REG - Serco Group PLC - 2021 Full Year Results
24/02/2022 07:00
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RNS Number : 6405C Serco Group PLC 24 February 2022
2021 full year results
24 February 2022
Another year of strong operational and financial delivery from our businesses
around the world; guidance for 2022 maintained. Our unique
Business-to-Government platform set to deliver attractive growth from 2022
onwards.
Year ended 31 December 2021 2020 Change at reported currency Change at constant currency
Revenue((1)) £4,424.6m £3,884.8m 14% 16%
Underlying Trading Profit (UTP)((2)) £228.9m £163.1m 40% 45%
Trading Profit £233.4m £175.7m 33%
Reported Operating Profit((2)) £216.2m £179.2m 21%
Underlying Earnings Per Share (EPS), diluted((3)) 12.56p 8.43p 49%
Reported EPS (i.e. after exceptional items), diluted 24.43p 10.67p 129%
Dividend Per Share (recommended) 2.41p 1.40p 72%
Free Cash Flow((4)) £189.5m £134.9m 40%
Adjusted Net Debt((5)) £178.0m £57.8m 208%
Reported Net Debt((6)) £608.3m £460.4m 32%
( )
Highlights
· Revenue: grew by 14% to £4.4bn, with organic growth of 10%.
· Underlying Trading Profit: increased by 40% to £229m. Margin
increased from 4.2% to 5.2%. Around two-thirds of our profit was from
outside of the UK((7)).
· Reported Operating Profit: increased by 21%, or £37m, to £216m;
prior year included exceptional credit of £12.5m.
· Earnings per Share: increased by 49% on an underlying basis and 129% on
a reported basis, the latter including the recognition of UK deferred tax
assets.
· Free Cash Flow: increased by 40% to £190m, Underlying Trading Profit
cash conversion of 112%.
· Adjusted Net Debt: increased by only £120m to £178m despite
acquisition spend of around £250m. Covenant leverage at the year-end was 0.7x
EBITDA.
· Return on Invested Capital: increased from 19.1% to 23.7%.
· Order Intake: very strong at £5.5bn, 125% book-to-bill.
· Closing Pipeline: up more than 50% year-on-year at £9.9bn despite
strong order intake.
· Dividends: the Board recommends a final dividend of 1.61p, +15%
year-on-year.
· New £90m share buyback agreed by the Board: prompt return of surplus
capital to shareholders as financial leverage is below our target range of
1-2x net debt: EBITDA. Still leaves ample headroom for investment.
· £10m of one-off payments supporting employees. 50,000 colleagues
received ex-gratia payments recognising their hard work in the year at a cost
of £6m. New charity Serco Peoples' Fund to support colleagues in times of
distress set up with a company donation of £4m. Together, Serco Peoples'
Fund and Serco Foundation now have funds of over £10m.
· Strong start to 2022.
Rupert Soames, Serco Group Chief Executive, said:
This was a year in which Serco delivered an outstanding financial and
operational performance across the world in the face of constant challenge and
disruption. Being a contract manager or team leader, responsible for the
daily delivery of vital public services, is never an easy job, but 2021 was
the toughest operational environment I have seen; around the world shortages
of every type of skill - HGV drivers, Prisoner Escort Officers, engineers,
welders, porters, IT staff to name a few; customers eager to restore
services (and themselves critically short of staff); large numbers of
unplanned absences as Omicron spread; all made operational delivery incredibly
stressful, and I want to pay tribute to the resilience, the skill and
commitment of not only the front-line colleagues, but also of their line
managers, for many of whom 2021 has been a year of relentless pressure.
Notwithstanding this challenging environment, the business excelled; we dealt
with wildly fluctuating demand - in the UK, the number of people contracted to
support tracing rose from 4,000 in April to 13,000 in August, and was down to
600 in December; the number of asylum seekers we found accommodation for
increased by over 6,000 in the year. In Australia we mobilised over 1,000
people to support the Department of Health in Victoria with their Covid-19
response; in Canada we have been working to clear a backlog of driving tests,
which stood at around 500,000 in November 2021. And whilst this was being
delivered on the front line, our business development teams secured our
largest ever order intake of £5.5bn, a further increase in the order book,
and a closing qualified prospect pipeline of nearly £10bn. Since 2017, when
our turnaround started to gain momentum, we have taken orders worth over
£20bn, whilst billing revenue of £17bn, giving a book-to-bill ratio
approaching 120% over a five-year period. There can be no clearer indication
of the health of the business, and its strong competitive position than this,
particularly when matched to the financial performance since 2017, with our
Underlying Trading Profit margins having climbed from 2.3% (2017) to 5.2%
(2021), cash conversion improved from 31% to over 100% and Return on Invested
Capital increased from 9.0% to 23.7%. And whilst supporting governments in
their response to Covid has provided a short-term uplift to revenues and
profits, it has left an enduring legacy of a much more capable and efficient
organisation, strong customer relationships, and lower debt. Crucially, our
non-Covid business has continued to grow apace during the last two years of
crisis, and we expect revenues and trading profit in a largely post-Covid 2022
to be, respectively, around 30% and 60% higher than in pre-Covid 2019.
We completed three acquisitions in the year for a total consideration of
around £250m; Facilities First in Australia for £42m, WBB in the US for
£207m, and Clemaco in Belgium for £1m. Despite being very different
businesses - FFA is a facilities management company, and WBB a high-end
defence consultancy business - both have a high proportion of their business
dependent on short-term contracts or task orders, and both found that the
second and third waves of Covid-19, which we did not foresee at the time of
acquisition, disrupted the flow of new work and their ability to hire
additional people. FFA and Clemaco ended the year on budget for Trading
Profit, while WBB was about $5m short. We remain confident that this
disruption will prove temporary and that all these acquisitions will meet our
strategic and financial expectations in the years ahead, and in the meantime
we have made good progress integrating the businesses. Both FFA and WBB have
had encouraging starts to 2022; WBB in particular won over $100m of contracts
since the start of the year and has a strong pipeline.
Work supporting governments' response to Covid-19 lasted much longer than we
expected at the start of 2021. As we became more efficient at delivery of
Covid-related work, and better at mitigating the negative impacts of Covid-19
across the business, the net contribution to our profits of this work was
significantly larger in 2021 than in 2020; whilst it is difficult to precisely
untangle what revenue was and was not directly attributable to Covid, and its
impact on profit, we estimate that revenues partially or wholly attributable
to Covid support work for governments worldwide were around £700m in 2021.
Some impacts such as increased volumes on certain contracts are likely to
continue in the medium term; for example, it will likely take some time to
reduce the numbers of asylum seekers being looked after to pre-Covid levels.
On balance, we estimate that of the £229m of Underlying Trading Profit in
2021, around £60m related to Covid will not recur in 2022.
The strong financial performance enables us to deliver all aspects of our
capital allocation strategy: investing in the business to drive growth and
efficiency; increasing returns to shareholders by increasing dividends (2021
final dividend increasing by 15% on 2020); using share buybacks to keep our
leverage within our target range of 1-2x EBITDA; maintaining plenty of
headroom to fund bolt-on acquisitions and other investment opportunities which
may appear. With covenant leverage at 0.7x EBITDA, we plan to spend £90m on
a share buyback programme over the next 12 months. Based on our 2022
guidance the buyback amount would return us to the lower end of our target
leverage range, and at a share price of £1.26 (the closing price on 23
February) would reduce the share count by around 6%.
Our Annual Report will detail the strong progress we have made on matters
related to ESG, including launching our international Serco Goes Green
initiative. Also, recognising that for many colleagues 2021 was no less
demanding than 2020 and that we have once again delivered an outstanding
financial performance, we repeated the ex-gratia payments made in 2020 of
£100 to all employees not receiving bonuses, which benefitted around 50,000
people at a cost of £6m in the year. In addition, we set up a new charity
called the Serco People's Fund in the year with a remit to help employees who
for one reason or another are suffering distress and would benefit from
financial support; the Group made a one-off donation to the charity in 2021 of
£4m to ensure it had the funds to make a meaningful difference to people's
lives. The People's Fund will complement the work of the existing Serco
Foundation, which was established in 2013 and now has funds of around £6m,
whose focus is on supporting community work and supporting causes sponsored by
Serco colleagues. The £10m now at their disposal will make a very
significant social impact over time.
Guidance for 2022
We have had a strong start to 2022, with order intake of over £600m and
trading consistent with our full-year guidance. We have been awarded the
contract to manage the new HMP Glen Parva prison on behalf of the UK Ministry
of Justice, which we expect to generate revenue of over £300m during the
10-year term; we have also seen strong order intake in the US, and our new WBB
business has won important pieces of work. In addition, the US Navy has
announced the award to Serco of the Ship Acquisition Programme / Project
Management (SHAPM) contract, which has an expected value of over £200m; this
award has not been included in our order intake as it has been protested by a
competitor. In January the US Government Accountability Office (GAO) upheld
our protest against the award of the US Navy SEA21 contract to a competitor,
and we have subsequently been awarded an extension of the existing contract.
Our guidance for 2022 is unchanged from that we issued at our Capital Markets
Event on 2 December 2021, other than to adjust for a lower opening position on
Net Debt, as a result of the better-than-expected cash performance in 2021,
and the new £90m share buyback recently agreed by the Board. As we have
consistently said, our success in providing Covid-related services to
governments worldwide inevitably means that revenues and profits will fall as,
hopefully, life returns to normal; we expect revenues directly related to
these services to be immaterial beyond the first half. Partially mitigating
this, we have a number of new contracts starting to contribute in 2022; in
addition, some overhead and IT investment costs incurred in 2021 will fall
away, enabling us to offset a substantial proportion of the non-recurring
Covid-related impact.
Serco is well-protected from inflationary effects as the great majority of our
contracts have either indexation provisions or are spot-priced under framework
contracts. In our budgeting we assumed low-single digit indexation impacts,
and whilst inflation expectations have increased since then - and so would
tend to increase revenues - higher inflation will also result in higher costs,
leaving the effect on profits broadly neutral.
2021 2022
Actual Initial guidance New guidance
Revenue £4.4bn £4.1bn-£4.2bn £4.1bn-£4.2bn
Organic sales growth 10% ~(8)% ~(8)%
Underlying Trading Profit £229m ~£195m ~£195m
Net finance costs £24m ~£25m ~£25m
Underlying effective tax rate 24% ~25% ~25%
Free Cash Flow £190m ~£100m ~£100m
Adjusted Net Debt £178m ~£160m ~£220m
NB: The guidance uses an average GBP:USD exchange rate of 1.34 in 2022 and
GBP:AUD of 1.90. New Net Debt guidance includes the £90m share buyback
programme. We expect a weighted average number of shares in 2022 of 1,195m
for basic EPS and 1,217m for diluted EPS.
For further information please contact Serco:
Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or
email: paul.checketts@serco.com (mailto:paul.checketts@serco.com)
Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email:
marcus.deville@serco.com (mailto:marcus.deville@serco.com)
Presentation:
A presentation for institutional investors and analysts will be held at the
London Stock Exchange today starting at 10.00am. The presentation will be
webcast live on www.serco.com (http://www.serco.com) and subsequently
available on demand. A dial-in facility is available on +44 (0) 207 192 8338
(USA: +1 646 741 3167) with participant pin code 4936797.
Notes to financial results summary table and highlights:
(1) Revenue is as defined under IFRS, which excludes Serco's share of revenue
of its joint ventures and associates. Organic revenue growth is the change
at constant currency after adjusting to exclude the impact of relevant
acquisitions or disposals. Change at constant currency is calculated by
translating non-sterling values for the year ended 31 December 2021 into
sterling at the average exchange rates for the prior year.
(2) Trading Profit is defined as IFRS Operating Profit excluding amortisation
of intangibles arising on acquisition as well as exceptional items.
Consistent with IFRS, it includes Serco's share of profit after interest and
tax of its joint ventures and associates. Underlying Trading Profit
additionally excludes Contract & Balance Sheet Review adjustments
(principally Onerous Contract Provision (OCP) releases or charges) and other
material one-time items. A reconciliation of Underlying Trading Profit to
Trading Profit and Reported Operating Profit is as follows:
Year ended 31 December 2021 2021 2020
£m
Underlying Trading Profit 228.9 163.1
Include: non-underlying items
OCP charges and releases 1.3 5.8
Other Contract & Balance Sheet Review adjustments and one-time items 3.2 6.8
Trading Profit 233.4 175.7
Amortisation of intangibles arising on acquisition (16.0) (9.0)
Operating Profit before exceptional items 217.4 166.7
Operating exceptional items (1.2) 12.5
Reported Operating Profit 216.2 179.2
(3) Underlying EPS reflects the Underlying Trading Profit measure after
deducting pre-exceptional net finance costs and related tax effects.
(4) Free Cash Flow is the net cash flow from operating activities before
exceptional items as shown on the face of the Group's Consolidated Cash Flow
Statement, adding dividends we receive from joint ventures and associates, and
deducting net interest and net capital expenditure on tangible and intangible
asset purchases.
(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS
Alternative Performance Measure (APM) used by the Group. This measure more
closely aligns with the covenant measure for the Group's financing facilities
than Reported Net Debt because it excludes all lease liabilities including
those newly recognised under IFRS16.
(6) Reported Net Debt includes all lease liabilities, including those newly
recognised under IFRS16. A reconciliation of Adjusted Net Debt to Reported
Net Debt is as follows:
As at 31 December 2021 2020
£m
Adjusted Net Debt 178.0 57.8
Include: all lease liabilities accounted for in accordance with IFRS16 430.3 402.6
Reported Net Debt 608.3 460.4
(7) Refers to non-UK Underlying Trading Profit as a proportion of group
Underlying Trading Profit before corporate costs. Our Underlying Trading
Profit before corporate costs in 2021 was £278.8m.
(8) Our outlook for 2022 is based upon currency rates as 31 January 2022.
The rates used, along with their estimated impact on revenue and UTP are as
follows:
Year ended 31 December 2022 outlook 2021 actual 2020 actual
Average FX rates:
US Dollar 1.34 1.38 1.29
Australian Dollar 1.90 1.83 1.88
Euro 1.20 1.16 1.13
Year-on-year impact:
Revenue ~£1m (£73m) (£24m)
UTP ~£1m (£7m) (£1m)
Reconciliations and further detail of financial performance are included in
the Finance Review on pages 18-32. This includes full definitions and
explanations of the purpose and usefulness of each non-IFRS Alternative
Performance Measure (APM) used by the Group. The condensed Consolidated
Financial Statements and accompanying notes are on pages 33-69.
Chief Executive's Review
Summary of financial performance
Revenue, Underlying Trading Profit and Underlying Earnings Per Share
Revenue increased by 14%, or £540m, to £4,425m (2020: £3,885m). Of the
growth, 10% (£391m) was organic, acquisitions contributed 6% (£221m) and
currency movements were a drag of 2% (£73m). The high level of organic growth
was driven by very strong performances from our UK and Australian
businesses. About £700m of our global revenue was from services supporting
governments' response to Covid-19, which compares to around £400m in 2020.
Underlying Trading Profit (UTP) increased by 40%, or £66m, to £229m (2020:
£163m). Excluding the adverse currency movement of £7m, growth at constant
currency was 45%. Acquisitions added 11%, or £18m, of the growth, with the
rest being organic. The organic growth arose from continued strong demand
for our Covid-19 work and growth in a range of other contracts, notably in
Justice & Immigration and Citizens Services. Our core operating platform
was able to respond efficiently to the additional demand and, as a
consequence, all of our regions improved their Underlying Trading Profit
margins by around 90 basis points or more, helping drive our UTP margin from
4.2% to 5.2%.
Year ended 31 December 2021 UK&E Americas AsPac Middle Corporate costs Total
£m East
Revenue 2,131.6 1,120.0 908.4 264.6 - 4,424.6
Change +20% +5% +26% (18%) +13.9%
Change at constant currency +20% +12% +24% (13%) +15.8%
Organic change at constant currency +20% +2% +8% (13%) +10.1%
Underlying Trading Profit 96.0 117.8 51.3 13.7 (49.9) 228.9
Margin 4.5% 10.5% 5.6% 5.2% (1.1%) 5.2%
Change 130bps 105bps 111bps 89bps -7bps 97bps
Contract & Balance Sheet Review adjustments 1.3 - - - 1.3
Other one-time items 2.5 - 0.7- - - 3.2
Trading Profit/(Loss) 99.8 117.8 52.0 13.7 (49.9) 233.4
Amortisation of intangibles arising on acquisition (0.8) (11.7) (3.5) - - (16.0)
Operating profit/(loss) before exceptionals 99.0 106.1 48.5 13.7 (49.9) 217.4
Diluted Underlying Earnings Per Share increased by 49% to 12.56p (2020:
8.43p). The percentage improvement was higher than the increase in UTP as
the leverage effect of higher profit and a lower finance cost more than offset
a 0.9% increase in the effective tax rate.
The Revenue and Underlying Trading Profit performances are discussed in more
detail in the Divisional Reviews, starting on page 14.
Cash flow and Net Debt
Free Cash Flow was very strong at £190m (2020: £135m). The improvement was
a result of the £66m increase in underlying profits and a working capital
inflow of £25m, despite revenue growth of £540m. The strong working
capital performance was helped by the successful collection of some older
receivables, including on our Dubai Metro contract following its conclusion,
efforts by governments to support their supply chains by ensuring prompt
payments and favourable timing of some receipts round the period end.
Average working capital days reduced with debtor days of 19 (2020: 23 days)
and creditor days of 23 (2020: 25 days). We are proud to say that 89% of UK
supplier invoices were paid in under 30 days (2020: 89%) and 95% were paid in
under 60 days (2020: 97%). No working capital financing facilities were
utilised in this or the prior year.
Adjusted Net Debt increased to £178m at 31 December (31 December 2020: £58m,
30 June 2021: £225m). The £120m increase since the prior year end includes
spend on acquisitions of around £250m, £27m of dividend payments and £41m
of share purchases.
The period end Net Debt compares to a daily average of £216m (2020: £209m)
and a peak of £346m (2020: £356m). The relatively large range for these
was due to the acquisition of WBB in May and the favourable timing of receipts
at the end of the period. As usual, we have not used any financing or
efforts out of the ordinary to reduce period end Net Debt.
Our measure of Adjusted Net Debt excludes lease liabilities, which aligns more
closely with the covenants on our financing facilities. Lease liabilities
totalled £430m at the year-end (2020: £403m), the majority being leases on
housing for asylum seekers under the AASC contract. The terms of these leases
are generally aligned to the contract we have with the customer.
At the closing balance sheet date, our leverage for debt covenant purposes was
0.7x EBITDA (2020: 0.5x). This compares with the covenant requirement for
net debt to be less than 3.5x EBITDA and our target range of 1-2x.
More detailed analysis of earnings, cash flow, financing and related matters
is included in the Finance Review.
Capital allocation and returns to shareholders
At our Capital Markets Day on 2 December 2021 we explained our capital
allocation priorities. We aim to maintain a strong balance sheet with our
target financial leverage of 1x to 2x net debt to EBITDA, and consistent with
this, the Board's priorities will be to:
· Invest in the business to support organic growth ahead of the
overall market.
· Increase ordinary dividends so shareholders are rewarded with a
growing and sustainable income stream.
· Selectively invest in bolt on acquisitions that add capability,
scale or access to new markets and have attractive returns.
· Return any surplus cash to shareholders through share buybacks.
In 2021, we have deployed all aspects of our capital allocation policy:
· Invest to support organic growth: we took the opportunity of our
strong performance to accelerate investments in our systems and processes,
costing about £10m in the second half.
· Increase ordinary dividends: the Board is recommending a final
dividend of 1.61p, 15% higher than the prior year. Following the interim
dividend of 0.8p, this results in a full year dividend of 2.41p, an increase
of 72% compared to 2020.
· Invest in acquisitions: we acquired three businesses in the year,
WBB, FFA and Clemaco.
· Return surplus cash to shareholders: with leverage being below the
bottom end of our preferred range, the Board has agreed that it intends to
buy back up to £90m of its shares over the next 12 months.
The full year ordinary dividend of 2.41p represents dividend cover of 5.2x.
When we resumed paying dividends in respect of 2020, we were targeting a
starting level of cover of around 4x, but the strong performance on our
Covid-related activities has increased cover temporarily. As these earnings
fall away and dividends increase, the level of cover will naturally fall. As
laid out in our Capital Markets Day, our strong balance sheet, confidence in
the outlook and good cash generation, mean we intend to reduce dividend cover
progressively towards 3x over the coming years. Regarding potential further
share buybacks, we will review our financial position and capital requirements
on a regular basis and return surplus capital to shareholders as appropriate.
Contract awards, order book, rebids and pipeline
Contract awards
Order intake was strong in 2021 with £5.5bn of work won, a book-to-bill rate
of 125%. There were 56 contract awards worth more than £10m each and 5 with
a total contract value of more than £200m. Around 60% of order intake came
from the UK & Europe, 25% from the Americas and the remaining 10% from
Asia Pacific and 5% from the Middle East.
Of the order intake, approximately 60% was represented by the value of new
business and 40% was rebids and extensions of existing work. This is the
opposite of the position in the same period last year. The win rate by value
for new work, which has averaged slightly less than 30% over the last five
years, was unusually high at around 55%. The win rate by value for securing
existing work was approximately 75%, which is lower than the 80-90% we
typically see, as a result of the loss of our Dubai Metro contract. Win rates
by number of tenders were 60% for new bids and around 90% for rebids and
extensions.
VIVO Defence Services, our joint venture with Engie, was successful in
securing several contracts from the UK Ministry of Defence (MOD) Defence
Infrastructure Organisation (DIO) as part of the Future Defence Infrastructure
Services (FDIS) programme, the largest facilities management procurement
currently running across Europe. In Lot 3, which awarded contracts to
provide asset and facilities management services for the UK defence built
estate, VIVO won the largest two regions of the four that were competed.
These have an estimated total potential value to Serco of around £1.7bn over
the initial seven-year period. VIVO also secured the largest two regions in
Lot 2B, which provides repairs and maintenance work for Service Family
Accommodation, with an estimated total potential value to Serco of around
£200m. Also in the UK, we were awarded contracts by the Department of Work
and Pensions as part of their Restart programme, which will help unemployed
people back into work. We estimate that the combined value over the initial
four and a half-year contract period will be around £350m, with the amount
dependent on the number of people who find employment. The order intake also
includes our Australian Immigration Services contract, which was successfully
extended to 2023, the £400m contract renewal to provide support services at
the Canadian Forces Base in Goose Bay and our award to continue to provide
services at Covid-19 testing centre locations in the UK.
Order book
The order book increased from £13.5bn at the start of the year to £13.7bn at
the end of December. This is lower than might be expected when order intake
has been so high as, consistent with our usual treatment of joint ventures,
our order book does not include the £1.9bn of order intake arising from our
VIVO joint venture with Engie; this is on the logic that as a joint venture,
we report its profits but not revenues. More widely, our order book
definition gives our assessment of the future revenue expected to be
recognised from the remaining performance obligations on existing contractual
arrangements. This excludes unsigned extension periods and the order book
would be £1.2bn (2020: £0.9bn) higher if option periods in our US business,
which always tend to be exercised, were included.
Rebids
In our portfolio of existing work, we have around 80 contracts with annual
revenue of £5m or more where an extension or rebid will be required before
the end of 2024. Excluding our NHS Test & Trace contracts, which are
short-term in nature and we expect the work to come to a natural finish,
contracts which will either end or need to be extended in 2022 have an annual
contract value of around £0.5bn. The annual value rises in 2023 to
approximately £0.9bn, which includes our Center for Medicare & Medicaid
Services (CMS) in the US and our Immigration Services contract in Australia,
before reducing to £0.3bn in 2024. The current CMS and Immigration Services
contracts end, respectively, in July and December 2023, and we will be
re-bidding both.
Pipeline
Our measure of pipeline is probably more narrowly defined than is common in
our industry. It includes only opportunities for new business that have an
estimated annual contract value (ACV) of at least £10m and which we expect to
bid and to be adjudicated within a rolling 24-month timeframe. We cap the
total contract value (TCV) of individual opportunities at £1bn, to lessen the
impact of single large opportunities. The definition does not include rebids
and extension opportunities, and in the case of framework, or call-off,
contracts such as 'ID/IQ' (Indefinite Delivery / Indefinite Quantity
contracts), which are common in the US, we only take the value of individual
task orders into our pipeline as the customer confirms them. Our published
pipeline is thus a relatively small proportion of the total universe of
opportunities, many of which have annual revenues less than £10m, are likely
to be decided beyond the next 24 months, or are rebids and extensions.
Our pipeline was £9.9bn at the end of 2021, an increase of more than 50% on
the £6.4bn level at the end of 2020 and around 70% higher than the £5.8bn at
the end of June 2021. It is pleasing to see the pipeline replenish so well
given 2021 was a strong year for wins, with £5.5bn of orders secured. The
pipeline consists of around 40 bids with an ACV averaging approaching £40m
and a contract length averaging more than six years. The pipeline of
opportunities for new business that have an estimated ACV of less than £10m
has also increased, with the value rising from £1.7bn to £2.0bn in the year.
As we have noted before, in the services industry in which Serco operates,
pipelines are often lumpy, as individual opportunities can be very large, and
when they come in and out of the pipeline they can have a material effect on
reported values. Since the year end two of the larger opportunities in the
pipeline have come out due to award decisions; HMP Glen Parva, a new prison in
the UK which we won, and Frankston Hospital in Australia, which we lost. We
expect that the value of the pipeline, having increased from £5.8bn in June
2021 to £10bn in December 2021, will reduce during the first half as some of
the large opportunities are adjudicated.
Acquisitions
We regard acquisitions as an important part of our strategic toolkit, which,
if deployed correctly, can add significant value to the business; but they
should be in addition to, and designed to deliver, new opportunities for
organic growth. They require discipline and process, and for M&A we
follow our head office mantra of having a few good people rather than a lot of
average ones. Much of our work we do in-house although we also use advisers
where appropriate. We look at many opportunities, and reject most of them.
