REG - Serco Group PLC - 2023 Final Results
29/02/2024 07:00
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RNS Number : 8683E Serco Group PLC 29 February 2024
2023 full year results
Serco Group plc
29 February 2024
Strong performance in 2023, positive outlook for 2024 and medium-term
Year ended 31 December 2023 2022 Change at reported currency Change at constant currency
unaudited
Revenue((1)) £4,874m £4,534m 7% 8%
Underlying operating profit((2)) £249m £237m 5% 5%
Reported operating profit((2)) £272m £217m 25%
Underlying earnings per share (EPS), diluted((3)) 15.36p 13.92p 10%
Reported EPS (i.e. after exceptional items), diluted 17.93p 12.79p 40%
Dividend per share (recommended) 3.41p 2.86p 19%
Free cash flow((4)) £209m £159m 31%
Adjusted net debt((5)) £109m £204m (47)%
Reported net debt((6)) £562m £650m (13)%
Highlights
• Revenue: grew by 7% to £4.9bn, organic revenue growth of 4%
• Underlying operating profit: increased by 5% to £249m, a margin
of 5.1%. More than 60% of Group underlying operating profit derived from
outside the UK((7))
• Underlying earnings per share: increased by 10% to 15.36p
• Cash flow: free cash flow very strong at £209m, trading cash
conversion of 111%
• Adjusted net debt: better than previous guidance at £109m;
covenant leverage at 0.5x EBITDA
• Order intake: £4.6bn of wins, order book remains strong at
£13.6bn
• Pipeline: pipeline of potential new work of £10.1bn, +28% since
half year, highest level in a decade
• Dividend per share: recommended final dividend per share of 2.27p,
+18% year on year
• New £140m share buyback in 2024: continuing to return capital to
shareholders as a result of strong trading and cash conversion consistent with
our capital allocation priorities.
• Updated guidance for 2024: Revenue and underlying operating profit
unchanged, net debt updated to include better 2023 outcome and new share
buyback
Mark Irwin, Serco Group Chief Executive, said:
"We are making good progress in building a resilient international platform
for growth in the government services sector. Our strong results for 2023
reflect this progress, with another year of growth in revenue and profit and
continued excellent cash generation. We enhanced our customer relationships
and improved our win rates compared to the prior year, delivered better safety
outcomes for our colleagues, and announced two strategic acquisitions to
strengthen our capabilities.
We have entered 2024 with increased execution focus on service excellence to
our customers, effective conversion of a substantial pipeline of
opportunities, the safety and productivity of our colleagues, and progressing
the technology-enablement of our business, all aligned to delivery of our
medium-term goals."
Guidance for 2024
We update our guidance for 2024. Revenue and underlying operating profit
guidance are unchanged. Net debt guidance is updated to reflect a stronger
outcome on free cash flow than expected in 2023 and the new £140m share
buyback announced with these results.
2023 Actual 2024 Initial guidance 2024 New guidance
unaudited 14 December 2023
Revenue £4.9bn ~£4.8bn ~£4.8bn
Organic sales growth 4% ~(3)% ~(3)%
Underlying operating profit £249m ~£260m ~£260m
Net finance costs £25m ~£33m ~£35m
Underlying effective tax rate 23% ~25% ~25%
Free Cash Flow £209m ~£140m ~£140m
Adjusted Net Debt £109m ~£85m ~£175m
NB: The guidance uses an average GBP:USD exchange rate of 1.26 in 2024,
GBP:AUD of 1.93 and GBP:EUR of 1.17((8)). We expect a weighted average number
of shares in 2024 of 1,065m for basic EPS and 1,085m for diluted EPS.
Medium-term financial targets
- Revenues to grow at ~4-6% per year over the medium term
- Profits to grow faster than revenue with margins of 5-6%
- At least 80% of profit converted into cash
- Returns to shareholders will grow faster than profits.
For further information please contact Serco:
Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or
email: paul.checketts@serco.com
Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email:
marcus.deville@serco.com
Presentation:
A presentation for institutional investors and analysts will be held at
H/Advisors Maitland, 3 Pancras Square, London, N1C 4AG today at 10.00 UKT.
The presentation will be webcast live at
https://edge.media-server.com/mmc/p/pg7tzizn
(https://edge.media-server.com/mmc/p/pg7tzizn) and subsequently available
on demand. A dial-in facility is available on
https://register.vevent.com/register/BI91351cd9c6f7468781113fb5ea697036
(https://register.vevent.com/register/BI91351cd9c6f7468781113fb5ea697036)
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 2023 into
sterling at the average exchange rates for the prior year.
(2) Underlying operating profit is defined as IFRS Operating Profit excluding
amortisation of intangibles arising on acquisition and exceptional items (and
in the prior year other non-underlying items). Consistent with IFRS, it
includes Serco's share of profit after interest and tax of its joint ventures
and associates. A reconciliation of underlying operating profit to reported
operating profit is as follows:
Year ended 31 December 2023 2022
£m unaudited
Underlying operating profit 248.7 237.0
Amortisation and impairment of intangibles arising on acquisition (30.9) (21.6)
Exceptional operating items 53.8 (2.4)
Other non-underlying items - 4.2
Reported operating profit 271.6 217.2
(3) Underlying EPS is derived from the underlying operating 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 adjusted to
remove the impact of non-underlying cash flows from operating activities,
adding dividends we receive from joint ventures and associates and deducting
net interest, net capital expenditure on tangible and intangible asset
purchases and the purchase of own shares to satisfy share awards.
(5) Adjusted net debt is used by Serco as an additional non-IFRS Alternative
Performance Measure (APM). 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 recognised under IFRS 16
Leases.
(6) Reported net debt includes all lease liabilities, including those
recognised under IFRS 16 Leases. A reconciliation of adjusted net debt to
reported net debt is as follows:
As at 31 December 2023 2022
£m unaudited
Adjusted net debt 108.7 203.9
Include: all lease liabilities 453.7 446.0
Reported net debt 562.4 649.9
(7) Refers to non-UK underlying operating profit as a proportion of Group
underlying operating profit before corporate costs. Our underlying operating
profit before corporate costs in 2023 was £298.0m.
(8) The currency rates used for our 2024 outlook, along with their estimated
impact on revenue and underlying operating profit are:
Year ended 31 December (unaudited) 2024 2023 2022
outlook actual actual
Average FX rates:
US Dollar 1.26 1.24 1.24
Australian Dollar 1.93 1.87 1.78
Euro 1.17 1.15 1.18
Year-on-year impact:
Revenue £(48)m £(33)m £175m
Underlying operating profit £(4)m £(0)m £14m
Reconciliations and further detail of financial performance are included in
the Finance Review on pages 17-29 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 30-51.
Chief Executive's update
In 2023 we made good progress towards building a resilient international
platform for growth in the government services sector. We delivered growth in
revenue, profit and cash, with all three financial performance measures ending
the year better than our initial guidance. We have also made good progress
executing our strategy with clarity about our Purpose - to impact a better
future; our Vision - to be the partner of choice to governments globally; and
our Mission - to bring together the right people, the right technology and the
right partners to support our government customers with solving some of the
most complex problems that they face.
We grew revenue by 7% to £4.9bn, with organic growth of 4%, acquisitions
adding another 4% and a 1% drag from currency. Underlying operating profit
increased by 5% to £249m and our cash generation was again very strong, with
111% profit to trading cash conversion.
In North America, which generates close to half our profit, organic revenue
growth was strong. We secured the rebid for our CMS contract, one of the
largest and strategically crucial contracts in the Group and we strengthened
our order book with excellent rebid success. Within North America, Canada
continues to grow, and we are seeing our focus on global collaboration bear
fruit with success in winning employment services work in Ontario, as we
entered the sector for the first time by leveraging our longstanding work in
the UK.
Our UK business delivered high organic revenue growth, margin improvement and
good conversion rates for new wins and recompetes. In Europe, the successful
integration of ORS, which is now delivering revenue more than double the level
prior to us acquiring it, has strengthened our position in immigration
services. We have followed that with the acquisition of European Homecare, a
German immigration services provider which will complement the work we do to
support governments in the UK, Australia and across Europe.
Our Middle East business had a good year. Although profit reduced slightly,
order intake was high as we saw success in executing our strategy of
repositioning Serco for higher margin growth in the most dynamic markets in
the region. The development of an advisory business has helped us win work in
new segments, such as sustainability services at the Red Sea Global
megaproject and has expanded our presence in the exciting new giga-cities of
Saudi Arabia.
Our Asia Pacific business had a difficult year. Volume-variable work, which as
part of a portfolio we expect to ebb and flow, reduced in the period, tight
labour markets created operational challenges and new business wins did not
meet our expectations. We took appropriate action, appointing a new CEO for
the business and implementing the necessary business changes to ensure we are
well positioned for future opportunities in what remains an important market
for Serco.
In summary, we are pleased with the full year results for 2023 which were the
direct result of the hard work and dedication of more than 50,000 colleagues
across the Group. For that we remain grateful, as we do for the continued
trust of our customers and the support of our shareholders.
After my first full year as Group Chief Executive, I am confident that we
enter this next stage of Serco's development with strong foundations and a
strategy aimed at delivering profitable, sustainable growth aligned to our
medium-term goals. We enter 2024 with the largest pipeline of potential new
work in a decade, a business plan to deliver margin improvement from a
rigorous approach to operational efficiency, a network of partnerships to
support technology enablement and a robust balance sheet providing good
optionality for capital allocation. We therefore see clear opportunity to
sustain the consistent positive results reported in recent years.
Mark Irwin
Group Chief Executive
Serco - Impact a better future
Group Review
Summary of financial performance
Revenue, underlying operating profit and underlying earnings per share
Revenue increased by 7%, or £340m, to £4,874m (2022: £4,534m). Organic
revenue growth was 4% (£199m), acquisitions added 4% (£174m) and currency
was a drag of 1% (£33m). Revenue has increased organically as growth in the
immigration and defence sectors, areas we have invested in significantly in
recent years, more than offset Covid-related work which concluded in 2022.
Were revenue from our joint ventures to be included, it would add a further 5%
to the Group's organic revenue growth, as our VIVO Defence Services work for
the UK's Defence Infrastructure Organisation continues to experience robust
demand.
Underlying operating profit increased by 5% to £249m (2022: £237m), and
growth on a constant currency basis was also 5%. Ongoing demand for
immigration services in the UK and Europe, operational improvement in our
existing portfolio, as well as the successful ramp up of new business signed
in prior years, more than offset a 7% impact from Covid-related work, as well
as lower volumes in Asia Pacific. Improved margins in the UK & Europe
division broadly offset lower margins in the other regions, underlining the
benefit of our geographic and sectoral diversity, and the overall resilience
this brings to our business.
Reported operating profit increased by 25% to £272m. The growth rate was
greater than for underlying operating profit because of positive exceptional
operating items. Exceptional operating items of £54m resulted from the
release of £44m of provisions held for indemnities provided on businesses
disposed of in 2015, predominantly due to the claims period ending, and £10m
compensation we received on the early termination of a contract.
Diluted underlying earnings per share increased by 10% to 15.36p (2022:
13.92p). The percentage improvement was higher than the increase in underlying
operating profit as a 7% reduction in the weighted average number of shares,
due to our share buybacks in 2022 and 2023, more than offset higher net
finance costs.
The revenue and underlying operating profit performances are discussed in more
detail in the Divisional Reviews.
Cash flow and net debt
Free cash flow was very strong at £209m. This was 31% better than the prior
year (2022: £159m), which itself had been a particularly good outcome.
Trading cash conversion was also very strong at 111%. High conversion of
profit to cash in recent years has been achieved, in part, by intense focus on
the cash management process. An important element of this has been increased
focus on the timeliness and accuracy of issuing sales invoices, which enables
our customers to pay us on time. In 2023, cash flow benefitted from
continued good performance on working capital, including successful collection
of some older debt, the timing of payments on some large contracts, contract
mobilisation dynamics, and the working capital unwind of lower work levels in
Asia Pacific. Average working capital days were at attractive levels with
debtor days of 16 (2022: 22 days) and creditor days of 20 (2022: 21 days). The
reduction in debtor days reflects the factors mentioned above, some of which
are temporary. Including accrued income and other unbilled receivables, day
sales outstanding for 2023 were 38 days (2022: 48 days). Of all UK supplier
invoices, 94% were paid in under 30 days (2022: 87%) and 98% were paid in
under 60 days (2022: 95%). No working capital financing facilities were
utilised in this or the prior year.
Adjusted net debt was £109m at the end of December. This was a reduction of
£95m (December 2022: £204m) despite £34m of dividend payments to
shareholders and £89m being spent on our share buyback programme, net of
fees.
The period end adjusted net debt compares to a daily average of £232m (2022:
£231m) and a peak of £362m (2022: £377m). The variance reflects free cash
flow being generated across the year, while returns to shareholders - our
share buyback and final dividend - were concentrated in the first half.
Receipts towards the end of the period supported the closing balance being
lower than prior guidance.
Our measure of adjusted net debt excludes lease liabilities, which aligns
closely with the covenants on our financing facilities. Lease liabilities
totalled £454m at the end of December (2022: £446m), the majority being
leases on housing for asylum seekers under our Asylum Accommodation and
Support Services Contract (AASC). The terms of these leases do not extend
beyond the expected life of the contract we have with the customer.
At the closing balance sheet date, our leverage for debt covenant purposes was
0.5x EBITDA (2022: 0.8x). This compares with the covenant requirement for net
debt to be less than 3.5x EBITDA and our target range of 1-2x.
On 27 February 2024, we issued $150m (£118m) of US Private Placement loan
notes. The notes are equally split into two series of $75m each with
maturities of five and ten years, giving an average maturity of seven and a
half years. The average interest rate on the new loan notes is fixed at
6.58%, which compares to a blended rate of 3.97% for the existing notes.
More detailed analysis of earnings, cash flow, financing and related matters
is included in the Divisional Reviews and Finance Review.
Capital allocation and returns to shareholders
We aim to have a strong balance sheet with our target financial leverage of 1x
to 2x net debt to EBITDA, and, consistent with this, the Board's capital
allocation priorities are to:
- Invest in the business to support organic growth.
- Increase ordinary dividends to reward shareholders with a growing and
sustainable income stream.
- Selectively invest in strategic acquisitions that add capability, scale or
access to new markets, enhance the Group's future potential organic growth and
have attractive returns.
- Return any surplus cash to shareholders through share buybacks or other means.
Our capital allocation framework was actively applied in 2023:
- Invest to support organic growth: significant investment has been put into
business development, which has supported our healthy pipeline of new
opportunities. In the Middle East, we have invested in developing an advisory
capability and this has generated good new business wins in the year. We also
invested in new pilot programmes to partner with both start-up and established
technology businesses, as well as academic and research institutions to create
a broader capability ecosystem from which to deliver future growth.
