REG - Serco Group PLC - 2017 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 6
22/02/2018 07:05
- Part 6: For the preceding part double click ID:nRSV5870Fe
millions millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,089.7 1,088.3
Effect of dilutive potential ordinary shares: Share options 44.9 37.3
Weighted average number of ordinary shares for the purpose of diluted EPS 1,134.6 1,125.6
At 31 December 2017 options over 236,616 (2016: 246,818) shares were excluded
from the weighted average number of shares used for calculating diluted
earnings per share because their exercise price was above the average share
price for the year and they were, therefore, anti-dilutive.
Due to the loss making position of the combined continuing and discontinued
operations in 2016 and for continuing in 2017, the dilutive impact has not
been separately disclosed for those measures of profitability.
Earnings per share for continuing and discontinued operations
Basic EPS Earnings 2017 Per share amount 2017 pence Earnings 2016 £m Per share amount 2016
£m pence
Earnings for the purpose of basic EPS (0.2) (0.02) (1.2) (0.11)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS (0.2) (0.02) (1.2) (0.11)
Add back exceptional items 19.6 1.80 70.9 6.51
Add back tax on exceptional items 5.0 0.46 (3.1) (0.28)
Earnings excluding exceptional operating items for the purpose of basic EPS 24.4 2.24 66.6 6.12
Earnings per share for continuing operations
Basic EPS Earnings 2017 Per share amount Earnings Per share amount
£m 2017 2016 2016
pence £m pence
Earnings for the purpose of basic EPS (0.2) (0.02) 16.9 1.55
Effect of dilutive potential ordinary shares - - - (0.05)
Diluted EPS (0.2) (0.02) 16.9 1.50
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS (0.2) (0.02) 16.9 1.55
Add back exceptional items 19.6 1.80 56.3 5.17
Add back tax on exceptional items 5.0 0.46 (3.1) (0.28)
Earnings excluding exceptional operating items for the purpose of basic EPS 24.4 2.24 70.1 6.44
Earnings per share discontinued
Basic EPS Earnings 2017 Per share amount Earnings Per share amount
£m 2017 2016 2016
pence £m pence
Earnings for the purpose of basic EPS - - (18.1) (1.66)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS - - (18.1) (1.66)
Add back exceptional items - - 14.6 1.34
Earnings excluding exceptional operating items for the purpose of basic EPS - - (3.5) (0.32)
14. Goodwill
Cost Accumulated impairment losses Carrying amount
£m £m £m
At 1 January 2016 799.1 (289.2) 509.9
Exchange differences 109.6 (41.6) 68.0
Acquisitions 17.8 - 17.8
Impairment (exceptional) - (17.8) (17.8)
At 1 January 2017 926.5 (348.6) 577.9
Exchange differences (48.5) 21.9 (26.6)
At 31 December 2017 878.0 (326.7) 551.3
Movements in the balance since the prior year end can be seen as follows:
Goodwill balance Additions Exchange differences Impairment Goodwill balance Headroom on impairment analysis Headroom on impairment analysis
1 January 2017 2017 2017 31 December 2017 2017 2016
2017 £m £m £m £m £m £m
£m
UK & Europe
Justice & Immigration 49.6 - - - 49.6 127.4 126.3
Health 60.6 - - - 60.6 19.4 3.2
Direct Services & Europe 66.5 - 0.8 - 67.3 71.5 99.0
Americas 277.9 - (24.9) - 253.0 151.8 66.5
AsPac 112.4 - (1.6) - 110.8 231.6 203.2
Middle East 10.9 - (0.9) - 10.0 145.6 114.7
577.9 - (26.6) - 551.3 747.3 612.9
Included above is the detail of the headroom on the CGUs existing at the year
end which reflects where future discounted cash flows are greater than the
underlying assets and includes all relevant cash flows, including where
provisions have been made for future costs and losses.
The key assumptions applied in the impairment review are set out below:
Discount rate Discount rate Terminal growth rates Terminal growth rates
2017 2016* 2017 2016
% % % %
UK & Europe
Justice & Immigration 10.4 11.2 2.0 2.0
Health 10.4 11.2 2.0 2.0
Direct Services & Europe 11.7 12.5 2.0 2.0
Americas 10.5 12.3 2.4 2.4
AsPac 9.7 11.2 2.4 2.4
Middle East 10.8 10.7 2.5 2.2
* Restated based on rates applied in impairment testing calculations
in the prior year.
Discount rate
Pre-tax discount rates, derived from the Group's post-tax weighted average
cost of capital have been used in discounting the projected cash flows. These
rates are reviewed annually with external advisers and are adjusted for risks
specific to the market in which the CGU operates.
Short term growth rates
The annual impairment test is performed immediately prior to the year end,
based initially on five year cash flow forecasts approved by senior
management. Short term revenue growth rates used in each CGU five year plan
are based on internal data regarding our current contracted position, the
pipeline of opportunities and forecast growth for the relevant market.
Short term profitability and cash conversion is based on our historic
experiences and a level of judgement is applied to expected changes in both.
Where businesses have been poor performers in recent history, turnaround has
only been assumed where a detailed and achievable plan is in place and all
forecasts include cash flows relating to contracts where onerous contract
provisions have been made.
Terminal growth rates
The calculations include a terminal value based on the projections for the
fifth year of the short term plan, with a growth rate assumption applied which
extrapolates the business into perpetuity. The terminal growth rates are based
on 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. These are provided by external sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption, a 1% movement
in discount rates and a 1% movement in terminal growth rates are considered to
be reasonably possible. The only CGU impacted by a reasonably possible change
in a key assumption is Health where a 1% increase in discount rates and a 1%
decrease in terminal growth rates would result in an impairment of £4.2m. The
breakeven point of Health goodwill impairment is a 0.8% increase in discount
rate combined with a 0.8% decrease in terminal growth rate. A reduction of
£2.0m in the terminal year cash flows for the Health CGU would lead to the
recoverable amount no longer exceeding the carrying value. Any additional
reduction in terminal year cash flows would result in an impairment of the
goodwill of this CGU.
