £0.1m (2016: £0.1m) expire within 5 years, losses of £0.1m (2016
£0.2m) expire within 6-10 years, losses of £4.1m (2016 £8.6m) expire within
20 years and losses of £998.4m (2016 £884.6m) may be carried forward
indefinitely.
13. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in
accordance with IAS33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares 2017 2016
- More to follow, for following part double click ID:nRSV5870Ff al course
of business. These are summarised as follows:
For the year ended 31 December 2016 £m
Exceptional items arising on discontinued operations
Exceptional loss on disposal (2.8)
Other exceptional operating items
Restructuring costs (1.1)
Impairment of goodwill -
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)
In 2016 a charge of £1.1m arose in discontinued operations in relation to the restructuring programme resulting from the
Strategy Review. This included redundancy payments, provisions and other charges relating to the exit of the UK private
sector BPO business, external advisory fees and other incremental costs.
A charge of £13.7m arose in 2016 in relation to the movement in the value of indemnities provided on business disposals
made in previous years. These relate to changes in exchange rates where indemnities were provided in foreign currencies and
increases to provisions for interest and penalties on any indemnities. There were no changes in the value of these
indemnities in 2017.
A charge of £0.4m was incurred in 2016 as a result of early payments to the US Private Placement (USPP) Noteholders
following the disposal of the offshore private sector BPO business. These charges were treated as exceptional finance costs
as they were directly linked to the restructuring resulting from the Strategy Review.
The net cash flows resulting from the discontinued operations were as follows:
For the year ended 31 December 2016 £m
Net cash inflow from operating activities before exceptional items 5.5
Exceptional items -
Net cash inflow from operating activities 5.5
Net cash inflow from investing activities 12.5
Net cash outflow from financing activities (11.4)
Net increase in cash and cash equivalents attributable to discontinued operations 6.6
4. Segmental information
The Group's operating segments reflecting the information reported to the Board in 2017 under IFRS8 Operating Segments are
as set out below.
Reportable segments Operating segments
UK & Europe Services for sectors including Citizen Services, Defence, Health, Justice & Immigration and Transport delivered to UK Government, UK devolved authorities and other public sector customers in the UK and Europe;
Americas Services for sectors including Defence, Transport and Citizen Services delivered to US federal and civilian agencies, selected state and municipal governments and the Canadian Government;
AsPac Services for sectors including Defence, Justice & Immigration, Transport, Health and Citizen Services in the Asia Pacific region including Australia, New Zealand and Hong Kong;
Middle East Services for sectors including Defence, Transport and Health in the Middle East region; and
Corporate Central and head office costs.
Each operating segment is focused on a narrow group of customers in a specific geographic region and is run by a local
management team which report directly to the CODM on a regular basis. As a result of this focus, the sectors in each region
have similar economic characteristics and are aggregated at the operating segment level in these condensed financial
statements.
During the year two existing divisions, UK Central Government and UK & Europe Local & Regional Government, were merged to
form the new UK & Europe division (UK&E) with the management team structure and responsibilities altered to match the
segment. This note has been adjusted to reflect the impact of this, which has been to add together the results of the two
former divisions in the comparative period.
Geographic information
Year ended 31 December Revenue Non current assets* Revenue Non current assets*
2017 £m 2017 £m 2016 £m 2016 £m
United Kingdom 1,185.2 340.3 1,244.9 444.7
United States 623.6 273.3 632.9 309.1
Australia 559.3 143.2 593.1 146.0
Middle East 351.9 18.0 324.8 19.7
Other countries 235.3 21.7 215.3 20.4
Total 2,953.6 796.5 3,011.0 939.9
* Non current assets exclude financial instruments, deferred tax assets and loans to joint ventures and associates
Revenues from external customers are attributed to individual countries on the basis of the location of the customer.
Information about major customers
The Group has four major governmental customers which each represent more than 10% of Group revenues. The customers'
revenues were £1,102.9m for the UK Government within the UK & Europe segment, £569.7m for the US Government within the
Americas segment, £522.1m for the Australian Government within the AsPac segment and £238.4m for the Government of the
United Arab Emirates within the Middle East segment.
In 2016 the Group had three major governmental customers which each represented more than 10% of Group revenues. The
customers' revenues were £1,233.7m for the UK Government within the UK & Europe segment, £623.1m for the US Government
within the Americas segment and £581.4m for the Australian Government within the AsPac segment.