- Increase ordinary dividends: the Board is recommending a final dividend of
2.27p per share. Following the interim dividend of 1.14p, this results in a
full year dividend of 3.41p, an increase of 19% compared to 2022, as we
continue on our path to reduce dividend cover progressively towards 3x over
the coming years.
- Invest in acquisitions: we agreed to acquire European Homecare (EHC), a
leading provider of immigration services in Germany, and we also agreed to
acquire Climatize, a small but fast-growing business that operates in the
United Arab Emirates and the Kingdom of Saudi Arabia offering 'zero-carbon'
advisory and related engineering services. The Climatize acquisition completed
in January 2024 and EHC is expected to complete in March 2024. We continue to
assess other opportunities that are aligned to our strategy and provide
potential to enhance future organic growth.
- Return surplus cash to shareholders: in 2023 we completed a £90m share
buyback and the Board has agreed that it intends to buy back a further £140m
of the Company's shares during 2024. Net debt to EBITDA was 0.5x at the end of
2023 and the £140m buyback, applied retrospectively, would take leverage to
1.0x, the low end of our preferred 1-2x range and the level below which we
consider capital to be surplus.
Contract awards, order book, rebids and pipeline
Contract awards
Order intake in 2023 was £4.6bn, a book-to-bill rate of 95%. Book-to-bill of
slightly below 100% reflects a significant number of bids currently submitted
and awaiting decision. Our win rates in the year improved and have rebounded
to the levels we have delivered on average over recent years, following a dip
in the second half of 2022.
There were around 60 contract awards worth £10m or more each. As in 2022,
North America had the strongest book-to-bill at 154%, with robust new order
intake in Defence and Citizen Services as well as the strategically important
rebid of our Centers for Medicare & Medicaid Services (CMS) contract.
Our Middle East business showed strong momentum, with full year book-to-bill
of 150%, supported by order intake in the second half approaching 2x revenue.
Around £2.1bn, or 45%, of the order intake came from North America, £1.9bn,
or 41%, from the UK & Europe, and the Middle East and Asia Pacific both
contributed £0.3bn, or 7%.
Approximately 40% of the order intake value was new business and 60% was
rebids or extensions of existing work. The win rate by value for new work was
approaching 35%, while the win rate by value for retaining existing work was
approximately 90%.
New wins included a £350m five-year contract to deliver functional health
assessments in the south-west of England for the Department of Work and
Pensions to determine disability benefits and a contract to deliver electronic
monitoring services in England and Wales that is expected to be worth £200m
over its initial six-year term. We also secured a £140m, five-year contract
with the Government of Ontario to assist job seekers develop their skills and
match them to employment opportunities, and a £78m, nine-year contract with
the UK Home Office to run the Derwentside Immigration Removal Centre. In the
UK, increases in the numbers of service users led to us securing additional
immigration accommodation work that is expected to generate around £300m of
revenue in 2024. We also successfully rebid our CMS contract where we support
eligibility determinations for citizens purchasing health insurance through
the Federal Health Insurance Exchanges. The estimated total value to Serco,
subject to workload volumes, is approximately $690m (£570m) over its term of
just over four and a half years, if all option periods are exercised. Other
notable retained work in the year included our driver examination services
contract in Ontario, where we secured a three-year extension worth an
estimated £220m, an agreement with the Australian Defence Force to continue
to provide logistics and a full suite of base services for their locations in
the Middle East, and our force protection work for the US Navy, with the new
five-year contract expected to be worth approximately £160m.
Order book
The order book remains strong at £13.6bn at the end of December (2022:
£14.8bn). The reduction during the year primarily reflected book-to-bill
being slightly below 1.0x. 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 £2.6bn
(2022: £1.9bn) higher if option periods in our US business, which typically
tend to be exercised, were included. If joint venture work was included this
would add a further £1.9bn (2022: £2.0bn) to our order book.
Rebids
In our portfolio of existing work, we have around 85 contracts with annual
revenue of £5m or more where an extension or rebid will be required before
the end of 2026, with an aggregate annual revenue of £1.9bn. Contracts that
will either need to be rebid or extended in 2024 have an annual contract value
of around £0.7bn, including our immigration services work in Australia, which
is currently contracted until December 2024. The annual value of rebids is
approximately £0.6bn in both 2025 and in 2026.
New business pipeline
Our measure of pipeline 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 small proportion of the total universe of opportunities, as many
opportunities have annual revenues less than £10m, are likely to be decided
beyond the next 24 months or are rebids and extensions.
Our pipeline was £10.1bn at the end of December, 20% higher than the £8.4bn
level at the end of 2022, an increase of nearly 30% since the end of June
2023, and is now more than double its pre-Covid level. The pipeline consists
of around 45 bids with an ACV averaging around £40m and an average contract
length of around six years. The pipeline of opportunities for new business
with an estimated ACV of less than £10m totalled £2.6bn at the end of
December, a 4% increase from the £2.5bn value at the end of 2022.
Acquisitions
We continue to view acquisitions as an important part of our strategic
toolkit, which, if deployed correctly, can add significant value to the
business. They should therefore supplement and be capable of delivering new
opportunities for organic growth. Generally speaking, we regard acquisitions
as higher risk than organic growth, so any potential opportunities have to
meet our stringent criteria of being both financially and strategically
compelling. We judge potential acquisitions against three criteria: do they
add new, or strengthen existing, capability? Do they add scale which we can
use to increase 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, the execution of all acquisitions is centrally managed by
Group and follows the same rigorous process. Equal focus and discipline is
applied to post-acquisition value drivers such as effective integration and
value realisation from synergy and growth.
We announced two acquisitions in 2023:
- In December we agreed to acquire European Homecare (EHC), for a consideration
of €40m (£34m). EHC is a leading private provider of immigration services
in Germany. In conjunction with ORS, the Swiss-based business we acquired in
2022, this strategic acquisition will create a strong partner for European
governments in immigration services and complement the support we already
provide to government customers in the UK and Australia. The acquisition has
received competition clearance and is expected to complete in March 2024.
- We agreed in December and completed in January 2024, the acquisition of
Climatize, for an initial cash consideration of AED 9m (£2m) and a contingent
consideration of up to AED 51m (£11m), payable on achieving certain financial
targets. Climatize is a small but fast-growing business that operates in the
United Arab Emirates and Saudi Arabia offering 'zero-carbon' advisory and
related engineering services. The business will significantly boost Serco's
sustainability advisory capability in the Middle East with possible
scalability to other markets.
We continue to seek out and evaluate new opportunities for acquisition which
fit our criteria, and focus on delivering value from those acquisitions
already executed.
Our market
The market for private sector delivery of government services is large and
growing. Independent research has put low estimates of Serco's addressable
market at around £715bn. Further growth is predicted as governments around
the world are facing ever more complex challenges.
We believe that the 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 to access the skills, resources, innovation and agility
of a partnership ecosystem. At the same time, the supply-side is fragmented
and even Serco, as a leading international provider, has only a small market
share. This gives us an opportunity to grow within, as well as with, the
market.
Our strategy
We embark on the next stage of Serco's development from a strong position; our
foundations are solid and the strategy is working as demonstrated by the
results delivered over recent years. Our focus in the period ahead is on the
execution of our strategy to make our business even better and achieve our
medium-term growth goal to grow revenue faster than the market, profit faster
than revenue and convert that profit into cash.
Last year we laid out three strategic enablers, Customers, Colleagues and
Capabilities, where we see opportunity to create value by driving enhanced
execution. We have made good progress in 2023.
Customers
Our power to drive innovation and support customers from service discovery
through to delivery is underpinned by Serco's unique operating model, which
features three components: Impact Pathway, Partnership, and Global data and
insights.
Impact Pathway factors in the perspectives of citizens, communities, customers
and operators - to inform service innovation and deliver measurable
improvement in outcomes. Our highly collaborative approach to Partnership
brings our people together with government, along with network partners -
including start-ups, enterprise level technology companies, academia and third
sector organisations - to design and deliver end-to-end solutions and learn
collectively from our experience.
Finally, we draw on a global pool of data and insights, deep domain knowledge,
and global operating experience to inform the design of solutions we know will
work in the real world.
Bringing these together allows us to support our government customers with
solving some of the most complex problems they face.
By way of example, we will continue to invest in our advisory-to-operate
business in Saudi Arabia, which has shown early success and is focussed on
supporting the country in its development of sustainable future cities. With
more than 100 advisory colleagues already active on the giga projects during
the planning and construction phases, we are working to build the trust of our
customers to make a long-term contribution to delivery of the Kingdom's Vision
2030.
Colleagues
During 2023, our People and Culture function was reorganised to ensure that it
is structured to confront the current and emerging workforce challenges
impacting government service providers, while continuing our work to progress
inclusivity, equity and diversity. Health, safety, and well-being feature as
priorities in the development of a high-performance culture and will remain
central to strategic decisions that affect our people including recruitment,
development, digital inclusivity and compensation.
In the past year we have made key appointments to give us a stronger and more
diverse executive team, and taken a data driven approach to addressing People
and Culture challenges and opportunities. We have effectively resourced
successful mobilisation of key contracts such as the newly built HMP Fosse
Way, and pleasingly saw a reduction in employee attrition which has created
operational challenges for our business in recent years. And we have proudly
welcomed more than two thousand new colleagues in our growing immigration
business in Europe.
As we press ahead, ongoing execution of our People and Culture strategy is
crucial to our long-term success. Continually evolving our Employee Value
Proposition from its purpose-led and values-driven foundations to remain
relevant, attractive, and exciting is a key element to that execution.
Colleagues are, and have always been, at the heart of Serco.
Capabilities
We have begun to optimise existing IT platforms and align investment to
business and growth needs such as selectively piloting AI systems, as outlined
below. The appointment of a Chief Data and Technology Officer to the Group's
Executive Committee will be a critical enabler to the next stage of developing
and delivering our technology roadmap. As we explore the positive impacts AI
can have on our operations, we are mindful that AI is also enabling an
expanded cyber threat landscape that requires adaptive risk and response
management, and continuous vigilance throughout the business and into our
supply chain. We will continue to invest in technology pilots as well as
strategic partnerships with technology companies to drive productivity and
open new revenue opportunities.
Artificial intelligence pilot programs
Microsoft Partnership
In December 2023, we signed a strategic memorandum of understanding with
Microsoft UK to drive Serco's digital transformation, leverage opportunities
for co-innovation and joint business development. This includes a pilot
project to use Microsoft's VisionAI products to automatically identify,
classify, and retrieve prisoner property - this will potentially improve
processing time as well as enable the identification of signs of bullying and
potential gang activity. Once this product has been fully tested, Serco will
aim to deploy it for similar use cases in its prison and immigration estate
globally. This is an example of Serco partnering to impact a better future for
our government customers globally.
AutogenAI
Serco's first technology pilot in 2023 with AutogenAI (a UK-based start-up)
has already resulted in a global partnership agreement. Initial tests, during
the pilot, have shown up to a very significant time saving when managing and
collating knowledge about Serco's capabilities worldwide. If deployed at
scale, Serco believes the technology could produce significant productivity
improvements; increase global collaboration; and lead to more innovative
solutions for Serco's customers. Serco has already used AutogenAI's technology
over 6,000 times during the pilot phase in the UK & Europe Division. It
will now be deployed globally to support better knowledge management across
the Group.
Guidance for 2024
Our guidance for 2024 is updated from our pre-close trading statement on 14
December 2023, to reflect the strong cash performance and share buyback
announced today. We expect revenue in 2024 to be slightly below 2023,
underlying operating profit to grow by around 5% and the conversion of profit
to cash to be consistent with our medium-term target of at least 80%.
Revenue: We expect revenue to be around £4.8bn, slightly below the £4.9bn
outturn for 2023, with a 3% organic contraction, a 2% contribution from
acquisitions and a 1% adverse impact of currency. Revenue is expected to be
lower organically due to our CMS contract now being in its new five-year
agreement, the annualisation of our previously announced exit from certain
low-margin contracts, and contract mix change in immigration, as we support
the UK Government's efforts to reduce the number of asylum seekers being
accommodated in hotels. These factors will be partially offset by increased
contribution from newer contracts ramping up, new business and growth in the
existing portfolio. EHC, the leading provider of immigration services in
Germany we have agreed to acquire, is expected to complete in March 2024 and
to contribute revenue of around £100m.
Underlying operating profit: Underlying operating profit is expected to grow
by around 5% to £260m, including an expected currency drag of £4m, with
margins increasing by around 30 basis points. The year will benefit from new
contracts ramping up, operational efficiency improvements across the existing
portfolio and a contribution from acquisitions. We expect these to more than
offset the mobilisation costs on new work, lower immigration volumes in the UK
and Australia, and CMS operating in its new contract term. Following our
success in winning the Functional Assessment Services and electronic
monitoring contracts in the UK in the fourth quarter, we expect around £13m
of mobilisation costs relating to these in 2024.
Net finance costs and tax: Net finance costs are expected to be around £35m.
This is more than 2023 due to higher interest rates, increased volume of
lease-related interest and acquisition spend. The underlying effective tax
rate is expected to be 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 again expected to be strong at around
£140m in the year, consistent with our ongoing expectation of converting at
least 80% of profit into cash. This is below 2023, as this included the
benefit of actions taken to structurally improve our working capital. We
expect adjusted net debt to end the year at around £175m, including the
acquisitions of EHC and Climatize, and the £140m share buyback announced
today.
Summary of guidance for 2024
2023 Actual 2024 Initial guidance 2024 New guidance
unaudited 14 December 2023
Revenue £4.9bn ~£4.8bn ~£4.8bn
Organic sales growth 4% ~(3)% ~(3)%
Underlying operating profit £249m ~£260m ~£260m
Net finance costs £25m ~£33m ~£35m
Underlying effective tax rate 23% ~25% ~25%
Free Cash Flow £209m ~£140m ~£140m
Adjusted Net Debt £109m ~£85m ~£175m
NB: The guidance uses an average GBP:USD exchange rate of 1.26 in 2024,
GBP:AUD of 1.93 and GBP:EUR of 1.17((8)). We expect a weighted average number
of shares in 2024 of 1,065m for basic EPS and 1,085m for diluted EPS.
Outlook for growth in the medium-term
Our medium-term targets remain unchanged. We expect to grow revenue at an
average of 4-6% a year. Our focus on productivity and efficiency will help us
increase our margins. At least 80% of our operating profit will be converted
into cash.
Divisional Reviews
Serco's operations are reported as four regional divisions: North America; UK
& Europe (UK&E); the Asia Pacific region; 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 operating profit.
