REG - Serco Group PLC - Final Results
26/02/2020 07:00
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RNS Number : 1310E Serco Group PLC 26 February 2020
2019 full year results
26 February 2020
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Year ended 31 December 2019 2018 Change at reported currency Change at constant currency
Revenue((1)) £3,248.4m £2,836.8m +15% +13%
Underlying Trading Profit (UTP)((2)) £120.2m £93.1m +29% +25%
Reported Operating Profit (ie after exceptional items)((2)) £102.5m £80.5m +27% +22%
Underlying Earnings Per Share (EPS), diluted((3)) 6.16p 5.21p +18% +15%
Reported EPS (ie after exceptional items), diluted 4.21p 5.99p
Dividend Per Share (recommended re-instated) 1.0p n/a
Free Cash Flow((4)) £62.0m £16.3m
Adjusted Net Debt((5)) £214.5m £173.2m
Reported Net Debt((6)) £584.4m £188.0m
( )
Rupert Soames, Serco Group Chief Executive, said: "The results for 2019
represent the first year of revenue growth since 2013 and the second
successive year of growth in profits, and we expect continued strong progress
in 2020. 15% revenue growth of which 8% was organic, 29% underlying profit
growth and £5.4bn of order intake compares favourably with a market growing
at 2-3%. Free Cash Flow has increased significantly, and our leverage ratio
is at the lower end of our target range. All this indicates that we have
finally achieved escape velocity, leaving behind the gravitational pull of
past mis-steps, and gives the Board confidence to recommend paying a dividend
for the first time since 2014, which is an important milestone. We are
immensely grateful to our committed and hardworking colleagues, our patient
shareholders and our supportive customers who have helped us reach this point.
"The benefits of having a broad international presence, with over 60% of our
revenues and 50% of our employees outside the UK, are once again evident. We
have delivered double-digit organic revenue growth in both our North America
and Asia Pacific Divisions, and demonstrated the ability to execute
strategically important acquisitions such as NSBU in markets with premium
rates of growth. But 2019 is also notable as being the first time since 2013
that revenues have grown in the UK.
"Perhaps the most significant aspect of 2019, however, was the record £5.4bn
of order intake, representing 170% of annual revenues, and which resulted in
our order book increasing to £14.1bn, an increase of around 40% over the last
three years. This is the third successive year our order intake has exceeded
our revenues, and underlines the confidence governments have in Serco's
ability to deliver critical, sensitive and complex public services."
Highlights
· Revenue((1)) of £3.2bn increased by 14.5%, comprising 8.2% organic
growth, 4.8% contribution from acquisitions and 1.5% currency benefit. Very
strong constant currency growth in Americas (+35%, of which +19% was organic)
and Asia Pacific (+16%). UK & Europe (+5%) grew revenues for the first
time since 2013; Middle East (-2%) did well in a difficult market.
· Underlying Trading Profit((2)) of £120.2m increased by £27.1m or
29% (25% at constant currency); the NSBU acquisition contributed £8.6m of the
increase. The Group's Underlying Trading Profit margin increased by
40 basis points to 3.7%.
· Reported Operating Profit increased by £22.0m, £5.1m less than the
increase in UTP as a result of the net impact of various non-trading items
including £22.9m related to the conclusion of the SFO investigation and
£9.6m related to the commercial settlement received from the MoD as a result
of the Defence Fire and Rescue Project tender. Exceptional items included in
Reported Operating Profit, at £23.4m, were £8.5m lower than the prior year.
· Onerous Contract Provisions (OCPs) have run off broadly as we
expected, with the remaining liability now just £17m. We estimate the total
value of OCPs will have been within 2% of the original £447m as at December
2014.
· Underlying EPS of 6.16p increased by 18%, reflecting the growth in
Underlying Trading Profit, together with the benefit of the tax rate reducing
from 26% to 25%, but with this partially offset by the increase in the number
of shares following the Equity Placing in May 2019 to fund the Naval Systems
Business Unit (NSBU) acquisition. Reported EPS in the prior year benefited
from a number of non-underlying tax credits totalling £11.8m which did not
recur in 2019.
· Free Cash Flow((4)) improved sharply to £62m (2018: £16.3m), due to
the increase in underlying profits, neutral working capital movement and lower
cash outflows on the residual OCP portfolio. The number of supplier invoices
in the UK paid within 30 days increased to 86% (2018: 85%).
· Adjusted Net Debt((5)) at £215m increased over the year by £41m, as
the £62m of positive Free Cash Flow was offset by the £55m of acquisition
consideration not covered by the Equity Placing relating to the NSBU
acquisition; in addition there was a £49m outflow related to exceptional
items (2018: £19m).
· Leverage for covenant purposes was 1.17x; underlying leverage was
1.31x. Daily Average Adjusted Net Debt was broadly unchanged at £231m
(2018: £219m).
· Acquisition of NSBU, a leading provider of ship and submarine design
and engineering services to the US Navy that adds materially to the scale and
capability of Serco's defence business, completed in August 2019.
Integration progressing smoothly and the business has traded to plan. The
acquisitions completed in 2018 of BTP Systems (deepening our satellite and
radar capabilities) and of six Carillion health facilities management
contracts (adding significant scale to our UK Health business) have performed
in line with our expectations.
· Order intake was very strong at a record £5.4bn, representing around
170% of revenues; the three largest awards were for asylum accommodation and
support services in the UK valued at £1.9bn, Prisoner Escort and Custody
Services also in the UK valued at £0.8bn, and defence healthcare provision in
Australia valued at £0.6bn; over 40% of the order intake comprised new
business, and the balance was existing work being rebid or extended.