Generally speaking, we regard acquisitions as higher risk than organic
growth, so any candidates have to meet our stringent criteria of being both
financially and strategically compelling; strategically we judge potential
acquisitions against three criteria: do they add new, or strengthen existing
capability? Do they add scale which we can use to add efficiency? Do they
bring us access to new and desirable customers and markets? We also
recognise that acquisition opportunities come in different shapes, sizes and
sectors, and a small one can be strategically important to a region, but not
necessarily significant at Group level. But large or small, all acquisitions
are centrally managed by Group and follow the same rigorous process.
Since 2014 we have undertaken six acquisitions:
· In 2017, we acquired BTP systems, a US defence engineering
company, for $20m (£13m).
· In 2018 we acquired parts of the Carillion Healthcare business,
for £18m.
· In 2019 we undertook a major acquisition in North America in the
form of the Naval Systems Business Unit of Alion, a leading provider of naval
design, systems engineering and acquisition & programme management, for a
consideration of $225m (£186m).
· In January 2021, we acquired FFA, a specialist provider of cleaning,
facilities maintenance and management services to governments in Australia for
A$74m (£42m), including working capital adjustments.
· In April 2021 we acquired WBB, a leading provider of advisory,
engineering, and technical services to the US military, for $293m (£207m).
· In July 2021 we acquired Clemaco, which specialises in the support
and maintenance of the ships of the Belgian Navy, for around €1m (£1m).
The unexpected persistence of Covid-19 meant that both FFA and WBB faced
disruption in both labour supply and order intake; however, both have bedded
in well and the integration of them has been successful.
FFA has seen a different mix of business as a result of the ongoing Covid-19
situation, with lower demand for larger, discretionary facilities maintenance
work but higher levels of cleaning. These two effects have largely broadly
offset each other with the business overall delivering profit in-line with
expectations for the year. The strategic logic of acquiring the business was
to extend the reach and capability of our Australian business in the
government facilities maintenance and management market, which we believe will
position us well for numerous bidding opportunities in the coming years.
WBB has experienced the same market headwinds we saw in our US defence
business: repeated and unexpected surges of Covid led to significant delays in
new award decisions and tight labour markets, particularly in the highly
skilled and sensitive areas in which WBB operates. As the business typically
grows rapidly from securing new work, revenue and profit in the year were
~10-20% lower than anticipated. However, since the start of 2022, WBB won
over $100m of contracts, and recruitment began to improve. And our belief in
the strategic merit of the acquisition - to extend our Air Force, Army and the
Office of the Secretary of Defense presence - has only been reinforced by
owning the business.
We will continue to search out new opportunities for acquisition which fit our
criteria, and in the meantime focus on delivering value from those
acquisitions already executed.
Operational progress, transformation, innovation and people
We have an ambition to be the best-managed business in our sector. Achieving
this will require investment in people, processes and systems. Covid-19 has
been hugely disruptive over the last two years and has tested our systems,
processes and people in unforeseen ways.
Our first trading statement on Covid-19, issued on 2 April 2020, set out our
operational priorities:
"Our priority in this crisis is to support the delivery of essential public
services and, within that context, do all we can
to protect our employees from harm and our shareholders from loss…..Our
mettle is being tested as never before, and we are determined to rise to the
level of events."
It turns out that many of the investments that we have made over recent years
have proven their worth during the crisis. In particular, I would point to
three themes which have served us well.
The first is a management structure based on our "loose-tight" model. This
means that we delegate authority and responsibility for day-to-day operational
management to be as close to the customer as possible, but we maintain a tight
control over risk management, bidding and cost control, and we have a
well-established reporting regime, where transparency and reporting bad news
as soon as it happens are mandatory. During the crisis, we maintained the
regimen of monthly reporting, and the Investment Committee, which is a
standing committee of the most senior Group executives including the CEO, CFO,
COO and Group General Counsel and which oversees bids and investments, met 97
times during 2021. Divisional Performance Reviews, and Business Unit
Performance Reviews, continued their monthly rhythm. Our cash performance was
reported daily.
The second was cultural: over the past seven years we have laid much emphasis
on our values of Trust, Care, Innovation and Pride. These played a significant
part in sustaining the ability of the business to deliver under extreme and
unprecedent pressure. The levels of Trust built up across the management team
allowed us to work seamlessly together across boundaries; the value of Care
made it easy to connect company and people's own values with the astonishing
efforts that people had to make to look after prisoners, patients, travellers,
and hundreds of thousands of often frightened and confused citizens.
Innovation and loose-tight management allowed us to invent new services and
business models almost overnight and to adapt our IT platforms to new ways of
working. Pride meant that people understood that the work we do delivering
public services is incredibly important and that it is a privilege to be able
to make a difference every day to people's lives. Pride and Trust also helped
us maintain momentum and morale in the face of public criticism and comment
about our work in the early days of NHS Test & Trace in the UK. Needless
to say, much of the criticism was wildly unfair and bore little relationship
to the facts, but it was still unsettling to our colleagues to see their hard
work being called into question.
What evidence do we have of the impact of our culture and organisational
philosophy? On the operational side, clearly we have the evidence of what
has been delivered: on the UK testing programme, to which we are significant
contributors, the number of tests per week in 2021 ranged from 117,000 to 1.5
million; on tracing, the number of people we provided to the service rose from
4,000 in April 2021, to 13,000 in August, and back down to 600 in December.
In Australia we had 275 people on tracing in January 2021 for the Department
of Health in Victoria, which rose to 1,000 in August and fell back to 300 in
December. Managing this variability is one of Serco's key skills and it has
required major investment in IT systems to support the recruitment and
management of over 100,000 direct and indirect employees over the last 2
years.
Our Viewpoint engagement survey generated 29,470 individual respondents, about
the same as last year; having risen every year from a low of 42 in 2014, our
engagement score fell slightly from 73 in 2020 to 70, which is still a good
score for a business of our type, and higher than it was in 2018; we sense
that it probably reflects the fact that in the second year of Covid, and huge
volatility, people are just tired of all the uncertainty and disruption.
Operationally Serco has performed very well during the crisis. We operated
services on Northlink Ferries, MerseyRail, and the Caledonian Sleeper in the
face of numerous challenges. In prisons we had to manage rapidly changing
regimes as lockdowns came and went; hospital staff had to deliver cleaning,
catering and portering with sickness absence rates of up to 25% in some
contracts.
One thing that has suffered during the pandemic is in-person management
training. Several years ago we designed and developed bespoke week long
management training programmes with our partners at the Saïd Business School,
at the University of Oxford. Travel restrictions meant we had to suspend
these programmes as we believed the week long residential element was critical
in being able to build networks across the company. We have now reinstated
these programmes, running our Contract Managers programme in February 2022,
and we will run our first course specifically designed for women in management
in the next few months. In North America, we have instituted along with
LinkedIn remote training programmes that give colleagues access to over 1,000
high-quality training courses. And we have sustained our commitment to
recruiting talented young people at a time when many companies have cut back;
in the US we increased our Internship programme to over 50 people, and on
graduation our recruitment rate is around 90%. In the UK we expanded our
graduate recruitment intake and as a result now have placed over 50 people
into our graduate programme over the last two years.
The third element that has stood us in good stead has been our investment in
IT systems; over the past few years we have been migrating our key management
and financial systems to the Cloud, and upgrading them at the same time. We
have invested considerable money and effort in improving our HR systems, and a
new front-end to our core HR applications which went live in January 2022.
We also extended the rollout of our Workforce Management System and created a
new infrastructure for our VIVO joint venture.
In January 2021 our European business was the subject of a serious ransomware
attack. Fortunately, the capability we had developed allowed us to respond
robustly to this challenge, and we were able to trace the criminals' server;
with the assistance of local law enforcement, it was disabled and our stolen
data was safely removed. Our ability to deliver services to clients was not
disrupted and no ransom was paid, but the time, effort and expense required to
achieve a satisfactory outcome was considerable.
We said at the beginning of the Covid crisis that it would test our mettle; it
has, and I am proud beyond words as to how well colleagues and the
organisation as a whole have performed since March 2020. The same words I
used in last year's report are worth repeating: for a very large business, we
have shown surprising agility. For a business which used to look like a
collection of individual contracts, we have demonstrated our ability to act
with common purpose, deliver economies of scale, and to maintain rigorous
standards of reporting and control in confusing and difficult circumstances.
For a business of any size we have shown great resilience.
Market outlook
In 2021 we conducted a detailed market review, which included using two
independent research firms, one British, and one American, to estimate the
size and growth rates of our markets. We now estimate that total outsourcing
spend by governments on services in the countries in which we operate (which
account for an estimated 65% of the world market, excluding Russia and China)
is around £715bn; and that our market share is between 1% and 3%, depending
on whether we look at segments we operate in or the market as a whole. And
we estimate that once Covid-19 expenditure has normalised the market will grow
at around 2-3% per year in the medium term. Rather than concentrate on the
absolute number, which is likely to have a large margin for error, some key
conclusions from our work are:
· The market for private sector delivery of government services is
very large.
· The supply-side is fragmented; as a leading international supplier,
our market share within our existing footprint, at around 3%, is small,
although it is larger in some specific segments within certain sectors.
· The market is likely to continue to grow and, given our small
market share, there is ample opportunity for us to grow faster than the
market.
In terms of the impact of Covid-19 on our markets, we think it will take
several years for governments' expenditure patterns to settle down following
the pandemic; the immediate aftermath will probably focus on continued need
for surveillance of the virus, as well as catching up on the areas of normal
expenditure such as healthcare, court hearings and defence infrastructure
which have been disrupted during the pandemic. The private sector has
responded extremely well to governments' emergency requirements, and we think
it likely that this will remind governments of the value of flexible,
resilient and robust supply chains which can support them in both ordinary and
extraordinary times. Nor do we anticipate a lot of change arising from
Covid-19 in our basic business model of offering public services delivered by
people supported by good technology. On the contrary, we know that governments
will be massively more indebted than they were before the crisis and that
citizens will be more in need, as well as more demanding, of public services
critical to rebuilding society and quality of life - be that services to deal
with unemployment, training and skills gaps, social care reform, acute
healthcare capacity, building national resilience, sustainable transport
growth and more. And the level of geo-political threat that countries
perceive themselves to be facing in 2022 seems if anything higher than in the
immediate pre-Covid years; so defence expenditure is likely to remain robust.
The drivers of growth in our markets can be summarised as 'Four Forces', which
have existed for some time and we believe will be amplified by the crisis:
· Increasing and changing demand for public services.
· Heightened expectations around the quality and resilience of
public services.
· Increased fiscal deficits.
· The unwillingness of voters and corporate taxpayers to tolerate
tax increases.
These will continue to drive governments to want to deliver more public
services, of higher quality, for less money. We believe that this imperative
to provide more, and better, for less will become even more urgent in the
years ahead, and to deliver those objectives governments will need the skills,
resources, innovation and nimbleness of the private sector.
Following our review of the market, we held a Capital Markets Event in
December 2021. We described how Serco had evolved over the last seven years
from being a collection of largely unrelated contracts, into a powerful and
capable business with a well-proven Management Framework and
Business-to-Government (B2G) operating platform which enabled us to address
our chosen market of international government services and outperform our
competitors. Our Management Philosophy, and B2G platform are described in
detail in our Annual Report.
Guidance for 2022
In our Capital Markets Day statement on 2 December, we provided our initial
guidance for 2022. Since then we have again seen the speed at which the
impact of Covid-19 can change, as the Omicron variant spread rapidly in
December and January. As a consequence in the first weeks of 2022 there was
high demand for Covid-19 testing services, while other parts of the group,
such as transport, had lower volumes because of restrictions, or higher cost
due to increased employee absence rates. As case numbers decline, these
effects are beginning to reverse, leaving our expectations for 2022 largely
unchanged.
We expect a rapid wind-down of Covid-19 related services supplied to
governments during 2022, which will have a significant impact on both revenue
and profits. We anticipate around £60m of net profit impacts that arose in
2021 will not recur in 2022, including the frontline bonus and People Fund
contribution. However, a large part of this reduction will be offset by
growth in other parts of the business as a result of the very strong order
intake in 2021. We have also had a strong start to 2022, with order intake
of over £600m and trading consistent with our full-year guidance. We have
been awarded the contract to manage the new HMP Glen Parva prison on behalf
the UK Ministry of Justice which we expect to generate revenue of over £300m
during the 10-year term; we have also seen strong order intake in the US, and
our new WBB business has won important pieces of work. In addition, the US
Navy has announced the award to Serco of the Ship Acquisition Programme /
Project Management (SHAPM) contract, which has an expected value of over
£200m; this award has not been included in our order intake as it has been
protested by a competitor. In January the US Government Accountability
Office (GAO) upheld our protest against the award of the SEA21 contract to a
competitor, and we have subsequently been awarded an extension of the existing
contract.
Serco is well-protected from inflationary effects as the great majority of our
contracts have either indexation provisions or are spot-priced under framework
contracts. In our budgeting we assumed low-single digit indexation impacts,
and whilst, since then, inflation expectations have increased, so would tend
to increase revenues, they will tend to also result in higher costs, leaving
the effect on profits broadly neutral. We have not at this stage increased
our revenue guidance to reflect what may be slightly higher indexation
benefits, but we will have a better idea of the actual levels of indexation
achieved at the half year.
Revenue in 2022 is expected to be £4.1bn-£4.2bn, approximately 6% lower than
the £4.4bn in 2021. This assumes a 1% contribution from acquisitions and a
neutral currency impact. We expect lower demand for Covid-19 related
services in 2022 to reduce our revenue by approximately 13%, with organic
growth on non-Covid work to be around 5%, in-line with our new medium-term
growth targets.
Underlying Trading Profit (UTP) in 2022 is expected to be around £195m. As
well as the impact of reduced Covid-19 revenues noted above, UTP will be
reduced by the ending of the AWE and Dubai Metro contracts; we also expect the
increase in National Insurance employers' contributions in the UK to cost
around £5 million on an annualised basis. The impact of these factors is
cushioned by the positive effect of new work secured in 2021, such as the DWP
Restart Programme and the Defence Infrastructure Organisation contracts moving
into profitability, as well as the ending of our accelerated investment
programme, and the beneficial impact of the efficiencies we will derive from
these investments in 2022. In terms of wider cost increases, the business
has robust mitigation of the impact of inflation as the great majority of
contracts have either indexation provisions or the ability to re-price work
orders at the time they are contracted.
Net finance costs and tax: Net finance costs are expected to be around £25m,
slightly higher than 2021. The underlying effective tax rate is expected to
continue at around 25%, although this is sensitive to the geographic mix of
our profit and any changes to current corporate tax rates.
Financial position: Free cash flow is expected to remain strong at around
£100m, lower than 2021 reflecting the reduced profitability and more normal
working capital absorption following the reduction of Covid-19 services which
had beneficial payment terms. We expect Adjusted Net Debt to end the year at
around £160m.
Returns to shareholders: Although it is anticipated earnings will reduce in
2022, it is our intention continue on our path of increasing dividends to
shareholders as part of our policy of progressively reducing dividend cover
towards 3x over the coming years. The Board will keep future buybacks under
review in line with our capital allocation framework and target leverage of
1-2x net debt to EBITDA.
Summary and concluding thoughts
There is a sense of déjà vu in writing this report, because we start 2022
with the same expectation as we did 2021: that life will return to normal
during the first half as the impact of Covid faded and became something of the
past not the present. These hopes, dashed by successive waves of infection
and Omicron in 2021, seem better founded at the start of 2022 as the vile
virus appears to be behaving like its predecessors in decades past in that
successive variants tend to be more infectious but less lethal. More like
flu; more endemic than pandemic; something we can live with rather than having
to hide from.
And reporting on the results of a single year - 2021 - also permits the eye to
look further back. A single year of strong performance might be a blip; two,
even, good fortune. But the fact that since 2017, Serco's revenues have
grown at a compound rate of 11%, and profits by 35%, and that over that
extended period we have taken £20bn of orders against £17bn of sales, in a
market growing at around 3% per year, suggests that there is something afoot
other than blips and luck.
There is a saying that "even turkeys can fly in a hurricane". And the
revenues we have won providing services to governments related to Covid have
certainly been a strong tail wind. But our Management Framework, combined
with our Business-to-Government Platform, enabled us to find, and then respond
to those winds, to spread our wings, and fly to the aid of our government
customers. And even if you strip out all the recent Covid impact, the
business has grown much faster than the market over the last five years.
We are pleased with the way our business model is delivering competitive
advantage and differentiation; settled on our strategy of being a focused
provider of services to governments; happy with our relationships with
customers; delighted with the performance that the business has delivered over
the past five years. But there are two parts of our ecosystem that require
careful navigation.
The first is labour markets; worldwide, we employ more than 50,000 people, and
handle around 400,000 job applications a year. Our business is providing
people based-services enabled by technology to governments, and for many years
the relationship, the rules of the road, between people who wanted to work and
companies who needed to employ them was stable and well understood. Since
Covid, that has no longer been the case, and we see far more difficult labour
market conditions than certainly I, in 35 years managing businesses, have
previously seen. It is an international phenomenon, affecting all our
markets, and seems to be driven by the experience of Covid causing some people
to reconsider the way they think about work. Some have retired early; some
have returned to their home countries; some have found working from home more
congenial than travelling to the office; some are fearful of Covid at work;
some are caring for relatives or suffering from long-Covid; some, having saved
money during lockdowns, have gone walkabout. Whatever the reason, at the
moment it is hard to recruit and retain people. Hard and frustrating, but
not impossible, as the fact that over the last two years we have recruited and
managed around 100,000 direct and indirect employees, and the millions of
pounds we have invested in the last year in systems to support workforce
efficiency and improved HR systems are helping us to manage through what we
believe will be a largely temporary phenomenon until the demand and supply
side of labour markets find a new equilibrium.
The other part of our eco-system that is complicated to navigate is ESG, to
which we devote a significant amount of senior management time. A company
that has been writing Corporate Responsibility Reports since 2003; whose daily
work is helping governments to deliver vital public services, often to the
most disadvantaged and vulnerable in society; and whose stated purpose is to
be a "valued and trusted partner of governments, delivering superb public
services, that transform outcomes and make a positive difference for our
fellow citizens", is one that clearly "gets" ESG. On Environment and
Governance, by any measure we have a good narrative. What is required by
stakeholders for them to make informed judgements is reasonably clear, and
getting clearer by the year with the introduction of recommendations such as
the Taskforce on Climate-Related Disclosures, which we are adopting in our
2021 Annual Report, as well as public company regulatory reporting
requirements.
It is on the "Social" side, which is such an integral part of what we do as a
provider of services to government, where we face the most scrutiny, and where
there is least consensus on standards to which we can adhere and against which
stakeholders can judge us. Perhaps this is because as greater
standardisation applies to the Environmental and Governance dimensions, there
is more divergence on the Social dimension; as a consequence we are faced by a
wide range of strongly-held, but different, opinions and interpretations of
various standards, and a company's Social Value appears to be in the eye of
the individual analyst or institution who beholds it. In August 2021 the CFA
Institute published some timely research (ESG Ratings: Navigating Through the
Haze)
(https://blogs.cfainstitute.org/investor/2021/08/10/esg-ratings-navigating-through-the-haze/)
which shows that on financial measures, such as debt ratings, there was a
correlation of around 95% between the main ratings agencies; on ESG matters,
the same agencies on the same companies, the correlation was mostly less than
50% in their scoring, and between some of the largest, less than 30%. In
other words, almost none, and certainly not a basis from which we can distil a
common view or consensus.
To us, the question of whether what we do has social value is quite
straightforward and obvious because of the nature of our customers. The
overwhelming majority of our work is at the instruction of
democratically-elected governments, who are signatories to international
conventions on social issues and who operate alongside strong legal systems.
If they ask us to do work which is lawful and which they consider is socially
useful, we do not think it is for us, as a mere corporate, to second-guess
that judgement, except in exceptional circumstances. And that applies to
work in areas which some consider contentious such as justice, immigration and
defence. We rather scratch our heads at institutions who think it is
consistent to trade in government bonds, but screen out companies on ESG
grounds who do work for the self-same governments and financed by the
self-same bonds; and those who regard democracy and law as social goods, but
prefer their own institution's interpretation of social value to those of
elected governments.
However, our job is to navigate with the world as it is, not as we would like
it to be. We want to ensure that we are within the universe of investible
companies of as many funds as possible, but the lack of consistency in how
investors judge companies on the social dimension of ESG can make it feel like
we are chasing rainbows. Our approach, therefore, is to get on with our work
serving governments, helping them to do the hard things citizens (and
investors) expect them to do, and to try and make a positive difference to
society whilst treating our colleagues, suppliers and communities with the
care and respect they deserve. And we recognise a responsibility to be
transparent about the work we do and respond constructively and helpfully to
requests for information so that investors and other stakeholders can make
informed judgements.
For us the most important thing is that our customers and our colleagues, who
best know the work we do, believe we are doing a good job delivering public
services and, by extension, social value. On the first, order intake in the
last five years of over £20bn, £3bn more than our revenues, and the fact
that our revenues from governments are growing faster than the market,
suggests that our customers think we are doing a good job. On the second, we
have an objective measure to rely on through our annual Viewpoint surveys, to
which around 30,000 Serco people respond each year; the vast majority of
respondents say they are proud to work for Serco and they feel their work at
Serco makes a positive difference.
In conclusion, we think that Serco's record over the last five years is proof
positive that our strategy of being a focused supplier of services to
governments, organising ourselves around our Management Framework, and using
our B2G platform to win and deliver business, has worked well. Our unique
operating platform differentiates us from our competitors and gives us
agility, reach, breadth, efficiency and resilience; these things have helped
us deliver our objectives of winning good business, executing brilliantly,
making Serco a place people are proud to work, and delivering profits that are
sustainable. We believe they will continue to do so over the coming years,
and will enable us to deliver a combination of revenues growing faster than
the market, profits growing faster than revenues, and shareholder returns
growing faster than profits, and all the while being a company that delivers
social value through excellent public services which deliver value for money
for taxpayers.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional divisions: UK & Europe
(UK&E); the Americas; the Asia Pacific region (AsPac); and the Middle
East. Reflecting statutory reporting requirements, Serco's share of revenue
from its joint ventures and associates is not included in revenue, while
Serco's share of joint ventures and associates' profit after interest and tax
is included in Underlying Trading Profit (UTP). As previously disclosed and
for consistency with guidance, Serco's UTP measure excludes contract &
balance sheet review adjustments, which were, in any case, immaterial in the
period.
Year ended 31 December 2021 UK&E Americas AsPac Middle Corporate costs Total
£m East
Revenue 2,131.6 1,120.0 908.4 264.6 - 4,424.6
Change +20% +5% +26% (18%) +13.9%
Change at constant currency +20% +12% +24% (13%) +15.8%
Organic change at constant currency +20% +2% +8% (13%) +10.1%
UTP 96.0 117.8 51.3 13.7 (49.9) 228.9
Margin 4.5% 10.5% 5.6% 5.2% (1.1%) 5.2%
Change 130bps 105bps 111bps 89bps -7bps 97bps
Contract & Balance Sheet Review adjustments 1.3 - - - 1.3
Other one-time items 2.5 - 0.7 - - 3.2
Trading Profit/(Loss) 99.8 117.8 52.0 13.7 (49.9) 233.4
Amortisation of intangibles arising on acquisition (0.8) (11.7) (3.5) - - (16.0)
Operating profit/(loss) before exceptionals 99.0 106.1 48.5 13.7 (49.9) 217.4
Year ended 31 December 2020 UK&E Americas AsPac Middle Corporate costs Total
£m East
Revenue 1,777.4 1,064.3 718.9 324.2 - 3,884.8
UTP 57.0 100.8 32.6 13.9 (41.2) 163.1
Margin 3.2% 9.5% 4.5% 4.3% (1.1%) 4.2%
Contract & Balance Sheet Review adjustments 5.8 - - - - 5.8
Other one-time items 6.8 - - - - 6.8
Trading Profit/(Loss) 69.6 100.8 32.6 13.9 (41.2) 175.7
Amortisation of intangibles arising on acquisition (2.0) (7.0) - - - (9.0)
Operating profit/(loss) before exceptionals 67.6 93.8 32.6 13.9 (41.2) 166.7
The trading performance and outlook for each Division are described on the
following pages. Reconciliations and further detail of financial performance
are included in the Finance Review on pages 18-32. This includes full
definitions and explanations of the purpose of each non-IFRS Alternative
Performance Measure (APM) used by the Group. The Condensed Consolidated
Financial Statements and accompanying notes are on pages 33-69. Included in
note 2 to the Group's Consolidated Financial Statements are the Group's
policies on recognising revenue across the various revenue streams associated
with the diverse range of goods and services discussed within the Divisional
Reviews. The various revenue recognition policies are applied to each
individual circumstance as relevant, taking into account the nature of the
Group's obligations under the contract with the customer and the method of
delivering value to the customer in line with the terms of the contract.
UK & Europe (48% of revenue, 34% of Underlying Trading Profit((7)))
Year ended 31 December 2021 2020 Growth
£m
Revenue 2,131.6 1,777.4 20%
Organic change 20% 31%
Acquisitions 0% 0%
Currency 0% 0%
Underlying Trading Profit 96.0 57.0 68%
Organic change 68%
Acquisitions 1%
Currency (1)%
Margin 4.5% 3.2% 130bps
Revenue grew by 20% to £2,132m (2020: £1,777m), with the increase being
almost entirely organic. All our sectors grew with Citizen Services and
Justice & Immigration delivering the strongest growth. Growth in Citizen
Services was particularly strong due to Covid-19 related work, which included
providing support services for approaching 300 Covid-19 regional, local and
mobile test centres as well as for the UK Tracing programme. We delivered
around 25% of the UK's Pillar 2 Testing facilities, facilitating over 21
million tests since the start of the programme. Justice & Immigration
also increased revenues, in part because of a full 12 months of the new
Prisoner Escorting Contract, and also as a result of increased numbers of
asylum seekers under our care.
Underlying Trading Profit increased to £96m (2020: £57m), representing a
margin of 4.5% (2020: 3.2%). Increased volumes and efficient scaling of
platform costs supported the margin improvement, as did signs of improvement
in those parts of our business that were badly affected in 2020 by Covid-19,
notably Leisure and Transport.