Year ended 31 December 2023 North America UK&E Asia Pacific Middle Corporate Total
East costs
unaudited £m £m £m £m £m £m
Revenue 1,362.8 2,439.5 845.1 226.4 - 4,873.8
Change +7% +16% (11)% +8% +7%
Change at constant currency +8% +16% (7)% +9% +8%
Organic change at constant currency +8% +7% (7)% +9% +4%
.
Underlying operating profit / (loss) 138.2 120.8 23.7 15.3 (49.3) 248.7
Margin 10.1% 5.0% 2.8% 6.8% (1.0)% 5.1%
Change 1% 68% (58)% (4)% 11% 5%
Amortisation of intangibles arising on acquisition (16.0) (3.4) (11.5) - - (30.9)
Exceptional operating items - 9.9 - - 43.9 53.8
Reported operating profit / (loss) 122.2 127.3 12.2 15.3 (5.4) 271.6
Year ended 31 December 2022 North America UK&E Asia Pacific Middle Corporate Total
East costs
£m £m £m £m £m £m
Revenue 1,269.8 2,100.2 954.6 209.4 - 4,534.0
Underlying operating profit / (loss) 136.6 72.1 56.9 16.0 (44.6) 237.0
Margin 10.8% 3.4% 6.0% 7.6% (1.0)% 5.2%
Amortisation of intangibles arising on acquisition (16.5) (1.5) (3.6) - - (21.6)
Exceptional operating items (1.2) (1.2) - - - (2.4)
Other non-underlying items 0.1 4.1 - - - 4.2
Reported operating profit / (loss) 119.0 73.5 53.3 16.0 (44.6) 217.2
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 17 to 29. 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 30 to 51. Included in
note 2 to the Group's 2022 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.
North America (28% of revenue, 46% of underlying operating profit)
Year ended 31 December 2023 2022 Growth
£m unaudited
Revenue 1,362.8 1,269.8 7%
Organic change 8% (1)%
Acquisitions -% 3%
Currency (1)% 11%
Underlying operating profit 138.2 136.6 1%
Organic change 1% 6%
Acquisitions -% -%
Currency -% 11%
Margin 10.1% 10.8% (62)bps
Revenue grew by 7% to £1,363m (2022: £1,270m), with organic growth of 8% and
a 1% adverse translational effect of currency. The two main sectors for our
North America business are Defence and Citizen Services, and both saw growth
in the period. Our Defence business delivered organic revenue growth of 8% as
the high level of new work secured in 2022 ramped up. Citizen Services also
showed good progress with 7% organic revenue growth, driven by higher demand
for our case management services and the start of our new employment services
work in Canada. These contracts with the Government of Ontario were secured by
leveraging the work we do in the UK for the Department of Work and Pensions.
Underlying operating profit grew by 1% in the year to £138m (2022: £137m).
Currency had a negligible impact, meaning underlying operating profit on a
constant currency basis also grew by1%. The profit outcome was lower than
revenue as good performance in case management was more than offset by new
contracts being in a lower margin, mobilisation stage, and some defence IT
management work transitioning from its more profitable installation phase to
sustainment operations. Margins reduced from 10.8% to 10.1% as a result.
Order intake was strong at £2.1bn, around 45% of the total for the Group and
a book-to-bill ratio of 1.5x. Of this, new business wins were around 25% of
the order intake, continuing the strong momentum of 2022. The largest single
new business win was in Canada. Following on from our success in 2022, we were
again selected by the Government of Ontario to support part of their
Employment Services Transformation program, which will help unemployed people
back into work.
The contract signed this year is expected to be worth around £140m over five
years. It was an active period for rebids and extensions, and we were pleased
to achieve a win rate of around 95% on these, above our usual 80-90% range.
This included the successful rebid of our Centers for Medicare & Medicaid
Services (CMS) work, which sees us continue to support eligibility
determinations for citizens purchasing health insurance through the Federal
Health Insurance Exchanges.
The new contract started on 1 July 2023 and has an estimated total value to
Serco, subject to workload volumes, of approximately $690m (£570m), if all
option periods are exercised over its term of just over four and a half years.
Other notable retained work in the year included our driver examination
services contract in Ontario, where we secured a three-year extension worth an
estimated £220m and our force protection work for the US Navy, with the new
five-year contract expected to be worth approximately £160m.
The pipeline of major new bid opportunities due for decision within the next
24 months in North America has increased from £2.5bn at the end of 2022 to
£3.2bn at the end of 2023. It is pleasing to see the pipeline at such a
healthy level given the high order intake in both 2022 and 2023. North America
represents approximately 35% of the total Group pipeline. Defence makes up the
largest proportion of the North American pipeline, with a broad spread of
types of work. There are also significant opportunities in Citizen Services,
where we have been actively seeking to grow.
UK & Europe (50% of revenue, 41% of underlying operating profit)
Year ended 31 December 2023 2022 Growth
£m unaudited
Revenue 2,439.5 2,100.2 16%
Organic change 7% (5)%
Acquisitions 8% 3%
Currency 1% -%
Underlying operating profit 120.8 72.1 68%
Organic change 55% (27)%
Acquisitions 12% 2%
Currency 1% -%
Margin 5.0% 3.4% 152bps
Revenue increased by 16% to £2,440m (2022: £2,100m), with 7% organic growth,
an 8% contribution from acquisitions and a 1% favourable translational effect
of currency. ORS, the business we acquired in September 2022 to enter the
European immigration services market, traded ahead of expectations with robust
underlying demand due to global migration patterns. Covid-related work, which
fully concluded in the first half of 2022, was a drag of £79m, or 4%. This
was more than offset by strong growth for our immigration services in both the
UK and Europe, and good growth in our defence and justice businesses. We
exclude the revenue from our joint ventures, however, our VIVO Defence
Services work for the Defence Infrastructure Organisation, which when won in
2021 included one of the largest contracts ever secured by Serco, continued to
ramp up. Were revenue from our joint ventures to be included, it would add a
further 10% to organic revenue growth, as our VIVO work experienced robust
demand.
Underlying operating profit increased by 68% to £121m (2022: £72m). Strong
demand for immigration services, the ramp up of contracts signed in prior
years, improved performance across a range of existing contracts and the ORS
acquisition more than offset the drag from Covid-related work. The year also
benefitted from a £6m one-off settlement of a dispute on a contract. The
margin increased by around 150bps to 5.0% (2022: 3.4%) because of these
factors.
Underlying operating 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 4.5% (2022: 3.2%). The joint venture and associate
profit contribution increased to £29m (2022: £12m) due to our VIVO work
continuing to ramp up, Merseyrail seeing improved performance and the one-off
settlement mentioned above being included.
Order intake was around £1.9bn, a book-to-bill ratio of 0.8x and around 40%
of the total intake for the Group. The low book-to-bill reflected 2023 being
relatively quiet in terms of rebids and contract award decisions for new work.
Our win rates, having dipped in the second half of 2022, rebounded in 2023.
New business represented nearly 60% of the order intake and our win rate on
new work was around 60%. Our win rate by value on rebids and extensions was
more than 95%. Agreements signed included a £350m five-year contract to
deliver functional health assessments in the south-west of England for the
Department of Work and Pensions to determine disability benefits, a contract
to deliver electronic monitoring services in England and Wales that is
expected to be worth £200m over its initial six-year term, and a contract
with the UK Home Office to run the Derwentside Immigration Removal Centre. The
new contract has an estimated value of around £80m over the initial nine-year
term. Also in the Justice & Immigration sector, increases in the numbers
of service users led to us securing additional immigration accommodation work
that is expected to generate around £300m of revenue in 2024.
The pipeline of new opportunities in the UK & Europe increased by around
30% to £4.8bn (December 2022: £3.7bn), with significant new opportunities
across Justice & Immigration, Defence and Citizen Services.
Asia Pacific (17% of revenue, 8% of underlying operating profit)
Year ended 31 December 2023 2022 Growth
£m unaudited
Revenue 845.1 954.6 (11)%
Organic change (7)% -%
Acquisitions -% 2%
Currency (4)% 3%
Underlying operating profit 23.7 56.9 (58)%
Organic change (56)% 13%
Acquisitions -% (6)%
Currency (2)% 4%
Margin 2.8% 6.0% (316)bps
Our Asia Pacific business had a difficult year. Volume-variable work, which as
part of a portfolio we expect to ebb and flow, reduced in the period, tight
labour markets created operational challenges and new business wins did not
meet our expectations. We have appointed a new CEO for the business, Andrew
Head, identified actions and designed what we believe to be an achievable plan
to ensure the business is well positioned for the opportunities we expect in
the coming years. Asia Pacific remains an important market for Serco.
Revenue reduced by 11% to £845m (2022: £955m). The business contracted by 7%
organically and adverse currency moves had a 4% impact. Revenue fell because
of lower volume-variable work in parts of the immigration network, reduced
work in facilities management and a combination of tight labour markets and
some lost work in the Citizen Services sector.
Underlying operating profit reduced by 58% to £24m (2022: £57m),
representing a margin of 2.8% (2022: 6.0%). Profit fell more than revenue due
to a negative mix impact from the lower immigration volumes, some initial
stranded costs on lost contracts and labour market disruption making it
difficult to recruit enough people to meet customer headcount targets.
Order intake was £0.3bn, continuing a recent record of low win rates on new
work. Our investor pipeline for new business currently stands at £1.3bn in
the year. Defence makes up around 90% of the pipeline with opportunities also
in the transport and health sectors.
Our immigration services work in Australia, which is contracted until December
2024, and one of the largest contracts in the Group, is currently in a
competitive rebid process. Serco has been providing immigration services as a
partner to the Australian Government since October 2009, with our work having
been successfully rebid and extended over this period. Our performance levels
have been high on the current contract and we believe we have submitted a
compelling bid. The final outcome of the tender process is expected before the
end of the third quarter of 2024.
Middle East (5% of revenue, 5% of underlying operating profit)
Year ended 31 December 2023 2022 Growth
£m unaudited
Revenue 226.4 209.4 8%
Organic change 9% (28)%
Acquisitions -% -%
Currency (1)% 8%
Underlying operating profit 15.3 16.0 (4)%
Organic change (2)% 8%
Acquisitions -% -%
Currency (2)% 9%
Margin 6.8% 7.6% (88)bps
Revenue grew by 8% to £226m (2022: £209m). The business grew by 9%
organically and currency moves had a 1% adverse impact. Organic growth was
driven by the Citizen Services sector, where our new advisory business unit is
gaining traction. Underlying operating profit reduced to £15m (2022: £16m).
Profit was negatively impacted by stopping services with a customer where we
had debtor collection issues and by costs on some health and facilities
management work we exited. These more than offset the higher margins being
achieved on our advisory work. Margins decreased from 7.6% to 6.8% as a
result.
Order intake was around £0.3bn, or 7% of the total for the Group and a
book-to-bill ratio of 1.5x. Around 60% of the order intake was new business.
The largest win was a contract to provide Fire Rescue, Emergency and
Ambulatory Services in the NEOM economic zone in Saudi Arabia, which is
estimated to be worth around £50m over eight years, and we also won a £40m,
five-year, contract with Red Sea Global to act as the managing agent for their
full suite of sustainable mobility services across Saudi Arabia's visionary
new tourism destination. In addition, we secured a three-year contract worth
approximately £30m to provide Customer Experience services within Terminal A
of the newly opened Zayed International Airport in Abu Dhabi. Since the end of
our contract to run the Dubai Metro, our Middle East business has been
exploring new potential areas of demand and has invested in developing an
advisory business in the region. The year saw this begin to pay off with
several agreements being secured to advise customers in the region as they
embark on ambitious new multi-year projects.
We were successful on all our key rebids in the period, including renewing our
agreement with the Australian Defence Force to continue to provide logistics
and a full suite of base services for their locations in the Middle East,
which has an estimated value of approaching £60m over three years. We also
secured a three-year extension to our contract for the delivery of integrated
facilities and support services at the United Arab Emirates University in Al
Ain, which is expected to be worth around £50m.
Our pipeline of major new bid opportunities in the Middle East totals around
£0.8bn and includes increasing opportunities in Defence and potential work in
the Citizen Service sector.
_____________________________________________________________________________________________________
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. Underlying corporate costs increased by £4.7m to
£49.3m (2022: £44.6m). The higher level in 2023 was primarily related to an
increase in audit fees and the transition of Group Chief Executive, as Rupert
Soames, who stepped down as Group Chief Executive on 31 December 2022, acted
as a strategic adviser to the Group in 2023 until his retirement in September
2023.
Dividend calendar, if approved at the AGM
Ex-dividend date 18 April 2024
Record date 19 April 2024
Final dividend payable 10 May 2024.
LEI: 549300PT2CIHYN5GWJ21
Forward looking statements
This announcement contains statements which are, or may be deemed to be,
"forward looking statements" which are prospective in nature. All statements
other than statements of historical fact are forward looking statements.
Generally, words such as "expect", "anticipate", "may", "could", "should",
"will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" or, in
each case, their negative or other variations or comparable terminology
identify forward looking statements. By their nature, these forward looking
statements are subject to a number of known and unknown risks, uncertainties
and contingencies, and actual results and events could differ materially from
those currently being anticipated as reflected in such statements. Factors
which may cause future outcomes to differ from those foreseen or implied in
forward looking statements include, but are not limited to: general economic
conditions and business conditions in Serco's markets; contracts awarded to
Serco; customers' acceptance of Serco's products and services; operational
problems; the actions of competitors, trading partners, creditors, rating
agencies and others; the success or otherwise of partnering; changes in laws
and governmental regulations; regulatory or legal actions, including the types
of enforcement action pursued and the nature of remedies sought or imposed;
the receipt of relevant third party and/or regulatory approvals; exchange rate
fluctuations; the development and use of new technology; changes in public
expectations and other changes to business conditions; wars and acts of
terrorism; cyber-attacks; and pandemics, epidemics or natural disasters.
Many of these factors are beyond Serco's control or influence. These forward
looking statements speak only as of the date of this announcement and have not
been audited or otherwise independently verified. Past performance should
not be taken as an indication or guarantee of future results and no
representation or warranty, express or implied, is made regarding future
performance. Except as required by any applicable law or regulation
(including under the UK Listing Rules and the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority), Serco expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward looking statements contained in this announcement to
reflect any change in Serco's expectations or any change in events, conditions
or circumstances on which any such statement is based after the date of this
announcement, or to keep current any other information contained in this
announcement. Accordingly, undue reliance should not be placed on the
forward looking statements.
