REG - Serco Group PLC - Final Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 6
12/03/2015 07:02
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adversely, a total impairment of £6m would arise. If half of uncontracted future cash flows
were not to be achieved, £17m of the goodwill balance is impaired.
· Global Services: The CGU is a single reportable segments as defined by IFRS 8 Operating segments and due to the
expected sale of a significant portion of the business, the impairment charge is limited by the estimated sales proceeds
and therefore a reasonably possible adverse movement in the key assumptions has no impact on the impairment of this CGU,
including uncontracted revenues.
· Americas: If the terminal growth rate were to fall by 1%, the impairment charge would increase by £39m, whereas a
2% increase in the discount rate results in an additional impairment charge of £86m. If both assumptions moved adversely
by these rates, the impairment charge would increase by £107m. This CGU is also a single reporting segment. The removal
of half of uncontracted future cash flows creates an additional impairment of £28m, if all other assumptions remain
unchanged.
13. Analysis of Net Debt
At 1 January 2014£m Cash flow£m Reclassified as held for sale£m Acquisitions*£m Disposals£m Exchange differences£m Non cash movements£m At 31 December 2014£m
Cash and cash equivalents 125.1 74.1 (22.4) 2.1 (1.0) 2.2 - 180.1
Loan receivables 5.8 (0.2) - - - - (4.6) 1.0
Non recourse loans (20.3) (3.7) 24.0 - - - - -
Other loans (788.0) 18.8 0.8 - - (32.5) 3.6 (797.3)
Obligations under finance leases (68.0) 18.2 37.1 - - (0.1) (13.7) (26.5)
(745.4) 107.2 39.5 2.1 (1.0) (30.4) (14.7) (642.7)
At 1 January 2013£m Cash flow£m Reclassified as held for sale£m Acquisitions*£m Disposals£m Exchange differences£m Non cash movements £m At 31 December 2013£m
Cash and cash equivalents 142.8 (1.8) - - - (15.9) - 125.1
Loan receivables 1.2 4.6 - - - - - 5.8
Non recourse loans (25.1) 4.9 - - - (0.1) - (20.3)
Other loans (700.7) (103.6) - - - 16.3 - (788.0)
Obligations under finance leases (50.2) 4.9 - - - 0.3 (23.0) (68.0)
(632.0) (91.0) - - - 0.6 (23.0) (745.4)
* Acquisitions represent the net cash / (debt) acquired on acquisition.
In the current year, a change was adopted in relation to the presentation of capitalised finance costs, incurred in the
raising of debt. As a result, an amount of £4.6m has been reclassified from trade and other receivables to loans, and this
movement is included in non cash items above. The prior year has not been restated.
14. Provisions
Employeerelated£m Property£m Contract£m Other£m Total£m
At 1 January 2013 13.3 7.9 14.9 20.1 56.2
Derecognised on disposal of subsidiary - (0.3) - - (0.3)
Charged to income statement 5.8 0.2 21.7 7.8 35.5
Released to income statement - (0.1) (4.6) (7.4) (12.1)
Utilised during the year (2.7) (2.5) (5.9) (6.0) (17.1)
Unwinding of discount - 0.2 0.2 - 0.4
Exchange differences (0.7) (0.1) (0.4) (0.3) (1.5)
At 1 January 2014 15.7 5.3 25.9 14.2 61.1
Reclassified from trade and other receivables* - - (3.9) - (3.9)
Recognised on acquisition of subsidiary 0.2 0.1 - - 0.3
Charged to income statement - exceptional 8.8 2.2 19.4 57.7 88.1
Charged to income statement - other 19.8 15.1 456.7 41.5 533.1
Released to income statement (0.2) (0.1) (3.5) (4.2) (8.0)
Utilised during the year (7.7) (1.7) (36.3) (5.1) (50.8)
Transferred to trade payables - - - (8.2) (8.2)
Assets held for sale (1.7) - (21.5) (6.8) (30.0)
Unwinding of discount - 0.1 - - 0.1
Exchange differences 0.2 0.5 (6.4) 1.8 (3.9)
At 31 December 2014 35.1 21.5 430.4 90.9 577.9
Analysed as:
Current 6.8 6.8 136.3 55.8 205.7
Non current 28.3 14.7 294.1 35.1 372.2
*£3.9m has been reclassified from accrued income.
Total provisions held by the Group at 31 December 2014 amount to £607.9m (2013: £61.1m) and include £577.9m (2013: £61.1m)
shown above and £30.0m (2013: £nil) included within amounts held for sale on the balance sheet.
Contract provisions relate to provisions for loss making onerous contracts. The present value of the estimated future cash
outflows required to settle the contract obligations as they fall due over the respective contracts has been used in
determining the provision. The individual provisions are discounted where the impact is assessed to be material.
Following a downturn in performance for certain contracts and the strategy review currently being undertaken, a full
analysis was performed of the future profitability of all contracts with marginal performances and of the balance sheet
items directly linked to these contracts.