· Order book increased by £2.1bn to £14.1bn, predominately reflecting
the strong order intake. Since the start of 2017 the value of our order book
has increased by around 40%.
· The Pipeline of larger new bid opportunities closed 2019 at £4.9bn;
it was £5.3bn at the start of the year, but reduced to £3.2bn at the
half-year stage, reflecting in large part the very strong result of contract
awards, followed by good progress in replenishing the pipeline during the
second half of 2019.
· Revenue guidance for 2020 is £3.4-3.5bn, representing total growth
of 6-8%, which assumes organic growth of around 4%, an acquisition
contribution of 5-6% from the annualisation of NSBU, and a currency headwind
(based upon recent rates((8))) of 2-3%. Underlying Trading Profit is
expected to grow by about 20% to around £145m. This guidance is unchanged
from that given at the Closed Period trading update issued on 12 December
2019((7)).
· The Board recommends restarting dividends, last paid to Serco
shareholders in 2014, with a payment of 1.0p in respect of the 2019 financial
year. Assuming this payment and an interim dividend for 2020 in line with
our approach, Adjusted Net Debt guidance at the end of 2020 is approximately
£200m, with leverage expected to be towards the lower end of our normal
target range of 1-2x.
For further information please contact Serco:
Stuart Ford, Head of Investor Relations T +44 (0) 7738 894 788
Marcus De Ville, Head of Media Relations T +44 (0) 7738 898 550
Presentation:
A presentation for institutional investors and analysts will be held today at
JPMorgan, 60 Victoria Embankment, London EC4Y 0JP, starting at 9.00am. The
presentation will be webcast live on www.serco.com (http://www.serco.com) and
subsequently available on demand. A dial-in facility is also available on
+44 (0) 207 192 8000 (USA: +1 631 510 7495) with participant pin code 5370067.
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 2019 into
Sterling at the average exchange rates for the prior year.
(2) Trading Profit is defined as IFRS Operating Profit excluding amortisation
of intangibles arising on acquisition as well as exceptional items.
Consistent with IFRS, it includes Serco's share of profit after interest and
tax of its joint ventures and associates. Underlying Trading Profit
additionally excludes Contract & Balance Sheet Review adjustments
(principally Onerous Contract Provision (OCP) releases or charges) and other
material one-time items. A reconciliation of Underlying Trading Profit to
Trading Profit and Reported Operating Profit is as follows:
Year ended 31 December 2019 2018
£m
Underlying Trading Profit 120.2 93.1
Include: non-underlying items
Contract & Balance Sheet Review adjustments and one-time items 3.6 23.6
Settlement received re DFRP tender 9.6 -
Trading Profit 133.4 116.7
Amortisation of intangibles arising on acquisition (7.5) (4.3)
Operating Profit before exceptional items 125.9 112.4
Operating exceptional items (23.4) (31.9)
Reported Operating Profit (after exceptional items) 102.5 80.5
(3) Underlying EPS reflects the Underlying Trading Profit measure after
deducting pre-exceptional net finance costs and related tax effects.
(4) Free Cash Flow is the net cash flow from operating
activities before exceptional items as shown on the face of the Group's
Consolidated Cash Flow Statement, adding dividends we receive from joint
ventures and associates, and deducting net interest and net capital
expenditure on tangible and intangible asset purchases. The results for the
year ended 31 December 2018 have been restated to include within Free Cash
Flow the capital repayment of finance lease liabilities of £8.7m (2019
includes an equivalent £5.9m accounted for in accordance with IFRS16); as
this was previously included beneath Free Cash Flow, there is no impact on net
cash flow.
(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS
Alternative Performance Measure (APM) used by the Group. This measure more
closely aligns with the covenant measure for the Group's financing facilities
than Reported Net Debt because it excludes all lease liabilities including
those newly recognised under IFRS16. The results for the year ended 31
December 2018 have been restated to exclude from Adjusted Net Debt £14.8m of
obligations under finance leases accounted for in accordance with the previous
standard for leases, IAS17 (2019 excludes an equivalent £8.9m accounted for
in accordance with IFRS16).
(6) Reported Net Debt includes all lease liabilities, including those newly
recognised under IFRS16. In accordance with the Group adopting the modified
retrospective transition approach for IFRS16, comparative information such as
net debt and other financial performance measures are not restated for the
effect of this new accounting standard; instead, the cumulative effect of
initially applying IFRS16 is reflected as an adjustment to opening equity at
the date of initial application, which for Serco is 1 January 2019. A
reconciliation of Adjusted Net Debt to Reported Net Debt is as follows:
As at 31 Dec 2019 31 Dec 2018
£m
Adjusted Net Debt 214.5 173.2
Include: all lease liabilities accounted for in accordance with IFRS16 369.9 n/a
Include: lease liabilities accounted for in accordance with IAS17 n/a 14.8
Reported Net Debt 584.4 188.0
(7) Our outlook for 2020 is summarised as follows:
2020 outlook Latest view As at 12 December 2019
Revenue £3.4-3.5bn £3.4-3.5bn
UTP ~£145m ~£145m
Closing Adjusted Net Debt ~£200m ~£200m
(8) Our outlook for 2020 is based upon currency rates as at 31 January 2020.
The rates used, along with their estimated impact on revenue and UTP are as
follows:
Year ended 31 December 2020 outlook 2019 actual 2018 actual
Average FX rates:
US Dollar 1.31 1.28 1.34
Australian Dollar 1.95 1.83 1.78
Euro 1.19 1.14 1.13
Year-on-year impact:
Revenue (£80-90m) +£42m (£65m)
UTP ~(£5m) +£3.7m (£4.0m)
Reconciliations and further detail of financial performance are included in
the Finance Review on pages 22-38. 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 39-71. Further
details regarding the impact of the adoption of IFRS16 are included in note 1
to the condensed consolidated financial statements.