15. Analysis of Net Debt
At 1 January 2017 Cash flow Reclassified as held for sale Acquisitions* Disposals Exchange differences Non cash movements At 31 December 2017
£m £m £m £m £m £m £m £m
Loans payable (299.9) 3.8 - - - 25.4 (0.8) (271.5)
Obligations under finance leases (28.2) 12.6 - - - 0.1 (4.7) (20.2)
Liabilities arising from financing activities (328.1) 16.4 - - - 25.5 (5.5) (291.7)
Cash and cash equivalents 177.8 (57.3) - 1.5 (7.1) (2.8) - 112.1
Loan receivables 22.9 (0.6) - - - - 3.4 25.7
Derivatives relating to Net Debt 18.1 - - - - (5.3) - 12.8
Net Debt (109.3) (41.5) - 1.5 (7.1) 17.4 (2.1) (141.1)
At 1 January 2016 Cash flow Reclassified as held for sale Acquisitions* Disposals Exchange differences Non cash movements At 31 December 2016
£m £m £m £m £m £m £m £m
Loans payable (381.9) 135.8 - - - (52.8) (1.0) (299.9)
Obligations under finance leases (43.8) 16.7 (0.2) - - (0.4) (0.5) (28.2)
Liabilities arising from financing activities (425.7) 152.5 (0.2) - - (53.2) (1.5) (328.1)
Cash and cash equivalents 323.6 (153.7) - 0.1 - 7.8 - 177.8
Loan receivables 19.9 - - - - 0.1 2.9 22.9
Derivatives relating to Net Debt 14.6 - - - - 3.5 - 18.1
Net Debt (67.6) (1.2) (0.2) 0.1 - (41.8) 1.4 (109.3)
* Acquisitions represent the net cash / (debt) acquired on
acquisition.
16. Provisions
Employee related Property Contract Other Total
£m £m £m £m £m
At 1 January 2017 45.1 15.2 220.2 141.2 421.7
Arising on acquisition 1.7 - - - 1.7
Eliminated on disposal of subsidiary - - - (0.5) (0.5)
Charged to income statement - exceptional 4.5 2.7 - 0.1 7.3
Charged to income statement - other 17.5 2.4 62.0 8.6 90.5
Released to income statement - exceptional (0.9) (1.3) (0.4) (10.5) (13.1)
Released to income statement - other (4.9) (1.4) (43.0) (9.0) (58.3)
Utilised during the year (4.9) (3.1) (69.3) (5.0) (82.3)
Unwinding of discount - - 1.3 - 1.3
Exchange differences (2.4) (0.2) (2.6) (3.1) (8.3)
At 31 December 2017 55.7 14.3 168.2 121.8 360.0
Analysed as:
Current 17.1 4.4 68.0 59.0 148.5
Non current 38.6 9.9 100.2 62.8 211.5
55.7 14.3 168.2 121.8 360.0
Contract provisions relate to onerous contracts which will be utilised over
the life of each individual contract, up to a maximum of 7 years from the
balance sheet date. The present value of the estimated future cash outflow
required to settle the contract obligations as they fall due over the
respective contracts has been used in determining the provision. The
individual provisions are discounted where the impact is assessed to be
significant. Discount rates used are calculated based on the estimated risk
free rate of interest for the region in which the provision is located and
matched against the ageing profile of the provision. 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.
17. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities
of its joint ventures and associates up to a maximum value of £4.3m (2016:
£20.4m). The actual commitment outstanding at 31 December 2017 was £4.3m
(2016: £17.9m).
The Company and its subsidiaries have provided certain guarantees and
indemnities in respect of performance and other bonds, issued by its banks on
its behalf in the ordinary course of business. The total commitment
outstanding as at 31 December 2017 was £227.1m (2016: £252.1m).
As we have disclosed before, we are under investigation by the Serious Fraud
Office. In November 2013, the UK's Serious Fraud Office announced that it had
opened an investigation, which remains ongoing, into the Group's Electronic
Monitoring Contract.
We are cooperating fully with the Serious Fraud Office's investigation but it
is not possible to predict the outcome. However, a description of the range of
possible outcomes in the event that the Serious Fraud Office decides to
prosecute the individuals and /or the Serco entities involved will be
disclosed in the Principal Risks and Uncertainties section of the Group's
Annual Report and Accounts.
The Group is aware of other claims and potential claims which involve or may
involve legal proceedings against the Group. The Directors are of the opinion,
having regard to legal advice received and the Group's insurance arrangements,
that it is unlikely that these matters will, in aggregate, have a material
effect on the Group's financial position.
18. Defined benefit schemes
Characteristics
The Group contributes to defined benefit schemes for qualifying employees of
its subsidiaries in the UK and Europe. The normal contributions expected to be
paid during the financial year ending 31 December 2018 are £7.1m (2017:
£9.7m).
Among our non contract specific schemes, the largest is the Serco Pension and
Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of
this scheme was undertaken as at 5 April 2015 and resulted in an actuarially
assessed deficit of £4.0m for funding purposes. Pension obligations are
valued separately for accounting and funding purposes and there is often a
material difference between these valuations. As at 31 December 2017 the
estimated actuarial deficit of SPLAS was £33.7m (2016: £42.6m) based on the
actuarial assessment on the funding basis whereas the accounting valuation
resulted in an asset of £41.8m. The primary reason a difference arises is
that pension scheme accounting requires the valuation to be performed on the
basis of a best estimate whereas the funding valuation used by the trustees
makes more prudent assumptions. A revised schedule of contributions for
SPLAS was agreed during the year, with 29% of pensionable salaries due to be
paid from 1 November 2017 to 31 October 2018 and 28% from 1 November 2018 to
18 December 2022. An additional shortfall contribution of £1.0m is due by
30 April 2018 and four further payments of £0.5m payable at the end of each
April through to 2022.
Events in the year
In June 2017 the Trustees of SPLAS entered into a bulk annuity purchase
whereby an insurer will fund future benefit payments to the relevant members,
commonly referred to as a "buy-in". The liability to pay the members remains
with SPLAS and therefore the pension scheme will continue to include the
relevant pension liabilities. However, but an insurance asset is held at fair
value, which, in line with IAS19 for qualifying insurance policies, is deemed
to be equal to the present value of the related obligations. 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. Of the total remeasurements
recognised in the statement of other comprehensive income in the year ended 31
December 2017 of £106.5m, £95.0m related to the revaluation of the assets
and liabilities as a result of this transaction. Whilst the impact
substantially reduced the asset on an IAS19 valuation basis, on an actuarial
basis the transaction decreased the deficit of the scheme by approximately
£12m. As a result of the transaction, the scheme also exited a longevity
swap arrangement early, at a cost borne by the scheme of £7.5m.