Underlying Trading Profit includes the profit contribution of joint ventures
and associates, from which interest and tax have already been deducted. If the
proportional share of revenue from joint ventures and associates was included
and the share of interest and tax cost was excluded, the overall divisional
margin would have been 4.2% (2020: 2.8%). The joint venture and associate
profit contribution was lower at £9m (2020: £13m), as a result of the
cessation of our Atomic Weapons Establishment contract at the end of June 2021
and some mobilistion expenses related to our new VIVO joint venture.
The UK & Europe division's order intake was strong at around £3.4bn, a
book-to-bill ratio of 1.6x and around 60% of the total intake for the Group.
Agreements signed included contracts from the Defence Infrastructure
Organisation (DIO) awarded to our VIVO JV with Engie, which we estimate will
have a value in aggregate to Serco of £1.9bn over their initial seven-year
term. The contracts include the maintenance of some 200 military sites,
19,000 buildings and around 20,000 homes. The order intake also includes our
DWP Restart contract, which has an estimated value of £350m and our Covid-19
Testing Centres contract award, which we value at £190m.
Despite such a strong period for order intake, the pipeline remains healthy,
with significant new opportunities across Defence, Space and Justice &
Immigration including for new prison operations.
Americas (25% of revenue, 42% of Underlying Trading Profit((7)))
Year ended 31 December 2021 2020 Growth
£m
Revenue 1,120.0 1,064.3 5%
Organic change 2% 1%
Acquisitions 10% 17%
Currency (7)% (1)%
Underlying Trading Profit 117.8 100.8 17%
Organic change 14%
Acquisitions 11%
Currency (8)%
Margin 10.5% 9.5% 105bps
Revenue grew by 5% to £1,120m (2020: 1,064m), with organic growth of 2% and
an acquisition contribution of 10% being partially offset by a 7% adverse
translational effect of currency. The acquisition growth came from WBB, a
leading provider of advisory, engineering and technical services to the US
Department of Defense. This acquisition completed at the end of April and
contributed £106m to revenues in the year at constant currency. The two
main sectors for our Americas business are Defence and Citizen Services.
Excluding WBB, our Defence business was stable in the year, with growth being
held back by continued delays in the award of new contracts. Citizen
Services saw good growth supported by increased demand for our case management
services.
Underlying Trading Profit growth outpaced revenue growth, increasing by 17% to
£118m (2020: £101m). Excluding the adverse currency movement of £8m, UTP
growth at constant currency was 25%. Margins increased from 9.5% to 10.5%,
due to a strong performance in the existing business and the acquisition of
WBB, which has slightly higher margins than the overall division. WBB
contributed around £12m of the growth and we saw improved profit contribution
in our existing business from contracts in the Defence and Citizen Services
sectors as well as £3m of profit on sale from the divestment of our US
parking business.
Order intake was £1.3bn, approximately 25% of the total for the Group and a
book-to-bill ratio of approaching 1.2x, despite Covid-19 having led to a
backlog of awards and delays in new tenders. We successfully rebid our
contract to provide support services at the 5 Wing Canadian Forces Base in
Goose Bay, Canada, with an estimated ceiling value of around C$700m or £400m
over the initial 10-year period. We also successfully rebid our
Anti-Terrorism / Force Protection (ATFP) framework contract for US Naval
Facilities, which we estimate will be worth approximately £110m over eight
years. New business wins totalled in the region of £450m, across a range of
contracts, primarily in the defence sector.
The pipeline of major new bid opportunities due for decision within the next
24 months in the Americas remains at more than £2bn with the past year having
seen a combination of new opportunities joining the pipeline and award
decisions being delayed due to Covid-19. Defence makes up the bulk of the
Americas pipeline, with a broad spread of types of work, and Citizen Services
opportunities represent the remainder.
Asia Pacific (21% of revenue, 18% of Underlying Trading Profit((7)))
Year ended 31 December 2021 2020 Growth
£m
Revenue 908.4 718.9 26%
Organic change 8% 18%
Acquisitions 15% 0%
Currency 3% (2)%
Underlying Trading Profit 51.3 32.6 57%
Organic change 34%
Acquisitions 20%
Currency 3%
Margin 5.6% 4.5% 111bps
Revenue increased by 26% to £908m (2020: £719m). Organic growth was 8% of
the increase, with nearly all sectors showing growth. There was particularly
strong growth in the Justice & Immigration, Citizen Services and Defence
sectors. In Justice & Immigration we experienced increased demand for
our immigration services partly as a result of the Covid-19 response, and saw
increased revenues from Clarence Correctional Centre, where operations
commenced in July 2020. Growth in Defence was supported by the successful
delivery of Australia's new Antarctic research icebreaker vessel, RSV
Nuyina. The acquisition of Facilities First added £110m, or 15%, to
revenues, having completed at the beginning of January. Currency movements
added 3% to reported revenue growth.
Underlying Trading Profit increased by 57% to £51m (2020: £33m),
representing a margin of 5.6% (2020: 4.5%). Excluding the favourable currency
movement of £1m, growth at constant currency was 54%. Facilities First
generated profit of £6m, in line with expectations in the first year of our
ownership, while our Citizen Services and Justice & Immigration businesses
increased both volumes and margins.
Order intake was £0.6bn, around 10% of the Group total. Having had
significant success in recent years, it was a quiet period for securing new
work. We did however have a very high rate of success of retaining existing
work; our Immigration Services contract was extended to December 2023 and our
contracts to provide contact centre services to the Australian Tax Office and
to Services Australia were extended to July 2022.
Our pipeline for new business increased significantly in the year, with new
opportunities in the Citizen Services, Health and Defence sectors.
Middle East (6% of revenue, 5% of Underlying Trading Profit ((7)))
Year ended 31 December 2021 2020 Growth
£m
Revenue 264.6 324.2 (18)%
Organic change (13)% (7)%
Acquisitions 0% 0%
Currency (5)% (1)%
Underlying Trading Profit 13.7 13.9 (1)%
Organic change 1%
Acquisitions 0%
Currency (2)%
Margin 5.2% 4.3% 89bps
Revenue fell by 18% to £265m (2020: £324m). Adverse currency moves
contributed 5% of the decline, with the remaining 13% being an organic decline
largely as a result of the end of our contract to operate the Dubai Metro,
which we exited in September, and the ongoing impact of Covid-19 on the
Transport and Health and other Facilities Management sectors. Covid-19
response work included a short-term contract to provide tracing services.
Despite the sharp revenue contraction, Underlying Trading Profit was stable at
£14m (2020: £14m). This favourable profit outcome was driven by a strong
performance in Citizen Services and Defence as well as good cost control in
the areas where we experienced subdued demand. Margins increased from 4.3%
to 5.2% as a result.
Order intake was around £0.2bn, or 3% of the total for the Group. The
majority of this was new business and included services at Dubai Airport,
where demand has been increasing following its reopening.
Our pipeline of major new bid opportunities in the Middle East, which had been
limited at the start of 2021, increased significantly over the year. It
includes work in the Transport and Citizen Services sectors.
Corporate costs
Corporate costs relate to typical central function costs of running the Group,
including executive, governance and support functions such as HR, finance and
IT. Where appropriate, these costs are stated after allocation of recharges
to operating divisions. The costs of Group-wide programmes and initiatives
are also incurred centrally.
Corporate costs increased by £8.7m to £49.9m (2020: £41.2m). The higher
level resulted from increased investment, as we took the opportunity of the
strong financial performance to accelerate spending on our systems and
processes, a one-off commitment to our recently established Serco People Fund
and the normalisation of LTIP costs and provisions, which were lower than
usual in 2020.
Dividend calendar, if approved at the AGM
Ex-dividend date 12 May 2022
Record date 13 May 2022
Final dividend payable 7 June 2022
LEI code: 549300PT2CIHYN5GWJ21
Finance Review
For the year ended Underlying Non- underlying items Trading Amortisation and impairment of intangibles arising on acquisition Statutory pre-exceptional Exceptional items Statutory
31 December 2021 £m £m £m £m £m £m £m
Revenue 4,424.6 - 4,424.6 - 4,424.6 - 4,424.6
Cost of sales (3,961.1) 4.5 (3,956.6) - (3,956.6) - (3,956.6)
Gross profit 463.5 4.5 468.0 - 468.0 - 468.0
Administrative expenses (243.3) - (243.3) - (243.3) - (243.3)
Other exceptional operating items - - - - - (1.2) (1.2)
Other expenses - - - (16.0) (16.0) - (16.0)
Share of profits in joint ventures and associates, net of interest and tax 8.7 - 8.7 - 8.7 - 8.7
Profit before interest and tax 228.9 4.5 233.4 (16.0) 217.4 (1.2) 216.2
Margin 5.2% 5.3% 4.9% 4.9%
Net finance costs (24.0) - (24.0) - (24.0) - (24.0)
Profit before tax 204.9 4.5 209.4 (16.0) 193.4 (1.2) 192.2
Tax (charge)/credit (48.6) 156.2 107.6 4.3 111.9 (0.2) 111.7
Effective tax rate 23.7% (51.4%) (57.9%) (58.1%)
Profit for the period 156.3 160.7 317.0 (11.7) 305.3 (1.4) 303.9
Minority interest - - - -
Earnings per share - basic (pence) 12.78 25.93 24.97 24.86
Earnings per share - diluted (pence) 12.56 25.48 24.54 24.43
For the year ended Underlying Non- underlying items Trading Amortisation and impairment of intangibles arising on acquisition Statutory pre- exceptional Exceptional items Statutory
31 December 2020 £m £m £m £m £m £m £m
Revenue 3,884.8 - 3,884.8 - 3,884.8 - 3,884.8
Cost of sales (3,514.4) 12.6 (3,501.8) - (3,501.8) - (3,501.8)
Gross profit 370.4 12.6 383.0 - 383.0 - 383.0
Administrative expenses (220.0) - (220.0) - (220.0) - (220.0)
Exceptional profit on disposal of subsidiaries and operations - - - - - 11.0 11.0
Other exceptional operating items - - - - - 1.5 1.5
Other expenses - - - (9.0) (9.0) - (9.0)
Share of profits in joint ventures and associates, net of interest and tax 12.7 - 12.7 - 12.7 - 12.7
Profit before interest and tax 163.1 12.6 175.7 (9.0) 166.7 12.5 179.2
Margin 4.2% 4.5% 4.3% 4.6%
Net finance costs (25.9) - (25.9) - (25.9) - (25.9)
Profit before tax 137.2 12.6 149.8 (9.0) 140.8 12.5 153.3
Tax (charge)/credit (31.2) 10.5 (20.7) 1.8 (18.9) (0.4) (19.3)
Effective tax rate 22.7% 13.8% 13.4% 12.6%
Profit for the period 106.0 23.1 129.1 (7.2) 121.9 12.1 134.0
Minority interest 0.2 0.2 0.2 0.2
Earnings per share - basic (pence) 8.61 10.49 9.90 10.89
Earnings per share - diluted (pence) 8.43 10.28 9.70 10.67
Alternative Performance Measures (APMs) and other related definitions
Overview
APMs used by the Group are reviewed below to provide a definition and
reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain
the purpose and usefulness of each APM.
In general, APMs are presented externally to meet investors' requirements for
further clarity and transparency of the Group's financial performance. The
APMs are also used internally in the management of our business performance,
budgeting and forecasting, and for determining Executive Directors'
remuneration and that of other Management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being included in an
APM, this reflects revenues presented elsewhere within the reported financial
information, except where amounts are recalculated to reflect constant
currency. Where items of profits or costs are being excluded in an APM, these
are included elsewhere in our reported financial information as they represent
actual profits or costs of the Group, except where amounts are recalculated to
reflect constant currency. As a result, APMs allow investors and other readers
to review different kinds of revenue, profits and costs and should not be used
in isolation. Other commentary within the Strategic Report, including the
other sections of this Finance Review, as well as the Consolidated Financial
Statements and their accompanying notes, should be referred to in order to
fully appreciate all the factors that affect our business. We strongly
encourage readers not to rely on any single financial measure, but to
carefully review our reporting in its entirety.
The methodology applied to calculating the APMs has not changed since 31
December 2020.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Consolidated Income Statement on
page 33, reflects revenue translated at the average exchange rates for the
period. In order to provide a comparable movement on the previous year's
results, reported revenue is recalculated by translating non-Sterling values
for the year to 31 December 2021 into Sterling at the average exchange rates
for the year ended 31 December 2020.
For the year ended 31 December 2021
£m
Reported revenue at constant currency 4,497.6
Foreign exchange differences (73.0)
Reported revenue at reported currency 4,424.6
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses acquired during a
particular year from the date of acquisition and/or generated by businesses
sold during a particular year up to the date of disposal. In order to provide
a comparable movement which ignores the effect of both acquisitions and
disposals, Organic Revenue at constant currency is recalculated by excluding
the impact of any relevant acquisitions or disposals.
There are three acquisitions excluded for the calculation of Organic Revenue
in the year to 31 December 2021 being the acquisitions of Facilities First
Australia Holdings Pty Ltd, Whitney, Bradley & Brown, Inc and Mercurius
Finance S.A.. The acquisitions completed on 4 January 2021, 27 April 2021 and
30 June 2021 respectively.
The Group also disposed of its interest in its Viapath joint venture on 31 May
2020, however no adjustment is required to Organic Revenue since the joint
venture results were accounted for on an equity accounting basis and therefore
had no impact on Group revenue.
Organic Revenue growth is calculated by comparing the current year Organic
Revenue at constant currency exchange rates with the prior year Organic
Revenue at reported currency exchange rates.
For the year ended 31 December 2021
£m
Organic Revenue at constant currency 4,277.1
Foreign exchange differences (68.3)
Organic Revenue at reported currency 4,208.8
Impact of any relevant acquisitions or disposals 215.8
Reported revenue at reported currency 4,424.6
For the year ended 31 December 2020
£m
Organic Revenue at reported currency 3,884.8
Impact of any relevant acquisitions or disposals -
Reported revenue at reported currency 3,884.8
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group's Consolidated Income Statement on
page 33, excludes the Group's share of revenue from joint ventures and
associates, with Serco's share of profits in joint ventures and associates
(net of interest and tax) consolidated within reported operating profit as a
single line in the Consolidated Income Statement. The alternative measure
includes the share of joint ventures and associates for the benefit of
reflecting the overall change in scale of the Group's ongoing operations,
which is particularly relevant for evaluating Serco's presence in market
sectors such as Defence and Transport. The alternative measure allows the
performance of the joint venture and associate operations themselves, and
their impact on the Group as a whole, to be evaluated on measures other than
just the post-tax result.
For the year ended 31 December 2021 2020
£m £m
Revenue plus share of joint ventures and associates 4,663.0 4,249.9
Exclude share of revenue from joint ventures and associates (238.4) (365.1)
Reported revenue 4,424.6 3,884.8
Alternative profit measures
For the year ended 31 December 2021 2020
£m £m
Underlying Trading Profit 228.9 163.1
Non-underlying items:
OCP charges and releases 1.3 5.8
Other Contract & Balance Sheet Review adjustments and one-time items 3.2 6.8
Total non-underlying items 4.5 12.6
Trading Profit 233.4 175.7
Operating exceptional items (1.2) 12.5
Amortisation and impairment of intangibles arising on acquisition (16.0) (9.0)
Operating profit 216.2 179.2
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading Profit, to make
adjustments for unusual items that occur and to remove the impact of
historical issues. UTP therefore provides a measure of the underlying
performance of the business in the current year.
Charges and releases on all Onerous Contract Provisions (OCPs) that arose
during the 2014 Contract & Balance Sheet Review are excluded from UTP in
the current and prior years. Charges associated with the creation of new OCPs
identified are included within UTP to the extent that they are not considered
sufficiently material to require separate disclosure on an individual basis.
During the period, net charges on new and existing OCPs of £1.3m (2020:
£5.6m) were taken within UTP. OCPs reflect the future multiple year cost of
delivering onerous contracts and do not reflect only the current cost of
operating the contract in the latest individual year. It should be noted that,
as for operating profit, UTP benefits from OCP utilisation of £0.3m in 2021
(2020: £1.8m).
Revisions to accounting estimates and judgements which arose during the 2014
Contract & Balance Sheet Review are reported alongside other one-time
items where the impact of an individual item is material. Items recorded
within this category during 2021 are a settlement received relating to a
judgement made as part of the 2014 Contract & Balance Sheet Review and
releases of provisions held against possible contractual requirements that
could have required settlement by the Group, but which have now exceeded the
period during which such a claim against the Group can be made.
Both OCP adjustments and other Contract & Balance Sheet Review and
one-time items are identified and separated from the APM in order to give
clarity of the underlying performance of the Group and to separately disclose
the progress made on these items.
Underlying trading margin is calculated as UTP divided by statutory revenue.
The non-underlying column in the summary income statement on page 18 includes
the tax impact of the above items and tax items that, in themselves, are
considered to be non-underlying. Further detail of such items is provided in
the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to operating profit,
as shown on the Group's Consolidated Income Statement on page 33, by making
two adjustments.
First, Trading Profit excludes exceptional items, being those considered
material and outside of the normal operating practices of the Group to be
suitable for separate presentation and detailed explanation.
Second, amortisation and impairment of intangibles arising on acquisitions are
excluded, because these charges are based on judgements about the value and
economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating practice.
UTP at constant currency
UTP disclosed above has been translated at the average foreign exchange rates
for the year. In order to provide a comparable movement on the previous year's
results, UTP is recalculated by translating non-Sterling values for the year
to 31 December 2021 into Sterling at the average exchange rate for the year
ended 31 December 2020.
For the year ended 31 December 2021
£m
Underlying Trading Profit at constant currency 235.8
Foreign exchange differences (6.9)
Underlying Trading Profit at reported currency 228.9
Alternative Earnings Per Share (EPS) measures
For the year ended 31 December 2021 2020
pence pence
Underlying EPS, basic 12.78 8.61
Net impact of non-underlying items and amortisation and impairment of 12.19 1.29
intangibles arising on acquisition
EPS before exceptional items, basic 24.97 9.90
Impact of exceptional items (0.11) 0.99
Reported EPS, basic 24.86 10.89
For the year ended 31 December 2021 2020
Pence pence
Underlying EPS, diluted 12.56 8.43
Net impact of non-underlying items and amortisation and impairment of 11.98 1.27
intangibles arising on acquisition
EPS before exceptional items, diluted 24.54 9.70
Impact of exceptional items (0.11) 0.97
Reported EPS, diluted 24.43 10.67
Underlying EPS
Reflecting the same adjustments made to operating profit to calculate UTP as
described above and including the related tax effects of each adjustment and
any other non-underlying tax adjustments as described in the tax charge
section below, an alternative measure of EPS is presented. This aids
consistency with historical results and enables performance to be evaluated
before the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS is provided in the
summary income statements on page 18.
EPS before exceptional items
EPS, as shown on the Group's Consolidated Income Statement on page 33,
includes exceptional items charged or credited to the income statement in the
year. EPS before exceptional items aids consistency with historical operating
performance.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect cash flow from
operating activities before exceptional items, which is the measure shown on
the Consolidated Cash Flow Statement on page 37. This IFRS measure is adjusted
to include dividends we receive from joint ventures and associates and exclude
net interest paid, the capital element of lease payments and net capital
expenditure on tangible and intangible asset purchases.
For the year ended 31 December 2021 2020
£m £m
Free Cash Flow 189.5 134.9
Exclude dividends from joint ventures and associates (13.5) (19.8)
Exclude net interest paid 24.3 24.6
Exclude capitalised finance costs paid 0.6 0.9
Exclude capital element of lease repayments 111.3 100.8
Exclude proceeds received from exercise of share options (0.2) (0.1)
Exclude purchase of own shares to satisfy share awards 20.3 -
Exclude purchase of intangible and tangible assets net of proceeds from 25.1 29.2
disposal
Cash flow from operating activities before exceptional items 357.4 270.5
Exceptional operating cash flows (7.5) (2.0)
Cash flow from operating activities 349.9 268.5
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In order to
calculate an appropriate cash conversion metric equivalent to UTP, Trading
Cash Flow is derived from FCF by excluding tax and interest items. UTP cash
conversion therefore provides a measure of the efficiency of the business in
terms of converting profit into cash before taking account of the impact of
interest, tax and exceptional items.
For the year ended 31 December 2021 2020
£m £m
Free Cash Flow 189.5 134.9
Add back:
Tax paid 42.1 35.9
Non-cash R&D expenditure - 0.1
Net interest paid 24.3 24.6
Capitalised finance costs paid 0.6 0.9
Trading Cash Flow 256.5 196.4
Underlying Trading Profit 228.9 163.1
Underlying Trading Profit cash conversion 112% 120%
Net Debt and Adjusted Net Debt
We present an alternative measure to bring together the various funding
sources that are included on the Group's Consolidated Balance Sheet on page 36
and in the accompanying notes. Net Debt is a measure to reflect the net
indebtedness of the Group and includes all cash and cash equivalents and any
debt or debt-like items, including any derivatives entered into in order to
manage risk exposures on these items. Net Debt includes all lease liabilities,
whilst Adjusted Net Debt is derived from Net Debt by excluding liabilities
associated with leases.
The Adjusted Net Debt measure was introduced because it more closely aligns to
the Consolidated Total Net Borrowings measure used for the Group's debt
covenants, which is prepared under accounting standards applicable prior to
the adoption of IFRS 16 Leases. Principally as a result of the Asylum
Accommodation and Support Services Contract (AASC), the Group has entered into
a significant number of leases which contain a termination option. The use of
Adjusted Net Debt removes the volatility that would result from estimations of
lease periods and the recognition of liabilities associated with such leases
where the Group has the right to cancel the lease and hence the corresponding
obligation. Though the intention is not to exercise the options to cancel the
leases, it is available, unlike other debt obligations.
For the year ended 31 December 2021 2020
£m £m
Cash and cash equivalents 198.4 335.7
Loans payable (377.0) (388.8)
Lease liabilities (430.3) (402.6)
Derivatives relating to Net Debt 0.6 (4.7)
Net Debt (608.3) (460.4)
Add back: Lease liabilities 430.3 402.6
Adjusted Net Debt (178.0) (57.8)
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used by the Group
and is one of the metrics used to determine the performance and remuneration
of the Executive Directors. ROIC is calculated based on UTP and Trading Profit
using the Group's Consolidated Income Statement for the year and a two-point
average of the opening and closing balance sheets. The composition of Invested
Capital and calculation of ROIC are summarised in the table below.
Invested Capital excludes right of use assets recognised under IFRS 16
Leases. This is because the Invested Capital of the Group are those items
within which resources are, or have been, committed, which is not the case for
many leases which would previously have been classified as operating leases
under IAS 17 Leases where termination options exist and commitments for
expenditure are in future years.
For the year ended 31 December 2021 2020
£m £m
ROIC excluding right of use assets
Non-current assets
Goodwill 852.7 669.6
Other intangible assets 144.0 80.6
Property, plant and equipment 55.5 54.2
Interest in joint ventures and associates 17.6 19.2
Contract assets, trade and other receivables 16.2 25.3
Current assets
Inventory 19.6 21.4
Contract assets, trade and other receivables 624.7 609.6
Total invested capital assets 1,730.3 1,479.9
Current liabilities
Contract liabilities, trade and other payables (587.3) (576.2)
Non-current liabilities
Contract liabilities, trade and other payables (55.9) (56.9)
Total invested capital liabilities (643.2) (633.1)
Invested Capital 1,087.1 846.8
Two-point average of opening and closing Invested Capital 967.0 855.5
Trading Profit 233.4 175.7
ROIC% 24.1% 20.5%
Underlying Trading Profit 228.9 163.1
Underlying ROIC% 23.7% 19.1%
Overview of financial performance
Revenue
Reported revenue increased by 13.9% in the year to £4,424.6m (2020:
£3,884.8m), a 15.8% increase at constant currency. Organic revenue growth at
constant currency was 10.1%. This is in line with the trading update issued on
15 November 2021 where revenue was expected to be £4.4bn for the year ended
31 December 2021.
Commentary on the revenue performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Trading Profit
Trading Profit for the year was £233.4m (2020: £175.7m).
Commentary on the trading performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Underlying Trading Profit
UTP was £228.9m (2020: £163.1m), up 40.3%. At constant currency, UTP was
£235.8m, up 44.6%. This is in line with the trading update issued on 15
November 2021 where UTP was expected to be not less than £225m for the year
ended 31 December 2021.
Commentary on the underlying performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Excluded from UTP were net releases from OCPs of £1.3m (2020: net releases of
£5.8m) following the detailed reassessment undertaken as part of the
budgeting process. Also excluded from UTP were net releases and additional
profits of £3.2m (2020: net releases and additional profits of £6.8m)
relating to items identified during the 2014 Contract & Balance Sheet
Review and other one-time items.
The tax impact of items in UTP and other non-underlying tax items is discussed
in the tax section of this Finance Review.
Joint ventures and associates - share of results
In 2021, the most significant joint ventures and associates in terms of scale
of operations were AWE Management Limited (AWEML), prior to the handing back
of the AWEML contract on 30 June 2021, and Merseyrail Services Holding Company
Limited (Merseyrail), with dividends received of £13.5m (2020: £15.5m) and
£nil (2020: £1.5m) respectively. Total revenues generated by these
businesses were £638.7m (2020: £1,106.8m) and £161.0m (2020: £150.7m),
respectively.
As announced on 2 November 2020, the Ministry of Defence notified the Group
that it would be exercising its ability to terminate services provided by the
Group through AWEML on 30 June 2021.
As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint
venture between Serco Limited and ENGIE SA, has been awarded contracts to
provide repairs and maintenance work for Service Family Accommodation (SFA) by
the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO).
VIVO is not a material joint venture to the Group in 2021.
While the revenues and individual line items are not consolidated in the
Group's Consolidated Income Statement, summary financial performance measures
for the Group's proportion of the aggregate of all joint ventures and
associates are set out below for information purposes.
For the year ended 31 December 2021 2020
£m £m
Revenue 238.4 365.1
Operating profit 11.5 15.4
Net finance cost (0.1) -
Income tax charge (2.7) (2.7)
Profit after tax 8.7 12.7
Dividends received from joint ventures and associates 13.5 19.8
The change in revenue and profits on the prior year is primarily due to the
exit from the AWEML contract. Merseyrail continued to make losses during 2021,
however these have reduced against prior year due to the lifting of Covid-19
measures resulting in increased passenger volumes.