Chief Executive's Review
Summary of financial performance
Revenue and Trading Profit
Reported Revenue increased 14.5% to £3,248m (2018: £2,837m); in accordance
with IFRS this measure excludes Serco's share of revenue from joint ventures
and associates of £395m (2018: £375m). Net currency movements increased
revenue by £42m or 1.5%, whilst the net revenue contribution from
acquisitions added £140m or 4.8% which splits approximately 1% from the
Carillion health facilities management contracts that transferred to Serco
between June and August last year and 4% from Naval Systems Business Unit
(NSBU) which completed at the start of August 2019. At constant currency,
the organic revenue growth was therefore £230m or 8.2%, accelerating from 4%
in the first half of the year to 12% in the second half. The very strong
growth rate in the second half included the start of the two particularly
large contract awards (the AASC asylum accommodation and support contract in
the UK, and the AHSC defence garrison healthcare services contract in
Australia) and better-than-expected short-term volume related work, notably
from our customers on US defence frameworks, the US Federal Emergency
Management Agency (FEMA) contract, as well as certain Citizen Services
operations in Australia. This has resulted in particularly strong organic
growth in each of our Americas and AsPac Divisions, and, after several years
of organic decline in the UK & Europe Division, we saw encouraging organic
growth in the second half of 2019.
Underlying Trading Profit (UTP) increased by £27.1m or 29% to £120.2m (2018:
£93.1m); excluding the £3.7m favourable impact of currency and the £1.2m
increase from the adoption of IFRS16, the increase in UTP was £22.2m or
24%. Profit growth was driven by the Americas Division in the first half by
the CMS contract, which experienced an unusually high volume of fixed-price
variable work in the first few months of the year, and in the second half of
the year from the NSBU acquisition. Profits in the UK benefited from the
Carillion health facilities management acquisition; successful mobilisation of
the AASC contract saw mobilisation costs, expensed largely in the first half
of the year, being offset by its move into profitability in the second half.
Profits also increased in the AsPac Division, again driven by its particularly
strong organic growth performance, whilst profits fell in the Middle East
Division, which largely reflects the significant reduction in the defence
logistics MELABS contract as described a year earlier. The Group's
Underlying Trading Profit margin was 3.7%, an increase of 40 basis points.
Trading Profit was £133.4m (2018: £116.7m), £13.2m higher than UTP, which
reflects a net £3.6m credit in Contract & Balance Sheet Review and
one-time items (2018: net credit of £23.6m), and £9.6m of the commercial
settlement received by Serco regarding the Defence Fire and Rescue Project
(DFRP) tender. As with prior years, both Trading Profit and Underlying
Trading Profit benefited from losses on previously-identified onerous
contracts being neutralised by the utilisation of Onerous Contract Provisions
(OCPs); the £40.9m utilised on losses in 2019 (excluding IFRS16-related
accelerated utilisation) was in line with expectations and lower than the
prior year utilisation of £51.8m; we expect utilisation to drop further in
2020. The closing balance of OCPs now stands at £17m, compared to £82m at
the start of the year and the initial charge of £447m taken at the end of
2014; we estimate the total value of OCPs will have been within 2% of that
original estimate.
Reported Operating Profit and Exceptional Costs
Reported Operating Profit of £102.5m (2018: £80.5m) was £30.9m lower than
Trading Profit as a result of, first, £7.5m (2018: £4.3m) of amortisation of
intangibles arising on acquisition, and second, operating exceptional costs of
£23.4m (2018: £31.9m). The latter includes the £22.9m for the fine and
costs regarding the conclusion of the SFO investigation, restructuring
programme costs of £12.8m (2018: £32.3m) related to the final steps in the
implementation of the Transformation stage of our strategy, and a £19.3m
non-cash release of a provision that had been originally charged in 2014 in
relation to commercial disputes. After exceptional net finance costs of
£nil (2018: £7.5m net credit) and an exceptional tax charge of £2.7m (2018:
credit of £2.1m), total net exceptional costs were £26.1m (2018: £22.3m).
Financing and pensions
Pre-exceptional net finance costs were £21.8m (2018: £13.9m), with the
increase driven by £6.9m (2018: £0.6m) of the interest component of leases
as required under IFRS16, and £3.0m of non-cash credits no longer earned
following the repayment of the Intelenet loan note in October 2018. On a
daily average basis, Adjusted Net Debt was broadly unchanged at £231m (2018:
£219m). Cash net interest paid was £22.2m (2018: £18.1m).
Serco's pension schemes are in a strong funding position, resulting in a
balance sheet accounting surplus, before tax, of £54m (31 December 2018:
£71m) on scheme gross assets and gross liabilities each of approximately
£1.4bn. The opening net asset position led to a net credit within net
finance costs of £2.1m (2018: £0.8m). For the Group's main scheme, the
Serco Pension and Life Assurance Scheme (SPLAS), the purchase of a bulk
annuity from an insurer, has the effect of fully removing longevity,
investment and accounting risks for around half of all scheme members; the
gross liability remains recognised on our balance sheet, but there is an equal
and opposite insurance asset reflecting the perfect hedge established by the
annuity.