In 2016, certain active former members of SPLAS on a specific contract were
transferred back to a Government backed pension scheme they had previously
been members of. This resulted in contribution savings due to lower rates
required under the Government Serco scheme and a curtailment gain of £1.9m
was recognised in 2016. In 2017 certain of these deferred members transferred
their accrued benefits from SPLAS to the Government scheme. The arrangements
for this process had been made by a planned transfer on a bulk basis, which
resulted in settlement accounting being applied in 2016 and an exceptional
charge booked at the time. However, it was subsequently agreed that the
Government would allow the transfer of members on an individual basis and as
the members are taking an existing option to take an individual transfer out
of the scheme, settlement accounting was no longer applicable following the
change of arrangements in 2017. The impact of the individuals transferring out
is now treated as a change in actuarial assumptions and impacts on reserves,
not through the income statement. The remaining provision of £10.3m was
therefore reversed through exceptional items in 2017. The impact of the
transfer resulted in a charge to other comprehensive income of £5.1m,
included within the effect of experience assumptions.
In November 2017 certain members of SPLAS agreed to transfer their active
membership to defined contribution schemes and a curtailment gain of £2.0m is
recognised in the year in the Group's income statement.
Values recognised in total comprehensive income in the year
The amounts recognised in the financial statements for the year are analysed
as follows:
Recognised in the income statement Contract specific 2017 Non contract specific 2017 Total 2017
£m £m £m
Current service cost - employer 1.0 7.6 8.6
Past service cost - 0.3 0.3
Curtailment gain recognised - (2.0) (2.0)
Administrative expenses and taxes - 5.3 5.3
Recognised in arriving at operating profit 1.0 11.2 12.2
Interest income on scheme assets - employer (0.4) (41.4) (41.8)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.5 37.6 38.1
Finance income - (3.8) (3.8)
Included within the SOCI Contract specific 2017 Non contract specific 2017 Total 2017
£m £m £m
Actual return on scheme assets 11.0 (50.7) (39.7)
Less: interest income on scheme assets (0.4) (41.4) (41.8)
10.6 (92.1) (81.5)
Effect of changes in demographic assumptions - 1.0 1.0
Effect of changes in financial assumptions (10.3) (21.3) (31.6)
Effect of experience adjustments 0.8 4.8 5.6
Remeasurements 1.1 (107.6) (106.5)
Change in franchise adjustment (0.2) - (0.2)
Change in members' share (0.4) - (0.4)
Actuarial losses on reimbursable rights (0.6) - (0.6)
Total pension gain recognised in the SOCI 0.5 (107.6) (107.1)
Recognised in the income statement Contract specific 2016 Non contract specific 2016 Total 2016
£m £m £m
Current service cost - employer 0.4 7.4 7.8
Past service cost - 0.4 0.4
Curtailment loss recognised - (1.9) (1.9)
Administrative expenses and taxes - 5.4 5.4
Recognised in arriving at operating profit 0.4 11.3 11.7
Interest income on scheme assets - employer (0.1) (49.0) (49.1)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.2 44.3 44.5
Finance income - (4.7) (4.7)
Included within the SOCI Contract specific 2016 Non contract specific 2016 Total 2016
£m £m £m
Actual return on scheme assets 0.9 285.2 286.1
Less: interest income on scheme assets (0.2) (49.0) (49.2)
0.7 236.2 236.9
Effect of changes in demographic assumptions - 26.2 26.2
Effect of changes in financial assumptions (3.5) (279.3) (282.8)
Effect of experience adjustments - 28.7 28.7
Remeasurements (2.8) 11.8 9.0
Change in franchise adjustment 1.7 - 1.7
Change in members' share 1.2 - 1.2
Actuarial losses on reimbursable rights 2.9 - 2.9
Total pension gain recognised in the SOCI 0.1 11.8 11.9
Balance sheet values
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value Contract specific 2017 Non contract specific 2017 Total 2017
£m £m £m
Equities 9.9 46.3 56.2
Bonds except LDIs 2.9 20.8 23.7
LDIs - 709.8 709.8
Gilts 0.2 - 0.2
Property 1.6 - 1.6
Cash and other 2.8 3.2 6.0
Annuity policies - 587.5 587.5
Fair value of scheme assets 17.4 1,367.6 1,385.0
Present value of scheme liabilities (23.4) (1,341.3) (1,364.7)
Net amount recognised (6.0) 26.3 20.3
Franchise adjustment* 3.6 - 3.6
Members' share of deficit 2.4 - 2.4
Net retirement benefit asset - 26.3 26.3
Net pension liability - (15.5) (15.5)
Net pension asset - 41.8 41.8
Net retirement benefit asset - 26.3 26.3
Deferred tax liabilities - (2.5) (2.5)
Net retirement benefit asset (after tax) - 23.8 23.8
* The franchise adjustment represents the amount of scheme deficit
that is expected to be funded outside the contract period.
Scheme assets at fair value Contract specific 2016 Non contract specific 2016 Total 2016
£m £m £m
Equities 3.3 43.3 46.6
Bonds except LDIs 0.7 20.2 20.9
LDIs - 1,390.6 1,390.6
Gilts - 72.4 72.4
Property 0.6 - 0.6
Cash and other 1.2 4.2 5.4
Annuity policies - 20.0 20.0
Fair value of scheme assets 5.8 1,550.7 1,556.5
Present value of scheme liabilities (12.0) (1,418.0) (1,430.0)
Net amount recognised (6.2) 132.7 126.5
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.5 - 2.5
Net retirement benefit asset - 132.7 132.7
Net pension liability - (17.7) (17.7)
Net pension asset - 150.4 150.4
Net retirement benefit asset - 132.7 132.7
Deferred tax liabilities - (17.6) (17.6)
Net retirement benefit asset (after tax) - 115.1 115.1
* The franchise adjustment represents the amount of scheme deficit
that is expected to be funded outside the contract period.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 92% of total
liabilities and 94% of total assets of the defined benefit pension scheme in
which the Group participates. The significant actuarial assumptions with
regards to the determination of the defined benefit obligation are set out
below.