Finance Review
For the year ended 31 December Underlying Non Underlying items Reported Underlying Non Underlying items Reported
2023 2023 2023 2022 2022 2022
£m £m £m £m £m £m
unaudited unaudited unaudited
Revenue 4,873.8 - 4,873.8 4,534.0 - 4,534.0
Cost of sales (4,378.3) - (4,378.3) (4,044.7) 4.2 (4,040.5)
Gross profit 495.5 - 495.5 489.3 4.2 493.5
Administrative expenses (275.8) - (275.8) (264.3) - (264.3)
Exceptional operating items - 53.8 53.8 - (2.4) (2.4)
Amortisation and impairment of intangibles arising on acquisition - (30.9) (30.9) - (21.6) (21.6)
Share of results of joint ventures and associates, net of interest and tax 29.0 - 29.0 12.0 - 12.0
Operating profit / (loss) 248.7 22.9 271.6 237.0 (19.8) 217.2
Margin 5.1% 5.6% 5.2% 4.8%
Net finance costs (24.6) - (24.6) (20.4) - (20.4)
Profit before tax 224.1 22.9 247.0 216.6 (19.8) 196.8
Tax (charge)/credit (50.8) 6.2 (44.6) (47.9) 6.1 (41.8)
Effective tax rate 22.7% 18.1% 22.1% 21.2%
Profit for the period 173.3 29.1 202.4 168.7 (13.7) 155.0
Attributable to:
Equity attributable to owners of the Company 173.3 29.1 202.4 169.1 (13.7) 155.4
Non-controlling interest - - - (0.4) - (0.4)
Earnings per share (EPS)
Basic EPS 15.61p 18.23p 14.18p 13.03p
Diluted EPS 15.36p 17.93p 13.92p 12.79p
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 income or expense are being excluded in an APM, these
are included elsewhere in our reported financial information as they represent
actual income or expense 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 this announcement, 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.
Consolidation of profit measures
The Group is simplifying its profit measures by removing Trading Profit and
renaming underlying trading profit (UTP) to underlying operating profit (UOP).
The historic UOP presented is consistent with the equivalent reported UTP in
that period.
The UTP definition was introduced in 2015 to exclude onerous contract
provision (OCP) releases or charges, other Contract and Balance Sheet Review
adjustments, depreciation and amortisation of assets held for sale, and some
other one-time items. It was maintained to ensure there was transparency
outside the underlying results of large charges and releases from the
portfolio of onerous contracts recorded in 2014. These definitions are no
longer required as the Contract and Balance Sheet Review Adjustments recorded
in 2014 are now at an insignificant level. In the future, no items will be
recorded between UTP and Trading Profit, meaning the additional measure no
longer adds any value.
Items excluded from UOP will be the amortisation and impairment of intangibles
arising on acquisition and exceptional operating items (and in the prior year
other non-underlying items), which is consistent with the items previously
excluded from Trading Profit. The methodology applied to calculating other
APMs has not changed since 31 December 2022.
Alternative revenue measures
2023 2022
For the year ended 31 December £m £m
unaudited
Reported revenue at constant currency(1) 4,906.3 4,534.0
Foreign exchange differences (32.5) -
Reported revenue at reported currency 4,873.8 4,534.0
1 In order to provide a comparable movement on the previous year's results,
reported revenue is recalculated by translating non-Sterling values into
Sterling at the average exchange rates for the year ended 31 December 2022.
Organic Organic Revenue plus share of joint ventures and associates(2) Revenue plus share of joint ventures and associates(2)
Revenue(1) Revenue(1)
2023 2022 2023 2022
For the year ended 31 December £m £m £m £m
unaudited unaudited
Alternative revenue measure at constant currency(3) 4,663.9 4,465.1 5,379.7 4,771.9
Foreign exchange differences (43.5) - (32.5) -
Alternative revenue measure at reported currency 4,620.4 4,465.1 5,347.2 4,771.9
Impact of relevant acquisitions or disposals 253.4 68.9 - -
Share of joint venture and associates - - (473.4) (237.9)
Reported revenue at reported currency 4,873.8 4,534.0 4,873.8 4,534.0
1 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 relevant acquisitions or disposals.
There are two acquisitions excluded for the calculation of organic revenue in
the year to 31 December 2023 being the acquisitions of OXZ Holdings AG (ORS)
and Sapienza Consulting Holdings BV (Sapienza). The prior year figure is
recalculated on a consistent basis to the acquisitions or disposals removed in
the current year and therefore may not agree to the organic revenue previously
reported.
2 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.
3 In order to provide a comparable movement on the previous period's results,
the alternative revenue measures are recalculated by translating non-Sterling
values into Sterling at the average exchange rates for the year ended 31
December 2022.
Alternative profit measures
2023 2022
For the year ended 31 December £m £m
unaudited
Underlying operating profit at constant currency(1) 248.9 237.0
Foreign exchange differences(1) (0.2) -
Underlying operating profit at reported currency(2) 248.7 237.0
Non-underlying items:
Amortisation and impairment of intangibles arising on acquisition(3) (30.9) (21.6)
Exceptional operating items(4) 53.8 (2.4)
Other non-underlying items(4) - 4.2
Reported operating profit 271.6 217.2
1 In order to provide a comparable movement on the previous period's results,
reported UOP is recalculated by translating non-Sterling values into Sterling
at the average exchange rates for the year ended 31 December 2022.
2 The Group uses an alternative measure, UOP, to make adjustments for items
considered material and outside of the normal operating practice of the Group
to be suitable for separate presentation and detailed explanation.
3 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.
4 Exceptional operating items (and in the prior year other non-underlying items)
are those items considered material and outside of the normal operating
practice of the Group to be suitable for separate presentation and detailed
explanation. Where items are not material, their inclusion is to ensure they
are treated consistently with prior periods.
Alternative Earnings per share (EPS) measures
2023 2022 2023 2022
For the year ended 31 December basic basic diluted diluted
pence pence pence pence
unaudited unaudited
Underlying EPS(1) 15.61 14.18 15.36 13.92
Non-underlying items:
Net impact of non-underlying operating items, non underlying tax and (2.02) (0.97) (1.99) (0.95)
amortisation and impairment of intangibles arising on acquisition
Exceptional operating items, net of tax 4.64 (0.18) 4.56 (0.18)
Reported EPS 18.23 13.03 17.93 12.79
1 Reflecting the same adjustments made to operating profit to calculate UOP 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 one-time effects described above.
Alternative cash flow and Net Debt measures
Free cash flow (FCF)
2023 2022
For the year ended 31 December £m £m
unaudited
Free cash flow(1) 209.2 159.1
Exclude dividends from joint ventures and associates (21.1) (9.1)
Exclude net interest paid 26.5 22.5
Exclude capitalised finance costs paid - 2.6
Exclude capital element of lease repayments 124.4 120.5
Exclude proceeds received from exercise of share options - (0.1)
Exclude purchase of own shares to satisfy share awards 22.9 15.9
Exclude purchase of intangible and tangible assets net of proceeds from 21.9 18.7
disposal
Net cash inflow from underlying operating activities 383.8 330.1
Non-underlying cash flows from operating activities 9.3 (2.9)
Net cash inflow from operating activities 393.1 327.2
1 Free cash flow is the net cash flow from operating activities adjusted to
remove the impact of non-underlying cash flows from operating activities,
adding dividends we receive from joint ventures and associates and deducting
net interest, net capital expenditure on tangible and intangible asset
purchases and the purchase of own shares to satisfy share awards.
Trading cash conversion
2023 2022
For the year ended 31 December £m £m
unaudited
Free cash flow(1) 209.2 159.1
Add back:
Tax paid 41.1 44.2
Non-cash R&D expenditure 0.4 0.4
Net interest paid 26.5 22.5
Capitalised finance costs paid - 2.6
Trading cash flow 277.2 228.8
Underlying operating profit 248.7 237.0
Trading cash conversion(1) 111% 97%
1 In order to calculate an appropriate cash conversion metric equivalent to UOP,
trading cash flow is derived from FCF by excluding capitalised finance costs,
interest, non-cash R&D expenditure and tax items. Trading 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 capitalised
finance costs, interest, non-cash R&D expenditure, tax and non-underlying
items.
Net Debt and Adjusted Net Debt
2023 2022
As at 31 December £m £m
unaudited
Cash and cash equivalents 94.4 57.2
Loans payable (206.2) (262.9)
Lease liabilities (453.7) (446.0)
Derivatives relating to Net debt 3.1 1.8
Net debt(1) (562.4) (649.9)
Add back: Lease liabilities 453.7 446.0
Adjusted net debt(2) (108.7) (203.9)
1 Alternative measures bring together the various funding sources that are
included on the Group's Consolidated Balance Sheet and the accompanying notes.
Net debt is a measure to reflect the net indebtedness of the Group and
includes all cash and cash equivalents and any debt or debt-like items,
including any derivatives entered into in order to manage risk exposures on
these items. Net debt includes all lease liabilities, whilst adjusted net debt
is derived from net debt by excluding liabilities associated with leases.
2 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.
Return on invested capital (ROIC)
2023 2022
For the year ended 31 December £m £m
unaudited
ROIC excluding right of use assets
Non current assets
Goodwill 906.7 945.0
Other intangible assets - owned 115.6 158.0
Property, plant and equipment - owned 44.3 48.1
Interest in joint ventures 32.1 23.3
Loans to joint ventures - 10.0
Contract assets, trade and other receivables 14.8 16.1
Current assets
Inventory 24.1 22.4
Loans to joint ventures 10.0 -
Contract assets, trade and other receivables 625.6 719.6
Total invested capital assets 1,773.2 1,942.5
Current liabilities
Contract liabilities, trade and other payables (593.8) (683.3)
Non current liabilities
Contract liabilities, trade and other payables (68.5) (42.8)
Total invested capital liabilities (662.3) (726.1)
Invested capital(1) 1,110.9 1,216.4
Two point average of opening and closing invested capital 1,163.7 1,151.8
Underlying operating profit 12 months 248.7 237.0
Underlying ROIC %(2) 21.4% 20.6%
1 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
where termination options exist and commitments for expenditure are in future
years.
2 ROIC is a measure to assess the efficiency of the resources used by the Group
and is a metric used to determine the performance and remuneration of the
Executive Directors. ROIC is calculated based on UOP, using the income
statement for the period 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 above.
Overview of financial performance
Revenue
Reported revenue increased by 7.5% in the year to £4,873.8m (2022:
£4,534.0m), a 8.2% increase at constant currency. Organic revenue at constant
currency increased by 4.4%. This is in line with the trading update issued on
14 December 2023 where revenue was expected to be at least £4.8bn for the
year ended 31 December 2023. Revenue including the Group's share of joint
ventures has increased by 12.1% in the year to £5,347.2m (2022: £4,771.9m) a
12.7% increase at constant currency.
Commentary on the revenue performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Underlying operating profit (UOP)
UOP increased by 4.9% in the year to £248.7m (2022: £237.0m), a 5.0%
increase at constant currency. This is marginally higher than the trading
update issued on 14 December 2023 where UOP was expected to be around £245m
for the year ended 31 December 2023.
Commentary on the underlying performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Exceptional operating items
Exceptional operating 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 2023, the total exceptional credit net of tax was £51.5m (2022:
charge of £2.1m).
The Group released provisions held for indemnities provided on disposed
businesses totalling £43.9m predominantly due to the claims period ending.
The Group also received £9.9m compensation on the early termination of a
contract which, due to the size of the settlement, has been disclosed as
exceptional.
Exceptional tax for the period was a tax charge of £2.3m (2022: credit of
£0.3m) which arises on exceptional operating items within operating profit.
Finance costs and investment revenue
Net finance costs recognised in the income statement were £24.6m (2022:
£20.4m), consisting of investment revenue of £7.0m, less finance costs of
£31.6m.
Investment revenue of £7.0m (2022: £4.7m) consists of interest accruing on
net retirement benefit assets of £3.1m (2022: £2.7m) and interest income of
£3.9m (2022: £1.9m).
Finance costs of £31.6m (2022: £25.1m) include interest incurred on loans,
primarily the US private placement loan notes and the revolving credit
facility of £15.6m (2022: £15.2m) and lease interest expense of £13.1m
(2022: £7.9m) as well as other financing related costs including the impact
of foreign exchange on financing activities.
Net interest paid recognised in the cash flow statement was £26.5m (2022:
£22.5m), consisting of interest received of £3.9m less interest paid of
£30.4m.
Tax
Underlying tax
The underlying tax charge recognised in the year was £50.8m (2022:
£47.9m). The effective tax rate of 22.7% is marginally higher than in 2022
(22.1%). The increase compared with 2022 is due to smaller credits recognised
in 2023 in connection with the finalisation of tax filings and movement in
provisions as part of the regular reassessment of tax exposures across the
Group. This has been offset by the change in mix of where profits have arisen.
The tax rate at 22.7% is slightly lower than the UK standard corporation tax
rate of 23.5%. This is mainly due to the impact of the profits of joint
ventures and associates whose post-tax profits are included in the Group's
profit before tax (reducing the rate by 3.0%) together with the reduction in
provisions held for uncertain tax positions which reduced the rate by 0.4%.
This is partially offset by the impact of the higher statutory rate of tax on
overseas profits (increasing the rate by 0.9%), the impact of unprovided UK
deferred tax in a company that ceased trading in the year (0.5% increase in
the rate), the impact of unprovided overseas deferred tax (increasing the rate
by 0.2%), and tax disallowable costs (increase the rate by 0.4%). Other
smaller items result in a net increase to the rate of 0.6%.
Non-underlying tax
A tax credit of £6.2m (2022: £6.1m) arises on non-underlying items which
comprises of:
- A tax credit of £8.5m (2022: £5.8m) due to tax deductions associated with
the amortisation of intangibles arising on acquisitions.
- A non-underlying exceptional tax charge for the period of £2.3m arising on
compensation received for early termination of a contract. The other
exceptional credits, which arise in the UK on the release of the indemnities,
are not subject to tax.
Deferred tax assets
At 31 December 2023, the Group has recognised a net deferred tax asset of
£184.8m (2022: £190.4m). This consists of a deferred tax asset of £235.7m
(2022: £244.2m) and a deferred tax liability of £50.9m (2022: £53.8m). A
£179.9m UK deferred tax asset has been recognised on the Group's balance
sheet at 31 December 2023 (2022: £186.9m) on the basis that the performance
in the underlying UK business indicates sustained profitability which will
enable the accumulated tax losses within the UK to be utilised.