The following is an analysis of the Group's revenue, results, assets and liabilities by reportable segment:
Year ended 31 December 2017 UK&E £m Americas £m AsPac £m Middle East £m Corporate £m Total £m
Revenue 1,334.7 688.0 579.0 351.9 - 2,953.6
Result
Trading profit / (loss) from continuing operations* 4.5 39.8 35.1 16.2 (41.6) 54.0
Amortisation and impairment of intangibles arising on acquisition - (3.0) (1.4) - - (4.4)
Operating profit / (loss) before exceptional items 4.5 36.8 33.7 16.2 (41.6) 49.6
Exceptional profit / (loss) on disposal of subsidiaries and operations 0.3 - - - - 0.3
Other exceptional operating items** 11.9 (0.3) (7.4) 0.1 (24.2) (19.9)
Operating profit / (loss) 16.7 36.5 26.3 16.3 (65.8) 30.0
Investment revenue 7.6
Finance costs (19.2)
Other gains 0.7
Profit before tax 19.1
Tax charge (14.0)
Tax on exceptional items (5.0)
Profit for the year from continuing operations 0.1
* Trading profit / (loss) is defined as operating profit / (loss) before exceptional items and amortisation and
impairment of intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent
costs that will benefit the wider business.
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 26.6 - 0.8 - (0.1) 27.3
Depreciation of plant, property and equipment (14.0) (3.2) (4.9) (0.8) (1.4) (24.3)
Impairment of plant, property and equipment 0.1 - - - - 0.1
Total depreciation and impairment of plant, property and equipment (13.9) (3.2) (4.9) (0.8) (1.4) (24.2)
Amortisation of intangible assets arising on acquisition - (3.0) (1.4) - - (4.4)
Exceptional impairment and write down of intangible assets arising on acquisition - - (6.1) - - (6.1)
Amortisation of other intangible assets (1.1) (1.5) (4.8) (0.2) (13.8) (21.4)
Exceptional impairment of other intangible assets - - - - (2.8) (2.8)
Total amortisation and impairment of intangible assets (1.1) (4.5) (12.3) (0.2) (16.6) (34.7)
Segment assets
Interests in joint ventures and associates 13.5 - 0.4 0.4 - 14.3
Other segment assets*** 445.9 391.3 223.4 112.0 133.2 1,305.8
Total segment assets 459.4 391.3 223.8 112.4 133.2 1,320.1
Unallocated assets 192.7
Consolidated total assets 1,512.8
Segment liabilities
Segment liabilities*** (368.5) (128.6) (148.5) (80.7) (142.0) (868.3)
Unallocated liabilities (337.3)
Consolidated total liabilities (1,205.6)
*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group,
including defined benefit pension schemes and corporate intangible assets.
Year ended 31 December 2016 (restated***) UK&E £m Americas £m AsPac £m Middle East £m Corporate £m Total £m
Revenue 1,375.1 691.4 619.7 324.8 - 3,011.0
Result -
Trading profit / (loss) from continuing operations* 84.5 6.4 34.2 18.8 (40.3) 103.6
Amortisation and impairment of intangibles arising on acquisition (0.3) (2.8) (2.0) - - (5.1)
Operating profit / (loss) before exceptional items 84.2 3.6 32.2 18.8 (40.3) 98.5
Exceptional profit / (loss) on disposal of subsidiaries and operations 4.4 - 0.4 - (1.9) 2.9
Other exceptional operating items** (25.9) - (0.9) - (32.4) (59.2)
Operating profit / (loss) 62.7 3.6 31.7 18.8 (74.6) 42.2
Investment revenue 9.3
Finance costs (21.9)
Profit before tax 29.6
Tax charge (15.8)
Tax on exceptional items 3.1
Profit for the year from continuing operations 16.9
* Trading profit / (loss) is defined as operating (loss) / profit before exceptional items and amortisation and
impairment of intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent
costs that will benefit the wider business.
*** During the year two existing divisions, UK Central Government and UK & Europe Local & Regional Government, were
merged to form the new UK & Europe division. This note has been adjusted to reflect the impact of this, which has been to
add together the results of the two former divisions.