The average duration of the benefit obligation at the end of the reporting
period is 17.9 years (2016: 17.7 years).
Main assumptions 2017 2016
% %
Rate of salary increases 2.70 2.80
Rate of increase in pensions in payment 2.30 (CPI) and 3.00 (RPI) 2.30 (CPI) and 3.30 (RPI)
Rate of increase in deferred pensions 2.30 (CPI) and 3.00 (RPI) 2.30 (CPI) and 3.30 (RPI)
Inflation assumption 2.20 (CPI) and 3.20 (RPI) 2.30 (CPI) and 3.30 (RPI)
Discount rate 2.50 2.70
Post retirement mortality 2017 2016
years years
Current pensioners at 65 - male 22.5 22.5
Current pensioners at 65 - female 25.1 25.0
Future pensioners at 65 - male 24.3 24.2
Future pensioners at 65 - female 26.9 26.9
Sensitivity analysis is provided below, based on reasonably possible changes
of the assumptions occurring at the end of the reporting period, assuming all
other assumptions are held constant. The sensitivities have been derived in
the same manner as the defined benefit obligation as at 31 December 2017 where
the defined benefit obligation is estimated using the Projected Unit Credit
method. Under this method each participant's benefits are attributed to years
of service, taking into consideration future salary increases and the scheme's
benefit allocation formula. Thus, the estimated total pension to which each
participant is expected to become entitled at retirement is broken down into
units, each associated with a year of past or future credited service. The
defined benefit obligation as at 31 December 2017 is calculated on the
actuarial assumptions agreed as at that date. The sensitivities are calculated
by changing each assumption in turn following the methodology above with all
other things held constant. The change in the defined benefit obligation from
updating the single assumption represents the impact of that assumption on the
calculation of the defined benefit obligation.
2017 2016
£m £m
Discount rate - 0.5% increase (107.9) (116.5)
Discount rate - 0.5% decrease 122.0 132.5
Inflation - 0.5% increase 83.4 106.1
Inflation - 0.5% decrease (78.0) (87.6)
Rate of salary increase - 0.5% increase 3.6 7.8
Rate of salary increase - 0.5% decrease (3.5) (7.4)
Mortality - one year age rating 41.6 44.2
19. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are
related parties, have been eliminated on consolidation and are not disclosed
in this note. Transactions between the Group and its joint venture
undertakings and associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with
joint ventures and associates:
Transactions 2017 Current outstanding at 31 December 2017 Non current outstanding at 31 December 2017
£m £m £m
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 7.1 0.5 -
Other
Dividends received - joint ventures 11.1 - -
Dividends received - associates 17.1 - -
Receivable from consortium for tax - joint ventures 2.4 5.3 -
Total 38.2 5.9 -
Joint venture receivable and loan amounts outstanding have arisen from
transactions undertaken during the general course of trading, are unsecured,
and will be settled in cash. Interest arising on loans is based on LIBOR, or
its equivalent, with an appropriate margin. No guarantee has been given or
received. The only loan amounts owed by joint ventures or associates related
to a single entity which have been provided for in full.
Current outstanding at 31 December 2016 Non current outstanding at 31 December 2016
£m £m
Transactions 2016
£m
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 6.2 0.5 -
Other
Dividends received - joint ventures 20.4 - -
Dividends received - associates 19.6 - -
Receivable from consortium for tax - joint ventures 3.2 7.7 -
Total 49.9 8.3 -
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group
during the year other than service contracts and Directors' liability
insurance.
The remuneration of the key management personnel of the Group is set out below
in aggregate for each of the categories specified in IAS24 Related Party
Disclosures:
2017 2016
£m £m
Short-term employee benefits 12.5 11.9
Share based payment expense 6.2 4.7
18.7 16.6
The key management personnel comprise the Executive Directors, Non-Executive
Directors and members of the Executive Committee (2017: 23 individuals, 2016:
20 individuals).
Aggregate directors' remuneration
The total amounts for directors' remuneration in accordance with Schedule 5 to
the Accounting Regulations were as follows:
2017 2016
£m £m
Salaries, fees, bonuses and benefits in kind 5.5 5.6
Amounts receivable under long-term incentive schemes 6.3 5.6
Gains on exercise of share options 0.1 -
11.9 11.2
None of the directors are members of the company's defined benefit pension
scheme.
One director is a member of the money purchase scheme.
20. Notes to the Condensed Consolidated Cash Flow Statement
Year ended 31 December 2017 2017 Exceptional items 2017 2016 2016 Exceptional items 2016
Before exceptional items £m Total Before exceptional items £m Total
£m £m £m £m
Operating profit for the year - continuing operations 49.6 (19.6) 30.0 98.5 (56.3) 42.2
Operating loss for the year - discontinued operations - - - (3.3) (14.2) (17.5)
Operating profit for the year 49.6 (19.6) 30.0 95.2 (70.5) 24.7
Adjustments for:
Share of profits in joint ventures and associates (27.3) - (27.3) (33.4) - (33.4)
Share based payment expense 11.4 - 11.4 9.7 - 9.7
Exceptional impairment of goodwill - - - - 17.8 17.8
Exceptional impairment of property, plant and equipment - - - - (0.8) (0.8)
Exceptional impairment of intangible assets - 8.9 8.9 - 0.3 0.3
Impairment and write down of intangible assets (0.1) - (0.1) 0.7 - 0.7
Impairment of property, plant and equipment - - - 0.7 - 0.7
Depreciation of property, plant and equipment 24.3 - 24.3 24.8 - 24.8
Amortisation of intangible assets 25.8 - 25.8 26.2 - 26.2
Exceptional profit on disposal of subsidiaries and operations - (0.3) (0.3) - (0.1) (0.1)
Loss on disposal of property, plant and equipment 0.3 - 0.3 0.4 - 0.4
Loss on disposal of intangible assets 0.3 - 0.3 0.8 - 0.8
Non cash R&D expenditure offset against intangible assets (0.7) - (0.7) 0.2 - 0.2
Decrease in provisions (46.4) (9.6) (56.0) (118.4) (1.1) (119.5)
Other non cash movements 0.1 - 0.1 0.4 - 0.4
Total non cash items (12.3) (1.0) (13.3) (87.9) 16.1 (71.8)
Operating cash inflow / (outflow) before movements in working capital 37.3 (20.6) 16.7 7.3 (54.4) (47.1)
Decrease in inventories 3.7 - 3.7 1.3 - 1.3
Decrease in receivables 8.1 4.5 12.6 59.0 13.9 72.9
Decrease in payables (20.8) (16.4) (37.2) (84.0) 0.6 (83.4)
Movements in working capital (9.0) (11.9) (20.9) (23.7) 14.5 (9.2)
Cash generated by operations 28.3 (32.5) (4.2) (16.4) (39.9) (56.3)
Tax paid (11.4) - (11.4) (5.6) - (5.6)
Non cash R&D expenditure (0.2) - (0.2) (0.4) - (0.4)
Net cash (outflow) / inflow from operating activities 16.7 (32.5) (15.8) (22.4) (39.9) (62.3)
Additions to property, plant and equipment during the year amounting to £4.7m
(2016: £0.5m) were financed by new finance leases.