Taxes paid
Net corporate income tax of £41.1m (2022: £44.2m) was paid during the year,
relating to the Group's operations in Asia Pacific (£12.3m), North America
(£24.1m), UK (£2.7m), Europe (£0.9m) and the Middle East (£1.1m). The
payments made in the UK consisted of £3.6m to HMRC, offset by £0.9m received
from the Group's joint ventures and associates for losses sold to them. The
amount of tax paid, £41.1m, differs slightly from the tax charge in the
period, £44.6m, mainly because taxes paid/received from Tax Authorities can
arise in later periods to the associated tax charge/credit. This is
particularly the case with regards to movements in deferred tax, such as on
the use of prior year losses, and provisions for uncertain tax positions.
Total tax contribution
The Group's published tax strategy of paying the appropriate amount of tax as
determined by local legislation in the countries in which it operates means
that a variety of taxes are paid across the globe. To increase the
transparency of the Group's tax profile, the cash taxes that have been paid
across its regional markets is shown below.
In total during 2023, Serco globally contributed £914.5m of tax to government
in the jurisdictions in which it operates.
Taxes by category
unaudited Taxes borne Taxes collected Total
£m £m £m
Total of Corporate Income Tax 41.8 - 41.8
Total of VAT and similar 11.6 277.0 288.6
Total of People Taxes 165.9 401.2 567.1
Total Other Taxes 16.7 0.3 17.0
236.0 678.5 914.5
Taxes by region
unaudited Taxes borne Taxes collected Total
£m £m £m
UK & Europe 126.3 362.8 489.1
Asia Pacific 39.4 176.8 216.2
North America 67.5 131.3 198.8
Middle East 2.8 7.6 10.4
236.0 678.5 914.5
Corporation tax, which is the only cost to be separately disclosed in our
Financial Statements, is only one element of the Group's tax contribution.
For every £1 of corporate tax paid directly by the Group (tax borne), a
further £4.65 is borne in other business taxes. The largest proportion of
these is in connection with employing people.
In addition, for every £1 of tax borne, £2.88 is collected on behalf of
national governments (taxes collected). This amount is directly impacted by
the number of people employed and the sales made.
Dividend, share buyback and share count
During the year to 31 December 2023, the Group paid dividends of £33.7m
(2022: £30.3m) in respect of the final dividend for the year ended
31 December 2022 and the interim dividend for the year ended 31 December
2023. As noted in the Chief Executive's Review, the Board has decided to
declare a final dividend of 2.27p per share in respect of the year ended
31 December 2023 (2022:1.92p per share).
On 28 February 2023, the Group announced its intention to repurchase ordinary
shares with a value of up to £90m. The buyback programme took place between 3
March and 22 June 2023. During this period, the Group repurchased 58,956,118
shares at an average cost of £1.51 for total cost including fees of £88.8m.
All shares held in treasury at 31 December 2022 and those purchased in 2023
have been cancelled.
The weighted average number of shares for EPS purposes was 1,110.2m for the
year ended 31 December 2023 (2022: 1,192.2m) and diluted weighted average
number of shares was 1,128.6m (2022: 1,214.8m). The decrease in the weighted
average number of shares is primarily due to the full year impact of
therepurchase of 55,506,704 shares in 2022 and the impact of the repurchase of
58,956,118 shares during 2023 which were all cancelled in year.
Cash flows and net debt
UOP of £248.7m (2022: £237.0m) converts into a trading cash inflow of
£277.2m (2022: £228.8m). The increase in trading cash inflows is mainly due
to a £30.1m inflow of working capital compared to an outflow of £24.4m in
2022. The improvement in working capital is driven by 2023 benefiting from
some aged debt collection on ceased contracts and better payment terms being
experienced within our immigration contracts. The Group saw a decrease in the
debtor days from 22 days (2022) to 16 days (2023) and a decrease in creditor
days from 21 days (2022) to 20 days (2023) during the year, as the Group
continues to ensure its suppliers are paid on time. Including accrued income
and other unbilled receivables, day sales outstanding for 2023 were 37.9 days
(2022: 48.4 days).
The table below shows the cash flow from underlying operating activities and
Free Cash Flow (FCF) reconciled to movements in Net Debt. FCF for the period
was an inflow of £209.2m compared to £159.1m in 2022. The movement compared
to 2022 is consistent with the increase in trading cash flow above.
Adjusted net debt decreased by £95.2m in the year to 31 December 2023, a
reconciliation of which is provided at the bottom of the following table.
Average Adjusted net debt as calculated on a daily basis for the year ended 31
December 2023 was £232.2m (2022: £231.0m). Peak Adjusted net debt was
£362.2m (2022: £376.8m)
For the year ended 31 December 2023 2022
£m £m
unaudited
Underlying operating profit 248.7 237.0
Less: Share of profit from joint ventures and associates (29.0) (12.0)
Movement in provisions 12.6 4.0
Depreciation, amortisation and impairment of property, plant and equipment and 25.7 33.1
intangible assets
Depreciation and impairment of right of use assets 126.1 121.7
Other non-cash movements 11.1 15.3
Working capital movements 30.1 (24.4)
Tax paid (41.1) (44.2)
Non-cash R&D expenditure (0.4) (0.4)
Net cash inflow from underlying operating activities 383.8 330.1
Dividends received from joint ventures and associates 21.1 9.1
Interest received 3.9 1.9
Interest paid (30.4) (24.4)
Capital element of lease repayments (124.4) (120.5)
Capitalised finance costs paid - (2.6)
Purchase of intangible and tangible assets net of proceeds from disposals (21.9) (18.7)
Purchase of own shares to satisfy share awards (22.9) (15.9)
Proceeds received from exercise of share options - 0.1
Free cash flow 209.2 159.1
Net cash outflow on acquisition and disposal of subsidiaries, joint ventures (7.5) (19.2)
and associates
Net increase in debt items on acquisition and disposal of subsidiaries, joint - (6.5)
ventures and associates
Dividends paid to non-controlling interests (1.7) -
Dividends paid to shareholders (33.7) (30.3)
Purchase of own shares (88.8) (91.2)
Movements on other investment balances (0.7) 1.6
Loans to joint venture - (10.0)
Capitalisation and amortisation of loan costs (0.8) 1.4
Exceptional items 9.2 (2.9)
Cash movements on hedging instruments (1.5) (2.7)
Foreign exchange gain/(loss) on Adjusted net debt 11.5 (25.2)
Movement in Adjusted net debt 95.2 (25.9)
Opening Adjusted net debt (203.9) (178.0)
Closing Adjusted net debt (108.7) (203.9)
Lease liabilities (453.7) (446.0)
Closing Net debt (562.4) (649.9)
Risk management and treasury operations
The Group's operations expose it to a variety of financial risks that include
access to 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 seek 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 which are reviewed annually. Financial instruments are
only used for hedging purposes and speculation is not permitted. A monthly
report is provided to senior management outlining performance against the
Treasury Policy.
Liquidity and funding
As at 31 December 2023, the Group had committed funding of £558.8m (at 31
December 2022: £616.4m), comprising £208.8m of US private placement loan
notes, and a £350.0m revolving credit facility which was undrawn. The US
private placement loan notes are repayable in bullet payments between 2024 and
2032. The Group does not engage in any external financing arrangements
associated with either receivables or payables.
During the year ended 31 December 2023 total repayments of debt were £44.5m
which related to US private placement loan notes.
The Group's revolving credit facility provides £350.0m of committed funding
for five years from the arrangement date in November 2022. The facility
includes an accordion option, providing a further £100.0m of funding
(uncommitted and therefore not incurring any fees) if required without the
need for additional documentation. This option has not been included in the
Group's assessment of available liquidity as approvals are required to access
the funding.
Interest rate risk
The Group has a preference for fixed rate debt to reduce the volatility of net
finance costs. The Group's Treasury Policy requires it 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 2023, £208.8m of debt was held at fixed rates and
Adjusted Net Debt was £108.7m.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of
its net investments in overseas subsidiaries. The Group seeks to manage this
risk, where appropriate, by borrowing in the same currency as those
investments. Group borrowings are predominantly denominated in Sterling and US
Dollars. The Group seeks to manage its currency cash flows to minimise foreign
exchange risk arising on transactions denominated in foreign currencies and
uses forward contracts where appropriate to hedge net currency cash 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 US 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 covenant net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set out in the
table below.
The covenants exclude the impact of IFRS 16 Leases on the Group's results.
2023 2022
For the year ended 31 December £m £m
unaudited
Operating Profit 271.6 217.2
Remove: Exceptional items (53.8) 2.4
Remove: Amortisation and impairment of intangibles arising on acquisition 30.9 21.6
Exclude: Share of joint venture post-tax profits (29.0) (12.0)
Include: Dividends from joint ventures 21.1 9.1
Add back: Net non-exceptional charges/(releases) to OCPs 8.2 (1.0)
Add back: Net covenant OCP utilisation (3.2) (1.3)
Add back: Depreciation, mortization and impairment of owned property, plant 25.7 33.1
and equipment and non acquisition intangible assets
Add back: Depreciation, mortization and impairment of property, plant and 4.3 4.8
equipment and non acquisition intangible assets held under finance leases - in
accordance with IAS17 Leases
Add back: Foreign exchange on investing and financing arrangements (0.9) 0.4
Add back: Share-based payment expense 13.5 15.6
Net Other covenant adjustments to EBITDA (11.5) (1.0)
Covenant EBITDA 276.9 288.9
Net finance costs 24.6 20.4
Exclude: Net interest receivable on retirement benefit obligations 3.1 2.7
Exclude: Movement in discount on other debtors - 0.1
Exclude: Foreign exchange on investing and financing arrangements (0.9) 0.4
Other covenant adjustments to net finance costs (12.7) (7.5)
Covenant net finance costs 14.1 16.1
Adjusted Net Debt 108.7 203.9
Obligations under finance leases - in accordance with IAS17 Leases 17.4 21.8
Recourse Net Debt 126.1 225.7
Add back: Disposal vendor loan note, encumbered cash and other adjustments 5.9 6.9
Covenant adjustment for average FX rates 5.6 (8.2)
CTNB 137.6 224.4
CTNB / covenant EBITDA (not to exceed 3.5x) 0.50x 0.78x
Covenant EBITDA / Covenant net finance costs (at least 3.0x) 19.64x 17.94x
Net assets
At 31 December 2023, the consolidated balance sheet shown on page 33 had net
assets of £1,033.7m, a movement of £4.0m from the closing net asset position
of £1,029.7m as at 31 December 2022. Whilst the Group generated total
comprehensive income of £138.5m during the year, returns to shareholders
totalled £122.5m through share buybacks and dividend payments.
Key movements since 31 December 2022 on the consolidated balance sheet shown
on page 33 include:
- A decrease in goodwill of £38.3m driven predominantly by foreign exchange
movements.
- A reduction in other intangible assets of £42.4m due to amortisation of
£30.5m, the impairment of customer relationships arising on the acquisition
of £8.1m and a revision to the provisional fair values of intangibles arising
on acquisition of ORS of £6.9m.
- A decrease in the net retirement benefit asset of £26.3m primarily in respect
of SPLAS; further details are provided in the pensions section below.
- Provisions have reduced by £38.1m predominately due to the £43.9m
exceptional release of provisions previously held for indemnities given on
disposed businesses.
- Cash and cash equivalents have increased by £37.2m. In the period the Group
generated cash of £383.8m from underlying operations. The net repayment of
loans was £44.5m and the capital element of lease repayments in the period
was £124.4m. Including associated costs, the spend on shares repurchased
during the year totalled £111.7m (£88.8m share buyback and £22.9m to fund
employee share options) and dividends totalling £33.7m have been paid to
shareholders.
- Net loan balances have decreased by £56.7m due to the £44.5m repayment of
the US Private Placement loan notes.
- The movement in contract assets, trade receivables and other assets, and,
contract liabilities, trade payables and other liabilities are as a result of
normal working capital movements.
Acquisitions
On 14 December 2023, Serco agreed to acquire 100% of the share capital of
European Homecare (EHC), a specialist provider of immigration services to
public sector customers in Germany. The business will be acquired from
Korte-Stiftung for €40m (£34m) subject to final fair value assessments.
Subsequent to the balance sheet date clearance has been obtained from the
competition authority and the acquisition is expected to complete on 1 March
2024.
On 14 December 2023, Serco agreed to acquire 100% of the share capital of
Climatize, a small but fast-growing business that operates in the United Arab
Emirates and the Kingdom of Saudi Arabia offering 'zero-carbon' advisory and
related engineering services. The acquisition completed on 31 January 2024 for
cash consideration of AED 9.0m (£1.9m) and contingent consideration of up to
AED 51.0m (£10.9m), payable on achieving certain financial targets. Due to
the timing of completion, the measurement of the fair value of net assets
acquired and any goodwill to be recognised as a result of the acquisition is
in progress.
Pensions
During the year there continued to be a high degree of volatility in the
pensions market. Discount rates and short-term inflation rates had been rising
since 31 December 2021. Concerns over high global inflation, recession, rising
interest rates and sharp rises in bond yields continued through to the third
quarter of 2023 and, as inflation fell and interest rates rose, bond yields
fell slightly below the levels at 31 December 2022.
Despite the volatility, Serco's pension schemes remain in a strong funding
position and have an accounting surplus, before tax, of £24.5m (2022:
£50.8m), on scheme gross assets of £1.1bn (2022 : £1.1bn) and gross
liabilities of £1.0bn (2022 £1.0bn). The decrease in the net retirement
benefit asset of £26.3m is primarily due to the Group's largest scheme, Serco
Pension and Life Assurance Scheme (SPLAS), and is as a result of the
following:
- Discount rates being lower than prior year resulting in an increase in pension
obligation
- Actual inflation in 2023 was higher than prior year assumptions resulting in
an experience adjustment increasing pension obligations
- Updated mortality assumptions to reflect the latest available actuarial
projections resulting in a reduction to pension obligations
- Reductions to long term RPI inflation assumptions have resulted in a decrease
to pension obligations
Based on the 2021 actuarial funding valuation which was finalised in 2022 for
SPLAS, the Group has committed to make deficit recovery payments of £6.6m per
year from 2022 to 2030.
On 25 June 2023 the contract for Caledonian Sleepers was transferred back to
the Scottish Government which included the transfer of obligations under the
section of the share costs pension scheme under the franchise agreement. In
line with the accounting under IAS 19 the Group held no liability for this
scheme on the balance sheet and therefore there is no gain or loss through the
income statement.
The opening net asset position led to a net interest income within net finance
costs of £3.1m (2022: £2.7m).
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. As the claim progresses, 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 10 to the
Condensed Consolidated Financial Statements.