Tax
The underlying effective tax cost was £24.4m (2018: £20.6m), representing an
underlying effective rate of 25% (2018: 26%) based upon £98.4m (2018:
£79.2m) of Underlying Trading Profit less net finance costs. The rate is
higher than the UK statutory rate of corporation tax as there was no deferred
tax credit taken against UK losses incurred in the year, and because it
reflects the tax charges at locally prevailing rates in the international
Divisions which tend to be higher than the UK's rate; these two factors are
partially offset by the proportion of Serco's profit before tax generated by
consolidating our share of joint venture and associate earnings which have
already been taxed. The rate in 2019 is lower than the prior year reflecting
the improvement in, and changing mix of, the Group's profitability; we expect
the rate to continue at around 25%, which reflects our updated expectations
for the proportions of profits coming from our UK and international
operations, and the anticipated tax rates in each jurisdiction.
Tax on non-underlying items was a net charge of £3.0m (2018: credit of
£11.8m), which includes an additional £0.8m (2018: £2.9m) of deferred tax
asset in relation to UK losses to reflect the improved forecast of UK taxable
income; the prior year credit related predominantly to deferred tax movements
associated with changes in the valuation of the Group's defined benefit
pension schemes. Total pre-exceptional tax costs were £27.4m (2018:
£8.8m). Tax on exceptional items was £2.7m (2018: tax credit of £2.1m).
The total tax charge was therefore £30.1m (2018: £6.7m) and net cash tax
paid was £31.2m (2018: £10.6m), which includes the effect of tax paid in
2019 on non-underlying items that were credits in the prior year, as well as
the timing of tax payments on account.
Reported result for the year
The reported result for 2019, as presented at the bottom of the Group's
Consolidated Income Statement on page 39, is a profit of £50.6m (2018:
£67.4m). This comprises Reported Operating Profit of £102.5m (2018:
£80.5m), Reported Profit Before Tax of £80.7m (2018: £74.1m) and Tax of
£30.1m (2018: £6.7m). The reported tax charge increased by £23.4m in 2019
as a result of increases in tax on non-underlying and exceptional items of
£19.6m in addition to the £3.8m increase in tax on underlying profit.
Earnings Per Share (EPS)
Diluted Underlying EPS, which reflects the Underlying Trading Profit measure
after deducting pre-exceptional net finance costs and related tax effects,
increased by 18% to 6.16p (2018: 5.21p). The improvement reflects the 29%
increase in Underlying Trading Profit and the lower tax rate, partially offset
by the increase in net finance costs; EPS growth was tempered by the 6%
increase in the weighted average number of shares in issue, after the dilutive
effect of share options, to 1,199.0m (2018: 1,125.4m), with the increase
largely as a result of the approximate seven-month effect of the additional
Placing shares from 28 May 2019. Diluted Reported EPS, which includes the
impact of the other non-underlying items and exceptional costs, was 4.21p
(2018: 5.99p).
Cash Flow and Net Debt
Free Cash Flow improved to £62.0m (2018: £16.3m), which included the effect
of the increase in underlying profits as described above as well as receipt of
the £9.6m DFRP settlement. The cash outflows related to loss-making
contracts subject to OCPs (principally the Caledonian Sleeper, COMPASS and
PECS) reduced, reflected in the lower rate of provision utilisation of £40.9m
(2018: £51.8m). Working capital movements were also broadly neutral, with a
net outflow of just £0.1m compared to an outflow of £21.6m in the prior
year. The Group did not utilise any working capital financing facilities in
2019 or the prior year, and has no such facilities in place. Average working
capital days for the year were broadly unchanged; we are proud to say that 86%
of UK supplier invoices were paid in under 30 days, up from 85% in 2018, and
96% were paid in under 60 days. Of other movements within Free Cash Flow to
note, cash tax paid was higher but capital expenditure was lower, both of
which include some timing effects.
Adjusted Net Debt at 31 December 2019 increased to £214.5m (31 December 2018:
£173.2m); our key measure of Adjusted Net Debt excludes all lease
liabilities, which now total £370m including those newly recognised under
IFRS16, and the Adjusted measure more closely aligns with that for covenant
purposes of our financing facilities. The increase of £41.3m includes the
Free Cash inflow of £62m, offset principally by three sources of outflow:
first, the £55m net outflow for acquisitions (2018: £31.3m), driven by the
consideration payment of £184m for NSBU and the £139m of Equity Placing
proceeds; second, £22.9m relating to the conclusion of the SFO investigation;
and thirdly an outflow of £26.3m related to other exceptional items (2018:
£19.2m). The closing Adjusted Net Debt of £214.5m compares to a broadly
unchanged daily average of £231m (2018: £219m) and a peak net debt of £357m
(2018: £292m), with this increase reflecting the timing of the payment of
exceptional costs and acquisition consideration.
Reported Net Debt was £584m (2018: £188m), which includes the £370m (2018:
£15m) related to leases. The increase in leases was largely related to the
mobilisation of the 10-year AASC contract in 2019.
At the closing balance sheet date, our leverage for debt covenant purposes was
1.17x EBITDA (2018: 1.06x). This compares with the covenant requirement to
be less than 3.5x. Our underlying net debt leverage, which excludes
non-underlying items within covenant EBITDA such as the DFRP settlement and
OCP releases, was 1.31x (2018: 1.23x), which is in the lower half of our
normal target range of 1-2x underlying net debt to EBITDA.
The Revenue and Trading Profit performances are described further in the
Divisional Reviews. More detailed analysis of earnings, cash flow, financing
and related matters are described further in the Finance Review.
Dividend recommendation
When dividend payments were suspended in 2014, the Board committed to resuming
dividend payments to Serco's shareholders as soon as it judged it prudent to
do so. 2019 has been a year of very strong operational and financial
performance. It is also the last year of significant outflows of cash
related to OCPs and restructuring exceptional costs. Our expectations for
2020 are for further good progress in increasing underlying earnings and
reducing financial leverage.