21. Post balance sheet events
On 26 January 2018, the Group acquired 100% of the issued share capital of BTP
Systems, LLC (BTP), for consideration of US Dollar $20.5m / £14.5m in cash.
BTP provides satellite communications (SATCOM), radar modernization,
operations and maintenance and sustainment services that enable customers to
extend the lives of existing systems and achieve phased upgrades with new
technology to enhance operational capability. BTP specializes in areas
including obsolescence engineering, systems engineering services, test
equipment and design, and field engineering services, and maintains a
near-field and compact antenna test range at their Ludlow, MA headquarters.
BTP's expertise spans shipboard and submarine SATCOM antenna systems, MILSTAR
command post antennas and radar antennas. No acquisition related costs were
incurred. The acquisition is expected to increase the Group's market share.
The financial results and impact of this transaction have not been recognised
in these Condensed Consolidated Financial Statements, the operating results,
assets and liabilities will be recognised with effect from 26 January 2018.
Provisional fair value Provisional fair value
US Dollar $m £m
Goodwill 13.6 9.6
Acquisition related intangible assets 4.4 3.1
Property, plant and equipment 0.4 0.3
Inventories 0.5 0.4
Trade and other receivables 2.3 1.6
Cash and cash equivalents 1.7 1.2
Trade and other payables (2.4) (1.7)
Acquisition date fair value of consideration transferred 20.5 14.5
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.
This information is provided by RNS
The company news service from the London Stock Exchange
te 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 £m 2016 £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 £m 2016 £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 £m Share based payment and employee benefits £m Retirement benefit schemes £m OCPs £m Tax Other temporary differences £m Total £m
losses £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 £m Share based payment and employee benefits £m Retirement benefit schemes £m OCPs £m Tax Other temporary differences £m Total £m
losses £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 £m 2016 £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 millions 2016millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,089.7 1,088.3
Effect of dilutive potential ordinary shares: Share options 44.9 37.3
Weighted average number of ordinary shares for the purpose of diluted EPS 1,134.6 1,125.6
At 31 December 2017 options over 236,616 (2016: 246,818) shares were excluded from the weighted average number of shares
used for calculating diluted earnings per share because their exercise price was above the average share price for the year
and they were, therefore, anti-dilutive.
Due to the loss making position of the combined continuing and discontinued operations in 2016 and for continuing in 2017,
the dilutive impact has not been separately disclosed for those measures of profitability.
Earnings per share for continuing and discontinued operations
Basic EPS Earnings Per share amount Earnings Per share amount
2017£m 2017 2016 2016pence
pence £m
Earnings for the purpose of basic EPS (0.2) (0.02) (1.2) (0.11)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS (0.2) (0.02) (1.2) (0.11)
Add back exceptional items 19.6 1.80 70.9 6.51
Add back tax on exceptional items 5.0 0.46 (3.1) (0.28)
Earnings excluding exceptional operating items for the purpose of basic EPS 24.4 2.24 66.6 6.12
Earnings per share for continuing operations
Basic EPS Earnings 2017 £m Per share amount 2017 pence Earnings 2016 £m Per share amount 2016 pence
Earnings for the purpose of basic EPS (0.2) (0.02) 16.9 1.55
Effect of dilutive potential ordinary shares - - - (0.05)
Diluted EPS (0.2) (0.02) 16.9 1.50
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS (0.2) (0.02) 16.9 1.55
Add back exceptional items 19.6 1.80 56.3 5.17
Add back tax on exceptional items 5.0 0.46 (3.1) (0.28)
Earnings excluding exceptional operating items for the purpose of basic EPS 24.4 2.24 70.1 6.44
Earnings per share discontinued
Basic EPS Earnings 2017 £m Per share amount 2017 pence Earnings 2016 £m Per share amount 2016 pence
Earnings for the purpose of basic EPS - - (18.1) (1.66)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS - - (18.1) (1.66)
Add back exceptional items - - 14.6 1.34
Earnings excluding exceptional operating items for the purpose of basic EPS - - (3.5) (0.32)
14. Goodwill
Cost £m Accumulated impairment losses £m Carrying
amount £m
At 1 January 2016 799.1 (289.2) 509.9
Exchange differences 109.6 (41.6) 68.0
Acquisitions 17.8 - 17.8
Impairment (exceptional) - (17.8) (17.8)
At 1 January 2017 926.5 (348.6) 577.9
Exchange differences (48.5) 21.9 (26.6)
At 31 December 2017 878.0 (326.7) 551.3
Movements in the balance since the prior year end can be seen as follows:
Goodwill balance 1 January 2017 £m Additions 2017 £m Exchange differences 2017 £m Impairment 2017 £m Goodwill balance 31 December 2017 £m Headroom on impairment analysis 2017 £m Headroom on impairment analysis 2016 £m
UK & Europe
Justice & Immigration 49.6 - - - 49.6 127.4 126.3
Health 60.6 - - - 60.6 19.4 3.2
Direct Services & Europe 66.5 - 0.8 - 67.3 71.5 99.0
Americas 277.9 - (24.9) - 253.0 151.8 66.5
AsPac 112.4 - (1.6) - 110.8 231.6 203.2
Middle East 10.9 - (0.9) - 10.0 145.6 114.7
577.9 - (26.6) - 551.3 747.3 612.9
Included above is the detail of the headroom on the CGUs existing at the year end which reflects where future discounted
cash flows are greater than the underlying assets and includes all relevant cash flows, including where provisions have
been made for future costs and losses.