Nigel Crossley
Group Chief Financial Officer
Condensed Consolidated Financial Statements
Consolidated Income Statement
For the year ended 31 December 2023 (unaudited)
Underlying Non Underlying items Reported Underlying Non Underlying items Reported
2023 2023 2023 2022 2022 2022
unaudited unaudited unaudited audited audited audited
For the year ended 31 December £m £m £m £m £m £m
Revenue 4,873.8 - 4,873.8 4,534.0 - 4,534.0
Cost of sales (4,378.3) - (4,378.3) (4,044.7) 4.2 (4,040.5)
Gross profit 495.5 - 495.5 489.3 4.2 493.5
Administrative expenses (275.8) - (275.8) (264.3) - (264.3)
Exceptional operating items - 53.8 53.8 - (2.4) (2.4)
Amortisation and impairment of intangibles arising on acquisition - (30.9) (30.9) - (21.6) (21.6)
Share of results of joint ventures and associates, net of interest and tax 29.0 - 29.0 12.0 - 12.0
Operating profit / (loss) 248.7 22.9 271.6 237.0 (19.8) 217.2
Investment revenue 7.0 - 7.0 4.7 - 4.7
Finance costs (31.6) - (31.6) (25.1) - (25.1)
Net finance costs (24.6) - (24.6) (20.4) - (20.4)
Profit before tax 224.1 22.9 247.0 216.6 (19.8) 196.8
Tax (charge)/credit (50.8) 6.2 (44.6) (47.9) 6.1 (41.8)
Profit for the period 173.3 29.1 202.4 168.7 (13.7) 155.0
Attributable to:
Equity attributable to owners of the Company 173.3 29.1 202.4 169.1 (13.7) 155.4
Non-controlling interest - - - (0.4) - (0.4)
Earnings per share (EPS)
Basic EPS 15.61p 18.23p 14.18p 13.03p
Diluted EPS 15.36p 17.93p 13.92p 12.79p
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2023 (unaudited)
2023 2022
unaudited audited
£m £m
Profit for the year 202.4 155.0
Other comprehensive income/(loss) for the period:
Items that will not be reclassified subsequently to profit or loss:
Share of other comprehensive income in joint ventures and associates 1.1 2.9
Remeasurements of post-employment benefit obligations(1) (29.1) (93.8)
Actuarial loss on reimbursable rights(1) (3.0) (12.3)
Income tax relating to components of other comprehensive income that will not 6.1 27.1
be reclassified subsequently to profit or loss
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss)/gain on translation of foreign operations(2) (38.4) 60.2
Fair value (loss)/gain on cash flow hedges during the year(2) (0.8) 0.6
Tax relating to items that may be reclassified(2) 0.2 (0.1)
Total other comprehensive loss for the year (63.9) (15.4)
Total comprehensive income for the year 138.5 139.6
Attributable to:
Equity owners of the Company 138.4 139.8
Non-controlling interest 0.1 (0.2)
1 Recorded in retirement benefit obligations reserve in the Consolidated
Statement of Changes in Equity.
2 Recorded in hedging and translation reserve in the Consolidated Statement of
Changes in Equity.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2023 (unaudited)
Share capital Share premium account Retained earnings Other Reserves Total shareholders' equity Non-controlling interest
£m £m £m £m £m £m
Audited balance at 1 January 2022 24.4 463.1 542.8 (23.6) 1,006.7 1.7
Total comprehensive income/(loss) for the year - - 158.1 (18.3) 139.8 (0.2)
Dividends paid - - (30.3) - (30.3) -
Shares purchased and held in own share reserve - - - (15.9) (15.9) -
Shares purchased and held in Treasury - - - (91.2) (91.2) -
Shares transferred to award holders on exercise of share awards - - - 0.1 0.1 -
Expense in relation to share-based payments - - - 15.6 15.6 -
Tax credit on items taken directly to equity - - - 3.4 3.4 -
Audited balance at 1 January 2023 24.4 463.1 670.6 (129.9) 1,028.2 1.5
Total comprehensive income/(loss) for the year - - 203.4 (65.0) 138.4 0.1
Dividends paid - - (33.7) - (33.7) (1.7)
Shares purchased and held in own share reserve - - - (22.9) (22.9) -
Shares purchased and held in Treasury until cancelled - - - (88.8) (88.8) -
Cancellation of shares held in Treasury (2.3) - (180.0) 182.3 - -
Change in non-controlling interests - - (1.2) - (1.2) (0.2)
Expense in relation to share-based payments - - - 13.5 13.5 -
Tax credit on items taken directly to equity - - - 0.5 0.5 -
Unaudited balance at 31 December 2023 22.1 463.1 659.1 (110.3) 1,034.0 (0.3)
Consolidated Balance Sheet
For the year ended 31 December 2023 (unaudited)
At 31 December At 31 December
2023 2022
unaudited audited
£m £m
Non-current assets
Goodwill 906.7 945.0
Other intangible assets 115.6 158.0
Property, plant and equipment 44.3 48.1
Right of use assets 440.9 434.2
Interests in joint ventures and associates 32.1 23.3
Loan to joint ventures - 10.0
Trade and other receivables 14.8 16.1
Derivative financial instruments - 0.3
Deferred tax assets 235.7 244.2
Retirement benefit assets 37.4 57.0
1,827.5 1,936.2
Current assets
Inventories 24.1 22.4
Contract assets 296.6 345.0
Trade and other receivables 329.0 374.6
Loan to joint ventures 10.0 -
Current tax assets 23.8 11.5
Cash and cash equivalents 94.4 57.2
Derivative financial instruments 4.9 3.3
782.8 814.0
Total assets 2,610.3 2,750.2
Current liabilities
Contract liabilities (35.8) (60.5)
Trade and other payables (558.0) (622.8)
Derivative financial instruments (1.7) (1.1)
Current tax liabilities (18.4) (16.0)
Provisions (92.9) (134.9)
Obligations under leases (140.0) (144.4)
Loans (51.0) (44.5)
(897.8) (1,024.2)
Non-current liabilities
Contract liabilities (59.3) (36.3)
Trade and other payables (9.2) (6.5)
Derivative financial instruments (0.2) -
Deferred tax liabilities (50.9) (53.8)
Provisions (77.4) (73.5)
Obligations under leases (313.7) (301.6)
Loans (155.2) (218.4)
Retirement benefit obligations (12.9) (6.2)
(678.8) (696.3)
Total liabilities (1,576.6) (1,720.5)
Net assets 1,033.7 1,029.7
At 31 December At 31 December
2023 2022
unaudited audited
£m £m
Equity
Share capital 22.1 24.4
Share premium account 463.1 463.1
Retained earnings 659.1 670.6
Other reserves (110.3) (129.9)
Equity attributable to owners of the Company 1,034.0 1,028.2
Non-controlling interest (0.3) 1.5
Total equity 1,033.7 1,029.7
Consolidated Cash Flow Statement
For the year ended 31 December 2023 (unaudited)
2023 2022
unaudited audited
£m £m
Net cash inflow from underlying operating activities 383.8 330.1
Non-underlying items 9.3 (2.9)
Net cash inflow from operating activities 393.1 327.2
Investing activities
Interest received 3.9 1.9
Dividends received from joint ventures and associates 21.1 9.1
Loan to pension scheme relating to collateral calls - (60.0)
Repayment from pension scheme of loan relating to collateral calls - 60.0
Loan to joint venture - (10.0)
Purchase of other intangible assets (8.8) (7.0)
Purchase of property, plant and equipment (15.9) (12.4)
Proceeds from disposal of property, plant and equipment 1.4 0.7
Proceeds from disposal of intangible assets 1.3 -
Proceeds from disposal of subsidiary 0.2 -
Acquisition of subsidiaries, net of cash acquired (7.7) (19.2)
Other investing activities (0.9) 1.6
Net cash outflow from investing activities (5.4) (35.3)
Financing activities
Interest paid (30.4) (24.4)
Capitalised finance costs paid - (2.6)
Advances of loans - 205.0
Repayments of loans (44.5) (354.3)
Capital element of lease repayments (124.4) (120.5)
Cash movements on hedging instruments (1.5) (2.7)
Dividends paid to shareholders (33.7) (30.3)
Dividends paid to non-controlling interests (1.7) -
Purchase of Own Shares for Employee Share Ownership Trust (22.9) (15.9)
Own shares repurchased (88.8) (91.2)
Proceeds received from exercise of share options - 0.1
Net cash outflow from financing activities (347.9) (436.8)
Net increase/(decrease) in cash and cash equivalents 39.8 (144.9)
Cash and cash equivalents at beginning of year 57.2 198.4
Net exchange (loss)/gain (2.6) 3.7
Cash and cash equivalents at end of year 94.4 57.2
Notes to the Condensed Consolidated Financial Statements
1. Basis of preparation and accounting policies
Basis of preparation
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 2023 or 2022 The financial
information for 2022 is derived from the statutory accounts for 2022 which
have been delivered to the registrar of companies. The auditor has reported on
the 2022 accounts; their report was (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 statutory accounts
for 2023 will be finalised on the basis of the financial information presented
by the directors in this preliminary announcement and will be delivered to the
registrar of companies in due course.
The preliminary announcement has been prepared in accordance with UK-adopted
International Accounting Standards (IAS), UK-adopted International Financial
Reporting Standards (IFRS) and with the requirements of the Companies Act 2006
as applicable to companies reporting under those standards.
Going concern
In assessing the basis of preparation of the financial statements for the year
ended 31 December 2023, 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 2023, the Group's principal debt facilities comprised a
£350.0m revolving credit facility maturing in November 2027 (of which £nil
was drawn), and £208.8m of US private placement notes, giving £558.8m of
committed credit facilities and committed headroom of £444.4m, being the
undrawn revolving credit facility plus cash of £94.4m. The principal
financial covenant ratios are consistent across the US Private Placement loan
notes and revolving credit facility and are outlined on page 27. As at 31
December 2023, 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 to
2x at 0.50x.
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.
As noted in post balance sheet events within note 15, subsequent to the
balance sheet date the Group issued a further £118m ($150m) of US private
placement notes which have been included in the Directors liquidity forecast
supporting this assessment.
The basis of the assessment continues to be the Board-approved budget which 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.
Owing to the unprecedented levels of inflation driven by geopolitical factors,
the Directors have considered the Group's resilience to rising costs. Due to
the nature of the Group's operations, almost all of the revenue base has some
form of inflationary protection, whether it be through contractual indexation
mechanisms, cost plus billing or being short term in nature. Though the timing
of such protections becoming effective may, in the short term, differ from the
impact of cost pressures, it is expected that the current inflation levels
will not have a material impact on the Group's profitability or cash flow.
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 bids and extensions, 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 loan of £51m due to mature during the assessment period is repaid,
and that no additional refinancing occurs after the date of approval of the
financial statements, the Group can afford to be unsuccessful on 80% of its
bids and extensions, combined with a profit margin 80 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 and extensions 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 extensions and available
contract extensions by volume over the last two years, therefore a reduction
of 80% or more to the budgeted bid and extensions rates is not considered
plausible. The Group does not generally bid for contracts at margins below its
target range.
In respect of 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 80 basis points (bps) versus the Group's budget is not considered plausible
within the assessment period combined with an 80% reduction in bid and
extensions rates.
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.
Accounting policies, estimates and judgements
In the year ended 31 December 2023, the same accounting policies, presentation
and methods of computation are followed in the condensed set of financial
statements as applied in the Group's 2022 audited financial statements with
the exception of the change to alternative profit measures (APMs) as set out
below.
No new or amended accounting standards had a material impact on the Group for
the 31 December 2023 reporting period.
In preparing these condensed consolidated financial statements, there have
been no changes to the critical accounting judgements and key sources of
estimation uncertainty from those disclosed in the Group's 2022 audited
financial statements.
Consolidation of profit measures
The Group has simplified its profit measures by removing Trading Profit and
renaming underlying trading profit (UTP) to underlying operating profit (UOP).
The historic UOP will be the same as the reported UTP.
The UTP definition was introduced in 2015 to exclude onerous contract
provision (OCP) releases or charges, other Contract and Balance Sheet Review
adjustments, depreciation and amortisation of assets held for sale, and some
other one-time items. It was maintained to ensure that there was transparency
outside the underlying results of large charges and releases from the
portfolio of onerous contracts recorded in 2014. These definitions are no
longer required as the Contract and Balance Sheet Adjustments recorded in 2014
are now at an insignificant level. In the future, no items will be recorded
between UTP and Trading Profit, meaning the additional measure no longer adds
any value.
Items excluded from UOP will be the amortisation and impairment of intangibles
arising on acquisition and exceptional operating items (and in the prior year
other non-underlying items), which is consistent with the items currently
excluded from Trading Profit.
The methodology applied to calculating other APMs has not changed since 31
December 2022.
2. Segmental information
The Group's operating segments reflecting the information reported to the
Board in 2023 under IFRS 8 Operating Segments are consistent with those
reported in the Group's 2022 audited financial statements. An analysis of the
Group's revenue from its key market sectors is as follows:
Year ended 31 December 2023 (unaudited) UK&E North America Asia Pacific Middle East Total
£m £m £m £m £m
Key sectors
Defence 355.0 931.9 156.7 30.9 1,474.5
Justice & Immigration 1,329.8 - 351.3 - 1,681.1
Transport 148.7 102.5 12.2 71.3 334.7
Health & Other Facilities Management 227.4 - 196.5 103.2 527.1
Citizen Services 378.6 328.4 128.4 21.0 856.4
2,439.5 1,362.8 845.1 226.4 4,873.8
Year ended 31 December 2022 (audited) UK&E North America Asia Pacific Middle East Total
£m £m £m £m £m
Key sectors
Defence 315.8 863.0 147.9 30.5 1,357.2
Justice & Immigration 798.9 - 412.9 - 1,211.8
Transport 173.9 95.9 9.8 70.0 349.6
Health & Other Facilities Management 264.4 - 225.3 103.0 592.7
Citizen Services 547.2 310.9 158.7 5.9 1,022.7
2,100.2 1,269.8 954.6 209.4 4,534.0
The following is an analysis of the Group's revenue, results, assets and
liabilities by reportable operating segment:
Year ended 31 December 2023 (unaudited) UK&E North America Asia Pacific Middle East Corporate Total
£m £m £m £m £m £m
Revenue 2,439.5 1,362.8 845.1 226.4 - 4,873.8
Result
Underlying operating profit/(loss)(1) 120.8 138.2 23.7 15.3 (49.3) 248.7
Amortisation and impairment of intangibles arising on acquisition (3.4) (16.0) (11.5) - - (30.9)
Exceptional operating items(2) 9.9 - - - 43.9 53.8
Operating profit/(loss) 127.3 122.2 12.2 15.3 (5.4) 271.6
Net finance cost (24.6)
Profit before tax 247.0
Tax (charge)/credit (42.3)
Tax on exceptional items (2.3)
Profit for the year 202.4
Supplementary Information
Share of profits in joint ventures and associates, net of interest and tax 29.0 - - - - 29.0
Total depreciation and impairment of plant, property and equipment and right (99.4) (20.6) (10.0) (2.1) (11.9) (144.0)
of use assets
Amortisation and impairment of intangible assets (1.9) (0.9) (1.1) (0.1) (3.6) (7.6)
1 Underlying operating profit/(loss) is defined as operating profit/(loss)
before exceptional items (and in the prior year other non-underlying items)
and amortisation and impairment of intangible assets arising on acquisition.