Dividends received have also reduced due to the exit from the AWEML contract
as well as the sale of Viapath which contributed £1.0m in dividends during
2020. Northern Rail and Hong Kong Parking also contributed £1.0m and £0.8m
respectively in 2020. As Merseyrail recorded a loss in 2021, no dividends were
received during the year. Future dividends received from the joint ventures
are likely to take into consideration operating performance as a result of the
pandemic and a requirement to maintain an appropriate level of cash resources
within the entities given the impact of Covid-19, though most notably in
respect of the Merseyrail joint venture.
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. These require separate disclosure on the face of the income
statement to assist in the understanding of the performance of the Group. In
2021, the total exceptional charge for the year net of tax was £1.4m (2020:
gain of £12.1m).
The Group completed the acquisition of Facilities First Australia Holdings Pty
Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB) in 2021. The
combined transaction and implementation costs incurred during the year ended
31 December 2021 of £4.9m have been treated as exceptional costs in line with
the Group's accounting policy and the treatment of similar costs during the
year ended 31 December 2020.
During 2021, the Group sold an investment recording a profit of £4.2m which
was treated as exceptional in line with the Group's accounting policy.
The Group has recorded an additional £0.6m property provision related to the
onerous lease of a building to cover the expected loss until March 2025. The
building was vacated following the strategy review completed in 2014 and
therefore the associated cost treated as exceptional.
Exceptional costs of £1.3m were recorded in 2020 associated with the UK
Government review and the programme of Corporate Renewal. No such costs were
incurred in the current financial year.
Exceptional tax
Exceptional tax for the period was a tax charge of £0.2m (2020: charge of
£0.4m) which arises on exceptional items within operating profit.
The tax charge on exceptional costs has been increased as an element of the
exceptional costs associated with the WBB acquisition were not allowable for
tax. This is partially offset by previously unrecognised capital losses in
Australia that were utilised against the gain arising on the sale of an
investment reducing the charge.
Finance costs and investment revenue
Net finance costs were £24.0m (2020: £25.9m) and net interest paid was
£24.3m (2020: £24.6m).
Investment revenue of £2.4m (2020: £1.9m) consists primarily of interest
accruing on net retirement benefit assets of £1.1m (2020: £1.2m), dividends
received of £0.6m (2020: £0.4m) and interest receivable of £0.6m (2020:
£0.2m).
The finance costs of £26.4m (2020: £27.8m) include interest incurred on the
US private placement loan notes and the revolving credit facility of £15.6m
(2020: £15.3m) and lease interest payable of £7.8m (2020: £9.5m) as well as
other financing related costs including the impact of foreign exchange on
financing activities.
Tax
Tax charge
Underlying tax
In 2021 we recognised a tax charge of £48.6m on underlying trading profits
after net finance costs. The effective tax rate (23.7%) is slightly higher
than in 2020 (22.7%). The increase compared with 2020, is primarily due to the
recognition of deferred tax assets in the UK as discussed below. This means
that utilisation of losses brought forward to offset current year profits does
not reduce the tax rate in 2021 as it did in the prior year. Further, there
has been a reduction in profits made by our joint ventures and associates
whose post tax profits are included in our profit before tax. This is
partially offset by a reduction in our expenses not deductible for tax
together with the impact of movements in provisions as part of our regular
reassessment of tax exposures across the Group.
Pre-exceptional tax
A tax credit of £111.9m (2020: £18.9m charge) on pre-exceptional profits has
been recognised which includes an underlying tax charge of £48.6m, the tax
impact of amortisation of intangibles arising on acquisition of £4.3m credit
and a £156.2m credit on non-underlying items.
Of the £156.2m credit on non-underlying items, £157.2m relates to UK
deferred tax. £144.8m of this credit arises from the recognition of deferred
tax assets in relation to the Group's UK operations which have not previously
been recognised as assets. It is now considered that the UK business has
returned to sustainable profitability, and there is sufficient certainty of
future taxable profits against which these deductions can be utilised to
enable the recognition of an increased deferred tax asset. £10.8m of the UK
deferred tax credit relates to the revaluation of the deferred tax asset at 1
January 2021, following the announcement in the UK Budget earlier this year
that the tax rate in the UK is to increase in 2023 to 25% and £1.6m of the UK
deferred tax credit relates to non-underlying movements in the deferred tax
asset where the value of the asset has been impacted by factors outside of
current period trading, such as changes in future forecasts. The remaining
£1.0m non-underlying tax charge relates to tax on non-underlying income that
is taxable.
The tax rate on profits before exceptional items at (57.9)% is lower than the
UK standard corporation tax rate of 19.0%. This is mainly due to the impact of
non-underlying tax items noted above (reducing rate by 81.3%) together with a
reduction in provisions held for uncertain tax positions (reducing rate by
1.4%). As part of our regular reassessment of tax exposures across the Group,
we have concluded that certain provisions are no longer likely to lead to an
outflow of tax. The impact of this is only partially offset by higher
statutory rates of tax being suffered on overseas profits (increasing rate by
5.8%).
Exceptional tax
Analysis of exceptional tax is provided within the exceptional items section
above.
Deferred tax assets
At 31 December 2021 there is a net deferred tax asset of £174.0m (2020:
£56.3m). This consists of a deferred tax asset of £214.3m (31 December 2020:
£83.2m) and a deferred tax liability of £40.3m (31 December 2020: £26.9m).
A £162.8m UK tax asset is recognised on the Group's balance sheet at 31
December 2021 (31 December 2020: £30.6m) on the basis that improved
performance in the underlying UK business indicates a sustained return to
profitability which would enable accumulated tax losses within the UK to be
utilised. The return to profitability is as a result of onerous contracts
ending and new profitable long-term contracts being entered into, as well as a
significant reduction in exceptional restructuring spend following the
strategy review in 2015, which also reduced the level of overhead spend within
the UK business.
Taxes paid
Net corporate income tax of £42.1m was paid during the year, relating
primarily to our operations in AsPac (£24.4m), North America (£17.6m),
Middle East (£1.2m), UK (£0.8m refund) and Europe (£0.3m net refund). The
refund in the UK consists of £1.2m which was paid to HMRC net of £2.0m which
was received in the period from our joint ventures and associates for 2019
losses sold to them. The refund in Europe relates to various overpayments of
tax instalment payments which were refunded during the year.
The amount of tax paid (£42.1m) differs from the tax credit in the period
(£111.9m) mainly due to the impact of the additional deferred tax assets
recognised during the period. In addition, taxes paid/received from Tax
Authorities can arise in later periods to the associated tax charge/credit,
and there is a time lag on receipts of cash from joint ventures and associates
for losses transferred to them resulting in a net tax inflow.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as determined by
local legislation in the countries in which we operate, means that we pay a
variety of taxes across the globe. We have shown below the cash taxes that
we have paid across our regional markets.
In total during 2021, Serco globally contributed £815.2m of tax to government
in the jurisdictions in which we operate.
Taxes by category
For the year ended 31 December 2021 Taxes Taxes collected Total
borne £m £m
£m
Corporation tax 44.0 - 44.0
VAT and similar 8.5 246.6 255.1
People taxes 133.7 375.5 509.2
Other taxes 6.8 0.1 6.9
Total 193.0 622.2 815.2
Taxes by region
For the year ended 31 December 2021 Taxes Taxes collected Total
borne £m £m
£m
UK & Europe 90.0 335.4 425.4
AsPac 49.0 184.7 233.7
Americas 51.3 98.7 150.0
Middle East 2.7 3.4 6.1
Total 193.0 622.2 815.2
Corporation tax, which is the only cost to be separately disclosed in our
Consolidated Financial Statements, is only one element of our tax
contribution. For every £1 of corporate tax paid directly by the Group (tax
borne), we bear a further £3.39 in other business taxes. The largest
proportion of these is in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect £3.22 on behalf of
national governments (taxes collected). This amount is directly impacted by
the people that we employ and the sales that we make.
Dividends and share buyback
During the year to 31 December 2021, the Group has paid dividends of £26.5m
(2020: £nil) in respect of the final dividend for the year ended 31 December
2020 and the interim dividend in respect of the six months ended 30 June 2021.
As noted in the Chief Executive's Review, the Board has decided to declare a
final dividend of 1.61p per share in respect of the year ended 31 December
2021 (2020: 1.4p per share).
Following the successful completion of the share buyback programme during
2021, in which 30.7m shares were repurchased at an average price including
fees of 1.32p, the Group has announced its intention to commence a further
share buyback of up to £90m. Consistent with the Group's capital allocation
policy, the objective of the programme is to provide additional returns to
shareholders as well as aid the Group in meeting its medium-term leverage
targets. The buyback programme is expected to complete within 12 months with
the shares either cancelled or held in Treasury.
Share count and EPS
The weighted average number of shares for EPS purposes was 1,222.6m for the
year ended 31 December 2021 (2020: 1,229.1m) and diluted weighted average
number of shares was 1,244.0m (2020: 1,254.3m).
The number of ordinary shares in issue has reduced during the year ended 31
December 2021 as a result of the Serco Share Repurchase Programme (the
Programme). At the end of 2020, the Group announced its intention to
repurchase ordinary shares with a value of up to £40m, subject to a maximum
of 122,338,063 ordinary shares being purchased, during the period 4 January
2021 to 11 June 2021. Through the Programme, the Group repurchased 30,721,849
ordinary shares for total consideration of £40.7m including fees.
On 28 June 2021, the Group announced that, of the ordinary shares repurchased
and held in Treasury, 15,350,000 were transferred to the Employee Share
Ownership Trust to be used to satisfy awards granted under the Group's share
award schemes. The 15,371,849 ordinary shares remaining in Treasury were
cancelled on 28 June 2021.
Basic EPS before exceptional items was 24.97p per share (2020: 9.90p);
including the impact of exceptional items, Basic EPS was 24.86p (2020:
10.89p). Basic Underlying EPS was 12.78p per share (2020: 8.61p).
Diluted EPS before exceptional items was 24.54p per share (2020: 9.70p);
including the impact of exceptional items, Diluted EPS was 24.43p (2020:
10.67p). Diluted Underlying EPS was 12.56p per share (2020: 8.43p).
Cash flows
UTP of £228.9m (2020: £163.1m) converts into a trading cash inflow of
£256.5m (2020: £196.4m). The improvement in 2021 trading cash flows reflects
the increase in profitability from revenue and profit growth offset by £20.3m
spent on the repurchase of the Group's own shares to satisfy share awards. The
Group has delivered a working capital inflow which is better than expected as
the working capital position on the Dubai Metro contract has unwound following
its exit during the year. There also continues to be a focus on collections
across the Group.
The table below shows the operating profit and Free Cash Flow (FCF) reconciled
to movements in Adjusted Net Debt. FCF for the year was an inflow of £189.5m
compared to £134.9 in 2020. The improvement in FCF is largely as a result of
improved trading cash inflows, as discussed above.
Adjusted Net Debt has increased by of £120.2m in 2021, a reconciliation of
which is provided at the bottom of the following table. The increase is due to
£189.5m of free cash flow generated, offset by £234.9m of cash outflow
related to acquisitions, £14.3m used to settle historic intercompany
positions at Facilities First Australia Holdings Limited Pty, £26.5m of
dividend payments and £20.4m of cash paid out as part of the Serco Share
Repurchase Programme.
For the year ended 31 December 2021 2020
£m £m
Operating profit 216.2 179.2
Remove exceptional items 1.2 (12.5)
Operating profit before exceptional items 217.4 166.7
Less: share of profit from joint ventures and associates (8.7) (12.7)
Movement in provisions (7.2) 16.2
Depreciation, amortisation and impairment of property, plant and equipment and 47.2 39.2
intangible assets
Depreciation and impairment of right of use assets 109.0 93.9
Other non-cash movements 16.6 8.5
Operating cash inflow before movements in working capital, exceptional items 374.3 311.8
and tax
Working capital movements 25.2 (5.3)
Tax paid (42.1) (35.9)
Non-cash R&D expenditure - (0.1)
Cash flow from operating activities before exceptional items 357.4 270.5
Dividends from joint ventures and associates 13.5 19.8
Interest received 0.6 0.3
Interest paid (24.9) (24.9)
Capital element of lease repayments (111.3) (100.8)
Capitalised finance costs paid (0.6) (0.9)
Purchase of intangible and tangible assets net of proceeds from disposals (25.1) (29.2)
Purchase of own shares to satisfy share awards (20.3) -
Proceeds received from exercise of share options 0.2 0.1
Free Cash Flow 189.5 134.9
Net cash (outflow)/inflow on acquisition and disposal of subsidiaries, joint (234.9) 6.1
ventures and associates
Net increase in debt items on acquisition and disposal of subsidiaries, joint (14.3) -
ventures and associates
Dividends paid to shareholders (26.5) -
Purchase of own shares (20.4) -
Movements on other investment balances 0.6 0.5
Exceptional sale of other investments 13.0 -
Capitalisation and amortisation of loan costs (0.7) -
Exceptional items (7.5) (2.0)
Exceptional proceeds from loans receivable - 1.2
Exceptional distribution from joint venture - 1.9
Cash movements on hedging instruments (16.6) 2.4
Foreign exchange (loss)/gain on Adjusted Net Debt (2.4) 11.7
Movement in Adjusted Net Debt (120.2) 156.7
Opening Adjusted Net Debt (57.8) (214.5)
Closing Adjusted Net Debt (178.0) (57.8)
Lease liabilities (430.3) (402.6)
Closing Net Debt at 31 December (608.3) (460.4)
Net Debt
As at 31 December 2021 2020
£m £m
Cash and cash equivalents 198.4 335.7
Loans payable (377.0) (388.8)
Lease liabilities (430.3) (402.6)
Derivatives relating to Net Debt 0.6 (4.7)
Net Debt (608.3) (460.4)
Exclude lease liabilities 430.3 402.6
Adjusted Net Debt (178.0) (57.8)
Average Adjusted Net Debt as calculated on a daily basis for the year ended 31
December 2021 was £216.1m (2020: £209.2m). Peak Adjusted Net Debt was
£346.3m (2020: £355.7m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks that include
liquidity, the effects of changes in foreign currency exchange rates, interest
rates and credit risk. The Group has a centralised Treasury function whose
principal role is to ensure that adequate liquidity is available to meet the
Group's funding requirements as they arise and that the financial risk arising
from the Group's underlying operations is effectively identified and managed.
Treasury operations are conducted in accordance with policies and procedures
approved by the Board and are reviewed annually. Financial instruments are
only executed for hedging purposes and speculation is not permitted. A monthly
report is provided to senior Management outlining performance against the
Treasury Policy and the Treasury function is subject to periodic internal
audit review.
Liquidity and funding
As at 31 December 2021, the Group had committed funding of £629m (2020:
£642m), comprising £259m of US private placement notes, a £120m term loan
facility which was fully drawn and a £250m revolving credit facility (RCF)
which was undrawn in its entirety. The Group does not engage in any external
financing arrangements associated with either receivables or payables.
The Group's RCF provides £250m of committed funding for five years from the
arrangement date in December 2018. The US private placement notes are
repayable in bullet payments between 2022 and 2032.
Interest rate risk
Given the nature of the Group's business, we have a preference for fixed rate
debt to reduce the volatility of net finance costs. Our Treasury Policy
requires us to maintain a minimum proportion of fixed rate debt as a
proportion of overall Adjusted Net Debt and for this proportion to increase as
the ratio of EBITDA to interest expense falls. As at 31 December 2021,
£259.2m of debt was held at fixed rates and Adjusted Net Debt was £178.0m.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of
its net investments in overseas subsidiaries. The Group manages this risk
where appropriate, by borrowing in the same currency as those investments.
Group borrowings are predominantly denominated in Sterling and US Dollar. The
Group manages its currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward contracts
where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk
on the amounts due from counterparties. The Group manages this risk by
adhering to counterparty exposure limits based on external credit ratings of
the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private
placement loan notes and revolving credit facility, with a maximum
Consolidated Total Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and
minimum covenant EBITDA to net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set out in the
table below.
Following the refinancing in December 2018, the debt covenants were amended to
include the impact of IFRS 15 Revenue from Contracts with Customers. The
covenants continue to exclude the impact of IFRS 16 Leases on the Group's
results.
For the year ended 31 December 2021 2020
£m £m
Operating profit before exceptional items 217.4 166.7
Remove: Amortisation and impairment of intangibles arising on acquisition 16.0 9.0
Trading Profit 233.4 175.7
Exclude: Share of joint venture post-tax profits (8.7) (12.7)
Include: Dividends from joint ventures 13.5 19.8
Add back: Net non-exceptional charges to covenant OCPs 1.3 4.9
Add back: Net covenant OCP utilisation (0.6) (0.7)
Add back: Depreciation, amortisation and impairment of property, plant and 31.2 30.2
equipment and non-acquisition intangible assets
Add back: Depreciation, amortisation and impairment of property, plant and 5.0 4.3
equipment and non-acquisition intangible assets held under finance leases - in
accordance with IAS17 Leases
Add back: Foreign exchange credit on investing and financing arrangements (0.6) (0.7)
Add back: Share based payment expense 15.8 11.2
Other covenant adjustments to EBITDA 6.3 (7.2)
Covenant EBITDA 296.6 224.8
Net finance costs 24.0 25.9
Exclude: Net interest receivable on retirement benefit obligations 1.1 1.2
Exclude: Movement in discount on other debtors 0.1 0.1
Exclude: Other dividends received 0.6 0.4
Exclude: Foreign exchange on investing and financing arrangements (0.6) (0.7)
Add back: Movement in discount on provisions - (0.2)
Other covenant adjustments to net finance costs resulting from IFRS 16 Leases (7.3) (9.1)
Covenant net finance costs 17.9 17.6
Adjusted Net Debt 178.0 57.8
Obligations under finance leases - in accordance with IAS 17 Leases 26.5 24.1
Recourse Net Debt 204.5 81.9
Exclude: Amortised capitalised finance costs, encumbered cash and other 2.9 (1.7)
adjustments
Covenant adjustment for average FX rates (5.7) 21.3
CTNB 201.7 101.5
CTNB / covenant EBITDA (not to exceed 3.5x) 0.68x 0.45x
Covenant EBITDA / covenant net finance costs (at least 3.0x) 16.6x 12.8x
Net assets summary
As at 31 December 2021 2020
£m £m
Non-current assets
Goodwill 852.7 669.6
Other intangible assets 144.0 80.6
Property, plant and equipment 55.5 54.2
Right of use assets 416.7 387.5
Contract assets, trade receivables and other non-current assets 33.8 44.5
Deferred tax assets 214.3 83.2
Retirement benefit assets 166.2 114.6
Total non-current assets 1,883.2 1,434.2
Current assets
Inventories 19.6 21.4
Contract assets, trade receivables and other current assets 627.3 614.1
Current tax assets 5.5 4.9
Cash and cash equivalents 198.4 335.7
Total current assets 850.8 976.1
Total assets 2,734.0 2,410.3
Current liabilities
Contract liabilities, trade payables and other current liabilities (589.3) (585.5)
Current tax liabilities (17.2) (21.6)
Provisions (79.6) (62.1)
Lease obligations (126.3) (109.3)
Loans (64.9) (89.7)
Total current liabilities (877.3) (868.2)
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities (55.9) (57.0)
Deferred tax liabilities (40.3) (26.9)
Provisions (118.0) (115.9)
Lease obligations (304.0) (293.3)
Loans (312.1) (299.1)
Retirement benefit obligations (18.0) (34.9)
Total non-current liabilities (848.3) (827.1)
Total liabilities (1,725.6) (1,695.3)
Net assets 1,008.4 715.0
At 31 December 2021 the Group had net assets of £1,008.4m, a movement of
£293.4m from the closing net asset position of £715.0m as at 31 December
2020. The increase in net assets is mainly due to the following movements:
· An increase in goodwill of £183.1m due to additional goodwill on the
acquisitions of Facilities First Australia Holdings Limited Pty (FFA),
Whitney, Bradley & Brown, Inc (WBB) and Mercurius Finance S.A. together
with an increase due to foreign exchange movements.
· An increase in other intangible assets of £63.4m due to the combined
intangibles recognised on the FFA and WBB acquisitions, offset by amortisation
charged in the period.
· Net deferred taxes have increased by £117.7m owing mainly to the Group's
recognition of assets relating to historic losses in the UK. Recognition has
been based on there now being sufficient certainty of future taxable profits
against which these deductions can be utilised, following structural change in
performance of the UK entities.
· An increase in the net retirement benefit asset of £68.5m. An increase in
risk free rates and a corresponding increase in the discount rate applied to
the defined benefit obligation associated with the Group's most significant
pension scheme resulted in a decrease in the liabilities of the scheme. The
scheme's assets also saw favourable net returns during the year.
· Cash and cash equivalents have decreased by £137.3m which includes a net
exchange loss of £4.8m. In the year the Group has generated cash inflows of
£357.4m from operations before exceptionals. The net spend on tangible and
intangible assets was £25.1m and the capital element of lease repayments in
the year was £111.3m. Including associated costs, the spend on shares
repurchased during the year totals £40.7m and dividends totalling £26.5m
have been paid. The other significant cash outflow is the spend on
acquisitions which, inclusive of costs but net of cash received, totalled
£234.9m.
Acquisitions
On 4 January 2021, the Group acquired 100% of the issued share capital of
Facilities First Australia Holdings Pty Limited (FFA), for consideration of AU
Dollars $52.2m (£29.6m) in cash, subject to standard working capital and
completion adjustments. The acquired net assets included AU Dollars $3.6m
(£2.1m) of cash resulting in a net cash outflow on acquisition of AU Dollars
$48.6m (£27.5m). At the same time, the Group transferred AU Dollars $25.2m
(£14.3m) to allow FFA to settle existing debt and debt-like balances. FFA is
a specialist provider of cleaning, facility maintenance and management
services in Australia. The operating results, assets and liabilities have been
recognised effective 4 January 2021.
On 27 April 2021, the Group acquired 100% of the issued share capital of
Whitney, Bradley & Brown, Inc (WBB) for US Dollars $300.5m (£211.9m) in
cash, subject to standard working capital and completion adjustments. The
acquired net assets included US Dollars $7.2m (£5.1m) of cash resulting in a
net cash outflow on acquisition of US Dollars $293.3m (£206.8m). The
acquisition will increase the scale, breadth and capability of Serco's North
American Defence business and will give Serco a strong platform from which to
address all major segments of the US Defence services market. The operating
results, assets and liabilities have been recognised effective 27 April 2021.
On 30 June 2021, the Group acquired 100% of the issued share capital of
Mercurius Finance S.A., the holding company of Clemaco Trading N.V., Clemaco
Contracting N.V. and Targets N.V. (together Clemaco), for €7.8m (£6.7m) in
cash, subject to standard working capital and completion adjustments. The
acquired net assets included €7.1m (£6.1m) of cash resulting in a net cash
outflow on acquisition of €0.7m (£0.6m). Clemaco specialises in the support
and maintenance of ships for the Belgian Navy, enabling Serco to provide
additional value to existing Serco and Clemaco customers and expanding the
Group's existing activities with the Belgian Navy. The operating results,
assets and liabilities have been recognised effective 30 June 2021.
Pensions
Serco's pension schemes are in a strong funding position and show an
accounting surplus before tax of £148.2m (2020: £79.7m) on scheme gross
assets of £1.6bn and gross liabilities of £1.5bn. The opening net asset
position led to a net credit within net finance costs of £1.1m (2020:
£1.2m). For the Group's main scheme, the Serco Pension and Life Assurance
Scheme (SPLAS), the purchase of a bulk annuity from an insurer, which covers
around half of all scheme members, has the effect of fully removing longevity,
investment and accounting risks for those members; the gross liability remains
recognised on our balance sheet, but there is an equal and opposite insurance
asset reflecting the perfect hedge established by the annuity.
Covid-19
In 2021, the Group continued to support governments in their management of the
pandemic through its immigration support, testing and tracing services. Whilst
there continues to be some negative impact within the Group's transport,
leisure, health and environmental waste sectors, the financial performance
within these is improving as the impact of the pandemic reduces, and the
restrictions implemented by governments are eased. It remains unknown whether
volumes or costs within these sectors will return to pre-pandemic levels,
however given the diverse nature of the Group's operations the financial
impact is mitigated.
As noted in 2020, the Group returned all Covid-19 financial support offered by
governments with the exception of the US tax deferrals which will be repaid in
line with regulations given there is no mechanism to repay early; the amount
remaining to be repaid is £7.7m.
Claim for losses in respect of the 2013 share price reduction
Following the announcement during 2020 that the Group has received a claim
seeking damages for alleged losses as a result of the reduction in Serco's
share price in 2013, the Group has continued to assess the merit, likely
outcome and potential impact on the Group of any such litigation that either
has been or might potentially be brought against the Group. Any outcome is
subject to a number of significant uncertainties. The Group does not currently
assess the merits as strong, especially given the legal uncertainties in such
actions.
Information on other contingent liabilities can be found in Note 19 to the
Condensed Consolidated Financial Statements.