The key assumptions applied in the impairment review are set out below:
Discount Discount Terminal Terminal
rate 2017 % rate 2016* % growth growth
rates 2017 % rates 2016 %
UK & Europe
Justice & Immigration 10.4 11.2 2.0 2.0
Health 10.4 11.2 2.0 2.0
Direct Services & Europe 11.7 12.5 2.0 2.0
Americas 10.5 12.3 2.4 2.4
AsPac 9.7 11.2 2.4 2.4
Middle East 10.8 10.7 2.5 2.2
* Restated based on rates applied in impairment testing calculations in the prior year.
Discount rate
Pre-tax discount rates, derived from the Group's post-tax weighted average cost of capital have been used in discounting
the projected cash flows. These rates are reviewed annually with external advisers and are adjusted for risks specific to
the market in which the CGU operates.
Short term growth rates
The annual impairment test is performed immediately prior to the year end, based initially on five year cash flow forecasts
approved by senior management. Short term revenue growth rates used in each CGU five year plan are based on internal data
regarding our current contracted position, the pipeline of opportunities and forecast growth for the relevant market.
Short term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to
expected changes in both. Where businesses have been poor performers in recent history, turnaround has only been assumed
where a detailed and achievable plan is in place and all forecasts include cash flows relating to contracts where onerous
contract provisions have been made.
Terminal growth rates
The calculations include a terminal value based on the projections for the fifth year of the short term plan, with a growth
rate assumption applied which extrapolates the business into perpetuity. The terminal growth rates are based on 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. These are provided by external sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption, a 1% movement in discount rates and a 1% movement in
terminal growth rates are considered to be reasonably possible. The only CGU impacted by a reasonably possible change in a
key assumption is Health where a 1% increase in discount rates and a 1% decrease in terminal growth rates would result in
an impairment of £4.2m. The breakeven point of Health goodwill impairment is a 0.8% increase in discount rate combined with
a 0.8% decrease in terminal growth rate. A reduction of £2.0m in the terminal year cash flows for the Health CGU would lead
to the recoverable amount no longer exceeding the carrying value. Any additional reduction in terminal year cash flows
would result in an impairment of the goodwill of this CGU.
15. Analysis of Net Debt
At 1 January 2017 £m Cash Reclassified as held for sale £m Acquisitions* £m Disposals £m Exchange differences £m Non cash movements £m At 31 December 2017 £m
flow £m
Loans payable (299.9) 3.8 - - - 25.4 (0.8) (271.5)
Obligations under finance leases (28.2) 12.6 - - - 0.1 (4.7) (20.2)
Liabilities arising from financing activities (328.1) 16.4 - - - 25.5 (5.5) (291.7)
Cash and cash equivalents 177.8 (57.3) - 1.5 (7.1) (2.8) - 112.1
Loan receivables 22.9 (0.6) - - - - 3.4 25.7
Derivatives relating to Net Debt 18.1 - - - - (5.3) - 12.8
Net Debt (109.3) (41.5) - 1.5 (7.1) 17.4 (2.1) (141.1)
At 1 January 2016£m Cash Reclassified as held for sale £m Acquisitions* £m Disposals £m Exchange differences£m Non cash movements £m At 31 December 2016£m
flow £m
Loans payable (381.9) 135.8 - - - (52.8) (1.0) (299.9)
Obligations under finance leases (43.8) 16.7 (0.2) - - (0.4) (0.5) (28.2)
Liabilities arising from financing activities (425.7) 152.5 (0.2) - - (53.2) (1.5) (328.1)
Cash and cash equivalents 323.6 (153.7) - 0.1 - 7.8 - 177.8
Loan receivables 19.9 - - - - 0.1 2.9 22.9
Derivatives relating to Net Debt 14.6 - - - - 3.5 - 18.1
Net Debt (67.6) (1.2) (0.2) 0.1 - (41.8) 1.4 (109.3)
* Acquisitions represent the net cash / (debt) acquired on acquisition.
16. Provisions
Employee related £m Property £m Contract £m Other £m Total £m
At 1 January 2017 45.1 15.2 220.2 141.2 421.7
Arising on acquisition 1.7 - - - 1.7
Eliminated on disposal of subsidiary - - - (0.5) (0.5)
Charged to income statement - exceptional 4.5 2.7 - 0.1 7.3
Charged to income statement - other 17.5 2.4 62.0 8.6 90.5
Released to income statement - exceptional (0.9) (1.3) (0.4) (10.5) (13.1)
Released to income statement - other (4.9) (1.4) (43.0) (9.0) (58.3)
Utilised during the year (4.9) (3.1) (69.3) (5.0) (82.3)
Unwinding of discount - - 1.3 - 1.3
Exchange differences (2.4) (0.2) (2.6) (3.1) (8.3)
At 31 December 2017 55.7 14.3 168.2 121.8 360.0
Analysed as:
Current 17.1 4.4 68.0 59.0 148.5
Non current 38.6 9.9 100.2 62.8 211.5
55.7 14.3 168.2 121.8 360.0
Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract, up to a
maximum of 7 years from the balance sheet date. The present value of the estimated future cash outflow required to settle
the contract obligations as they fall due over the respective contracts has been used in determining the provision. The
individual provisions are discounted where the impact is assessed to be significant. Discount rates used are calculated
based on the estimated risk free rate of interest for the region in which the provision is located and matched against the
ageing profile of the provision. 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.
17. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a
maximum value of £4.3m (2016: £20.4m). The actual commitment outstanding at 31 December 2017 was £4.3m (2016: £17.9m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31
December 2017 was £227.1m (2016: £252.1m).
As we have disclosed before, we are under investigation by the Serious Fraud Office. In November 2013, the UK's Serious
Fraud Office announced that it had opened an investigation, which remains ongoing, into the Group's Electronic Monitoring
Contract.
We are cooperating fully with the Serious Fraud Office's investigation but it is not possible to predict the outcome.