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 31.3 - 2.0 - 0.1 33.4
Depreciation of plant, property and equipment (15.0) (3.1) (4.5) (0.9) (1.3) (24.8)
Impairment of plant, property and equipment (0.3) - (0.4) - - (0.7)
Total depreciation and impairment of plant, property and equipment (15.3) (3.1) (4.9) (0.9) (1.3) (25.5)
Amortisation of intangible assets arising on acquisition (0.3) (2.8) (1.3) - - (4.4)
Impairment and write down of intangible assets arising on acquisition - - (0.7) - - (0.7)
Amortisation of other intangible assets (0.6) (1.5) (3.3) (0.7) (15.7) (21.8)
Total amortisation and impairment of intangible assets (0.9) (4.3) (5.3) (0.7) (15.7) (26.9)
Segment assets
Interests in joint ventures and associates 12.3 - 1.7 0.4 - 14.4
Other segment assets**** 467.0 428.8 252.1 108.7 228.6 1,485.2
Total segment assets 479.3 428.8 253.8 109.1 228.6 1,499.6
Unallocated assets, including assets held for sale 265.0
Consolidated total assets 1,764.6
Segment liabilities
Segment liabilities**** (442.9) (140.7) (182.8) (79.3) (139.7) (985.4)
Unallocated liabilities, including liabilities held for sale (380.4)
Consolidated total liabilities (1,365.8)
****The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group,
including defined benefit pension schemes and corporate intangible assets.
5. Joint ventures and associates
AWE Management Limited (AWEML), Merseyrail Services Holding Company Limited (MSHCL) and Northern Rail Holdings Limited
(NRHL) were the only equity accounted entities which were material to the Group during the year or prior year. Dividends of
£17.1m (2016: £19.6m), £7.3m (2016: £7.3m) and £1.8m (2016: £10.0m) respectively were received from these companies in the
year. The Northern Rail franchise ended on 31 March 2016.
Summarised financial information of AWEML, MSHCL, NRHL and an aggregation of the other equity accounted entities in which
the Group has an interest is as follows:
31 December 2017
Summarised financial information AWEML(100% of results) £m MSHCL(100% of results)£m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Revenue 951.8 155.7 0.3 311.2 45.5 356.7
Operating profit 90.8 17.8 3.8 33.0 1.4 34.4
Net investment revenue / (finance costs) 0.2 (0.2) - (0.1) - (0.1)
Income tax charge (18.8) (3.9) (0.5) (6.9) (0.1) (7.0)
Profit from continuing operations 72.2 13.7 3.3 26.0 1.3 27.3
Other comprehensive income - 2.0 - 1.0 (0.1) 0.9
Total comprehensive income 72.2 15.7 3.3 27.0 1.2 28.2
Non current assets 665.6 8.7 - 167.5 2.2 169.7
Current assets 197.3 43.5 5.2 72.7 14.5 87.2
Current liabilities (179.0) (37.0) (2.0) (63.4) (13.0) (76.4)
Non current liabilities (664.3) (1.6) - (163.5) (2.7) (166.2)
Net assets 19.6 13.6 3.2 13.3 1.0 14.3
Proportion of group ownership 24.5% 50.0% 50.0% - - -
Carrying amount of investment 4.8 6.8 1.6 13.3 1.0 14.3
* Total results of the entity multiplied by the respective proportion of Group ownership.
AWEML(100% of results) £m MSHCL(100% of results)£m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Cash and cash equivalents 77.2 33.6 6.0 38.7 2.5 41.2
Current financial liabilities excluding trade and other payables and provisions (8.3) (1.9) 0.1 (2.9) (0.6) (3.5)
Non current financial liabilities excluding trade and other payables and provisions - - - - (2.7) (2.7)
Depreciation and amortisation - (2.2) - (1.1) (1.4) (2.5)
Interest income 0.2 0.1 - 0.1 - 0.1
Interest expense - (0.3) - (0.2) - (0.2)
* Total results of the entity multiplied by the respective proportion of Group ownership.
The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52 week period
ended 6 January 2018 (2016: 52 week period ended 7 January 2017). The 52 week period reflects the joint venture's internal
reporting structure and is sufficiently close so as to not require adjustment to match that of the Group. The NRHL
franchise ended on 31 March 2016, with the results reflected in year ended 31 December 2017 reflecting the ongoing post
contract negotiations.
Certain employees of the groups headed by AWEML and MSHCL are members of sponsored defined benefit pension schemes. Given
the significance of the schemes to understanding the position of the entities the following key disclosures are made:
Main assumptions: 2017 AWEML MSHCL
Rate of salary increases (%) 2.2% 3.1%
Inflation assumption (CPI %) 2.2% 2.2%
Discount rate (%) 2.6% 2.5%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.9 N/A
Future male industrial pensioners at 65 (years) 25.2 N/A
Retirement benefit funding position (100% of results) £m £m
Present value of scheme liabilities (2,233.3) (304.4)
Fair value of scheme assets 1,569.1 193.9
Net amount recognised (664.2) (110.5)
Members' share of deficit - 44.2
Franchise adjustment* - 66.3
Related asset, right to reimbursement 664.2 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit pension scheme under current contractual arrangements. The
deficit reflected in the financial statements of MSHCL covers only that portion of the deficit that is expected to be
funded over the term of the franchise arrangement the entity operates under. In addition, the defined benefit position
reflects an adjustment in respect of funding required to be provided by employees.