There remains a level of uncertainty over the amount and timing of the related cash flows as a result of the matters set
out in note 1. Due to the significant size of the balance, if the expected operational performance varies from the best
estimates made at the year end, a material change in estimate may be required. The key drivers behind operational
performance is the level of activity required to be serviced, which is often directed by the actions of the UK Government,
and the efficiency of Group employees and resources.
The contract and balance sheet review also highlighted the need for additional provisions where parts of the business are
no longer considered to be core. This resulted in an increase in various other provisions, as explained below.
Further details relating to Onerous Contract Provisions are described in the Finance Review section of the Strategic report
under the heading "Onerous Contract Provisions and Related Impairments" including all sections up to, but not including,
"Onerous Contract Provisions Projected Utilisation.
14. Provisions (continued)
Employee related provisions are for long-term service awards and terminal gratuities liabilities which have been accrued
and are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until
retirement and receive all relevant amounts. There are also amounts included in relation to restructuring.
Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs
associated with the lease exceed the economic benefits expected to be generated in the future. The provision has been
calculated based on the discounted cash outflows required to settle the lease obligations as they fall due.
Other provisions are held for legal and other costs that the Group expects to incur over an extended period. These costs
are based on past experience of similar items and other known factors and represent management's best estimate of the
likely outcome.
15. Contingent Liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value
of £26.2m (2013: £26.0m). The actual commitment outstanding at 31 December 2014 was £21.4m (2013: £22.6m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31
December 2014 was £192.1m (2013: £119.9m).
The Group is aware of other claims and potential claims which involve or may involve legal proceedings against the Group.
The Directors are of the opinion, having regard to legal advice received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material effect on the Group's financial position.
On 31st May 2011 we filed a claim with the Authority for Advance Rulings to seek to confirm that Serco was not required to
withhold Indian income tax from the purchase price on the acquisition of Intelenet. The AAR declined to rule on the
matter, so Serco filed a claim with the High Court to decide on the matter or direct the AAR to rule on the matter. The
High Court has currently reserved judgment. Should the matter be decided against Serco, it would be liable for unprovided
tax of £27m together with accrued interest to 31 December 2014 of £11m. Having taken appropriate professional advice,
Serco considers it likely that it will ultimately be successful in this matter.
In December 2013, following a review of billing arrangements on the EM contract by the Ministry of Justice, a settlement of
£64.3m was reached in respect of contractual claims. In addition a £2.0m settlement was reached on the Prisoner Escort and
Custody Services (PECS) contract which was also subject to Government review to reflect repayment of past profits earned on
this contract. The settlement was full and final in respect of contractual claims with the proviso that additional
payments might be sought in limited circumstances, such as if criminality was to be established. Serco continues to
cooperate fully with the ongoing investigations by the Serious Fraud Office.
16. Notes to the Consolidated Cash Flow Statement
Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
Year ended 31 December 2014Before Exceptional Items£m 2014Exceptional Items£m 2014Total£m 2013Before Exceptional Items£m 2013Exceptional Items£m 2013Total£m
Operating profit for the year (655.8) (661.5) (1,317.3) 236.0 (90.5) 145.5
Adjustments for:
Share of profits in joint ventures (30.0) - (30.0) (47.1) - (47.1)
Share-based payment expense 5.4 - 5.4 2.9 - 2.9
Exceptional impairment of goodwill - 466.0 466.0 - - -
Exceptional impairment of property, plant and equipment - 18.6 18.6 - 6.4 6.4
Exceptional impairment of intangible assets - 6.0 6.0 - 3.2 3.2
Impairment and write down of intangible assets - other 38.6 - 38.6 - - -
Impairment of property, plant and equipment - other 22.1 - 22.1 1.4 - 1.4
Depreciation of property, plant and equipment 41.8 - 41.8 46.3 - 46.3
Amortisation of intangible assets 38.7 - 38.7 46.1 - 46.1
Exceptional profit on disposal of subsidiariesand operations - 0.8 0.8 - (19.2) (19.2)
Exceptional impairment of loan receivable - 4.6 4.6 - - -
Loss on disposal of intangible assets 0.2 - 0.2 1.0 - 1.0
Increase/(decrease) in provisions 472.6 85.5 558.1 (11.2) 18.6 7.4
Increase in deferred consideration in relationto prior year acquisition 4.0 - 4.0 - - -
Release of deferred consideration in relation to prior year acquisition - exceptional - - - - (10.3) (10.3)
Other non-cash movements - - - (7.9) - (7.9)
Impairment of working capital items (non-cash) 148.8 - 148.8 - - -
Total non cash items 772.2 581.5 1,353.7 78.6 (1.3) 77.3
Operating cash (outflow)/inflow before movements in working capital 86.4 (80.0) 6.4 267.5 (91.8) 175.7
(Increase)/decrease in inventories (1.4) - (1.4) 7.2 - 7.2
Decrease/(increase) in receivables 8.7 18.8 27.5 (66.0) - (66.0)
Increase/(decrease) in payables 9.7 20.8 30.5 (78.6) (11.6) (90.2)
Movements in working capital 17.0 39.6 56.6 (137.4) (11.6) (149.0)Recent news on Serco
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