However, a description of the range of possible outcomes in the event that the Serious Fraud Office decides to prosecute
the individuals and /or the Serco entities involved will be disclosed in the Principal Risks and Uncertainties section of
the Group's Annual Report and Accounts.
The Group is aware of other claims and potential claims which involve or may involve legal proceedings against the Group.
The Directors are of the opinion, having regard to legal advice received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material effect on the Group's financial position.
18. Defined benefit schemes
Characteristics
The Group contributes to defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. The
normal contributions expected to be paid during the financial year ending 31 December 2018 are £7.1m (2017: £9.7m).
Among our non contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most
recent full actuarial valuation of this scheme was undertaken as at 5 April 2015 and resulted in an actuarially assessed
deficit of £4.0m for funding purposes. Pension obligations are valued separately for accounting and funding purposes and
there is often a material difference between these valuations. As at 31 December 2017 the estimated actuarial deficit of
SPLAS was £33.7m (2016: £42.6m) based on the actuarial assessment on the funding basis whereas the accounting valuation
resulted in an asset of £41.8m. The primary reason a difference arises is that pension scheme accounting requires the
valuation to be performed on the basis of a best estimate whereas the funding valuation used by the trustees makes more
prudent assumptions. A revised schedule of contributions for SPLAS was agreed during the year, with 29% of pensionable
salaries due to be paid from 1 November 2017 to 31 October 2018 and 28% from 1 November 2018 to 18 December 2022. An
additional shortfall contribution of £1.0m is due by 30 April 2018 and four further payments of £0.5m payable at the end of
each April through to 2022.
Events in the year
In June 2017 the Trustees of SPLAS entered into a bulk annuity purchase whereby an insurer will fund future benefit
payments to the relevant members, commonly referred to as a "buy-in". The liability to pay the members remains with SPLAS
and therefore the pension scheme will continue to include the relevant pension liabilities. However, but an insurance asset
is held at fair value, which, in line with IAS19 for qualifying insurance policies, is deemed to be equal to the present
value of the related obligations. 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.
Of the total remeasurements recognised in the statement of other comprehensive income in the year ended 31 December 2017 of
£106.5m, £95.0m related to the revaluation of the assets and liabilities as a result of this transaction. Whilst the
impact substantially reduced the asset on an IAS19 valuation basis, on an actuarial basis the transaction decreased the
deficit of the scheme by approximately £12m. As a result of the transaction, the scheme also exited a longevity swap
arrangement early, at a cost borne by the scheme of £7.5m.
In 2016, certain active former members of SPLAS on a specific contract were transferred back to a Government backed pension
scheme they had previously been members of. This resulted in contribution savings due to lower rates required under the
Government Serco scheme and a curtailment gain of £1.9m was recognised in 2016. In 2017 certain of these deferred members
transferred their accrued benefits from SPLAS to the Government scheme. The arrangements for this process had been made by
a planned transfer on a bulk basis, which resulted in settlement accounting being applied in 2016 and an exceptional charge
booked at the time. However, it was subsequently agreed that the Government would allow the transfer of members on an
individual basis and as the members are taking an existing option to take an individual transfer out of the scheme,
settlement accounting was no longer applicable following the change of arrangements in 2017. The impact of the individuals
transferring out is now treated as a change in actuarial assumptions and impacts on reserves, not through the income
statement. The remaining provision of £10.3m was therefore reversed through exceptional items in 2017. The impact of the
transfer resulted in a charge to other comprehensive income of £5.1m, included within the effect of experience
assumptions.
In November 2017 certain members of SPLAS agreed to transfer their active membership to defined contribution schemes and a
curtailment gain of £2.0m is recognised in the year in the Group's income statement.
Values recognised in total comprehensive income in the year
The amounts recognised in the financial statements for the year are analysed as follows:
Recognised in the income statement Contract Non contract specific Total
specific 2017£m 2017£m
2017£m
Current service cost - employer 1.0 7.6 8.6
Past service cost - 0.3 0.3
Curtailment gain recognised - (2.0) (2.0)
Administrative expenses and taxes - 5.3 5.3
Recognised in arriving at operating profit 1.0 11.2 12.2
Interest income on scheme assets - employer (0.4) (41.4) (41.8)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.5 37.6 38.1
Finance income - (3.8) (3.8)
Included within the SOCI Contract Non contract specific Total
specific 2017£m 2017£m
2017£m
Actual return on scheme assets 11.0 (50.7) (39.7)
Less: interest income on scheme assets (0.4) (41.4) (41.8)
10.6 (92.1) (81.5)
Effect of changes in demographic assumptions - 1.0 1.0
Effect of changes in financial assumptions (10.3) (21.3) (31.6)
Effect of experience adjustments 0.8 4.8 5.6
Remeasurements 1.1 (107.6) (106.5)
Change in franchise adjustment (0.2) - (0.2)
Change in members' share (0.4) - (0.4)
Actuarial losses on reimbursable rights (0.6) - (0.6)
Total pension gain recognised in the SOCI 0.5 (107.6) (107.1)
Recognised in the income statement Contract Non contract specific Total
specific 2016£m 2016£m
2016£m
Current service cost - employer 0.4 7.4 7.8
Past service cost - 0.4 0.4
Curtailment loss recognised - (1.9) (1.9)
Administrative expenses and taxes - 5.4 5.4
Recognised in arriving at operating profit 0.4 11.3 11.7
Interest income on scheme assets - employer (0.1) (49.0) (49.1)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.2 44.3 44.5
Finance income - (4.7) (4.7)
Included within the SOCI Contract Non contract specific Total
specific 2016£m 2016£m
2016£m
Actual return on scheme assets 0.9 285.2 286.1
Less: interest income on scheme assets (0.2) (49.0) (49.2)
0.7 236.2 236.9
Effect of changes in demographic assumptions - 26.2 26.2
Effect of changes in financial assumptions (3.5) (279.3) (282.8)
Effect of experience adjustments - 28.7 28.7
Remeasurements (2.8) 11.8 9.0
Change in franchise adjustment 1.7 - 1.7
Change in members' share 1.2 - 1.2
Actuarial losses on reimbursable rights 2.9 - 2.9
Total pension gain recognised in the SOCI 0.1 11.8 11.9
Balance sheet values
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value Contract Non contract specific Total
specific 2017£m 2017£m
2017£m
Equities 9.9 46.3 56.2
Bonds except LDIs 2.9 20.8 23.7
LDIs - 709.8 709.8
Gilts 0.2 - 0.2
Property 1.6 - 1.6
Cash and other 2.8 3.2 6.0
Annuity policies - 587.5 587.5
Fair value of scheme assets 17.4 1,367.6 1,385.0
Present value of scheme liabilities (23.4) (1,341.3) (1,364.7)
Net amount recognised (6.0) 26.3 20.3
Franchise adjustment* 3.6 - 3.6
Members' share of deficit 2.4 - 2.4
Net retirement benefit asset - 26.3 26.3
Net pension liability - (15.5) (15.5)
Net pension asset - 41.8 41.8
Net retirement benefit asset - 26.3 26.3
Deferred tax liabilities - (2.5) (2.5)
Net retirement benefit asset (after tax) - 23.8 23.8
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract
period.