Condensed Consolidated Financial Statements
Consolidated Income Statement
For the year ended 31 December
Note 2021 2020
£m £m
Revenue 6 4,424.6 3,884.8
Cost of sales (3,956.6) (3,501.8)
Gross profit 468.0 383.0
Administrative expenses (243.3) (220.0)
Exceptional profit on disposal of subsidiaries and operations - 11.0
Other exceptional operating items 7 (1.2) 1.5
Other expenses - amortisation and impairment of intangibles arising on (16.0) (9.0)
acquisition
Share of profits in joint ventures and associates, net of interest and tax 4 8.7 12.7
Operating profit 216.2 179.2
Operating profit before exceptional items 217.4 166.7
Investment revenue 8 2.4 1.9
Finance costs 9 (26.4) (27.8)
Total net finance costs (24.0) (25.9)
Profit before tax 192.2 153.3
Profit before tax and exceptional items 193.4 140.8
Tax on profit before exceptional items 10 111.9 (18.9)
Exceptional tax 10 (0.2) (0.4)
Tax credit/(charge) 111.7 (19.3)
Profit for the year 303.9 134.0
Attributable to:
Equity owners of the Company 303.9 133.8
Non-controlling interest - 0.2
Earnings per share (EPS)
Basic EPS 12 24.86p 10.89p
Diluted EPS 12 24.43p 10.67p
The accompanying notes form an integral part of the financial statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 December
Note 2021 2020
£m £m
Profit for the year 303.9 134.0
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Remeasurements of post-employment benefit obligations* 20 66.8 18.2
Actuarial (loss)/gain on reimbursable rights* 20 (0.5) 3.9
Income tax relating to these items* 10 (21.7) (5.9)
Share of other comprehensive income in joint ventures and associates 4 3.3 2.7
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss)/gain on translation of foreign operations** (11.6) 7.9
Fair value gain/(loss) on cash flow hedges during the year** 0.2 (0.2)
Income statement items reclassified 0.1 -
Tax relating to items that may be reclassified** 4.0 -
Total other comprehensive income for the year 40.6 26.6
Total comprehensive income for the year 344.5 160.6
Attributable to:
Equity owners of the Company 344.5 160.4
Non-controlling interest - 0.2
* Recorded in retirement benefit obligations reserve in the Consolidated
Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Consolidated Statement
of Changes in Equity.
The accompanying notes form an integral part of the financial statements.
Consolidated Statement of Changes in Equity
Share Share premium account Retained earnings Other reserves* Total shareholders' equity Non-controlling interest
capital £m £m £m £m £m
£m
At 1 January 2020 24.5 462.9 165.9 (111.9) 541.4 1.5
Total comprehensive income for the year - - 136.5 23.9 160.4 0.2
Issue of share capital 0.2 0.2 - (0.2) 0.2 -
Shares transferred to award holders on exercise of share awards - - - 0.1 0.1 -
Expense in relation to share based payments - - - 11.2 11.2 -
At 1 January 2021 24.7 463.1 302.4 (76.9) 713.3 1.7
Total comprehensive income for the year - - 307.3 37.2 344.5 -
Income statement items reclassified - - - 0.1 0.1 -
Dividends paid - - (26.5) - (26.5) -
Shares purchased and held in Treasury - - - (40.7) (40.7) -
Cancellation of shares held in Treasury (0.3) - (20.4) 20.7 - -
Shares transferred from Treasury to own shares reserves - - (20.0) 20.0 - -
Shares transferred to award holders on exercise of share awards - - - 0.2 0.2 -
Expense in relation to share based payments - - - 15.8 15.8 -
At 31 December 2021 24.4 463.1 542.8 (23.6) 1,006.7 1.7
* An analysis of other reserves is presented as part of note 21 Other
reserves.
The accompanying notes form an integral part of the financial statements.
Consolidated Balance Sheet
Note At 31 December 2021 At 31 December 2020
£m £m
Non-current assets
Goodwill 13 852.7 669.6
Other intangible assets 144.0 80.6
Property, plant and equipment 55.5 54.2
Right of use assets 416.7 387.5
Interests in joint ventures and associates 4 17.6 19.2
Contract assets 14 2.6 -
Trade and other receivables 14 13.6 25.3
Deferred tax assets 11 214.3 83.2
Retirement benefit assets 20 166.2 114.6
1,883.2 1,434.2
Current assets
Inventories 19.6 21.4
Contract assets 14 319.0 296.1
Trade and other receivables 14 305.7 313.5
Current tax assets 5.5 4.9
Cash and cash equivalents 198.4 335.7
Derivative financial instruments 2.6 4.5
850.8 976.1
Total assets 2,734.0 2,410.3
Current liabilities
Contract liabilities 15 (61.3) (42.3)
Trade and other payables 15 (526.0) (533.9)
Derivative financial instruments (2.0) (9.3)
Current tax liabilities (17.2) (21.6)
Provisions 18 (79.6) (62.1)
Lease obligations 16 (126.3) (109.3)
Loans (64.9) (89.7)
(877.3) (868.2)
Non-current liabilities
Contract liabilities 15 (48.6) (47.5)
Trade and other payables 15 (7.3) (9.4)
Derivative financial instruments - (0.1)
Deferred tax liabilities 11 (40.3) (26.9)
Provisions 18 (118.0) (115.9)
Lease obligations 16 (304.0) (293.3)
Loans (312.1) (299.1)
Retirement benefit obligations 20 (18.0) (34.9)
(848.3) (827.1)
Total liabilities (1,725.6) (1,695.3)
Net assets 1,008.4 715.0
Equity
Share capital 24.4 24.7
Share premium account 463.1 463.1
Retained earnings 542.8 302.4
Other reserves 21 (23.6) (76.9)
Equity attributable to owners of the Company 1,006.7 713.3
Non-controlling interest 1.7 1.7
Total equity 1,008.4 715.0
The accompanying notes form an integral part of the financial statements.
The financial statements were approved by the Board of Directors on 23
February 2022 and signed on its behalf by:
Rupert
Soames
Nigel Crossley
Group Chief Executive
Officer Group
Chief Financial Officer
Consolidated Cash Flow Statement
For the year ended 31 December
Note 2021 2020
£m £m
Net cash inflow from operating activities before exceptional items 357.4 270.5
Exceptional items (7.5) (2.0)
Net cash inflow from operating activities 23 349.9 268.5
Investing activities
Interest received 0.6 0.3
Decrease in other investments - 0.1
Exceptional sale of other investments 13.0 -
Dividends received from joint ventures and associates 13.5 19.8
Exceptional distribution from joint ventures - 1.9
Other dividends received 0.6 0.4
Proceeds from disposal of property, plant and equipment 7.0 20.9
Net cash inflow on disposal of subsidiaries and operations - 11.0
Acquisition of subsidiaries, net of cash acquired 5 (234.9) (4.9)
Proceeds from loans receivable - 1.2
Purchase of other intangible assets (8.2) (8.3)
Purchase of property, plant and equipment (23.9) (41.8)
Net cash (outflow)/inflow from investing activities (232.3) 0.6
Financing activities
Interest paid (24.9) (24.9)
Capitalised finance costs paid (0.6) (0.9)
Advances of loans 110.0 447.9
Repayments of loans (139.7) (348.5)
Capital element of lease repayments (111.3) (100.8)
Cash movements on hedging instruments (16.6) 2.4
Dividends paid to shareholders (26.5) -
Own shares repurchased (40.7) -
Proceeds received from exercise of share options 0.2 0.1
Net cash outflow from financing activities (250.1) (24.7)
Net (decrease)/increase in cash and cash equivalents (132.5) 244.4
Cash and cash equivalents at beginning of year 335.7 89.5
Net exchange (loss)/gain (4.8) 1.8
Cash and cash equivalents at end of year 198.4 335.7
The accompanying notes form an integral part of the financial statements.
Notes to the Condensed Consolidated Financial Statements
1. General information, going concern and changes in accounting standards
The basis of preparation in this preliminary announcement is set out below.
The financial information in this announcement does not constitute the Group's
or the Company's statutory accounts as defined in section 434 of the Companies
Act 2006 for the years ended 31 December 2021 or 2020 but is derived from
those accounts. Statutory accounts for 2020 have been delivered to the
registrar of companies, and those for 2021 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
The preliminary announcement has been prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 (Adopted IFRS) and are prepared in accordance with
UK-adopted International Accounting Standards. Whilst the financial
information included in this preliminary announcement has been computed in
accordance with IFRS, this announcement does not itself contain sufficient
information to comply with IFRS. The Company expects to publish full Group and
parent company only financial statements that comply with IFRS and FRS101
respectively, in March 2022 and this includes the Group's and parent company's
accounting policies.
The financial statements have been prepared on the historical cost basis,
except for the revaluation of financial instruments. Historical cost is
generally based on the fair value of the consideration given in exchange for
goods and services. The following principal accounting policies adopted have
been applied consistently in the current and preceding financial year except
as stated below.
Going concern
In assessing the basis of preparation of the financial statements for the year ended 31 December 2021, the Directors have considered the principles of the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, 2014', particularly in assessing the applicability of the going concern basis, the review period and disclosures. The period of assessment is considered to be at least 12 months from the date of approval of these financial statements.
At 31 December 2021, the Group's principal debt facilities comprised a £250m revolving credit facility (of which £nil was drawn), acquisition term loan facilities totalling £120m (of which £120m was drawn) and £259m of US private placement notes, giving £629m of committed credit facilities and committed headroom of £444m. As at 31 December 2021, the Group's primary restricting covenant, its leverage ratio, is below the covenant of 3.5x and is below the Group's target range of 1x-2x at 0.68.
The Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts, as well as the potential impact of key uncertainties and sensitivities on the Group's future performance. In making this assessment the Directors have considered the Group's existing debt levels, the committed funding and liquidity positions under its debt covenants, its ability to generate cash from trading activities and its working capital requirements. The Directors have also identified a series of mitigating actions that could be used to preserve cash in the business should the need arise.
The basis of the assessment continues to be the Board-approved budget. The budget is prepared annually for the next two-year period and is based on a bottom-up approach to all of the Group's existing contracts, potential new contracts and administrative functions. As part of the budgeting process covering 2022 and 2023, consideration was given to the known impacts of Covid-19, though most of the Group's contracts deliver critical services to governments and the delivery requirements of these have not been materially impacted. Where situations have evolved, these have been reflected in the Group's most recent forecasts and thus are included within the assessment process outlined below.
The Directors have considered the ongoing impact of Covid-19 on the Group's operations. The key impacts which the Group has felt are lower passenger volumes on the Group's train operating contracts, lower volumes within its air traffic control business in the Middle East, higher costs within the Health portfolio and lower usage of the Group's UK leisure centres. The Group has continued to trade profitably during the pandemic, and even at the various peaks globally, the potentially adverse impact of the pandemic was mitigated through the Group's involvement in Covid-related responses. As a result, the Directors no longer consider going concern to be a critical accounting judgement as was previously disclosed in the financial statements for the year ended 31 December 2020.
Due to the limited adverse impacts of Covid-19 on the Group's profitability, the Directors believe that appropriate sensitivities in assessing the Group's ability to continue as a going concern are to model reductions in the Group's win rates for new business and rebids, and reductions in profit margins. Due to the diversity in the Group's operations, the Directors believe that a reverse stress test of these sensitivities to assess the headroom available under the Group's debt covenants and available liquidity provides meaningful analysis of the Group's ability to continue as a going concern. Based on the headroom available, the Directors are then able to assess whether the reductions required to breach the Group's financial covenants, or exhaust available liquidity, are plausible.
This reverse stress test shows that, even after assuming that the US private placement loans of $28.4m due to mature before 30 June 2023 and the £45m acquisition term loan facility used to fund the acquisition of NSBU are repaid, and that no additional refinancing occurs, the Group can afford to be unsuccessful on 60% of its target new business and rebid wins, combined with a profit margin 60 basis points below the Group's forecast, and still retain sufficient liquidity to meet all liabilities as they fall due and remain compliant with the Group's financial covenants.
In respect of win rates, rebids have a more significant impact on the Group's revenue than new business wins during the assessment period. The Group has won more than 85% of its rebids and available contract extensions over the last two years, therefore a reduction of 60% or more to the budgeted win rates and rebid rates is not considered plausible. The Group does not generally bid for contracts at margins below its target range.
In respect to margin reduction, due to the diversified nature of the Group's portfolio of long-term contracts and the fact that the Group has met or exceeded its full-year guidance for the last five years, a reduction in margin of 60bps versus the Group's budget is not considered plausible within the assessment period combined with a 60% reduction in win rates for new business and rebids.
Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements on a going concern basis.
Adoption of new and revised standards
There have been no new accounting standards implemented by the Group during
the year and no revisions to accounting standards have had a material impact
on the Group's Financial Statements.
Changes in accounting policies
The Group, following a review of its accounting policies, has updated its
accounting policy for modifications to contracts with customers which do not
result in the provision of distinct goods or services. Previously, it was
stated that if the pricing in the new contract was not commensurate with the
stand-alone selling prices for the goods or services and the new goods and
services were not distinct from those in the original contract, that any
historic adjustments would be recognised through opening retained earnings.
This is not the case, and the Group would recognise any adjustments as an
adjustment to revenue in the period of the modification. No such modifications
have occurred either during the year ended 31 December 2021 or 31 December
2020.
2. Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group's accounting policies, which are
described in note 2 to the Group's Consolidated Financial Statements,
Management has made the following judgements that have the most significant
effect on the amounts recognised in the Consolidated Financial Statements. As
described below, many of these areas of judgement also involve a high level of
estimation uncertainty.
Key sources of estimation uncertainty
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions requires
assumptions and complex judgements to be made about the future performance of
the Group's contracts. The level of uncertainty in the estimates made, either
in determining whether a provision is required, or in the calculation of a
provision booked, is linked to the complexity of the underlying contract and
the form of service delivery. Due to the level of uncertainty and combination
of variables associated with those estimates, there is a significant risk that
there could be material adjustment to the carrying amounts of onerous contract
provisions within the next financial reporting period. This includes the
potential recognition of onerous contract provisions for contracts which the
Directors have assessed do not require a provision as at 31 December 2021.
Major sources of uncertainty which could result in a material adjustment
within the next financial year, are:
· The ability of the Company to maintain or improve operational performance to
ensure costs or performance related penalties are in line with expected
levels;
· Volume driven revenue and costs being within the expected ranges;
· The outcome of open claims made by or against a customer regarding contractual
performance or contractual negotiations taking place where there is expected
to be a positive outcome from the Group's perspective;
· The ability of suppliers to deliver their contractual obligations on time and
on budget; and
· The potential impact of any longer term impacts of Covid-19 on contract
performance such as the performance and usage of leisure centres or passenger
volumes in the UK and the risk that this may be impacted by any future wave of
the virus which requires a subsequent lock down period, or as-yet unknown
shifts in customer behaviours, in the absence of any customer support.
In the current year, an amount of £1.3m was released from historic
provisions. The net charge on new and existing OCPs within Underlying Trading
Profit was £1.3m. All of these revisions have resulted from triggering events
in the current year, either through changes in contractual positions or
changes in circumstances which could not have been reasonably foreseen at the
previous balance sheet date. To mitigate the level of uncertainty in making
these estimates, Management regularly compares actual performance of the
contracts against previous forecasts and considers whether there have been any
changes to significant judgements.
The future range of possible outcomes in respect of those assumptions and
significant judgements made to determine the carrying value of onerous
contracts could result in either a material increase or decrease in the value
of onerous contract provisions in the next financial year. The extent to
which actual results differ from estimates made at the reporting date depends
on the combined outcome and timing of a large number of variables associated
with performance across multiple contracts.
The individual provisions are discounted where the impact is assessed to be
significant. When used, discount rates 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.
The Group undertakes a robust assessment at each reporting date to determine
whether any individual customer contracts, which the Group has entered into,
are onerous and require a provision to be recognised in accordance with IAS 37
Provisions, Contingent Liabilities & Contingent Assets. The Group operates
a large number of long-term contracts at different phases of their contract
life cycle. Within the Group's portfolio, there are a small number of
contracts where the balance of risks and opportunities indicates that they
might be onerous if transformation initiatives or contract changes are not
successful. The Group has concluded that these contracts do not require an
onerous contract provision on an individual basis. Following the individual
contract reviews, the Group has also undertaken a top-down assessment which
assumes that, whilst the contracts may not be onerous on an individual basis,
as a portfolio there is a risk that at least some of the transformation
programmes or customer negotiations required to avoid a contract loss, will
not be fully successful, and it is more likely than not that one or more of
these contracts will be onerous. Therefore, in considering the Group's overall
onerous contract provision, the Group has made a best estimate of the
provision required to take into consideration this portfolio risk. As a
result, the risk of OCPs and the monitoring of individual contracts for
indicators remains a critical estimate for the Group. As at 31 December 2021,
the provision recognised in respect of this portfolio of contracts is £9.7m
(2020: £8.5m).
Onerous contract provisions totalling £4.5m are estimated for individual
contracts, based on the specific characteristics of the contract including
possible contract variations, estimates of transaction price such as variable
revenues and forecast costs to fulfil those contracts. As noted above, the
Group also holds a balance of £9.7m in respect of the portfolio risk
associated with operating a large number of long-term contracts, giving a
total onerous contract provision of £14.2m (see note 18). Management has
considered the nature of the estimate for onerous contract provisions and
concluded that it is reasonably possible that outcomes within the next
financial year may be different from Management's assumptions and could, in
aggregate, require a material adjustment to the onerous contract provision.
However, due to the estimation uncertainty across numerous contracts each with
different characteristics, it is not practical to provide a quantitative
analysis of the aggregated judgements that are applied, and Management do not
believe that disclosing a potential range of outcomes on a consolidated basis
would provide meaningful information to a reader of the financial statements.
Whilst the focus of the judgement is to determine whether the Group is
required to record an onerous contract provision, management also inherently
assess whether any assets dedicated to the contract are required to be
impaired where contracts are forecast to make sustainable losses in the
future. In accordance with IAS 37, the Group will impair assets dedicated to
the contract before the recognition of an onerous contract provision.
Impairment of goodwill
A key area of focus in recent years has been in the impairment testing of
goodwill, though no impairment indicators were noted in the year ended 31
December 2021. At each reporting period an assessment is performed in order
to determine whether there are any such indicators, which involves considering
the performance of our business and any significant changes to the markets in
which we operate.
Determining whether goodwill requires an actual impairment involves an
estimation of the expected value in use of the cash generating unit (CGU). The
value in use calculation involves an estimation of future cash flows and also
the selection of appropriate discount rates, both of which involve
considerable judgement. The future cash flows are derived from latest approved
forecasts, with the key assumptions being revenue growth, margins and cash
conversion rates. As was the case at the end of 2020, the budgeting process is
required to estimate the ongoing impact of Covid-19, and whilst this remains a
source of uncertainty, the Group's understanding of the potential impacts
continues to improve. As a result of known and anticipated impacts of Covid-19
being included in Management's forecasts, no additional specific adjustments
have been made to the cash flows used in assessing the value in use of assets.
Discount rates are calculated with reference to the specific risks associated
with the assets and are based on advice provided by external experts. Our
calculation of discount rates is performed based on a risk free rate of
interest appropriate to the geographic location of the cash flows related to
the CGU being tested, which is subsequently adjusted to factor in local market
risks and risks specific to Serco. For the purpose of impairment testing in
accordance with IAS36 Impairment of Assets, Management estimates pre-tax
discount rates based on the post-tax weighted average cost of capital which is
used for internal purposes.
There continues to be significant headroom across all CGUs and as detailed in
note 13, sufficient headroom remains even when reasonably possible changes to
discount rates occur. However, a high degree of judgement remains in
estimating future cash flows, particularly those relating to the terminal year
of the value in use calculation.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit obligation as a result
of contractual arrangements entered into requires a level of judgement,
largely driven by the legal position held between the Group, the customer and
the relevant pension scheme. The Group's retirement benefit obligations are
covered in note 20.
The calculation of retirement benefit obligations is dependent on material key
assumptions including discount rates, mortality rates, inflation rates and
future contribution rates.
In accounting for the defined benefit schemes, the Group has applied the
principle that the asset recognised for the Serco Pension and Life Assurance
Scheme is equal to the full surplus that will ultimately be available to the
Group as a future refund.
No pension assets are invested in the Group's own financial instruments or
property.
Pension annuity assets are remeasured to fair value at each reporting date
based on the share of the defined benefit obligation covered by the insurance
contract.
Critical accounting judgements
Deferred tax
Deferred tax assets are recognised on tax deductible temporary differences to
the extent that it is probable that taxable profit will be available against
which they can be utilised. Significant Management judgement is required to
determine the amount of deferred tax assets that should be recognised, based
upon the likely timing, geography and the level of future taxable profits.
Since a significant portion of the deductible temporary differences relate to
historic tax losses, there has been historic evidence that future taxable
profits may not be available.
A £162.8m UK tax asset is recognised on the Group's balance sheet at 31
December 2021 (31 December 2020: £30.6m) on the basis that structural changes
in the underlying UK business indicate a sustained return to profitability
which would enable future tax deductions within the UK to be utilised. The
return to profitability is as a result of onerous contracts ending and new
profitable long-term contracts being entered into as well as a significant
reduction in exceptional restructuring spend following the strategy review in
2015, which also reduced the level of overhead spend within the UK business. A
UK deferred tax asset of £186.2m was initially recognised during the year
with this balance subsequently being revalued by £1.6m and £25.0m being used
to offset profits and reserves movements arising in the year to 31 December
2021.
Further details on deferred taxes are disclosed in note 11.
Use of Alternative Performance Measures: Operating profit before exceptional items
IAS 1 Presentation of Financial Statements requires material items to be
disclosed separately in a way that enables users to assess the quality of a
company's profitability. In practice, these are commonly referred to as
'exceptional' items, but this is not a concept defined by IFRS and therefore
there is a level of judgement involved in arriving at an Alternative
Performance Measure which excludes such exceptional items. We consider items
which are material and outside of the normal operating practice of the Company
to be suitable for separate presentation. There is a level of judgement
required in determining which items are exceptional on a consistent basis and
require separate disclosure. Further details can be seen in note 7.
The segmental analysis in note 3 includes the additional performance measure
of Trading Profit on operations which is reconciled to reported operating
profit in that note. The Group uses Trading Profit as an alternative measure
to reported operating profit by making several adjustments. Firstly, Trading
Profit excludes exceptional items, being those we consider material and
outside of the normal operating practice of the Company to be suitable for
separate presentation and detailed explanation. Secondly, amortisation and
impairment of intangibles arising on acquisitions are excluded, because these
charges are based on judgements about the value and economic life of assets
that, in the case of items such as customer relationships, would not be
capitalised in normal operating practice. The Group's Chief Operating Decision
Maker (CODM) reviews the segmental analysis for operations.
Claim for losses in respect of the 2013 share price reduction
Following the announcement during 2020 that the Group has received a claim
seeking damages for alleged losses as a result of the reduction in Serco's
share price in 2013, the Group has continued to assess the merit, likely
outcome and potential impact on the Group of any such litigation that either
has been or might potentially be brought against the Group. Any outcome is
subject to a number of significant uncertainties. The Group does not currently
assess the merits as strong, especially given the legal uncertainties in such
actions.
3. Segmental information
The Group's operating segments reflecting the information reported to the
Board in 2021 under IFRS 8 Operating Segments are as set out below.
Reportable operating segments Sectors
UK & Europe Services for sectors including Citizen Services, Defence, Health & Other
Facilities Management, 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 Citizen Services, Defence and Transport
delivered to US federal and civilian agencies, selected state and municipal
governments and the Canadian Government
AsPac Services for sectors including Citizen Services, Defence, Health & Other
Facilities Management, Justice & Immigration and Transport in the Asia
Pacific region including Australia, New Zealand and Hong Kong
Middle East Services for sectors including Citizen Services, Defence, Health & Other
Facilities Management and Transport in the Middle East region
Corporate Central and head office costs
Each reportable 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 Group's Chief Operating Decision Maker (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 reportable
operating segment level in these financial statements.
The accounting policies of the reportable operating segments are the same as
the Group's accounting policies described in note 2 to the Group's
Consolidated Financial Statements.
Information about major customers
The Group has three major governmental customers which each represent more
than 5% of Group revenues in the current year. The customers' revenues were
£1,814.4m (2020: £1,517.0m) for the UK Government within the UK & Europe
segment, £993.0m (2020: £913.1m) for the US Government within the Americas
segment and £836.4m (2020: £703.8m) for the Australian Government within the
AsPac segment. These customers do not act in a unified way in making purchase
decisions, and in general, the Group engages directly with the various
departments of these customers in respect of the services it provides.
Segmental information
Segmental revenue is analysed on an external basis. Inter-segment revenue is
not presented as it is not significant in the context of revenue as a whole.
Net finance costs are not presented for each reportable operating segment as
they are reviewed on a consolidated basis by the CODM.
Specific corporate expenses are allocated to the corresponding segments.
Segment assets comprise goodwill, other intangible assets, property, plant and
equipment including right of use assets, inventories, trade and other
receivables (excluding corporation tax recoverable) and any retirement benefit
asset. Segment liabilities comprise trade and other payables, lease
liabilities, provisions and retirement benefit obligations.
The following is an analysis of the Group's revenue, results, assets and
liabilities by reportable operating segment:
Year ended 31 December 2021 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 2,131.6 1,120.0 908.4 264.6 - 4,424.6
Result
Trading Profit/(Loss) from operations* 99.8 117.8 52.0 13.7 (49.9) 233.4
Amortisation and impairment of intangibles arising on acquisition (0.8) (11.7) (3.5) - - (16.0)
Operating profit/(loss) before exceptional items 99.0 106.1 48.5 13.7 (49.9) 217.4
Other exceptional operating items** 0.4 (4.1) 3.4 - (0.9) (1.2)
Operating profit/(loss) 99.4 102.0 51.9 13.7 (50.8) 216.2
Investment revenue 2.4
Finance costs (26.4)
Profit before tax 192.2
Tax credit 111.9
Tax on exceptional items (0.2)
Profit for the year 303.9
* Trading Profit/(Loss) is defined as operating profit/(loss) before
exceptional items and amortisation and impairment of intangible assets arising
on acquisition.
** Exceptional restructuring costs incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that will benefit
the wider business. Included within Other exceptional operating items are
total acquisition related costs of £4.9m.
Year ended 31 December 2021 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 8.7 - - - - 8.7
Depreciation of plant, property and equipment and right of use assets (77.6) (23.4) (12.5) (5.2) (9.9) (128.6)
Impairment of plant, property and equipment and right of use assets (0.3) - - - - (0.3)
Total depreciation and impairment of plant, property and equipment and right (77.9) (23.4) (12.5) (5.2) (9.9) (128.9)
of use assets
Amortisation of intangible assets arising on acquisition (0.8) (11.7) (3.5) - - (16.0)
Amortisation of other intangible assets (1.2) (0.5) (2.9) (0.1) (6.6) (11.3)
Total amortisation and impairment of intangible assets (2.0) (12.2) (6.4) (0.1) (6.6) (27.3)
Segment assets
Interests in joint ventures and associates 17.1 - 0.1 0.4 - 17.6
Other segment assets*** 782.5 911.6 313.2 60.8 227.5 2,295.6
Total segment assets 799.6 911.6 313.3 61.2 227.5 2,313.2
Unallocated assets 420.8
Consolidated total assets 2,734.0
Segment liabilities
Segment liabilities*** (641.2) (187.7) (224.7) (53.2) (182.3) (1,289.1)
Unallocated liabilities (436.5)
Consolidated total liabilities (1,725.6)
*** 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.
The depreciation charge in the UK&E segment has increased to £77.6m
(2020: £61.6m) due to additional property leases together with the timing of
renewals on existing leases on the Asylum Accommodation and Support Services
Contract (AASC).