The Board is therefore recommending the payment of a final dividend in respect
of the 2019 financial year. Our intention going forward is to weight
dividend payments roughly one-third : two-thirds between interim and final
payments. The Board considers it appropriate to reintroduce the dividend
payments at a level of underlying EPS cover initially of around four times,
equivalent to a payout ratio of approximately 25%. The Board is therefore
recommending the payment of a final dividend in respect of the 2019 financial
year of 1.0p. The dividend, subject to shareholder approval at the Annual
General Meeting on 14 May 2020, would be paid on 5 June 2020.
A combination of this final dividend in respect of the 2019 financial year,
together with an interim dividend in respect of 2020 aligned to the
recommended dividend and outlook as described, would result in a cash outflow
for dividend payments to shareholders of around £20m in 2020. This has been
taken account of in our guidance for 2020 Adjusted Net Debt and leverage.
The Board will keep the dividend, including the payout ratio, under regular
consideration as we continue to implement the growth stage of our strategy.
This will consider views of the Group's underlying earnings, cash flows and
financial leverage, together with the prevailing market outlook. The Board
is mindful of the requirement to maintain an appropriate level of dividend
cover, the potential alternative uses of capital to generate incremental value
for shareholders, and the desire to maintain financial flexibility and a
strong balance sheet that is considered appropriate for Serco's ability to
deliver sustainable value for all of the Group's stakeholders.
Contract awards, order book, rebids and Pipeline
Contract awards
2019 was a record year for order intake, with almost all regions performing
very strongly. At £5.4bn, order intake represented a book-to-bill ratio
(the relationship between orders received and revenue recognised) of around
170%, and 2019 was the third year in succession that the book-to-bill ratio
exceeded 100%, which helped to drive our order book to record levels. There
were over 50 contract awards worth more than £10m each, but there were four
particularly large awards which accounted for approaching two-thirds of the
intake for the year.
In the UK, we won our largest ever contract, being an estimated £1.9bn over
10 years for AASC (providing asylum accommodation and support services). As
previously set out, the AASC contracts are particularly significant, as they
replace the COMPASS contracts which had been incurring losses (offset in the
P&L by the utilisation of the OCP) of around £15-20m on average per year
for the last five years. Under the new AASC contracts, we did not retain the
Scotland & Northern Ireland region, but gained the much larger Midlands
& East of England region, whilst retaining our other previous COMPASS
region of the North West; as a consequence, we are now the largest provider of
asylum seeker accommodation in the UK. Given our past experience, we also
bid the regions at prices which we believe should allow us to make a fair
return. The Group's second largest contract award for the year was also in
the UK, where the UK Ministry of Justice (MoJ) selected Serco to continue
operating the Prisoner Escort & Custody Services (PECS) in a contract
valued at £0.8bn over 10 years. Similar to COMPASS/AASC, this is a
successful rebid of a contract previously incurring losses that were being
offset by an OCP, and also similar to AASC in that Serco was selected to
provide these sensitive and demanding services over a significantly increased
geographical area.
The next two largest contract awards were in Australia. Serco won a new
AU$1.01bn (around £560m) contract over an initial six-year term to provide
health services personnel to the Australian Defence Force at garrisons across
the country, working as a sub-contractor to BUPA. We also secured a two-year
extension for immigration services with an estimated value of £0.4bn.
We have not included within our order intake the contract to continue
operating the Northern Isles Ferry Services, which was announced by the
customer in September 2019 and has an estimated total contract value of
£450m, as we have not yet signed the contract due to a procurement challenge
by the unsuccessful bidder. In early February 2020 the Scottish Government
announced that all barriers to the award of the contract had been resolved,
and that signing the definitive contract is anticipated to occur in the coming
months.
Other notable contract awards included, in the UK & Europe Division: rebid
and expansion of our work on the Skills Support for the Workforce Programme; a
new environmental services contract with the Royal Borough of Windsor and
Maidenhead, together with numerous other contract extensions for similar
services; extending defence support contracts for the UK MOD and the US Air
Forces in Europe; and securing our contact centre operations for Companies
House and our support services to the European Organisation for Nuclear
Research (CERN).
Americas had a strong year of order intake, including: a new win for field
office services to the US Pension Benefit Guaranty Corporation worth up to
$200m; extending work we perform for the Federal Retirement Thrift Investment
Board (FRTIB); support to transitioning military service members valued at
$95m; an $82m award for NexGen IT solutions US Air Force Civil Engineering;
increased task orders on ship and shore modernisation and hardware frameworks
totalling over $250m as well as those for our support services to the Federal
Emergency Management Agency (FEMA) totalling over $100m; and the acquired
businesses of NSBU and BTP Systems also achieved pleasing contract awards as
referred to in the Acquisitions section below.
In AsPac, a new AU$115m contract to operate the Adelaide Remand Centre on
behalf of the South Australia Department for Correctional Services was won, we
extended our contract for South Queensland Correctional Centre and
successfully rebid our contract for traffic camera services in the State of
Victoria. In the Middle East, we signed the contract extension to continue
operating the Dubai Metro, as well as extensions for air traffic control
services in Dubai and Iraq, several facilities management awards in Abu Dhabi,
and a new contract for public infrastructure advisory services for Mashroat in
Saudi Arabia.
Of the total order intake, over 40% comprised new business, with the balance
represented by the value of rebids and extensions of existing work.
Reflecting the scale of the AASC and PECS awards, around 55% of order intake
came from the UK, with the remaining 45% from customers of our Americas,
AsPac, Middle East and continental European businesses.