2 Included within exceptional operating items are releases of provisions
previously held for indemnities given on disposed businesses of £43.9m and
compensation received on the early termination of a contract of £9.9m.
Exceptional items incurred by the Corporate segment are not allocated to other
segments. Such items may represent costs that will benefit the wider business.
Year ended 31 December 2022 (audited) UK&E North America Asia Pacific Middle East Corporate Total
£m £m £m £m £m £m
Revenue 2,100.2 1,269.8 954.6 209.4 - 4,534.0
Result
Underlying operating profit/(loss)(1) 72.1 136.6 56.9 16.0 (44.6) 237.0
Other non-underlying items(2) 4.1 0.1 - - - 4.2
Amortisation and impairment of intangibles arising on acquisition (1.5) (16.5) (3.6) - - (21.6)
Exceptional operating items(3) (1.2) (1.2) - - - (2.4)
Operating profit/(loss) 73.5 119.0 53.3 16.0 (44.6) 217.2
Net finance cost (20.4)
Profit before tax 196.8
Tax (charge)/credit (42.1)
Tax on exceptional items 0.3
Profit for the year 155.0
Supplementary Information
Share of profits in joint ventures and associates, net of interest and tax 12.0 - - - - 12.0
Total depreciation and impairment of plant, property and equipment and right (86.4) (26.7) (12.6) (1.9) (12.9) (140.5)
of use assets
Amortisation and impairment of intangible assets (1.3) (1.0) (2.1) (0.1) (5.6) (10.1)
1 Underlying operating profit/(Loss) is defined as operating profit/(loss)
before exceptional items (and in the prior year other non-underlying items)
and amortisation and impairment of intangible assets arising on acquisition.
2 Non-underlying items include the reversal of an impairment in respect of
assets which is no longer required due to contractual changes which the Group
has agreed with its customer.
3 Included within exceptional operating items are total acquisition related
costs of £2.4m.
Year ended 31 December 2023 (unaudited) UK&E North America Asia Pacific Middle East Corporate Total
£m £m £m £m £m £m
Segment assets
Interests in joint ventures and associates 31.8 - - 0.4 - 32.2
Other segment assets(1) 891.6 897.7 254.5 62.4 113.2 2,219.4
Total segment assets 923.4 897.7 254.5 62.8 113.2 2,251.6
Unallocated assets(2) 358.7
Consolidated total assets 2,610.3
Segment liabilities
Segment liabilities (725.1) (172.0) (223.5) (54.1) (124.7) (1,299.4)
Unallocated liabilities(2) (277.2)
Consolidated total liabilities (1,576.6)
Supplementary Information
Additions to non current assets(3) 125.3 16.7 8.0 2.6 15.7 168.3
Segment non-current assets 677.1 688.6 151.9 13.5 60.8 1,591.9
Unallocated non-current assets 235.8
Year ended 31 December 2022 (audited) UK&E North America Asia Pacific Middle East Corporate Total
£m £m £m £m £m £m
Segment assets
Interests in joint ventures and associates 22.9 - - 0.4 - 23.3
Other segment assets(1) 960.8 948.0 309.6 68.7 123.3 2,410.4
Total segment assets 983.7 948.0 309.6 69.1 123.3 2,433.7
Unallocated assets(2) 316.5
Consolidated total assets 2,750.2
Segment liabilities
Segment liabilities (720.2) (178.3) (248.1) (61.1) (179.0) (1,386.7)
Unallocated liabilities(2) (333.8)
Consolidated total liabilities (1,720.5)
Supplementary Information
Additions to non current assets(3) 173.7 14.5 7.4 3.0 12.1 210.7
Segment non-current assets 701.1 718.6 177.1 14.1 80.8 1,691.7
Unallocated non-current assets 244.5
1 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.
2 Unallocated assets and liabilities include deferred tax, cash and cash
equivalents, derivative financial instruments and loans.
3 Additions to non-current assets reflects additions and amounts arising on
acquisition for goodwill, other intangible assets, property plant and
equipment and right of use assets.
3. Acquisitions
No acquisitions were completed during the year. See note 15 for details of
acquisitions completed subsequent to the Balance Sheet date.
During the year, the Group finalised the integration of OXZ Holdings AG (ORS),
completed the analysis of balances acquired as part of the transaction, and
made closing net working capital settlements with the vendors. As a result of
these activities, the Group revised the fair values of the acquired assets and
liabilities resulting in an increase to goodwill of £3.3m, a reduction in
other intangibles of £6.9m, an increase to the deferred tax asset of £1.3m,
and a cash receipt of £2.3m for final working capital settlements.
Contingent consideration recognised on acquisition of ORS in 2022 was CHF12.8m
(£11.2m) and reflected the fair value of the earn-out and over performance
payments based on a range of targets for the full year 2022 EBITDA. The
maximum earn-out and over performance payments were CHF10.0m and CHF4.0m
respectively. The final earn-out and over performance payments settled at CHF
12.3m (£10.2m) which resulted in a change to the fair value of the contingent
consideration resulting in a profit of £1.0m including the impact of foreign
currency translation.
During the year the Group finalised the integration of Sapienza Consulting
Holdings BV (Sapienza), completed the analysis of balances acquired as part of
the transaction, and made closing net working capital settlements with the
vendors. As a result of these activities, the Group revised the fair values of
the acquired assets and liabilities resulting in a decrease of goodwill of
£0.2m, an increase in provisions of £0.4m, a reduction in trade and other
payables of £0.4m, and a cash receipt of £0.2m for final working capital
settlements.
The total impact of acquisitions to the Group's cash flow position in the
period was as follows:
£m
unaudited
Cash received in respect of prior period acquisitions (2.5)
Settlement of deferred consideration in respect of prior year acquisitions 10.2
Net cash outflow in respect of prior year acquisitions 7.7
Acquisition related costs 1.3
Net cash impact in the year on acquisitions 9.0
The total transaction and implementation costs recognised in exceptional items
for the year ended 31 December 2023 was nil (2022 £2.4m).
4. Exceptional operating 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.
2023 2022
unaudited audited
Year ended 31 December £m £m
Compensation received on the early termination of contractual services 9.9 -
Release of provisions held for indemnities given on disposed businesses 43.9 -
Costs associated with successful acquisitions - (2.4)
Exceptional operating items 53.8 (2.4)
Exceptional tax (charge)/credit (2.3) 0.3
Total exceptional operating items net of tax 51.5 (2.1)
5. Tax
5 (a) Income tax recognised in the income statement
Year ended 31 December Underlying Non-underlying items Reported Underlying Non-underlying items Reported
2023 2023 2023 2022 2022 2022
unaudited unaudited unaudited audited audited audited
£m £m £m £m £m £m
Current income tax
Current income tax charge/(credit) 34.0 (1.5) 32.5 41.8 (4.0) 37.8
Adjustments in respect of prior years 1.3 - 1.3 3.5 - 3.5
Deferred tax
Current year charge/(credit) 16.8 (4.7) 12.1 7.5 (2.1) 5.4
Adjustments in respect of prior years (1.3) - (1.3) (4.9) - (4.9)
50.8 (6.2) 44.6 47.9 (6.1) 41.8
The corporate income tax expense for the year is based on the UK statutory
rate of corporation tax for the period of 23.5% (2022: 19.0%). Taxation for
other jurisdictions is calculated at the rates prevailing in the respective
jurisdictions.
5 (b) Income tax recognised in the SOCI
2023 2022
unaudited audited
Year ended 31 December £m
£m
Current tax
Taken to retirement benefit obligations reserve 1.9 2.0
Deferred tax
Relating to cash flow hedges 0.2 (0.1)
Taken to retirement benefit obligations reserve 4.2 25.1
6.3 27.0
5 (c) Tax on items taken directly to equity
2023 2022
unaudited audited
Year ended 31 December £m £m
Current tax
Recorded in share-based payment reserve 1.0 2.2
Deferred tax
Recorded in share-based payment reserve (0.5) 1.2
0.5 3.4
6. Earnings per share
Basic earnings per share is calculated by dividing the profit after tax
attributable to owners of the Company by the weighted average number of shares
in issue after deducting the own shares held by employee share ownership
trusts and treasury shares and adding back vested share options not exercised.
In calculating the diluted earnings per share, unvested share options
outstanding have been taken into account where the impact of these is
dilutive.
The calculation of the basic and diluted EPS is based on the following data:
2023 2022
unaudited audited
Number of shares millions millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,110.2 1,192.2
Effect of dilutive potential ordinary shares: Shares under award 18.4 22.6
Weighted average number of ordinary shares for the purpose of diluted EPS 1,128.6 1,214.8
Earnings per share
Earnings Per share amount Earnings Per share amount
2023 2023 2022 2022
unaudited unaudited audited audited
Basic EPS £m pence £m pence
Earnings for the purpose of basic EPS 202.4 18.23 155.4 13.03
Effect of dilutive potential ordinary shares - (0.30) - (0.24)
Diluted EPS 202.4 17.93 155.4 12.79
7. Goodwill
Movements in the balance since the prior year end can be seen as follows:
Goodwill balance 1 January 2023 Acquisitions Disposals Exchange differences 2023 Goodwill balance 31 December 2023 Headroom on impairment analysis 2023 Headroom on impairment analysis 2022
audited unaudited unaudited audited
£m £m £m £m £m £m £m
UK & Europe 203.8 3.1 - (0.3) 206.6 1,051.1 811.1
North America 592.2 - - (32.7) 559.5 644.3 360.9
Asia Pacific 137.8 - - (7.6) 130.2 110.0 281.0
Middle East 11.2 - (0.1) (0.7) 10.4 285.5 119.5
945.0 3.1 (0.1) (41.3) 906.7 2,090.9 1,572.5
Included above is 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. In all CGUs,
there is sufficient headroom available which is consistent with 2022.
Sensitivity analysis
Reflecting the assumptions made in the estimation of future cash flows and the
selection of appropriate discount rates and terminal growth rates, a number of
plausible scenarios have been considered as part of the overall impairment
assessment.
Sensitivity analysis has been performed by applying a 1% movement in discount
rates and a 1% movement in terminal growth rates which are considered to be
reasonably possible. Both individually and combined, the impact of these
changes in key assumptions does not lead to an impairment in any CGU (2022: no
impairment in any CGU).
A sensitivity analysis has been performed in respect of short-term growth
rates within the Board-approved five-year plan. The sensitivity applied has
been to assume no growth to cash flows outside of the two year budget period
of the five-year plan. No impairment results from these changes, even when
combined with the additional 1% increase in discount rates and 1% reduction in
terminal growth rates, with the exception of the Asia Pacific CGU (2022: Asia
Pacific CGU) for which additional sensitivities have been performed below.
Given the visibility of pipeline available, a no growth scenario is unlikely
and would require win and rebid rates to fall below the five-year averages
seen within the business. In order to deliver revenue growth, amongst other
things, the Group continues to invest in bidding activity in order to ensure
it remains competitive within the markets in which it operates.
Management has also considered the sensitivity of cash flows in the terminal
year for all CGUs and has determined that a reduction in cash flows of up to
10% in the final year of the plan is reasonably possible. No impairment
results from this scenario even when combined with an additional 1% increase
in discount rates and a 1% reduction in terminal growth rates though this is
not deemed reasonably possible. Cash flows in the terminal year would need to
reduce by 91% in the Middle East (£32.4m), 32% in Asia Pacific (£9.8m), 68%
in North America (£56.5m) and 79% in UK & Europe (£102.3m), before an
impairment would need to be recognised.
Asia Pacific CGU
The risk adjusted Board-approved five-year plan for the Asia Pacific Division
supports the headroom held against the CGU. The key judgements in respect of
the divisional plan are as follows:
- Win rates by value improve from the current levels experienced by the Division
in 2023 of 2% for new business and 24% for rebids, to the five-year average
which are 15% for new business and 63% for rebids.
- The immigration rebid, for which the tender outcome is expected in the first
half of 2024, delivers cash flows beyond 2024.
- There is no significant deterioration within the outsourcing market in the
region
Having performed a review of the market, made local management changes and
identified areas where the business could be more efficient, the Directors
believe that sufficient opportunities exist to deliver the five-year plan and
that win rates can be improved. Whilst tangible cost savings are expected in
the short term, it may take a longer period for an improvement in pipeline and
win rates to be observed. In addition, the Directors believe on balance that
the immigration contract is likely to be retained given the Group's experience
in delivering the existing contract, and the general rebid rates it achieves.
However, a loss would impact the Division's ability to deliver the five-year
plan if no opportunities are secured to replace the cash flows delivered by
the contract.
In respect of scenarios within the Asia Pacific CGU:
a Whilst the base case scenario, which assumes win rates returning to the
long-term five-year average outlined above, results in no impairment, the
Directors note that sustained win rates at the level observed over the last
year combined with the inability to identify sufficient credible opportunities
could lead to an impairment of the entire goodwill balance of the CGU. Win
rates by value would independently have to reduce to 11% for new business and
46% for rebids over the five-year period to result in no headroom.
b An unsuccessful outcome in respect of the immigration rebid could result in an
impairment in isolation. However, given the scale of this contract to the CGU,
a fundamental restructuring of the Division may be required to improve
profitability and would mitigate the risk of impairment.
As noted above, win rates not improving, or the loss of the immigration rebid,
would require a review of the efficiency of the Asia Pacific Division and may
result in a review of the overhead and support structures in place to ensure
that they are appropriate for the scale of business and opportunities
available . Any costs or benefits of restructuring are not included in the
five-year cash flows.
8. 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 2023 Cash flow Exchange differences Non-cash movements(2) At 31 December 2023
audited unaudited
£m £m £m £m £m
Loans payable (262.9) 44.5 13.1 (0.8) (206.2)
Lease obligations (446.0) 124.4 3.1 (135.2) (453.7)
Liabilities arising from financing activities (708.9) 168.9 16.2 (136.0) (659.9)
Cash and cash equivalents 57.2 39.8 (2.6) - 94.4
Derivatives relating to net debt 1.8 - 1.3 - 3.1
Net debt (649.9) 208.7 14.9 (136.0) (562.4)
1 Acquisitions represent the net cash/(debt) acquired on acquisition.
2 Non-cash movements on loans payable relate to movement in capitalised finance
costs in the year. For lease obligations 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.