Year ended 31 December 2020 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 1,777.4 1,064.3 718.9 324.2 - 3,884.8
Result
Trading Profit/(Loss) from operations* 69.6 100.8 32.6 13.9 (41.2) 175.7
Amortisation and impairment of intangibles arising on acquisition (2.0) (7.0) - - - (9.0)
Operating profit/(loss) before exceptional items 67.6 93.8 32.6 13.9 (41.2) 166.7
Exceptional profit on disposal of subsidiaries and operations 11.0 - - - - 11.0
Other exceptional operating items** 1.0 1.4 (0.8) - (0.1) 1.5
Operating profit/(loss) 79.6 95.2 31.8 13.9 (41.3) 179.2
Investment revenue 1.9
Finance costs (27.8)
Profit before tax 153.3
Tax charge (18.9)
Tax on exceptional items (0.4)
Profit for the year 134.0
* Trading Profit/(Loss) is defined as operating profit/(loss) before
exceptional items and amortisation and impairment of intangible assets arising
on acquisition.
** Exceptional restructuring costs incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that will
benefit the wider business. Included within Other exceptional operating items
are total acquisition related costs of £2.4m.
Year ended 31 December 2020 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 12.7 - - - - 12.7
Depreciation of plant, property and equipment and right of use assets (61.6) (22.5) (9.6) (7.6) (8.1) (109.4)
Impairment of plant, property and equipment and right of use assets (0.7) - - - - (0.7)
Total depreciation and impairment of plant, property and equipment and right (62.3) (22.5) (9.6) (7.6) (8.1) (110.1)
of use assets
Amortisation of intangible assets arising on acquisition (2.0) (7.0) - - - (9.0)
Amortisation of other intangible assets (0.7) (0.6) (3.0) (0.4) (9.3) (14.0)
Total amortisation and impairment of intangible assets (2.7) (7.6) (3.0) (0.4) (9.3) (23.0)
Segment assets
Interests in joint ventures and associates 18.7 - 0.1 0.4 - 19.2
Other segment assets*** 750.9 675.3 274.4 87.9 174.3 1,962.8
Total segment assets 769.6 675.3 274.5 88.3 174.3 1,982.0
Unallocated assets 428.3
Consolidated total assets 2,410.3
Segment liabilities
Segment liabilities*** (626.6) (185.0) (200.0) (66.7) (170.3) (1,248.6)
Unallocated liabilities (446.7)
Consolidated total liabilities (1,695.3)
*** 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.
4. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding Company Limited
(MSHCL) were the only equity accounted entities which were material to the
Group during the year or prior year. Dividends of £13.5m (2020: £15.5m) and
£nil (2020: £1.5m), respectively were received from these companies in the
year. The low level of dividends received in respect of MSHCL were due to
lower passenger volumes which were negatively impacted by Covid-19.
As announced on 2 November 2020, the Ministry of Defence notified the Group
that it would be exercising its ability to terminate services provided by the
Group through AWEML on 30 June 2021.
As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint
venture between Serco Limited and ENGIE SA, has been awarded contracts to
provide repairs and maintenance work for Service Family Accommodation (SFA) by
the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO).
VIVO is not a material joint venture to the Group in 2021.
Summarised financial information of AWEML and MSHCL, and an aggregation of the
other equity accounted entities in which the Group has an interest in is as
follows:
31 December 2021
Summarised financial information AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Revenue 638.7 161.0 237.0 1.4 238.4
Operating profit/(loss) 49.6 (0.8) 11.8 (0.3) 11.5
Net finance cost - (0.1) (0.1) - (0.1)
Income tax (charge)/credit (12.0) 0.3 (2.8) 0.1 (2.7)
Profit/(loss) from operations 37.6 (0.6) 8.9 (0.2) 8.7
Other comprehensive income - 6.6 3.3 - 3.3
Total comprehensive income/(expense) 37.6 6.0 12.2 (0.2) 12.0
Non-current assets - 13.9 7.0 0.2 7.2
Current assets 8.5 43.4 23.8 7.7 31.5
Current liabilities (1.7) (23.6) (12.2) (3.9) (16.1)
Non-current liabilities - (4.0) (2.0) (3.0) (5.0)
Net assets 6.8 29.7 16.6 1.0 17.6
Proportion of Group ownership 24.5% 50.0% - - -
Carrying amount of investment 1.7 14.9 16.6 1.0 17.6
* Total results of the entity multiplied by the respective proportion of
Group ownership.
AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Cash and cash equivalents 8.5 28.9 16.5 4.7 21.2
Current financial liabilities excluding trade and other payables and (0.3) (5.3) (2.7) - (2.7)
provisions
Non-current financial liabilities excluding trade and other payables and - (2.9) (1.5) - (1.5)
provisions
Depreciation and amortisation - (5.8) (2.9) - (2.9)
Interest income - - - - -
Interest expense - (0.2) (0.1) - (0.1)
* Total results of the entity multiplied by the respective proportion of
Group ownership.
The Group's share of liabilities within joint ventures and associates is
£21.1m (2020: £224.5m). In 2020, £163.1m relates to a defined benefit
pension obligation against which Serco is fully indemnified. As a result of
the Ministry of Defence's termination of the Management & Operations
contract with AWEML, the gross obligation no longer exists. The remaining
liabilities include £3.9m of lease obligations (2020: £6.2m) and the balance
is trade and other payables which arise as part of the day-to-day operations
carried out by those entities. Other than liabilities associated with leases,
the Group has no material exposure to third party debt or other financing
arrangements within any of its joint ventures and associates.
Certain employees of the group headed by MSHCL are members of a sponsored
defined benefit pension scheme. Given the significance of the scheme to
understanding the position of the entities, the following key disclosures are
made:
Main assumptions: 2021 MSHCL
Rate of salary increases (%) 3.25%
Inflation assumption (CPI %) - pre-retirement 2.35%
Inflation assumption (CPI %) - post-retirement 2.85%
Discount rate (%) 1.80%
Post-retirement mortality: Nil
Current male industrial pensioners at 65 (years) N/A
Future male industrial pensioners at 65 (years) N/A
Retirement benefit funding position (100% of results) £m
Present value of scheme liabilities (468.4)
Fair value of scheme assets 280.9
Net amount recognised (187.5)
Members' share of deficit 75.0
Franchise adjustment* 112.5
Net retirement benefit obligation -
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
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 2020
Summarised financial information AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Revenue 1,106.8 150.7 346.5 18.6 365.1
Operating profit/(loss) 75.0 (5.7) 15.5 (0.1) 15.4
Net investment revenue/(finance cost) 0.3 (0.1) - - -
Income tax (charge)/credit (14.0) 1.5 (2.7) - (2.7)
Profit/(loss) from operations 61.3 (4.3) 12.8 (0.1) 12.7
Other comprehensive income - 5.3 2.7 - 2.7
Total comprehensive income/(expense) 61.3 1.0 15.5 (0.1) 15.4
Non-current assets 668.1 19.1 173.3 0.1 173.4
Current assets 191.4 43.2 68.5 1.8 70.3
Current liabilities (169.2) (29.6) (56.3) (0.8) (57.1)
Non-current liabilities (665.9) (8.5) (167.4) - (167.4)
Net assets 24.4 24.2 18.1 1.1 19.2
Proportion of Group ownership 24.5% 50.0% - - -
Carrying amount of investment 6.0 12.1 18.1 1.1 19.2
* Total results of the entity multiplied by the respective proportion of
Group ownership.
AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Cash and cash equivalents 119.8 22.5 40.6 0.8 41.4
Current financial liabilities excluding trade and other payables and (0.6) (5.5) (2.9) 0.1 (2.8)
provisions
Non-current financial liabilities excluding trade and other payables and - (7.7) (3.8) - (3.8)
provisions
Depreciation and amortisation - (6.1) (3.1) (0.4) (3.5)
Interest income 0.3 0.1 0.1 - 0.1
Interest expense - (0.2) (0.1) - (0.1)
* 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: 2020 AWEML MSHCL
Rate of salary increases (%) 1.9% 2.8%
Inflation assumption (CPI %) 1.9% 1.9%
Discount rate (%) 1.5% 2.4%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 23.0 N/A
Future male industrial pensioners at 65 (years) 25.1 N/A
Retirement benefit funding position (100% of results) £m £m
Present value of scheme liabilities (2,597.7) (450.5)
Fair value of scheme assets 1,931.8 233.8
Net amount recognised (665.9) (216.7)
Members' share of deficit - 86.7
Franchise adjustment* - 130.0
Related asset, right to reimbursement 665.9 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
5. Acquisitions
On 4 January 2021, the Group acquired 100% of the issued share capital of
Facilities First Australia Holdings Pty Limited (FFA), for consideration of AU
Dollars $52.2m (£29.6m) in cash, subject to standard working capital and
completion adjustments. The acquired net assets included AU Dollars $3.6m
(£2.1m) of cash resulting in a net cash outflow on acquisition of AU Dollars
$48.6m (£27.5m). At the same time, the Group transferred AU Dollars $25.2m
(£14.3m) to allow FFA to settle existing debt and debt-like balances. FFA is
a specialist provider of cleaning, facility maintenance and management
services in Australia. The operating results, assets and liabilities have been
recognised effective 4 January 2021.
FFA contributed AU Dollars $206.8m (£112.8m) of revenue and AU Dollars $5.7m
(£3.1m) of operating profit before exceptional items, including an
appropriate allocation of charges for shared support services and fully
allocated overheads, to the Group's results during the year to 31 December
2021.
On 27 April 2021, the Group acquired 100% of the issued share capital of
Whitney, Bradley & Brown, Inc (WBB) for US Dollars $300.5m (£211.9m) in
cash, subject to standard working capital and completion adjustments. The
acquired net assets included US Dollars $7.2m (£5.1m) of cash resulting in a
net cash outflow on acquisition of US Dollars $293.3m (£206.8m). The
acquisition will increase the scale, breadth and capability of Serco's North
American Defence business and will give Serco a strong platform from which to
address all major segments of the US Defence services market. The operating
results, assets and liabilities have been recognised effective 27 April 2021.
WBB contributed US Dollars $135.8m (£98.5m) of revenue and US Dollars $7.5m
(£5.5m) of operating profit before exceptional items, including an
appropriate allocation of charges for shared support services and fully
allocated overheads, to the Group's results during the year to 31 December
2021.
On 30 June 2021, the Group acquired 100% of the issued share capital of
Mercurius Finance S.A., the holding company of Clemaco Trading N.V., Clemaco
Contracting N.V. and Targets N.V. (together Clemaco), for €7.8m (£6.7m) in
cash, subject to standard working capital and completion adjustments. The
acquired net assets included €7.1m (£6.1m) of cash resulting in a net cash
outflow on acquisition of €0.7m (£0.6m). Clemaco specialises in the support
and maintenance of ships for the Belgian Navy, enabling Serco to provide
additional value to existing Serco and Clemaco customers and expanding the
Group's existing activities with the Belgian Navy. The operating results,
assets and liabilities have been recognised effective 30 June 2021.
Clemaco contributed €5.4m (£4.6m) of revenue and €0.2m (£0.2m) of
operating profit before exceptional items, including an appropriate allocation
of charges for shared support services and fully allocated overheads, to the
Group's results during the year to 31 December 2021.
Based on estimates made of the full-year impact of the acquisition of WBB and
Clemaco, had the acquisitions taken place on 1 January 2021, Group revenue and
operating profit before exceptional items for the period would have increased
by approximately £58.9m and £4.6m respectively, taking total Group revenue
to £4,483.5m and total Group operating profit before exceptional items to
£222.0m. Due to the date of acquisition of FFA, the annualised impact is not
considered to be materially different to the results already included in the
financial statements.
Provisional fair values
FFA WBB Clemaco Total
£m £m £m £m
Goodwill 29.7 148.6 0.5 178.8
Other intangible assets 19.8 62.4 - 82.2
Property, plant and equipment 1.6 2.0 0.1 3.7
Right of use assets 2.3 7.6 - 9.9
Retirement benefit assets 1.3 - - 1.3
Inventories 0.1 - - 0.1
Trade and other receivables 14.9 22.5 1.3 38.7
Cash and cash equivalents 2.1 5.1 6.1 13.3
Corporation tax assets - 0.1 0.1 0.2
Trade and other payables (19.2) (15.3) (1.4) (35.9)
Provisions (1.7) (1.0) - (2.7)
Retirement benefit obligations (2.7) - - (2.7)
Loans (14.3) - - (14.3)
Corporation tax liabilities (0.7) - - (0.7)
Deferred tax liabilities (1.3) (8.6) - (9.9)
Lease obligations (2.3) (11.5) - (13.8)
Acquisition date fair value of consideration transferred 29.6 211.9 6.7 248.2
Satisfied by:
Cash 29.6 211.9 6.7 248.2
Total consideration 29.6 211.9 6.7 248.2
Goodwill on the acquisitions of FFA and WBB represents the premium associated
with expanding the Group's capabilities in the relevant sectors and
geographical locations in which the acquired companies operate. For FFA, this
represents scale within facilities management in Australia, whilst for WBB it
relates to the increased presence in the US defence market as well as
considerable expertise in complementary areas. No tax deductions related to
the goodwill arising on either transaction are available. The acquisition
related intangibles represent customer relationships which have been valued
using our best estimate of forecast cash flows discounted to present value
and, in the case of WBB, certain software related assets and the brand names
associated with them.
The total impact of acquisitions to the Group's cash flow position in the
period was as follows:
£m
Cash consideration in respect of current period acquisitions:
FFA 27.5
WBB 206.8
Clemaco 0.6
Net cash outflow in relation to acquisitions 234.9
Exceptional acquisition related costs (4.9)
Net cash impact in the year on acquisitions 230.0
Costs associated with the acquisitions of both FFA and WBB are shown as
exceptional costs in the Consolidated Income Statement. The total acquisition
related costs recognised in exceptional items for the year ended 31 December
2021 was £4.9m. There were no material costs associated with the acquisition
of Clemaco during the year.
6. Revenue from contracts with customers
Revenue
Information regarding the Group's major customers and a segmental analysis of
revenue is provided in note 3.
An analysis of the Group's revenue from its key market sectors, together with
the timing of revenue recognition across the Group's revenue from contracts
with customers, is as follows:
Year ended 31 December 2021 UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Key sectors
Defence 262.2 764.6 145.6 31.4 1,203.8
Justice & Immigration 468.9 - 374.2 - 843.1
Transport 149.3 79.9 7.3 135.6 372.1
Health & Other Facilities Management 260.9 - 220.3 94.4 575.6
Citizen Services 990.3 275.5 161.0 3.2 1,430.0
2,131.6 1,120.0 908.4 264.6 4,424.6
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods 2.5 - 6.6 - 9.1
Revenue recognised at a point in time 17.3 - 8.4 - 25.7
Products and services transferred over time 2,111.8 1,120.0 893.4 264.6 4,389.8
2,131.6 1,120.0 908.4 264.6 4,424.6
Yar ended 31 December 2020 (restated*) UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Key sectors
Defence 243.7 725.2 133.3 27.0 1,129.2
Justice & Immigration 393.7 - 328.1 - 721.8
Transport 143.3 84.7 7.7 194.2 429.9
Health & Facilities Management 247.8 - 110.0 102.8 460.6
Citizen Services 748.9 254.4 139.8 0.2 1,143.3
1,777.4 1,064.3 718.9 324.2 3,884.8
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods 1.1 - (0.8) - 0.3
Revenue recognised at a point in time 14.2 - 0.8 - 15.0
Products and services transferred over time 1,762.1 1,064.3 718.9 324.2 3,869.5
1,777.4 1,064.3 718.9 324.2 3,884.8
* The prior period balances have been restated to ensure consistent
application of the sector definitions used for the current period. This
follows a review in 2021 of the Group's sector definitions to align with the
strategic objectives of the Group. The change has no impact to the income
statement or the balance sheet of the Group.
Transaction price allocated to remaining performance obligations
The following table shows the transaction price allocated to remaining
performance obligations. This represents revenue expected to be recognised in
subsequent periods arising on existing contractual arrangements.
In assessing the future transaction price, the judgements of most relevance
are the future term over which the transaction price is calculated and the
estimation of variable revenue to be included.
Where a contract with a customer includes, within the term of the committed
contract, provisions for price-rebasing or a provision for market testing,
revenue beyond these is included to the extent that there are no indicators
which suggest that the contract will not continue past this point and it is
highly probable that a significant reduction will not occur. Where there is a
requirement for the Group, or a customer, to enter into to a new contract,
rather than continuing an existing contract, such an extension is not included
for the purposes of calculating future transaction price.
Additionally, the Group has a small subset of contracts that contain a
termination for convenience clause, for example due to national security
considerations which are assumed by the Group not to be without cause. These
contracts are considered to run for the full intended term for the purpose of
calculating the transaction price allocated to remaining performance
obligations, other than instances where the Group believes that termination
will occur before the original contract end date.
Under the terms of certain contracts which the Group has with its customers,
the Group's compensation for providing those services is based on volumes or
other drivers of variable activity, such as additional activities awarded
under existing contracts. These volumes are not guaranteed, however based on
historic volumes and the nature of the contracts in operation, such as the
provision of asylum seeker accommodation or passenger transport, Management
are able to prepare a sufficiently reliable estimate of the minimum level of
variable revenue that is likely to be earned. As a result, variable revenue is
included only to the level at which Management remain confident that a
significant reduction will not occur.
As part of the considerations around variable revenue, Management consider the
impact that factors such as contractual performance, anticipated demand and
pricing (including indexation) may have on future revenue recognised.
Management also consider whether there are possible impacts from climate
change and other environmental related risks, with certain sectors considered
to be more at risk than others, however no adjustment was identified in
relation to existing contracts' future revenue forecasts.
UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Within 1 year (2022) 1,580.1 597.3 803.1 135.4 3,115.9
Between 2 - 5 years (2023 - 2026) 3,666.7 195.4 1,524.5 193.9 5,580.5
5 years and beyond (2027+) 3,340.1 118.4 1,456.6 118.4 5,033.5
8,586.9 911.1 3,784.2 447.7 13,729.9
7. Exceptional items
Exceptional items are items of financial performance that are outside normal
operations and are material to the results of the Group either by virtue of
size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the
performance of the Group.
For the year ended 31 December 2021 2020
£m £m
Exceptional items arising
Exceptional profit on disposal of subsidiaries and operations - 11.0
Other exceptional operating items
Restructuring costs 0.1 0.1
Costs associated with UK Government review - (1.3)
Increase in onerous lease provision (0.6) -
Movement in other provisions and other items - 2.6
Reversal of impairment in interest in joint venture and related loan balances - 2.5
Costs associated with successful acquisition (4.9) (2.4)
Profit on sale of investments 4.2 -
Other exceptional operating items (1.2) 1.5
Exceptional operating items (1.2) 12.5
Exceptional tax (0.2) (0.4)
Total exceptional operating items net of tax (1.4) 12.1
Other exceptional operating items
The Group completed the acquisition of Facilities First Australia Holdings Pty
Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB) in 2021. The
combined transaction and implementation costs incurred during the year ended
31 December 2021 of £4.9m have been treated as exceptional costs in line with
the Group's accounting policy and the treatment of similar costs during the
year ended 31 December 2020.
During 2021, the Group sold an investment recording a profit of £4.2m which
was treated as exceptional in line with the Group's accounting policy.
The Group has recorded an additional £0.6m property provision related to the
onerous lease of a building to cover the expected loss until March 2025. The
building was vacated following the strategy review completed in 2014 and
therefore the associated cost is treated as exceptional.
Exceptional costs of £1.3m were recorded in 2020 associated with the UK
Government review and the programme of Corporate Renewal. No such costs were
incurred in the current financial year.
Exceptional tax
Exceptional tax for the year was a charge of £0.2m (2020: £0.4m charge)
which arises on exceptional items within operating profit.
The tax charge on exceptional costs has been increased as an element of the
exceptional costs associated with the WBB acquisition were not allowable for
tax. This is partially offset by previously unrecognised capital losses in
Australia that were utilised against the gain arising from the sale of an
investment reducing the charge.
8. Investment revenue
Year ended 31 December 2021 2020
£m £m
Interest receivable on other loans and deposits 0.6 0.2
Net interest receivable on retirement benefit obligations (note 20) 1.1 1.2
Other dividends received 0.6 0.4
Movement in discount on other debtors 0.1 0.1
2.4 1.9
9. Finance costs
Year ended 31 December 2021 2020
£m £m
Interest payable on lease liabilities 7.8 9.5
Interest payable on other loans 15.6 15.3
Facility fees and other charges 2.4 2.1
Movement in discount on provisions - 0.2
25.8 27.1
Foreign exchange on financing activities 0.6 0.7
26.4 27.8
10. Tax
10 (a) Income tax recognised in the income statement
Year ended 31 December Before exceptional items Exceptional items Total Before exceptional items Exceptional items Total
2021 2021 2021 2020 2020 2020
£m £m £m £m £m £m
Current income tax
Current income tax charge 34.6 0.8 35.4 41.8 0.4 42.2
Adjustments in respect of prior years 1.3 - 1.3 (1.3) - (1.3)
Deferred tax
Current year credit (146.5) (0.6) (147.1) (23.5) - (23.5)
Adjustments in respect of prior years (1.3) - (1.3) 1.9 - 1.9
(111.9) 0.2 (111.7) 18.9 0.4 19.3
The tax expense for the year can be reconciled to the profit in the
Consolidated Income Statement as follows:
Year ended 31 December Before exceptional items Exceptional items Total Before exceptional items Exceptional items Total
2021 2021 2021 2020 2020 2020
£m £m £m £m £m £m
Profit before tax 193.4 (1.2) 192.2 140.8 12.5 153.3
Tax calculated at a rate of 19.00% (2020: 19.00%) 36.7 (0.2) 36.5 26.7 2.4 29.1
Expenses not deductible for tax purposes* 1.8 0.6 2.4 6.5 (0.2) 6.3
UK unprovided deferred tax** - - - (4.2) (1.9) (6.1)
Other unprovided deferred tax 2.2 - 2.2 2.5 - 2.5
Effect of the use of unrecognised tax losses (0.4) (0.3) (0.7) (1.1) - (1.1)
Additional recognition of UK deferred tax asset*** (146.4) - (146.4) (9.5) - (9.5)
Overseas rate differences 11.2 0.1 11.3 7.2 0.1 7.3
Other non-taxable income (4.6) - (4.6) (1.4) - (1.4)
Adjustments in respect of prior years**** - - - 0.6 - 0.6
Adjustments in respect of deferred tax on pensions - - - (5.9) - (5.9)
Impact of revaluing brought forward UK provided deferred tax from 19% to 25% (10.8) - (10.8) - - -
Adjustments in respect of equity accounted investments (1.6) - (1.6) (2.5) - (2.5)
Tax (credit)/charge (111.9) 0.2 (111.7) 18.9 0.4 19.3
* Relates to costs that are not allowable for tax deduction under local
tax law.
** Arises due to timing differences between when an amount is recognised in
the income statement and when the amount is subject to UK tax. This is nil in
the current year due to the recognition of previously unrecognised UK deferred
tax assets as referred to below.
*** In the current year, the Group brought onto the balance sheet a previously
unrecognised UK deferred tax asset of £144.8m at 1 January 2021. This asset
was revalued during year giving a net adjustment of £146.4m.
**** Included within adjustments in respect of prior years for the year ended
31 December 2020, is a charge of £4.9m being an immaterial adjustment related
to the deferred tax impact of the derecognition of balance sheet liabilities
recognised in retained earnings on implementation of IFRS 16 Leases in 2019.
The income tax charge for the year is based on the UK statutory rate of
corporation tax for the period of 19.00% (2020: 19.00%). Taxation for other
jurisdictions is calculated at the rates prevailing in the respective
jurisdictions.
Management are closely monitoring the Organisation for Economic Co-operation
and Development's Pillar II solution with regards to global minimum corporate
tax for multinational enterprises, which is expected to be enacted in 2022
with application from 1 January 2023. The accounting implications under IAS12
will be determined when the relevant legislation is available.
10 (b) Income tax recognised in the SOCI
Year ended 31 December 2021 2020
£m £m
Current tax
Taken to retirement benefit obligations reserves 0.8 -
Deferred tax
Relating to net investment hedge 4.0 -
Taken to retirement benefit obligations reserve (22.5) (5.9)
(17.7) (5.9)
10 (c) Tax on items taken directly to equity
Year ended 31 December 2021 2020
£m £m
Current tax
Recorded in share based payment reserve (0.7) -
Deferred tax
Recorded in share based payment reserve 0.7 -
- -
11. 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:
2021 2020
£m £m
At 1 January - asset (56.3) (37.2)
Income statement credit* (148.4) (21.6)
Items recognised in equity and in other comprehensive income 17.8 5.9
Arising on acquisition 9.9 -
Exchange differences 3.0 (3.4)
At 31 December - asset (174.0) (56.3)
* Included within the income statement credit for the year ended 31 December
2020, is a charge of £4.9m being an immaterial adjustment related to the
deferred tax impact of the derecognition of balance sheet liabilities
recognised in retained earnings on implementation of IFRS 16 Leases in 2019.