Bids for new work that were unsuccessful in the year included the defence
deployable health opportunity in Australia, the Eastern Harbour Crossing and
the Tsing Ma Control Area transport operations in Hong Kong, and environmental
services and health facilities management tenders in the UK and AsPac. Of
existing work, the largest loss was for the Scotland & Northern Ireland
region of the COMPASS contract, however this was more than offset by winning
the new larger region of the Midlands & East of England, whilst keeping
our existing North West of England region. The next largest rebid loss was
that for transport management of the Tsing Sha Control Area in Hong Kong which
had annual revenue of around £20m, equivalent to around 0.6% of the Group
overall; as this was an onerous contract it does not impact UTP. The next
two largest rebid losses each had annual revenue of £10-15m, which were the
Cleveland Clinic healthcare facilities management contract in Abu Dhabi and
traffic management services to the US state of Georgia Department of
Transportation.
The win rate by value for new work, which has been 20-25% for the last four
years, increased to around 40% particularly as a result of the value of the
new AASC Midlands & East of England region and the new Australia defence
health contract. The win rate by value for securing existing work was around
65%, which is lower than the 75-90% trend in recent years, but which is
reflective of losing the existing Scotland COMPASS region; if the Scotland
COMPASS region were excluded, the win rate by value for existing work would
have been over 90%. Win rates by volume were over 50% for new bids and over
90% for rebids and extensions.
2019's £5.4bn of order intake was an exceptional performance. However, in
our business, order intake is lumpy, and we expect in 2020 that order intake
will be significantly lower than that which we saw in 2019.
Order book
Driven by the very strong order intake, the Group's order book closed the year
at an estimated £14.1bn, up by £2.1bn versus the £12.0bn at the start of
2019. The order book takes into account any required changes in assumptions
for existing contracts including currency movements, as well as the addition
through the acquisition of NSBU which has visibility of around $700m of future
revenue but only $200m is taken into the order book as the balance is
unexercised options. This order book definition is therefore aligned with
the IFRS15 disclosures of the future revenue expected to be recognised from
the remaining performance obligations on existing contractual arrangements.
It is worth noting that as it excludes unsigned extension periods; the
£14.1bn would be £15.3bn if option periods in our US business were included;
as option periods have always tended to be exercised in our US business, we do
include these in our assessment of order intake, but in accordance with IFRS15
we do not include them in the order book until they are exercised.
Furthermore, the order book definition excludes our share of expected revenue
from contractual arrangements of our joint ventures and associates which would
add a further £1.5bn if included within our order book, driven by the current
pricing period of the AWE operations and the Merseyrail franchise.
There is £2.6bn of revenue already secured in the order book for 2020,
equivalent to around 75% visibility of our £3.4-3.5bn revenue guidance; the
'gap' in visibility is typically closed by our US business receiving the
exercise of contract option periods and through short-term task order work on
framework contracts, together with the necessary securing of contract
extensions or rebids across the rest of the Group.
Rebids
As we look ahead the customary three years through to the end of 2022, across
the Group there are over 70 contracts in our order book with annual revenue of
over £5m where an extension or rebid will be required, representing current
annual revenue of around £1.5bn in aggregate or over 40% of the Group's 2020
revenue guidance. The proportion of revenue that requires securing at some
point over the next three years is normal given our average contract length of
around seven years (or approximately ten years on average on a
revenue-weighted basis, as larger contracts typically have longer terms); at
the start of 2018 the three-year forward rebid value was £1.4bn and at the
start of 2019 it was £1.2bn. Contracts that could potentially end at some
point before the end of 2020 have aggregate annual revenue of around £300m,
though none individually exceed £50m. In 2021, the aggregate annual value
of contracts due for extension or recompete is currently around £800m, with
this including our operations for the Dubai Metro and Fiona Stanley Hospital
in Australia, each of which account approximately for 3% of Group revenue.
In 2022, the aggregate annual revenue due for extension or recompete at some
point in that year is around £400m; this includes the Australian immigration
services contract due to end in December 2021 unless the option for a further
extension is exercised or a rebid is won, and which currently accounts for
over 5% of Group revenue.
Pipeline
As we have previously described, Serco's measure of Pipeline is probably more
narrowly defined than is common in our industry; it was originally designed as
an indicator of future growth and focuses on bids for new business only. As
a consequence, on average over the last five years, less than half of our
achieved order intake has come from the Pipeline. It measures only
opportunities for new business that have an estimated Annual Contract Value
(ACV) greater than £10m, and which we expect to bid and to be awarded within
a rolling 24-month timeframe; we cap the Total Contract Value (TCV) of
individual opportunities at £1bn, to attenuate 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 individual task orders into account. It is thus
a relatively small proportion of the total universe of opportunities, many of
which either have annual revenues less than £10m, or are likely to be decided
beyond the next 24 months, or are rebids and extensions.
On this definition our Pipeline stood at £4.9bn at the close of 2019. At
the beginning of 2019 it was £5.3bn, however, as we noted at the time of
reporting the results for the 2018 financial year back in February 2019, we
had already won in the first month of the year the two largest opportunities
in this Pipeline which reduced it by £1.7bn. Other wins, losses and a small
number of removals due to opportunities no longer meeting our definition
reduced the Pipeline further, such that it stood at £3.2bn at the half-year
stage. With a number of opportunities maturing to the stage where they meet
our Pipeline definition, together with our ongoing Business Development
progress to reload the Pipeline with new opportunities, we therefore saw the
Pipeline increase in the second half of the year. The closing position
consisted of around 30 bids that have an ACV averaging approximately £30m and
a contract length averaging around six years. The UK & Europe and
Americas Divisions each represent around 40% of the Group's pipeline, with the
AsPac and Middle East Divisions the balance.