31 December 2016
Summarised financial information AWEML(100% of results) £m MSHCL(100% of results)£m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Revenue 968.1 150.3 132.7 437.5 43.3 480.8
Operating profit 72.9 18.9 13.2 37.4 3.3 40.7
Net investment revenue / (finance costs) 0.2 (1.3) 0.1 (0.5) (0.1) (0.6)
Income tax (charge) / credit (11.3) (3.7) (3.4) (6.8) 0.1 (6.7)
Profit from continuing operations 61.8 13.9 9.9 30.1 3.3 33.4
Other comprehensive income - 34.0 0.8 17.4 (1.6) 15.8
Total comprehensive income 61.8 47.9 10.7 47.5 1.7 49.2
Non current assets 1,097.0 12.5 - 275.1 3.2 278.3
Current assets 149.3 32.8 14.2 60.1 16.0 76.1
Current liabilities (133.9) (31.9) (10.7) (54.2) (14.0) (68.2)
Non current liabilities (1,095.2) (0.9) - (268.7) (3.1) (271.8)
Net assets 17.2 12.5 3.5 12.3 2.1 14.4
Proportion of group ownership 33% / 24.5% 50% 50% - - -
Carrying amount of investment 4.2 6.3 1.8 12.3 2.1 14.4
* Total results of the entity multiplied by the respective proportion of Group ownership.
AWEML(100% of results) £m MSHCL(100% of results)£m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Cash and cash equivalents 72.4 21.1 14.5 35.4 4.7 40.1
Current financial liabilities excluding trade and other payables and provisions (7.0) (2.3) (0.5) (3.1) (0.9) (4.0)
Non current financial liabilities excluding trade and other payables and provisions - (0.6) - (0.3) (3.0) (3.3)
Depreciation and amortisation - (2.3) (1.7) (2.1) (1.0) (3.1)
Interest income 0.2 - 0.1 0.2 - 0.2
Interest expense - (1.3) - (0.6) (0.1) (0.7)
* Total results of the entity multiplied by the respective proportion of Group ownership.
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
Main assumptions: 2016 AWEML MSHCL
Rate of salary increases (%) 2.3% 2.3%
Inflation assumption (CPI %) 2.3% 2.3%
Discount rate (%) 2.7% 2.7%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.8 N/A
Future male industrial pensioners at 65 (years) 24.9 N/A
Retirement benefit funding position (100% of results) AWEML£m MSHCL£m
Present value of scheme liabilities (2,556.0) (275.7)
Fair value of scheme assets 1,460.9 171.1
Net amount recognised (1,095.1) (104.6)
Members' share of deficit - 62.8
Franchise adjustment* - 41.8
Related asset, right to reimbursement 1,095.1 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit pension scheme under current contractual arrangements. The
deficit reflected in the financial statements of MSHCL covers only that portion of the deficit that is expected to be
funded over the term of the franchise arrangement the entity operates under. In addition, the defined benefit position
reflects an adjustment in respect of funding required to be provided by employees.
6. 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.
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.
On 24 August 2017 the Group acquired 50% of the issued share capital of Serco Sodexo Defence Services Pty Ltd (SSDS) for
£1.6m, obtaining full control. SSDS was previously a 50% owned joint venture accounted for on an equity accounting basis.
The business has a contract with the Australian Defence Forces Joint Logistics Command relating to the operation of the
Defence Forces national clothing stores and strengthens the financial performance of the AsPac division. As a result of the
increase in ownership from 50% to 100% the Group fair valued the existing 50% shareholding held at £0.2m, with the
resulting uplift in value of £0.7m being recorded in Other gains, outside of operating results. The amounts recognised in
respect of the identifiable assets acquired and the liabilities assumed are as set out in the table below:
Provisional fair value £m
Intangible assets, excluding goodwill 0.9
Trade and other receivables 1.6
Deferred tax assets 1.0
Cash and cash equivalents 3.1
Trade and other payables (3.3)
Provisions (1.7)
Acquisition date fair value of consideration transferred 1.6
Satisfied by:
Cash 0.4
Deferred consideration 1.2
Total consideration 1.6
The net cash inflow as a result of the acquisition was £2.7m, being £3.1m cash acquired less £0.4m consideration paid.