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 Onerous contract provisions Tax Other temporary differences Total
losses
£m £m £m £m
£m £m
£m
At 1 January 2021 25.5 (24.7) 14.8 (0.5) (31.1) (40.3) (56.3)
(Credited)/charged to income statement (note 10a) (11.7) (7.6) (0.8) (0.3) (127.3) (0.7) (148.4)
Arising on acquisition of a subsidiary 5.6 (2.4) (0.4) - (3.3) 10.4 9.9
Items recognised in equity and in other comprehensive income (note 10b and - (0.7) 22.5 - (4.0) - 17.8
10c)
Exchange differences 0.5 0.9 0.1 - (0.3) 1.8 3.0
At 31 December 2021 19.9 (34.5) 36.2 (0.8) (166.0) (28.8) (174.0)
Other temporary differences include amounts such as provisions and accruals
which, under certain tax laws, are only allowable when expended.
Of the amount credited to the income statement, £nil has been taken to costs
of sales in respect of the R&D Expenditure Credit.
As it is now considered that the UK business has returned to sustainable
profitability, tax losses of £662m have been valued on the balance sheet at
31 December 2021.
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 Onerous contract provisions Tax Other temporary differences Total
losses
£m £m £m £m
£m £m
£m
At 1 January 2020 24.4 (15.6) 6.8 (1.9) (21.0) (29.9) (37.2)
Charged/(credited) to income statement (note 10a)* 2.8 (6.2) - 1.3 (10.1) (9.4) (21.6)
Items recognised in equity and in other comprehensive income (note 10b and - - 5.9 - - - 5.9
10c)
Reclassification - (2.0) 2.0 - - - -
Exchange differences (1.7) (0.9) 0.1 0.1 - (1.0) (3.4)
At 31 December 2020 25.5 (24.7) 14.8 (0.5) (31.1) (40.3) (56.3)
* Included within other temporary differences is a charge of £4.9m being an
immaterial adjustment in the year ended 31 December 2020 related to the
deferred tax impact of the derecognition of balance sheet liabilities
recognised in retained earnings on implementation of IFRS 16 Leases in 2019.
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 analysis shows the deferred tax balances (after
offset) for financial reporting purposes:
2021 2020
£m £m
Deferred tax liabilities 40.3 26.9
Deferred tax assets (214.3) (83.2)
(174.0) (56.3)
As at the balance sheet date, the UK has a potential deferred tax asset of
£234.3m (2020: £189.9m) available for offset against future profits. A
deferred tax asset has currently been recognised of £162.8m (2020:
£30.6m). Recognition has been based on there being sufficient certainty of
future taxable profits against which these deductions can be utilised. No
deferred tax asset has been recognised in respect of the remaining asset (net
£71.5m) as they are more restricted in their use either due to their nature,
such as capital losses, or the period and entity in which they arose, as
revenue losses made before April 2017 are more restricted in their use. On
24 May 2021 legislation which increases the UK tax rate from 19% to 25% from
April 2023 was substantively enacted. These measures increase the Group's
future current tax charge accordingly. The deferred tax balance at 31 December
2021 has been calculated reflecting the increased rate of 25% where the
balance is expected to be realised after April 2023.
Losses of £1.3m (2020: £0.1m) expire within 5 years, losses of £0.1m (2020:
£0.5m) expire within 6-10 years, losses of £nil (2020: £0.7m) expire within
20 years and losses of £1,077.4m (2020: £1,052.3m) may be carried forward
indefinitely.
12. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in
accordance with IAS 33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares 2021 2020
millions millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,222.6 1,229.1
Effect of dilutive potential ordinary shares: Shares under award 21.4 25.2
Weighted average number of ordinary shares for the purpose of diluted EPS 1,244.0 1,254.3
Earnings per share
Basic EPS Earnings Per share amount Earnings Per share amount
2021
2021
2020
2020
pence
£m
£m pence
Earnings for the purpose of basic EPS 303.9 24.86 133.8 10.89
Effect of dilutive potential ordinary shares - (0.43) - (0.22)
Diluted EPS 303.9 24.43 133.8 10.67
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS 303.9 24.86 133.8 10.89
Add back exceptional items 1.2 0.10 (12.5) (1.02)
Add back tax on exceptional items 0.2 0.01 0.4 0.03
Earnings excluding exceptional items for the purpose of basic EPS 305.3 24.97 121.7 9.90
Effect of dilutive potential ordinary shares - (0.43) - (0.20)
Excluding exceptional items, diluted 305.3 24.54 121.7 9.70
13. Goodwill
Cost Accumulated impairment losses Carrying
amount
£m £m
£m
At 1 January 2020 1,006.0 (331.8) 674.2
Exchange differences (11.6) 7.0 (4.6)
At 31 December 2020 994.4 (324.8) 669.6
Acquisitions 178.8 - 178.8
Exchange differences 7.0 (2.7) 4.3
At 31 December 2021 1,180.2 (327.5) 852.7
Goodwill balance Acquisitions Exchange differences Goodwill balance Headroom on impairment analysis Headroom on impairment analysis
1 January £m 2021 31 December 2021 2021 2020
2021 £m £m £m £m
£m
UK & Europe 184.4 0.5 (1.3) 183.6 728.0 688.5
Americas 366.7 148.6 12.5 527.8 415.8 658.3
AsPac 108.6 29.7 (7.0) 131.3 380.6 328.0
Middle East 9.9 - 0.1 10.0 103.6 103.2
669.6 178.8 4.3 852.7 1,628.0 1,778.0
Movements in the balance since the prior year end can be seen as follows:
Included above is the detail of the headroom on the cash generating units
(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.
Headroom overall has decreased compared to 2020 driven primarily by the
movement in cash flows in the Americas CGU compounded by an increase in
discount and terminal growth rates. The UK & Europe and AsPac CGUs have
both seen increases in headroom as improvements to future cash flows have
outweighed the impact of discount rates.
The key quantifiable assumptions applied in the impairment review are set out
below:
Discount Discount Terminal Terminal
rate
rate
growth
growth
rates
rates
2021 2020*
2021 2020
% %
% %
UK & Europe 9.3 8.6 2.0 1.9
Americas 10.9 10.7 2.4 2.5
AsPac 11.0 10.1 2.2 2.2
Middle East 12.1 12.1 1.3 1.6
* The financial statements for the year ended December 2020 disclosed
different discount rates to those used in the underlying impairment analysis.
These have therefore been restated, but this has no impact on the conclusions
regarding impairment.
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.
Discount rates used in 2021 have increased compared with 2020 with the
exception of the Middle East where the rate has remained flat. The change can
be attributed to an increase in the equity risk premium (ERP) applied by
management following a return to the same margin of ERP over the base model as
was used until the end of 2019. In 2020, this margin was removed owing to the
range of discount rates amongst the Group's peers narrowing, however a return
to a wider spread of discount rates, as the pandemic eases, has allowed a
return to the previous approach.
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
and have not materially changed as compared with 2020.
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 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.
As explained in note 6, Management considers certain sectors in which the
Group operates to be more exposed to environmental risks than others. For
example, changes in consumer attitudes to aviation or the use of private
vehicles, may have an impact on the Group's Transport contracts. Currently, no
adjustment to existing contracts is required, although Management will
continue to monitor the potential impact of environmental risks and will
include these in future analysis as required.
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, as has a degree of estimation uncertainty in the cash
flows associated with each CGU of up to 10% in the final year of the plan.
Performing a sensitivity analysis on short-term growth rates is not a
numerical exercise, as growth rates are based on known opportunities and the
likelihood of those opportunities being won and turned into resulting cash
flows. However, in order to model a sensitivity scenario that reflects the
judgement associated with short-term growth rates, Management have applied a
no growth model to cash flows outside of the 2-year budget period. No
impairment results from these changes, even when combined with the additional
1% increase in discount rates and 1% reduction in terminal growth rates.
Management has also considered the sensitivity of cash flows in the terminal
year for the CGUs with the lowest headroom. Terminal year cash flows would
need to reduce by 56% (£12.9m) and 41% (£27.5m) in the Middle East and
AsPac, respectively, before an impairment would need to be recognised.
14. Contract assets, trade and other receivables
Contract asset: Non-current 2021 2020
£m £m
Accrued income 2.6 -
Contract assets: Current 2021 2020
£m £m
Accrued income and other unbilled receivables 306.5 278.0
Capitalised bid costs 2.4 2.8
Capitalised mobilisation and phase in costs 9.8 15.3
Other contract assets 0.3 -
319.0 296.1
An Expected Credit Loss (ECL) is recognised against contract assets only when
it is considered to be material and there is evidence that the credit
worthiness of a counterparty may render balances irrecoverable.
The Group's Consolidated Balance Sheet includes capitalised bid and phase in
costs that are realised as a part of the normal operating cycle of the Group.
These assets represent up-front investment in contracts which are recoverable
and expected to provide benefits over the life of those contracts. Bid costs
are capitalised only when they relate directly to a contract and are
incremental to securing the contract. Any costs which would have been incurred
whether or not the contract is actually won are not considered to be
capitalised bid costs.
Contract costs can only be capitalised when the expenditure meets all three
criteria identified in note 2 to the Group's Consolidated Financial
Statements.
Movements in the period were as follows:
Capitalised other contract assets, bid and phase in costs 2021 2020
£m £m
At 1 January 18.1 23.0
Additions 0.3 1.3
Amortisation (4.0) (6.8)
Written off (1.5) -
Exchange differences (0.4) 0.6
At 31 December 12.5 18.1
Total trade and other receivables held by the Group at 31 December 2021 amount
to £321.9m (2020: £338.8m).
Trade and other receivables: Non-current 2021 2020
£m £m
Trade receivables - 3.1
Other investments - 9.4
Prepayments 0.4 1.7
Other receivables 13.2 11.1
13.6 25.3
Other non-current receivables include long-term employee compensation plans,
advances and other non-trade receivables.
Trade and other receivables: Current 2021 2020
£m £m
Trade receivables 234.4 244.3
Prepayments 42.9 45.5
Amounts owed by joint ventures and associates 1.7 0.2
Other receivables 26.7 23.5
305.7 313.5
Other receivables include amounts due from third parties, advances paid to
suppliers and other non-trade receivables.
The management of trade receivables is the responsibility of the reportable
operating segments, although they report to the Group on a monthly basis on
debtor days, debtor ageing and significant outstanding debts. The average
credit period taken by customers is 19 days (2020: 23 days) and no interest
was charged on overdue amounts in the current or prior reporting period.
Each customer has an external credit score which determines the level of
credit provided. However, the majority of our customers have a sovereign
credit rating as a result of being government organisations. Of the trade
receivables balance at the end of the year, £68.0m is due from agencies of
the UK Government, the Group's largest customer, £54.7m from the Australian
Government, £37.9m from the US Government and £23.8m from the Government of
the United Arab Emirates. There are no other customers who represent more than
5% of the total balance of trade receivables. Of the trade receivables balance
at the end of 2020, £63.5m was due from agencies of the UK Government,
£57.1m from the Australian Government, £27.8m from the US Government and
£42.7m from the Government of the United Arab Emirates. The maximum potential
exposure to credit risk in relation to trade receivables at the reporting date
is equal to their carrying value. The Group does not hold any collateral as
security.
The Group does not have any material impairments associated with expected
credit losses due to the sovereign credit rating of most customers. Further
specific impairments to trade receivables are based on estimated irrecoverable
amounts and provisions on outstanding balances greater than a year old unless
there is firm evidence that the balance is recoverable. The total amount of
these impairments for the Group was £4.4m as of 31 December 2021 (2020:
£7.0m).
Ageing of trade receivables 2021 2020
£m £m
Not due 191.3 175.5
Overdue by less than 30 days 25.1 49.1
Overdue by between 30 and 60 days 8.2 5.5
Overdue by more than 60 days 14.2 21.2
Allowance for doubtful debts (4.4) (7.0)
234.4 244.3
Of the total overdue trade receivable balance, 92% (2020: 73%) relates to the
Group's four major governmental customers (being the governments of the UK,
US, Australia and the United Arab Emirates).
Movements on the Group allowance for doubtful debts 2021 2020
£m £m
At 1 January 7.0 5.5
Arising on acquisition 1.6 -
Net charges and releases to income statement 0.4 1.9
Utilised (4.7) (0.2)
Exchange differences 0.1 (0.2)
At 31 December 4.4 7.0
Included in the current other receivables balance is a further £0.8m (2020:
£0.2m) due from agencies of the UK Government.
15. Contract liabilities, trade and other payables
Contract liabilities: Current 2021 2020
£m £m
Deferred income 61.3 42.3
Contract liabilities: Non-current 2021 2020
£m £m
Deferred income 48.6 47.5
The allocation of deferred income between current and non-current is presented
on the basis that the current portion will unwind in the following twelve
months through revenue. There were no material items in the current portion
of deferred income in 2020 which did not unwind during the year.
Total trade and other payables held by the Group at 31 December 2021 amount to
£533.3m (2020: £543.3m).
Trade and other payables: Current 2021 2020
£m £m
Trade payables 89.2 99.6
Other payables 123.7 134.5
Accruals 313.1 299.8
526.0 533.9
Other payables include sales and other direct taxes, payroll taxes, salaries
and other non-trade payables.
The average credit period taken for trade purchases is 23 days (2020: 25
days).
2021 2020
Trade and other payables: Non-current £m £m
Other payables 7.3 9.4
16. Leases
The Directors estimate that the fair value of the Group's lease obligations
approximates their carrying amount. The Group uses leases in the delivery of
its contractual obligations and the services required to support the delivery
of those contracts, including administrative functions. There are no material
future cash outflows relating to leases in place as at 31 December 2021 that
are not reflected in the minimum lease payments disclosed below and the Group
does not have any leases to which it is contracted but which are not yet
reflected in the minimum lease payments. Additionally, the Group does not have
any leases where payments are variable. The Group has a significant number of
leases which include either termination or extension options, or both.
Included in amounts payable under leases below are only those amounts which
reflect Management's view of the reasonably certain lease term in line with
current operational requirements.
No lease liability is recognised in respect of leases which have a lease term
of less than twelve months in duration at the point of entering into the
lease, or where the purchase price of the underlying right of use asset is
less than £5,000.
The total cash outflow for leases, excluding short-term leases and low-value
leases, in the year was £119.1m (2020: £110.3m). This is presented in the
Consolidated Cash Flow Statement as £111.3m (2020: £100.8m) relating to the
principal element of the lease liability payments, with the remaining balance
of £7.8m (2020: £9.5m) presented within interest paid.
Amounts payable under leases Minimum lease payments Minimum lease payments
2021 2020
£m £m
Within one year 131.0 115.3
Between one and five years 263.9 228.9
After five years 53.6 90.5
448.5 434.7
Less: future finance charges (18.2) (32.1)
Present value of lease obligations 430.3 402.6
Less: amount due for settlement within one year (shown within current (126.3) (109.3)
liabilities)
Amount due for settlement after one year 304.0 293.3
The following amounts are included in the Group's Consolidated Financial
Statements in respect of its leases:
2021 2020
Note £m £m
Additions to right of use assets (including transitional adjustments) 201.0 159.1
Depreciation charge on right of use assets (including transitional (109.0) (93.5)
adjustments)
Impairment of right of use assets - (0.4)
Net disposals of right of use assets (72.6) (20.7)
Net reclassifications from right of use assets (0.2) (2.0)
Net exchange differences on right of use assets 0.1 (0.3)
Carrying amount of right of use assets 416.7 387.5
Current lease liabilities 126.3 109.3
Non-current lease liabilities 304.0 293.3
Capital element of lease repayments (111.3) (100.8)
Interest expense on lease liabilities 9 (7.8) (9.5)
Profit on early termination of leases 0.6 2.9
Expenses relating to short-term or low-value leases (2.8) (5.6)
17. Analysis of Net Debt
The analysis below provides a reconciliation between the opening and closing
positions in the balance sheet for liabilities arising from financing
activities together with movements in derivatives relating to the items
included in Net Debt. There were no changes in fair value noted in either
the current or prior year.
At 1 January 2021 Cash Acquisitions* Exchange differences Non-cash movements** At 31 December 2021
flow
£m
£m £m £m
£m
Loans payable (388.8) 29.7 (14.3) (2.9) (0.7) (377.0)
Lease obligations (402.6) 111.3 (13.8) (0.5) (124.7) (430.3)
Liabilities arising from financing activities (791.4) 141.0 (28.1) (3.4) (125.4) (807.3)
Cash and cash equivalents 335.7 (145.8) 13.3 (4.8) - 198.4
Derivatives relating to Net Debt (4.7) - - 5.3 - 0.6
Net Debt (460.4) (4.8) (14.8) (2.9) (125.4) (608.3)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
** Non-cash movements relate to the net impact of entering into new leases and
exiting certain leases before the end of the lease term without payment of a
cash termination cost.
At 1 January 2020 Cash Exchange differences Non-cash movements* At 31 December 2020
flow
£m
£m £m £m
£m
Loans payable (305.0) (99.4) 15.6 - (388.8)
Lease obligations (369.9) 100.8 0.9 (134.4) (402.6)
Liabilities arising from financing activities (674.9) 1.4 16.5 (134.4) (791.4)
Cash and cash equivalents 89.5 244.4 1.8 - 335.7
Derivatives relating to Net Debt 1.0 - (5.7) - (4.7)
Net Debt (584.4) 245.8 12.6 (134.4) (460.4)
* Non-cash movements relate to the net impact of entering into new
leases and exiting certain leases before the end of the lease term without
payment of a cash termination cost.
18. Provisions
Employee related Property Contract Other Total
£m £m £m £m £m
At 1 January 2021 83.2 15.7 14.5 64.6 178.0
Arising on acquisition 1.7 0.9 - 0.1 2.7
Transferred from working capital 2.1 - - 23.2 25.3
Charged to income statement - exceptional - 0.6 - - 0.6
Charged to income statement - other 18.3 4.4 2.1 14.8 39.6
Released to income statement - exceptional (0.1) - - (0.3) (0.4)
Released to income statement - other (6.2) (4.2) (2.1) (8.5) (21.0)
Included in the valuation of right of use asset - 3.1 - - 3.1
Utilised during the year (22.6) (1.0) (0.3) (3.6) (27.5)
Exchange differences (2.6) (0.2) - - (2.8)
At 31 December 2021 73.8 19.3 14.2 90.3 197.6
Analysed as:
Current 29.2 5.7 14.0 30.7 79.6
Non-current 44.6 13.6 0.2 59.6 118.0
73.8 19.3 14.2 90.3 197.6
Employee related provisions include amounts for long-term service awards and
terminal gratuity liabilities which have been accrued and are based on
contractual entitlement, together with an estimate of the probabilities that
employees will stay until rewards fall due and receive all relevant amounts.
There are also amounts included in relation to restructuring. The provisions
will be utilised over various periods driven by local legal or regulatory
requirements, the timing of which is not certain.
The majority of property provisions relate to leased properties and are
associated with the requirement to return properties to either their original
condition, or to enact specific improvement activities in advance of exiting
the lease. Dilapidations associated with leased properties are held as a
provision until such time as they fall due, with the longest running lease
ending in January 2037.
A contract provision is recorded when a contract is deemed not be profitable
and therefore is considered onerous. 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.
Individual provisions are only discounted where the impact is assessed to be
significant. Currently, no contract provisions are discounted. Discount rates
are calculated based on the estimate risk-free rate of interest for the region
in which the provision is located and matched against the ageing profit of the
provision.
Included within other provisions is:
· £43.0m related to indemnities provided in respect of a historic business
transaction. Within this amount, £36.0m is reserved for potential tax
liabilities arising within the disposed company when local tax submissions are
reviewed by the relevant authorities which represents Management's best
estimate of the likely outcome based on past experiences and other known
factors. Under the indemnity, £36.0m is the Group's maximum potential
exposure to these tax matters. The timing of utilisation is dependent on
future events which could occur within the next twelve months, or over a
longer period, with the majority expected to be settled by 31 December 2023.
· £20.1m related to claims made against the Group. These claims are varied in
nature, although they typically come from either the Group's service users,
claimants for vehicle related incidents or the Group's employees. Whilst there
is some level of judgement on the amount to be recorded, in almost all
instances the variance to the actual claim paid out will not individually be
material, however the timing of when the claims are reported and settled is
less certain as a process needs to be followed prior to the amounts being
paid. The Group has decided to reclassify these claim liabilities from other
payables to other provisions during 2021 as, although the liability is
materially accurate, there is sufficient uncertainty associated with the
timing of settlement. The claim liabilities reported in other payables in 2020
was £19.8m. The adjustment was made in the current year and no prior year
adjustment was considered necessary since it was concluded that the balance
sheet reclassification did not constitute a material prior period error that
required restatement.
· £27.2m related to legal and other costs that the Group expects to incur over
an extended period, in respect of past events for which a provision has been
recorded, none of which are individually material.
19. Contingent liabilities
The Group has guaranteed overdrafts, leases, and bonding facilities of its
joint ventures and associates up to a maximum value of £5.7m (2020: £3.8m).
The actual commitment outstanding at 31 December 2021 was £5.7m (2020:
£3.8m).
The Group has 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 2021
was £263.8m (2020: £247.9m).
Following the announcement during 2020 that the Group has received a claim
seeking damages for alleged losses as a result of the reduction in Serco's
share price in 2013, the Group has continued to assess the merit, likely
outcome and potential impact on the Group of any such litigation that either
has been or might potentially be brought against the Group. Any outcome is
subject to a number of significant uncertainties. The Group does not currently
assess the merits as strong, especially given the legal uncertainties in such
actions.
The Group is also aware of other claims and potential claims which involve or
may involve legal proceedings against the Group although the timing of
settlement of these claims remains uncertain. 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.
20. Retirement 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 2022 are £6.8m (2021:
£8.0m).
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 2018 and completed in June 2019. The
actuarially assessed deficit for funding purposes was £26.0m. The exercise to
value the scheme as at 5 April 2021 is underway with completion anticipated
during the first half of 2022 with an expected increase to the actuarially
assessed deficit for funding purposes as a result of the RPI reform. As a
scheme well hedged for inflation risk, the expected impact of RPI reform is a
£65m increase to liabilities. This will be partially offset by changes to
mortality assumptions and the scheme will work with the Trustees during the
2021 valuation process to address the impact on the funding level.
Pension obligations are valued separately for accounting and funding purposes
and there is often a material difference between these valuations. As at 31
December 2021, the estimated actuarial surplus of SPLAS was £23m (2020: £20m
deficit) based on the actuarial assessment on the funding basis valuation
before the impact of RPI reform, whereas the accounting valuation resulted in
an asset of £166.2m (2020: £114.6m). 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.
The schedule of contributions for SPLAS was agreed during 2019, with 30.8% of
pensionable salaries due to be paid from 1 November 2019, changing to 30.3%
from 1 November 2020. The schedule of contributions also determined that
additional shortfall contributions were required. A total of £13.2m of these
have already been made, with further amounts of £1.7m for the years 2022 to
2028. A change to the schedule of contributions is being finalised with the
pension trustees as part of the expected increase to the deficit for funding
purposes as noted above.
Events in the year
On 4 January 2021, the Group acquired 100% of the issued share capital of
Facilities First Australia Holdings Pty Limited (FFA). Included in the
acquisition was a net pension obligation of £1.4m.
On 30 June 2021, the 31 December 2019 formal actuarial valuation report was
issued for the RPS. This resulted in a reduction of the pension obligation on
the non-contract specific section of the RPS as a result of a change in
demographic assumptions.
Values recognised in total comprehensive income in the year
The amounts recognised in the Consolidated Financial Statements for the year
are analysed as follows:
Recognised in the income statement Contract Non-contract specific Total
specific
2021
2021
2021
£m £m
£m
Current service cost - employer 1.4 3.7 5.1
Administrative expenses and taxes 0.1 1.4 1.5
Recognised in arriving at operating profit after exceptionals 1.5 5.1 6.6
Interest income on scheme assets - employer (0.2) (21.8) (22.0)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.3 20.7 21.0
Finance income - (1.1) (1.1)
Included within the SOCI Contract Non-contract specific Total
specific
2021
2021
2021
£m £m
£m
Actual return on scheme assets 2.6 39.7 42.3
Less: interest income on scheme assets (0.2) (21.8) (22.0)
2.4 17.9 20.3
Effect of changes in demographic assumptions (0.1) 3.4 3.3
Effect of changes in financial assumptions (0.1) 19.9 19.8
Effect of experience adjustments - 23.4 23.4
Remeasurements 2.2 64.6 66.8
Change in franchise adjustment 0.1 - 0.1
Change in members' share (0.6) - (0.6)
Actuarial profit on reimbursable rights (0.5) - (0.5)
Total pension gain recognised in the SOCI 1.7 64.6 66.3
Recognised in the income statement Contract Non-contract specific Total
specific
2020
2020
2020
£m £m
£m
Current service cost - employer 1.2 3.5 4.7
Administrative expenses and taxes 0.1 1.5 1.6
Recognised in arriving at operating profit after exceptionals 1.3 5.0 6.3
Interest income on scheme assets - employer (0.2) (29.1) (29.3)
Interest cost on scheme liabilities - employer 0.4 27.8 28.2
Interest on franchise adjustment (0.1) - (0.1)
Finance cost/(income) 0.1 (1.3) (1.2)
Included within the SOCI Contract Non-contract specific Total
specific
2020
2020
2020
£m £m
£m
Actual return on scheme assets 0.1 216.7 216.8
Less: interest income on scheme assets (0.3) (29.1) (29.4)
(0.2) 187.6 187.4
Effect of changes in demographic assumptions 0.4 - 0.4
Effect of changes in financial assumptions (3.6) (170.0) (173.6)
Effect of experience adjustments (0.6) 4.6 4.0
Remeasurements (4.0) 22.2 18.2
Change in franchise adjustment 2.5 - 2.5
Change in members' share 1.3 0.1 1.4
Actuarial profit on reimbursable rights 3.8 0.1 3.9
Total pension (loss)/gain recognised in the SOCI (0.2) 22.3 22.1
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
2021
2021
2021
£m £m
£m
Equities 14.9 40.8 55.7
Bonds except LDIs 3.2 365.0 368.2
Pooled investment funds - 107.6 107.6
LDIs - 390.0 390.0
Property 2.0 0.2 2.2
Cash and other 4.9 2.0 6.9
Annuity policies - 662.3 662.3
Fair value of scheme assets 25.0 1,567.9 1,592.9
Present value of scheme liabilities (41.7) (1,417.4) (1,459.1)
Net amount recognised (16.7) 150.5 133.8
Franchise adjustment* 8.6 - 8.6
Members' share of deficit 5.8 - 5.8
Net retirement benefit asset (2.3) 150.5 148.2
Net pension liability (2.3) (15.7) (18.0)
Net pension asset - 166.2 166.2
Net retirement benefit asset (2.3) 150.5 148.2
Deferred tax liabilities - (36.9) (36.9)
Net retirement benefit asset (after tax) (2.3) 113.6 111.3
* 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
2020
2020
2020
£m £m
£m
Equities 11.3 44.3 55.6
Bonds except LDIs 4.1 363.2 367.3
Pooled investment funds - 62.8 62.8
LDIs - 408.3 408.3
Property 1.6 - 1.6
Cash and other 4.1 10.6 14.7
Annuity policies - 690.2 690.2
Fair value of scheme assets 21.1 1,579.4 1,600.5
Present value of scheme liabilities (37.0) (1,497.8) (1,534.8)
Net amount recognised (15.9) 81.6 65.7
Franchise adjustment* 8.4 - 8.4
Members' share of deficit 5.6 - 5.6
Net retirement benefit asset (1.9) 81.6 79.7
Net pension liability (1.9) (33.0) (34.9)
Net pension asset - 114.6 114.6
Net retirement benefit asset (1.9) 81.6 79.7
Deferred tax liabilities - (15.2) (15.2)
Net retirement benefit asset (after tax) (1.9) 66.4 64.5
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
The SPLAS Trust Deed gives the Group an unconditional right to a refund of
surplus assets, assuming the full settlement of plan liabilities in the event
of a plan wind-up. Pension assets are deemed to be recoverable and there are
no adjustments in respect of minimum funding requirements as economic benefits
are available to the Group either in the form of future refunds or, for plans
still open to benefit accrual, in the form of possible reductions in future
contributions.