Scheme assets at fair value Contract Non contract specific Total
specific 2016£m 2016£m
2016£m
Equities 3.3 43.3 46.6
Bonds except LDIs 0.7 20.2 20.9
LDIs - 1,390.6 1,390.6
Gilts - 72.4 72.4
Property 0.6 - 0.6
Cash and other 1.2 4.2 5.4
Annuity policies - 20.0 20.0
Fair value of scheme assets 5.8 1,550.7 1,556.5
Present value of scheme liabilities (12.0) (1,418.0) (1,430.0)
Net amount recognised (6.2) 132.7 126.5
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.5 - 2.5
Net retirement benefit asset - 132.7 132.7
Net pension liability - (17.7) (17.7)
Net pension asset - 150.4 150.4
Net retirement benefit asset - 132.7 132.7
Deferred tax liabilities - (17.6) (17.6)
Net retirement benefit asset (after tax) - 115.1 115.1
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract
period.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 92% of total liabilities and 94% of total assets of the defined
benefit pension scheme in which the Group participates. The significant actuarial assumptions with regards to the
determination of the defined benefit obligation are set out below.
The average duration of the benefit obligation at the end of the reporting period is 17.9 years (2016: 17.7 years).
Main assumptions 2017 % 2016 %
Rate of salary increases 2.70 2.80
Rate of increase in pensions in payment 2.30 (CPI) and 3.00 (RPI) 2.30 (CPI) and 3.30 (RPI)
Rate of increase in deferred pensions 2.30 (CPI) and 3.00 (RPI) 2.30 (CPI) and 3.30 (RPI)
Inflation assumption 2.20 (CPI) and 3.20 (RPI) 2.30 (CPI) and 3.30 (RPI)
Discount rate 2.50 2.70
Post retirement mortality 2017 years 2016 years
Current pensioners at 65 - male 22.5 22.5
Current pensioners at 65 - female 25.1 25.0
Future pensioners at 65 - male 24.3 24.2
Future pensioners at 65 - female 26.9 26.9
Sensitivity analysis is provided below, based on reasonably possible changes of the assumptions occurring at the end of the
reporting period, assuming all other assumptions are held constant. The sensitivities have been derived in the same manner
as the defined benefit obligation as at 31 December 2017 where the defined benefit obligation is estimated using the
Projected Unit Credit method. Under this method each participant's benefits are attributed to years of service, taking into
consideration future salary increases and the scheme's benefit allocation formula. Thus, the estimated total pension to
which each participant is expected to become entitled at retirement is broken down into units, each associated with a year
of past or future credited service. The defined benefit obligation as at 31 December 2017 is calculated on the actuarial
assumptions agreed as at that date. The sensitivities are calculated by changing each assumption in turn following the
methodology above with all other things held constant. The change in the defined benefit obligation from updating the
single assumption represents the impact of that assumption on the calculation of the defined benefit obligation.
2017£m 2016£m
Discount rate - 0.5% increase (107.9) (116.5)
Discount rate - 0.5% decrease 122.0 132.5
Inflation - 0.5% increase 83.4 106.1
Inflation - 0.5% decrease (78.0) (87.6)
Rate of salary increase - 0.5% increase 3.6 7.8
Rate of salary increase - 0.5% decrease (3.5) (7.4)
Mortality - one year age rating 41.6 44.2
19. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions between the Group and its joint venture undertakings and
associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with joint ventures and associates:
Transactions 2017 £m Current outstanding at 31 December 2017 £m Non current outstanding at 31 December 2017 £m
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 7.1 0.5 -
Other
Dividends received - joint ventures 11.1 - -
Dividends received - associates 17.1 - -
Receivable from consortium for tax - joint ventures 2.4 5.3 -
Total 38.2 5.9 -
Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of
trading, are unsecured, and will be settled in cash. Interest arising on loans is based on LIBOR, or its equivalent, with
an appropriate margin. No guarantee has been given or received. The only loan amounts owed by joint ventures or associates
related to a single entity which have been provided for in full.
Transactions 2016 £m Current outstanding at 31 December 2016 £m Non current outstanding at 31 December 2016 £m
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 6.2 0.5 -
Other
Dividends received - joint ventures 20.4 - -
Dividends received - associates 19.6 - -
Receivable from consortium for tax - joint ventures 3.2 7.7 -
Total 49.9 8.3 -
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts
and Directors' liability insurance.
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories
specified in IAS24 Related Party Disclosures:
2017 £m 2016 £m
Short-term employee benefits 12.5 11.9
Share based payment expense 6.2 4.7
18.7 16.6
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive
Committee (2017: 23 individuals, 2016: 20 individuals).
Aggregate directors' remuneration
The total amounts for directors' remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:
2017 £m 2016 £m
Salaries, fees, bonuses and benefits in kind 5.5 5.6
Amounts receivable under long-term incentive schemes 6.3 5.6
Gains on exercise of share options 0.1 -
11.9 11.2
None of the directors are members of the company's defined benefit pension scheme.
One director is a member of the money purchase scheme.
20. Notes to the Condensed Consolidated Cash Flow Statement
Year ended 31 December 2017 Before exceptional items £m 2017 Exceptional items £m 2017 Total £m 2016 Before exceptional items£m 2016 Exceptional items £m 2016 Total£m
Operating profit for the year - continuing operations 49.6 (19.6) 30.0 98.5 (56.3) 42.2
Operating loss for the year -
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