No acquisition related costs were incurred.
The additional stake in SSDS contributed £3.8m and £0.7m to operating profit before exceptional items in the period from
acquisition to 31 December 2017. Had the acquisition taken place on 1 January 2017 Group revenue and operating profit
before exceptional items for the year would have increased by £4.2m and £0.6m respectively, taking total Group revenue to
£2,957.8m and total Group operating profit before exceptional items to £50.2m.
Cash payments were made in the year relating to historic acquisitions. The total impact of acquisitions in the year to the
Group's cash flow position was as follows:
£m
Cash and cash equivalents in SSDS 3.1
Cash payments in respect of SSDS consideration (0.4)
Deferred consideration paid in respect of Anglia Support Partnership (1.2)
Net cash inflow arising on acquisitions in the year 1.5
7. Disposals
A summary of the disposals taking place in the year ended 31 December 2017 were as follows:
Profit / (loss) on disposal£m Cash flow£m
Disposal of Service Glasgow LLP - (6.7)
Disposal of final remaining UK onshore private sector BPO contract - (0.5)
Impact of historic transactions 0.3 0.1
0.3 (7.1)
There were no disposals of continuing operations in 2016, the profit on disposal of £2.9m related to transactions
completing in prior years.
In December 2017 the Group's interest in Service Glasgow LLP was disposed of, resulting in a net cash outflow of £6.7m with
no profit or loss on disposal. Further details are provided below.
Service Glasgow LLP£m
Inventories 0.9
Trade and other receivables 4.7
Cash and cash equivalents 6.7
Trade and other payables (9.9)
Provisions (0.5)
Net assets disposed 1.9
No profit or loss was made on the disposal:
Service Glasgow LLP£m
Consideration 1.6
Less:
Net assets disposed (1.9)
Non controlling interests disposed of 0.3
Income statement impact of disposal -
The net cash inflow arising on disposal of discontinued operations and the impact on Net Debt is as follows:
Service Glasgow LLP£m
Consideration 1.6
Less:
Deferred consideration (1.6)
Cash and cash equivalents disposed (6.7)
Net cash flow on disposal and movement in Net Debt (6.7)
8. 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 underlying performance of the Group.
Exceptional items arising on discontinued operations are disclosed on the face of the income statement within the loss
attributable to discontinued operations, of which there are none in 2017 (2016: charge of £3.4m), whereas those arising on
continuing operations are disclosed on the face of the income statement within exceptional operating items. Further
information regarding the exceptional items arising on discontinued operations in 2016 can be seen in note 3.
Exceptional gain on disposal of subsidiaries and operations
The exceptional net gain on disposals is included in note 7.
Other exceptional operating items arising on continuing operations
For the year ended 31 December 2017 £m 2016 £m
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)
Goodwill is tested for impairment annually or more frequently if there are indications that there is a risk that it could
be impaired. The recoverable amount of each cash generating unit (CGU) is based on value in use calculations derived from
forecast cash flows based on past experience, adjusted to reflect market trends, economic conditions, the Group's strategy
and key risks. These forecasts include an estimated level of new business wins and contract attrition and an assumption
that the final year forecast continues into perpetuity at a CGU specific terminal growth rate. The terminal growth rates
are provided by external sources and are based on the long-term inflation rates of the geographic market in which the CGUs
operate and therefore do not exceed the average long-term growth rates forecast for the individual markets.
In 2016, goodwill of £17.8m arose following the acquisition of Orchard & Shipman (Glasgow) Limited, the Group's
subcontractor on the COMPASS contract, providing accommodation to asylum seekers in Scotland and Northern Ireland on behalf
of the Home Office. This goodwill was then immediately impaired as the CGU is forecast to be loss making and therefore the
asset cannot be supported. The annual impairment testing of CGUs in 2017 has identified no other 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). We expect restructuring costs of
approximately £35m to be incurred in 2018 which will be treated as exceptional.
The disposal of the Environmental and Leisure businesses was aborted in 2015 and during 2016 costs related to the aborted
transaction were finalised, resulting in a charge of £nil (2016: £0.1m).
In 2017, there were exceptional costs totalling £0.4m (2016: £0.1m) associated with the UK Government reviews and the
programme of Corporate Renewal. These costs were treated as exceptional when the matter first arose and consistent
treatment is applied in 2017.
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. 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 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 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.
Tax impact of above items
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 in the year
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 Statement of
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