As required by IAS 19 Employee Benefits, the Group has considered the extent
to which the pension plan assets should be classified in accordance with the
fair value hierarchy of IFRS 13 Fair Value Measurement.
· Equity and Bonds all virtually have quoted prices in active markets and are
classified as level 1.
· Pooled investment funds are valued at fair value which is typically the Net
Asset Value provided by the fund administrator and are classified as level 3.
· LDIs are valued at fair value which is typically the Net Asset Value provided
by the fund administrator and are classified as level 2.
· Property assets are valued at fair value and are classified as level 3.
· Annuity policies are valued at fair value based on the share of the defined
benefit obligation covered by the insurance contract and can be classified as
level 3.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 91% of total
liabilities and 93% 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 Group continued to set RPI inflation in line with the market break-even
expectations less an inflation risk premium. The inflation risk premium has
remained at 0.3% at 31 December 2020 and at 31 December 2021.
The average duration of the benefit obligation at the end of the reporting
period is 16.3 years (2020: 17.4 years).
Main assumptions 2021 2020
% %
Discount rate 1.80 1.40
Rate of salary increases 2.95 2.50
Rate of increase in pensions in payment 2.75 (CPI) and 3.05 (RPI) 2.40 (CPI) and 2.75 (RPI)
Rate of increase in deferred pensions 2.00 (CPI) and 2.90 (RPI) 2.20 (CPI) and 2.80 (RPI)
Inflation assumption - pre-retirement 2.45 (CPI) and 3.35 (RPI) 2.00 (CPI) and 2.90 (RPI)
Inflation assumption - post-retirement 2.75 (CPI) and 3.05 (RPI) 2.40 (CPI) and 2.75 (RPI)
Post retirement mortality* 2021 2020
years years
Current pensioners at 65 - male 21.7 21.6
Current pensioners at 65 - female 24.3 24.2
Future pensioners at 65 - male 23.9 23.9
Future pensioners at 65 - female 26.4 26.3
* The mortality assumptions have not been updated to reflect the
potential effects of Covid-19 given there remains uncertainty of the Covid-19
impact on long-term mortality rates for pension scheme members.
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 2021 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 2021 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.
Increase/(decrease) in defined benefit obligation 2021 2020
£m £m
Discount rate - 0.5% increase (119.1) (125.3)
Discount rate - 0.5% decrease 127.6 142.4
Inflation - 0.5% increase 84.0 103.7
Inflation - 0.5% decrease (92.6) (96.6)
Rate of salary increase - 0.5% increase 3.5 3.7
Rate of salary increase - 0.5% decrease (3.3) (3.5)
Mortality - one-year age rating 54.0 59.8
Management acknowledges that the method used of presuming that all other
assumptions remaining constant has inherent limitation given that it is more
likely for a combination of changes but highlights the value of each
individual risk and is therefore a suitable basis for providing this analysis.
Assumptions in respect of the expected return on scheme assets are required
when calculating the franchise adjustment for the contract-specific plans.
These assumptions are based on market expectations of returns over the life of
the related obligation. Due consideration has been given to current market
conditions as at 31 December 2021 in respect to inflation, interest, bond
yields and equity performance when selecting the expected return on assets
assumptions.
The expected yield on bond investments with fixed interest rates is derived
from their market value. The yield on equity investments contains an
additional premium (an 'equity risk premium') to compensate investors for the
additional anticipated risks of holding this type of investment, when compared
to bond yields. The Group applies an equity risk premium of 4.6% (2020: 4.6%).
The overall expected return on assets is calculated as the weighted average of
the expected returns for the principal asset categories held by the scheme.
21. Movements in other reserves
Retirement benefit obligations reserve Share based payment reserve Own shares reserve Treasury shares Hedging reserve Translation reserve Capital redemption reserve Total other reserves
£m £m £m £m £m £m £m £m
At 1 January 2020 (151.8) 72.2 (4.4) - (0.2) (27.8) 0.1 (111.9)
Total comprehensive income for the year 16.2 - - - (0.2) 7.9 - 23.9
Issue of share capital - - (0.2) - - - - (0.2)
Shares transferred to award holders on exercise of share awards - (2.4) 2.5 - - - - 0.1
Expense in relation to share based payments - 11.2 - - - - - 11.2
At 1 January 2021 (135.6) 81.0 (2.1) - (0.4) (19.9) 0.1 (76.9)
Total comprehensive income for the year 44.6 - - - 0.2 (7.6) - 37.2
Income statement items reclassified - - - - 0.1 - - 0.1
Shares purchased and held in Treasury - - - (40.7) - - - (40.7)
Cancellation of shares held in Treasury - - - 20.4 - - 0.3 20.7
Shares transferred from Treasury to own shares reserves - - (0.3) 20.3 - - - 20.0
Shares transferred to award holders on exercise of share awards - (1.0) 1.2 - - - - 0.2
Expense in relation to share based payments - 15.8 - - - - - 15.8
At 31 December 2021 (91.0) 95.8 (1.2) - (0.1) (27.5) 0.4 (23.6)
22. 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 2021 Current outstanding at 31 December 2021 Non-current outstanding at 31 December 2021
£m £m £m
Sale of goods and services
Joint ventures 1.6 1.7 -
Associates 0.8 - -
Other
Dividends received - joint ventures - - -
Dividends received - associates 13.5 - -
Receivable from consortium for tax - joint ventures 0.9 0.2 0.8
Total 16.8 1.9 0.8
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. No guarantees have been given or received.
Transactions 2020 Current outstanding at 31 December 2020 Non-current outstanding at 31 December 2020
£m £m £m
Sale of goods and services
Joint ventures 0.1 - -
Associates 2.3 0.2 -
Other
Dividends received - joint ventures 4.3 - -
Dividends received - associates 15.5 - -
Receivable from consortium for tax - joint ventures (0.1) 2.0 0.1
Total 22.1 2.2 0.1
As announced on 2 November 2020, the Ministry of Defence notified the Group
that it would be exercising its ability to terminate services provided by the
Group through AWE Management Limited (AWEML) on 30 June 2021.
As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.
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 IAS 24 Related Party
Disclosures:
2021 2020
£m £m
Short-term employee benefits 8.5 9.3
Share based payment expense 5.0 5.4
13.5 14.7
The key Management personnel comprise the Executive Directors, Non-Executive
Directors and members of the Executive Committee (2021: 18 individuals, 2020:
18 individuals).
Aggregate Directors' remuneration
The total amounts for Directors' remuneration in accordance with Schedule 5 to
the Accounting Regulations were as follows:
2021 2020
£m £m
Salaries, fees, bonuses and benefits in kind 3.5 3.6
Amounts receivable under long-term incentive schemes 2.8 3.4
Gains on exercise of share awards 3.6 3.6
9.9 10.6
None of the Directors are members of the Company's defined benefit or money
purchase pension schemes.
23. Notes to the Consolidated Cash Flow statement
Year ended 31 December 2021 2021 Exceptional items 2021 2020 2020 Exceptional items 2020
Before exceptional items £m Total Before exceptional items £m Total
£m £m £m £m
Profit before tax 193.4 (1.2) 192.2 140.8 12.5 153.3
Net finance costs 24.0 - 24.0 25.9 - 25.9
Operating profit for the year 217.4 (1.2) 216.2 166.7 12.5 179.2
Adjustments for:
Share of profits in joint ventures and associates (8.7) - (8.7) (12.7) - (12.7)
Exceptional distribution from joint venture - - - - (1.9) (1.9)
Share based payment expense 15.8 - 15.8 11.2 - 11.2
Impairment of property, plant and equipment 0.3 - 0.3 0.3 - 0.3
Impairment of right of use assets - - - 0.4 - 0.4
Depreciation of property, plant and equipment 19.6 - 19.6 15.9 - 15.9
Depreciation of right of use assets 109.0 - 109.0 93.5 - 93.5
Amortisation of intangible assets 27.3 - 27.3 23.0 - 23.0
Exceptional profit on disposal of subsidiaries and operations - - - - (11.0) (11.0)
Reversal of impairment on loans to JVs - - - - (1.2) (1.2)
Profit on early termination of leases (0.6) - (0.6) (2.9) - (2.9)
Profit on disposal of property, plant and equipment (0.2) - (0.2) (0.4) - (0.4)
Loss on disposal of intangible assets 1.6 - 1.6 0.6 - 0.6
(Decrease)/increase in provisions (7.2) (1.5) (8.7) 16.2 (4.0) 12.2
Total non-cash items 156.9 (1.5) 155.4 145.1 (18.1) 127.0
Operating cash inflow/(outflow) before movements in working capital 374.3 (2.7) 371.6 311.8 (5.6) 306.2
Decrease/(increase) in inventories 1.7 - 1.7 (2.9) - (2.9)
Decrease/(increase) in receivables 25.4 - 25.4 (0.1) - (0.1)
(Decrease)/increase in payables (1.9) (4.8) (6.7) (2.3) 3.6 1.3
Movements in working capital 25.2 (4.8) 20.4 (5.3) 3.6 (1.7)
Cash generated by operations 399.5 (7.5) 392.0 306.5 (2.0) 304.5
Tax paid (42.1) - (42.1) (35.9) - (35.9)
Non-cash R&D expenditure - - - (0.1) - (0.1)
Net cash inflow/(outflow) from operating activities 357.4 (7.5) 349.9 270.5 (2.0) 268.5
24. Post balance sheet events
Serco share repurchase programme
Following the successful completion of the share buyback programme during 2021, in which 30.7m shares were repurchased at an average price including fees of 1.32p, the Group has announced its intention to commence a further share buyback of up to £90m. Consistent with the Group's capital allocation policy, the objective of the programme is to provide additional returns to shareholders as well as aid the Group in meeting its medium-term leverage targets. The buyback programme is expected to complete within 12 months with the shares either cancelled or held in Treasury.
Dividends
Subsequent to the year end, the Board has recommended the payment of a final dividend in respect of the year ended 31 December 2021 of 1.61p. The dividend remains subject to shareholder approval at the Annual General Meeting and therefore no amounts have been recognised in respect of a dividend in the Group's Consolidated Financial Statements.
REPORT OF KPMG LLP TO SERCO GROUP PLC ("THE COMPANY") IN RELATION TO THE
COMPANY'S PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER
2021
The UK Listing Rules require that we, as independent auditor, agree to the
publication of the Company's preliminary announcement of results for the year
ended 31 December 2021 which comprises the Condensed Consolidated Income
Statement, the Condensed Consolidated Statement of Comprehensive Income, the
Condensed Consolidated Statement of Changes in Equity, the Condensed
Consolidated Cash Flow Statement and the Notes to the Condensed Consolidated
Financial Statements as well as the Stock Exchange Announcement including the
Chief Executive's Review, the Divisional Reviews and the Finance Review.
At your request we have provided this report to set out the procedures
performed by us to agree to the publication, the status of the audit report on
the statutory financial statements, and the key audit matters addressed in
that audit report in respect of the consolidated financial statements of the
group.
Our audit of the statutory financial statements is complete and we have issued
an unmodified audit opinion
The annual report and statutory financial statements of Serco Group plc for
the year ended 31 December 2021 were approved by the board on 23 February
2022.
Our audit of those financial statements is complete and we signed our
auditor's report on 23 February 2022. Our opinion in that report is not
modified and does not include a material uncertainty related to going concern,
or emphasis of matter, paragraph.
This report is in addition to, should not be regarded as a substitute for, our
auditor's report on the statutory financial statements, which has been
released to the Company and will be available when the Company publishes its
annual report.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in the audit of the consolidated financial statements and
include the most significant assessed risks of material misstatement (whether
or not due to fraud) identified by us, including those which had the greatest
effect on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team.
Key audit matters were addressed, and our findings are based on procedures
undertaken, in the context of, and solely for the purpose of, our audit of the
consolidated financial statements as a whole, and in forming our opinion
thereon, and consequently are incidental to that opinion, and we do not
provide a separate opinion on these matters. The overall materiality applied
in the audit of the consolidated financial statements as a whole was £7m.
In our auditor's report on the statutory financial statements of the Company,
we reported on the key audit matters in respect of the consolidated financial
statements of the group described in decreasing order of audit significance
below. No additional work in relation to key audit matters has been
undertaken for the purpose of this report.
Revenue and margin recognition
Revenue £4,424.6m (2020: £3,884.8m), Onerous Contract Provisions of £14.2m
(2020: £14.5m) and Contract Assets £319.0m (2020: £296.1m)
Assessment of risk vs. prior year: Unchanged
Refer to note 2 Critical accounting judgements and key sources of estimation
uncertainty, note 6 Revenue from contracts with customers, note 15 Contract
assets, trade and other receivables and note 18 Provisions.
The risk
Accounting application
The many and sometimes unique contractual arrangements that underpin the
measurement and recognition of revenue by the group can be complex,
particularly in relation to variable revenue, with significant judgement
involved in the assessment of current and future financial performance. The
key judgements impacting the recognition of revenue and resulting operating
profit include:
· Interpretations of terms and conditions in relation to the required service
obligations in accordance with contractual arrangements;
· The allocation of revenue and costs to performance obligations where multiple
deliverables exist;
· Assessment of stage of completion and cost to complete, where percentage
completion accounting is used;
· Consideration of the Group's performance against contractual obligations and
the impact on revenue and costs of delivery;
· The recognition and recoverability assessments of contract related assets,
including those recognised as direct incremental costs prior to service
commencement.
Subjective estimate
Judgement is required to determine whether a contract is onerous, based upon
the estimated future performance of the contract. Where a contract is
determined to be loss-making, an onerous contract provision is required, which
requires further judgement in assessing the level of provision, based on
estimated variable income and cost to complete, taking into account
contractual obligations to the end of the contract, extension periods and
customer negotiations.
The effect of these matters is that, as part of our risk assessment, we
determined that the onerous contract provision has a high degree of estimation
uncertainty, with a potential range of reasonable outcomes greater than our
materiality for the financial statements as a whole, and possibly many times
that amount.
Our response
We performed the tests below rather than seeking to rely on any of the group's
controls because the contractual arrangements that underpin the measurement
and recognition of revenue by the group can be complex, with significant
judgement involved in the assessment of current and future financial
performance. This meant that detailed testing is inherently the most effective
means of obtaining audit evidence.
Our audit procedures included:
Contracts were selected for substantive audit procedures based on qualitative
factors, such as commercial complexity, and quantitative factors, such as
financial significance and profitability that we considered to be indicative
of risk. Our audit testing for the contracts selected included the following:
Assessing policy application
We inspected customer contracts to assess the method of revenue recognition to
determine that it was in accordance with the Group's accounting policy and
relevant accounting standards, including the appropriate recognition of
revenue as the performance obligation is satisfied on service contracts.
Accounting analysis
We inspected and challenged accounting papers prepared by the Group to explain
the positions taken in respect of key contract judgements including contract
modifications (such as those arising due to COVID-19). We also challenged
whether it is highly probable that the variable revenue recognised will not be
reversed in future periods as required by the application of the revenue
constraint in accordance with the Group's accounting policy and relevant
accounting standards.
Tests of details
To assess whether the revenue constraint was appropriately applied in
accordance with the Group's accounting policy and relevant accounting
standards;
· we vouched a sample of revenue to documents such as invoices or purchase
orders, or customer agreements for the work performed;
· we inspected a sample of customer contracts to identify any KPI obligations
and assessed the contract's operational performance against those obligations;
and
· we inspected a sample of customer contracts to identify contractual variations
and claims and where these arose, obtained evidence of correspondence with
customers and third parties.
Site visits
For contracts selected for testing;
· we attended a selection of monthly Divisional and Business Unit Performance
Reviews used to assess business performance in order to inform our assessment
of operational and financial performance of the contracts; and
· we performed a selection of physical and virtual site visits and enquired with
contract and Business Unit management teams as to matters related to
operational and financial performance in order to assess whether indicators of
an onerous contract exist.
For selected contract related assets, representing capitalised bid and phase
in costs, our procedures included:
· Assessing application: We assessed whether contract related assets have been
recognised in accordance with the Group's accounting policy and relevant
accounting standards.
· Historical comparisons: We compared forecast contract cash flows and profits
with historical actuals and assessed whether the forecasts supported the
carrying value of the assets.
· Independent reperformance: We compared the amortisation period with the
duration of the contract and checked that the amortisation had been calculated
correctly.
For onerous and potentially onerous contracts identified through application
of quantitative selection criteria, our procedures to address the subjective
estimate risk included:
Benchmarking assumptions
We compared contract level forecast revenues and costs to the Group's annual
budgets and longer-term forecasts approved by the directors. We challenged key
assumptions made by the Group in preparing these forecasts, including those in
relation to revenue growth and cost reductions, by comparing them to external
evidence (for example customer correspondence) where possible, and assessing
against business plans.
Our sector experience
We assessed the contractual terms and conditions to identify the key
obligations of the contract and compared these with common industry risk
factors to inform our challenge of completeness of forecast costs.
Historical comparisons
We compared the contract forecasts to historic and in year performance to
assess the historical accuracy of the forecasts.
Tests of details
We compared the allocation of central functional costs to the group's policy
and challenged the underlying assumptions using our understanding of the
contract operations.
Assessing transparency
We also assessed whether the Group's disclosures about the estimates and
judgements applied reflected the risks related to the estimation of onerous
contracts.
Our findings
We found no material errors in the group's application of its revenue
accounting policy (2020: no material errors). We found the resulting estimate
of onerous contract provision to be balanced (2020: balanced).
Recoverability of group goodwill and of parent's investment in subsidiary
Group: £852.7m (2020: £669.6m); parent Company: £2,041.7m (2020:
£2,032.7m)
Assessment of risk vs. prior year: Unchanged
Refer to note 13 Goodwill
The risk
Goodwill in the group and the carrying amount of the parent Company's
investment in subsidiary are significant and at risk of irrecoverability due
to estimation uncertainty in valuing the recoverable amounts of the Group's
cash generating units. The estimated recoverable amount of these balances
through value in use calculations is subjective due to the inherent
uncertainty involved in forecasting and discounting future cash flows.
The CGUs which were most sensitive to a deterioration in the division's cash
flow projections or an increase in discount rate were the AsPac CGU and Middle
East CGU. As at year end 31 December 2021, the AsPac CGU was estimated to have
headroom of £380.6m and Middle East has headroom of £103.6m.
The effect of these matters is that, as part of our risk assessment, we
determined that the value in use of CGUs and value in use of investment in
subsidiary have a high degree of estimation uncertainty, with a potential
range of reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount. The financial
statements
(note 13) disclose the sensitivity for goodwill estimated by the Group.
Our response
We performed the tests below rather than seeking to rely on any of the group's
controls because the nature of the balance is such that detailed testing is
inherently the most effective means of obtaining audit evidence.
Our audit procedures included:
Benchmarking assumptions: With the assistance of our valuation specialists, we
challenged the growth rate and discount rate used in the value in use
calculation by comparing the Group's assumptions to external data. We
challenged the implied cumulative annual growth rate within the five year
forecasts and assessed this against past performance and the terminal growth
rate. We challenged forecast assumptions around new contract wins or
extensions, contract attrition, cost reductions as well as cost reductions on
existing contracts.
Historical comparisons
We compared current year actual cash flows to historic forecasts to assess the
historical accuracy of the forecasts used in the impairment model.
Sensitivity analysis
We tested the sensitivity of impairment calculations to changes in key
underlying assumptions, which were the short term cash-flow projections, the
discount rate and terminal growth rates. We assessed the impact on headroom
with the inclusion of an alpha factor in the discount rate in order to reflect
any country specific and forecasting risks we considered might be present in
each division. We challenged the projected win probabilities (including
contract extensions) on key contracts and sensitised the five year cash flow
forecasts by reducing new wins and extensions within the pipeline. We
specifically considered the impact of COVID-19 on trading and compared the
forecasts against the company's experience to date during the pandemic.
Comparing valuations
We considered whether the forecast cash flow assumptions used in the value in
use calculation were consistent with the assumptions used to calculate the
expected loss on onerous contract provisions, the recognition of deferred tax
assets and the Directors' assessment of going concern and viability.
We compared the results of discounted cash flows against the Group's market
capitalisation, after adjusting for its net debt to assess the reasonableness
of the value in use calculations.
Assessing transparency
We also assessed whether the Group's disclosure about the sensitivity of
outcomes reflects the risks inherent in the valuation of goodwill.
Substantive audit procedures over testing of recoverability of the investment
in subsidiary included:
· Comparing the carrying amount of investment with the subsidiary's financial
statements or draft balance sheet to identify whether its net assets, being an
approximation of their minimum recoverable amount, are in excess of their
carrying amount and assessing whether the subsidiary has historically been
profit-making.
· We compared the carrying amount of the investment to the market capitalisation
for the Group (after adjusting for net debt).
Our findings:
We found the Group's assessment that there is no impairment of the carrying
amount of Group's goodwill and of parent's investment in subsidiary to be
balanced (2020: balanced) and the related sensitivity disclosures to be
proportionate (2020: proportionate).
Recognition of Deferred Tax Assets
£214.3m (2020: £83.2m)
Assessment of risk vs. prior year: Unchanged
Refer to note 11 Deferred Tax
The risk
Forecast based assessment
The Group has significant deferred tax assets in respect of tax losses.
There is inherent uncertainty involved in forecasting future taxable profits,
which determines the extent to which deferred tax assets are or are not
recognised.
The effect of these matters is that, as part of our risk assessment, we
determined that the recoverable amount of deferred tax assets has a high
degree of estimation uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the financial statements as a whole,
and possibly many times that amount.
Our response
We performed the tests below rather than seeking to rely on any of the group's
controls because the nature of the balance is such that detailed testing is
inherently the most effective means of obtaining audit evidence.
Our audit procedures included:
Assessing forecasts
The work on the Group's forecasts as described in the goodwill impairment risk
above.
Our tax expertise
Use of our own tax specialists to assist us in assessing the recoverability of
the tax losses against the forecast future taxable profits, taking into
account the Group's tax position, the timing of forecast taxable profits, and
our knowledge and experience of the application of relevant tax legislation.
Assessing transparency
Assessing the adequacy of the Group's disclosures about the sensitivity of the
recognition of deferred tax assets to changes in key assumptions reflected in
the inherent risk.
Our results
As a result of our work we found the level of deferred tax assets recognised
to be acceptable (2020 result: acceptable).
Procedures performed to agree to the preliminary announcement of annual
results
In order to agree to the publication of the preliminary announcement, we
conducted procedures having regard to the Financial Reporting Council's
Bulletin: The auditors' association with preliminary announcements made in
accordance with the requirements of the UK Listing Rules. Our work included
considering whether:
· the financial information included in the preliminary announcement has been
accurately extracted from the audited statutory financial statements, and that
it reflects the presentation adopted in the audited statutory financial
statements;
· based on our statutory financial statements audit work, the financial
information included in the preliminary announcement is materially misstated;
· the information included in the preliminary announcement (including the
management commentary) is materially consistent with the content of the annual
report;
· based on our statutory financial statements audit work, the assessment of the
Company's position and prospects in the preliminary announcement is fair,
balanced and understandable; and
· the preliminary announcement includes the disclosures required under the UK
Listing Rules and s435 of the Companies Act 2006.
Directors' responsibilities
The preliminary announcement is the responsibility of, and has been approved
by, the directors. The directors are responsible for: preparing, presenting
and publishing the preliminary announcement in accordance with the Listing
Rules of the UK FCA; ensuring that its content is consistent with the
information included in the annual report and audited statutory financial
statements; and, as required under the UK Corporate Governance Code, for
ensuring that the assessment of the Company's position and prospects in the
preliminary announcement is fair, balanced and understandable.
Our responsibility
Our responsibility under the Listing Rules is to agree to the publication of
the preliminary announcement based on our work. In addition, under the terms
of our engagement our responsibility is to report to the Company setting out
the procedures performed by us to agree to the publication, the status of the
audit report on the statutory financial statements, and the key audit matters
addressed in that audit report.
We do not express an audit opinion on the preliminary announcement.
We are not required to agree to the publication of presentations to analysts
or webcasts.
This report is made solely to the Company in accordance with the terms of our
engagement. Our work has been undertaken so that we might state to the
Company those matters we have agreed to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company for our work, for this
report, or for the conclusions we have reached.
This report is not the auditor's report on the Company's statutory financial
statements. It relates only to the matters specified and does not extend to
the Company's statutory financial statements taken as a whole.
John Luke
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
E14 5GL
23 February 2022
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