As we have noted before, in the services industry in which Serco operates,
pipelines are often lumpy, as individual opportunities can be very large, and
when they come in and out of the Pipeline they can have a material effect on
reported values. Whilst the second half of 2019 did produce an expected
increase in the Pipeline, and market conditions may over time become more
favourable, it does not particularly support that Pipeline progress is either
'straight line' nor strongly predictive of future revenues.
Going forward, Serco will change its Pipeline definition to no longer exclude
opportunities for new business that have an estimated ACV smaller than
£10m. At around £1.6bn, smaller opportunities in aggregate are a
significant component of the Pipeline and potential growth, and likely to be
increasingly so given the use of task orders under framework contracts; the
Pipeline on this basis therefore increases from £4.9bn to approximately
£6.5bn.
Operational progress, transformation, innovation and people
We have an ambition to be the best-managed business in our sector. Achieving
this will require investment in people, processes and systems. Each are
described below.
People
Serco is a business that provides people-enabled public services. In nearly
all our contracts, what government customers are buying is the service and
expertise of people who are knowledgeable, disciplined, reliable, committed to
delivering public services, appropriately paid and well led and managed. It
therefore is central to our ability to deliver effectively to our customers
that our colleagues within the business feel engaged.
Since 2011, Serco has carried out an employee survey every year, to which a
large majority of the eligible workforce respond - around 27,000 people in
2019. The survey has about 50 questions covering everything from attitudes
to health and safety, relationships with peers, respect for diversity and many
other dimensions. We also test an "engagement score" which is a standard
method of allowing companies to measure and benchmark from year to year what
in olden times would have been called "morale". The progression of these
scores in the run-up to the disastrous years of 2013 and 2014, and our
subsequent recovery, tell the tale of Serco's turnaround as eloquently as any
financial metrics:
2011 2012 2013 April 2014* Oct 2014* 2015 2016 2017 2018** 2019
Leaders 65 56 51 38 51 55 72 71 69 77
Managers 54 51 49 n/a 58 59 62 65 70 73
All employees 45 45 42 42 51 53 54 56 67 71
* in 2014 two surveys were done.
** in 2018, the methodology for calculating employee
engagement changed, aligned to the new specialist third party provider of the
survey. As reported at the time, it is not possible to adjust historic data
to restate to the new methodology, but analysis performed by the new provider
in 2018 indicated that the engagement level for that year was broadly stable
on the previous year's score.
Two things shine out from these numbers: in 2011 and 2012, there was a huge
difference in the experience as an employee of Serco to the experience of the
300 or so leaders. And in 2018 and 2019, not only are the scores much
higher, they are much more tightly grouped, which says that the morale of the
workforce is similar to that of managers and leaders. It is a good thing,
and actually quite rare, to find such close correlation between leaders' and
employees' morale in companies in our industry and with our scale.
One other fact worth mentioning: in 2019 we opened up the questionnaire to
allow free-text answers to questions, with specific opportunities to make
comments to the Board. To our amazement, the 27,000 respondents made some
50,000 individual comments, and ever since we have been trying to work out how
we can digest that much feedback. Our solution has been to pick at random
500 of them - the good the bad and the ugly - and publish them. If anyone
has any doubt as to the fact that Serco colleagues are a feisty, fearless and
passionate lot who care deeply about their work delivering public services and
about Serco, we need look no further than those comments.
Three other data points are worth mentioning as regards people: in 2019, we
estimate that over 500,000 people applied to work for Serco, so it appears
that our ambition to make Serco an employer of choice seems to be working.
And in the last three years, from a senior management cohort of around 350,
the rate of annual voluntary turnover has been around 3%. Finally, in 2019,
we launched our first graduate recruitment scheme in the UK; bearing in mind
that Serco's reputation, particularly in the UK, was so badly damaged a few
years ago, it was gratifying to see that around 1,000 graduates applied, over
400 sat the aptitude tests, 45 attended a selection day, and we hired 14.
We continue to make significant investment in training. At a Group Level, we
have continued to run our highly successful Serco Senior Management
Programme. This course, exclusive to Serco, and designed and delivered by us
and Saïd Business School, Oxford, has been an outstanding success, and so far
some 11 courses, embracing 330 senior managers, have been run. In 2019, we
added a specific Contract Managers' course, which also runs at Oxford.
Within the businesses, Operational Excellence practices continue to be
embedded across the business, with 2 Master Black Belts, 9 Black Belts and 154
Green Belts now supporting the 3,471 Yellow Belts that have been trained over
the last four years. And in addition, our Divisional Chief Executives are
encouraged to develop their own regional courses, and we have a plethora of
different local courses available to management.
Systems and processes
However well trained the people, they need the tools to do the job, and these
are in part processes, and in part systems. Significant progress has been
achieved on our core IT systems; in 2018, we migrated our SAP system into the
cloud, thereby avoiding the multi-million pound investment we would have had
to have made in upgrading our IBM servers, and allowing us to vacate our
largest server farm. In 2019, we followed this up by upgrading our SAP
versions from the heavily customised 2009 release to the latest version. Few
companies can claim to have their core ERP system both cloud-based and on
current release. We also did extensive and complex work migrating a large
number of specialist applications to the cloud, which has allowed us to close
the second of our two large server centres in the UK in December. We will
also be upgrading our core US ERP system to latest version in 2020.