9. Provisions
Employee related Property Contract Claims Other Total
£m £m £m £m £m £m
At 1 January 2023 (audited) 82.5 19.6 11.6 24.2 70.5 208.4
Acquisitions - revision of provisional fair value estimates - - - - 0.4 0.4
Disposals (1.2) (0.9) - - (0.3) (2.4)
Charge capitalised in right of use assets - 0.9 - - - 0.9
Charged to income statement 18.3 9.7 8.8 9.7 7.7 54.2
Released to exceptional items - - - - (43.9) (43.9)
Released to income statement (2.1) (1.6) (0.6) (3.1) (7.7) (15.1)
Utilised during the year (9.2) (4.2) (3.2) (5.2) (5.4) (27.2)
Exchange differences (4.4) (0.3) 0.1 - (0.4) (5.0)
At 31 December 2023 (unaudited) 83.9 23.2 16.7 25.6 20.9 170.3
Analysed as:
Current 54.0 5.9 10.7 5.4 16.9 92.9
Non-current 29.9 17.3 6.0 20.2 4.0 77.4
83.9 23.2 16.7 25.6 20.9 170.3
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.
The provisions will be utilised over various periods driven by attrition and
demobilisation of contracts, the timing of which is uncertain. There are also
amounts included in relation to restructuring.
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 March 2037.
A contract provision is recorded when a contract is deemed to be unprofitable
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.
Claims provisions relate 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. While
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.
Included within other provisions is £20.9m 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. The Group released from other provisions indemnities given on
disposed businesses of £43.9m during the year predominantly due to the claims
period ending.
Individual provisions are only discounted where the impact is assessed to be
significant. Currently, the effect of discounting is not material.
10. Contingent liabilities
The Group and its subsidiaries have provided certain guarantees and
indemnities in respect of performance and other bonds, issued by its banks on
its behalf in the ordinary course of business. The total commitment
outstanding as at 31 December 2023 was £214.4m (2022: £222.7m).
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. As the claim progresses, 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.
The Group has guaranteed overdrafts, finance leases and bonding facilities of
its joint ventures and associates up to a maximum value of £5.7m (2022:
£5.7m). The actual commitment outstanding at 31 December 2023 was £5.7m
(2022: £5.7m).
11. Financial risk management
The vast majority of financial instruments are held at amortised cost. The
classification of the fair value measurement falls into three levels, based on
the degree to which the fair value is observable. The levels are as follows:
Level 1: Inputs derived from unadjusted quoted prices in active markets for
identical assets or liabilities.
Level 2: Inputs that are observable for the asset or liability, either
directly or indirectly, other than quoted prices included within Level 1.
Level 3: Inputs are unobservable inputs for the asset or liability.
Based on the above, the derivative financial instruments held by the Group at
31 December 2023 and the comparison fair values for loans, are all considered
to fall into Level 2, with the exception of contingent consideration which is
considered to fall into Level 3. Market prices are sourced from Bloomberg and
third party valuations. The valuation models incorporate various inputs
including foreign exchange spot and forward rates and interest rate curves.
There have been no transfers between levels in the year.
12. Retirement benefit schemes
2023 2022
unaudited audited
Recognised in the income statement £m £m
Current service cost - employer 5.3 5.9
Past service cost - employer - 0.8
Settlement gain recognised - (0.3)
Administrative expenses and taxes 2.0 2.4
Recognised in arriving at operating profit 7.3 8.8
Interest income on scheme assets - employer (50.4) (28.3)
Interest on franchise adjustment - (0.2)
Interest cost on scheme liabilities - employer 47.3 25.8
Finance income (3.1) (2.7)
Total recognised in the income statement 4.2 6.1
2023 2022
unaudited audited
Included within the SOCI £m £m
Actual return on scheme assets 41.4 (539.8)
Less: interest income on scheme assets (50.4) (28.3)
Net return on scheme assets (9.0) (568.1)
Effect of changes in demographic assumptions 24.3 21.2
Effect of changes in financial assumptions (22.7) 530.3
Effect of experience adjustments (21.7) (77.2)
Remeasurements (29.1) (93.8)
Change in franchise adjustment (1.8) (7.0)
Change in members' share (1.2) (5.3)
Release of member share on end of franchise - -
Actuarial loss on reimbursable rights (3.0) (12.3)
Total recognised in the SOCI (32.1) (106.1)
The assets and liabilities of the schemes at 31 December are:
Fair value of Present value of scheme liabilities Surplus/(deficit) Fair value of Present value of scheme liabilities Surplus/(deficit)
scheme assets scheme assets
2023 2023 2023 2022 2022 2022
unaudited unaudited unaudited audited audited audited
£m £m £m £m £m £m
SPLAS(1) 917.0 (886.5) 30.5 925.3 (877.8) 47.5
ORS 68.5 (80.5) (12.0) 49.8 (54.9) (5.1)
RPS 66.7 (60.8) 5.9 68.4 (59.7) 8.7
Other Schemes in surplus 3.8 (2.8) 1.0 3.3 (2.5) 0.8
Other schemes in deficit 1.1 (2.0) (0.9) 1.0 (2.1) (1.1)
Scheme under Franchise agreement(2) - - - 11.9 (14.9) (3.0)
Total 1,057.1 (1,032.6) 24.5 1,059.7 (1,011.9) 47.8
Franchise adjustment(2) - 1.8
Members' share of deficit - 1.2
Net retirement benefit asset(3) 24.5 50.8
1 The SPLAS Trust Deed gives the Group an unconditional right to a refund of
surplus assets assuming the gradual settlement of plan liabilities over time
until all members have left the plan. 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 in the form of possible reductions in future
contributions
2 The franchise adjustment represents the amount of scheme deficit that is
expected to be funded outside the contract period and therefore no additional
funding will be required by the Group.
3 The net retirement benefit asset (before tax) is split in the balance sheet
between schemes in surplus totalling £37.4m (2022: £57.0m) reported in
retirement benefit assets and schemes in deficit totalling £12.9m (2022:
£6.2m) reported in retirement benefit obligations.
Actuarial assumptions:
The assumptions set out below are for SPLAS, which reflects 86% of total
liabilities and 87% 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.
2023 2022
unaudited audited
Significant actuarial assumptions % %
Discount rate 4.80 5.00
Rate of salary increases 2.85 2.85
RPI Inflation 3.05 3.15
CPI Inflation 2.35 2.35
2023 2022
unaudited audited
Post-retirement mortality(1) years years
Current pensioners at 65 - male 20.9 21.5
Current pensioners at 65 - female 23.6 24.1
Future pensioners at 65 - male 22.8 23.6
Future pensioners at 65 - female 25.6 26.2
1 The mortality assumptions have been updated to reflect the latest available
mortality tables CMI_2022.
13. 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. During the year, Group
companies entered into the following transactions with joint ventures and
associates:
Transactions Current Non-current
outstanding at outstanding at
31 December 31 December
2023 2023 2023
unaudited unaudited unaudited
£m £m £m
Sale of goods and services
Joint ventures 15.4 1.1 -
Other
Loan to joint venture - 10.0 -
Dividends received - joint ventures 21.1 - -
Receivable from consortium for tax - joint ventures 9.9 3.7 9.4
Total 46.4 14.8 9.4
Sales of goods and services to joint ventures relates to services provided
including administrative and back office activities to VIVO. 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.
Transactions Current Non-current
outstanding at outstanding at
31 December 31 December
2022 2022 2022
audited audited audited
£m £m £m
Sale of goods and services
Joint ventures 10.5 3.1 -
Other
Loan to joint venture 10.0 - 10.0
Loan to pension scheme 60.0 - -
Dividends received - joint ventures 7.3 - -
Dividends received - associates 1.8 - -
Receivable from consortium for tax - joint ventures 3.2 0.9 3.2
Total 92.8 4.0 13.2
The Group made a short-term temporary loan of £60.0m to Serco Pension and
Life Assurance Scheme (SPLAS) in 2022 in order for the scheme to be able to
liquidate assets to meet collateral calls required to ensure that the LDI
hedge was maintained; this loan was repaid in 2022.
14. Notes to the Consolidated Cash Flow statement
Year ended 31 December 2023 2023 2023 2022 2022 2022
Underlying Non Reported Underlying Non Reported
£m underlying £m £m underlying £m
items items
£m £m
unaudited unaudited unaudited audited audited audited
Profit before tax 224.1 22.9 247.0 216.6 (19.8) 196.8
Net finance costs 24.6 - 24.6 20.4 20.4
Operating profit for the year 248.7 22.9 271.6 237.0 (19.8) 217.2
Adjustments for:
Share of profits in joint ventures and associates (29.0) - (29.0) (12.0) - (12.0)
Share-based payment expense 13.5 - 13.5 15.6 - 15.6
Impairment of intangible assets 0.1 8.1 8.2 0.1 - 0.1
Amortisation of intangible assets 7.7 22.8 30.5 10.0 21.6 31.6
Impairment of property, plant and equipment 0.6 - 0.6 2.3 - 2.3
Net impairment/(reversal of impairment) of right of use assets 0.7 - 0.7 2.4 (4.2) (1.8)
Depreciation of property, plant and equipment 17.3 - 17.3 20.7 - 20.7
Depreciation of right of use assets 125.4 - 125.4 119.3 - 119.3
(Profit)/Loss on disposal of intangible assets (0.8) - (0.8) 0.4 - 0.4
Loss/(profit) on early termination of leases 0.6 - 0.6 (0.2) - (0.2)
Profit on disposal of property, plant and equipment (0.6) - (0.6) (0.5) - (0.5)
Other non-cash movements (1.5) - (1.5) - - -
Increase/(decrease) in provisions 12.6 (44.6) (32.0) 4.0 (0.6) 3.4
Total non-cash items 146.6 (13.7) 132.9 162.1 16.8 178.9
Operating cash inflow/(outflow) before movements in working capital 395.3 9.2 404.5 399.1 (3.0) 396.1
(Increase) in inventories (2.4) 0.1 (2.3) (1.5) - (1.5)
Decrease in receivables 63.1 - 63.1 1.2 - 1.2
(Increase)/decrease in payables (30.7) - (30.7) (24.0) 0.1 (23.9)
Movements in working capital 30.0 0.1 30.1 (24.4) 0.1 (24.3)
Cash generated by operations 425.3 9.3 434.6 374.7 (2.9) 371.8
Tax paid (41.1) - (41.1) (44.2) - (44.2)
Non-cash R&D expenditure (0.4) - (0.4) (0.4) - (0.4)
Net cash inflow/(outflow) from operating activities 383.8 9.3 393.1 330.1 (2.9) 327.2
15. Post balance sheet events
Acquisitions
On 14 December 2023, Serco agreed to acquire 100% of the share capital of
European Homecare (EHC), a specialist provider of immigration services to
public sector customers in Germany. The business will be acquired from
Korte-Stiftung for €40m (£34m) subject to final fair value assessments.
Subsequent to the balance sheet date clearance has been obtained from the
competition authority and the acquisition is expected to complete on 1 March
2024.
On 14 December 2023, Serco agreed to acquire 100% of the share capital of
Climatize, a small but fast-growing business that operates in the United Arab
Emirates and the Kingdom of Saudi Arabia offering 'zero-carbon' advisory and
related engineering services. The acquisition completed on 31 January 2024 for
cash consideration of AED 9.0m (£1.9m) and contingent consideration of up to
AED 51.0m (£10.9m), payable on achieving certain financial targets. Due to
the timing of completion, the measurement of the fair value of net assets
acquired and any goodwill to be recognised as a result of the acquisition is
in progress.
US Private Placement Loan Notes
On 27 February 2024, Serco Group plc issued $150m (£118m) of US Private
Placement loan notes. The notes are equally split into two series of $75m each
with maturities of 5 and 10 years, giving an average maturity of 7.5 years.
The average interest rate on the new loan notes is fixed at 6.58%, which
compares to a blended rate of 3.97% for the existing notes.
Serco share buyback
The Group has announced its intention to commence a share buyback of up to
£140m. 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 by 31 December 2024 with the shares either
held in treasury or cancelled.
Employee Share Ownership Trust
Subsequent to the year end, the Group's Employee Share Ownership Trust
completed the purchase of 9.3m shares at the cost of £16.2m. These shares
will be held in the own share reserve until they are transferred to award
holders on the exercise of share awards.
Dividends
Subsequent to the year-end, the Board has recommended the payment of a final
dividend in respect of the year ended 31 December 2023 of 2.27p. 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 these
Consolidated Financial Statements.
Additional information
We use key performance indicators (KPIs) to monitor our performance, ensuring
that we have a balance and
an appropriate emphasis to both financial and non-financial aspects. As part
of simplifying our profit measures, we renamed underlying trading profit (UTP)
to underlying operating profit (UOP). This is explained in more detail in the
Finance Review. All other KPIs are unchanged and therefore there is
comparability and consistency with our focus in the business and the guidance
we issue. The Finance Review provides further detailed definitions and
reconciliations of our use of Alternative Performance Measures (APMs).
Alternative performance measure Relevance to strategy
Underlying operating profit (UOP) The level of absolute UOP and the relationship of UOP with revenue - i.e. the
margin we earn on what our customers pay us - is at the heart of our
aspiration to be profitable and sustainable. We believe the delivery of
strategic success has potential to support annual revenue growth of 4-6%, in
the medium term, and trading margins of 5-6%.
Underlying earnings per share (EPS), diluted EPS builds on the relevance of UOP, and further reflects the achievement of
being profitable and sustainable by taking into account not just our ability
to grow revenue and margin but also the strength and costs of our financial
funding and tax arrangements. EPS is therefore a measure of financial return
for our shareholders.
Free cash flow (FCF) FCF is a reflection of the sustainability of the business, by showing how much
of our effort turns into cash to reinvest back into the business or to deploy
in other ways. Our philosophy is we should only win business that generates
appropriate cash returns, and 'executing well' includes appropriate management
of our working capital cash flow cycles.
Underlying return on invested capital (ROIC) ROIC measures how efficiently the Group uses its capital to generate returns
from its assets. To be a sufficiently profitable and sustainable business, a
return must be achieved that is appropriately above a cost of capital hurdle
reflective of the typical returns required by our weighting of equity and debt
capital.
Pipeline of larger new bid opportunities The pipeline provides a key area of potential for winning good business and
therefore is a major input to being profitable and sustainable. The size of
the pipeline and our win-rate on the bids within it are at the heart of our
strategy to grow the business.
Order book The order book reflects progress with winning good business, including
retaining existing work and as a store of future value, it is a key measure to
ensure the Group is profitable and sustainable. The value of how much is added
to the order book compared to how much revenue we are billing our customers -
the book-to-bill ratio - is key to achieving long-term growth.
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