Many contracts are supported by IT systems we have developed. In the US, we
have used sophisticated Robotic Process Automation and Artificial Intelligence
tools to transform the speed and efficiency of key processes on our CMS
contract, which has allowed us to handle large variations in volumes of work
without hiring and firing people. In the UK, using the latest workflow tools
we have completely re-written the systems used to manage the AASC and PECS
contracts. Similarly, in Australia, we have created a highly efficient set
of systems which have allowed us to recruit and manage over 1,000 healthcare
professionals to serve the Australian Defence Force; we have also developed
and launched a combined online and call centre application which allows
citizens to report non-urgent issues to the Victoria Police. So far, we have
taken over 500,000 calls to this service.
A key priority for the Company is to improve the productivity and efficiency
of our workforce, and to streamline processes such as payroll and absence
management. Whilst this sounds straightforward, in a company employing over
50,000 people, many on terms and conditions inherited from previous employers,
it has proved to be a major task, on which we have so far spent not far short
of £10m. However, we are now rolling out workforce management systems, and
have around 13,000 users on various levels of system, ranging from simple
clock-in-clock-out time management, to full rostering, absence management and
workforce planning.
In the critical area of cyber security we continue to invest, and regularly
achieve the accreditations and standards demanded by our various government
clients of their contractors. Our hopes that we would be able to reduce our
IT costs as we shed old server farms and systems have been largely set to
nought by the inexorable increase in investment we need to make on protecting
our IT systems and data from those who would do us and our customers harm.
A major challenge for the IT team was the integration of around 1,000 NSBU
employees onto our systems. Both Serco North America and NSBU work on highly
classified contracts, and managing the task of migration whilst maintaining
the appropriate security was complex. Rather than try and merge the two
environments, we have given all NSBU employees new laptops which meet our
security requirements and "lifted and shifted" all the NSBU data onto our
proven Serco secure network.
The basic operational transformation of Serco is now largely complete in terms
of HR, IT, Procurement and Finance. But much work still remains to bring
systems and processes from "acceptable" up to "best-in-class" in our industry,
and we intend to continue to invest, with the priority in 2020 being the
creation of a new front-end to our HR systems outside North America ("Project
Goldfinch") and beginning to use the analytics available in our workforce
management systems to improve efficiency and productivity and create
sustainable competitive advantage. A business which employs over 50,000
people, receives over 500,000 job applications and recruits over 15,000 new
hires a year has the scale to be efficient.
Innovation does not only come from IT. The new Clarence prison in New South
Wales, which opens in mid-2020, is a minor miracle of innovation and stands in
sharp contrast to prisons built 20 years ago, let alone 100 years ago.
Advances in materials - specifically strengthened glass, have allowed us to
create a prison where there is barely a steel bar to be seen. Cells are airy
and light, with large windows, likewise visiting areas; prisoners will have
their own tablets which allow them to communicate with family, read books and
watch films. And yet security is world class. Our new Caledonian Sleeper
trains, running between Scotland and London, have replaced notoriously shabby
40-year old rolling stock, and have double beds and ensuite showers and
toilets. Our Northlink ferries have introduced disabled changing and toilet
facilities that transform the experience of disabled people who travel between
the mainland and the Northern Isles. In Australia, we have developed an
"e-order" mobile trolley system for ordering and tracking clinical pathology
tests in Fiona Stanley Hospital, which other hospitals are considering
adopting.
The Serco Institute
In 2019, we relaunched Serco Institute. Originally active in the early days
of outsourcing as a way to encourage thinking and research about the delivery
of government services, it had a reputation for providing interesting and
challenging articles for those interested in public service delivery. After
2011 it was left to wither, and has been dormant for several years. However,
at a time when the idea that private companies can deliver public services is
being widely questioned, when citizens' expectations of public services
continue to increase and evolve, and where over-aggressive risk-transfer has
led in the UK to huge damage to the UK Government's supply chain, we feel that
there is need for a forum in which ideas about the delivery of public services
can be expressed.
We have brought together people to discuss ways of capturing social value in
government contracts; we have commissioned independent research from Capital
Economics on the economics of outsourcing, as well as work in conjunction with
Kings College on the Whole Force approach for the British military; we have
commissioned research on why rates of violence are so much lower in Australian
prisons than UK prisons. The Serco Institute works to help governments
understand what works in service delivery; what sets it apart from other think
tanks is the international dimension, access to colleagues' deep operational
expertise, and the live public service environment we have to conduct studies
and run trials.
It is early days, but we believe that the Serco Institute can make a
meaningful contribution to understanding what works, and why, in policy
delivery, and disseminating knowledge of innovations in public services.
Acquisitions
Acquisitions can have an important role in sustainable value creation by
bringing new capabilities and skills to our customers, enhancing returns for
our shareholders and improving opportunities for the employees and business
partners of Serco. Generally speaking, we regard acquisitions as higher risk
than organic growth, so any candidates have to meet our stringent criteria of
being both strategically and financially compelling. In 2019 we undertook a
major acquisition (described below) in the form of NSBU, having made two much
smaller 'bolt on' acquisitions of BTP Systems and the Carillion health
facilities management contracts in 2018.
In May 2019, Serco announced that it had entered into a definitive Asset
Purchase Agreement to acquire for $225m the Naval Systems Business Unit and a
small number of related contracting entities (collectively, 'NSBU'), from
Alion Science & Technology Corporation. NSBU is a leading provider of
naval design, systems engineering, as well as production and lifecycle support
services to the US Navy, US Army and Royal Canadian Navy. In the 12 months
to September 2018 NSBU had revenues of $336m, which compares with Serco's
North American Defence revenues in 2018 of $453m.
The acquisition marked an important step for Serco, materially adding to the
scale and capability of our US defence business, and in particular to the
maritime support segment. Prior to the acquisition, Serco employed some
6,000 people in North America, of whom 2,300 worked in defence, and Serco has
been providing services to the US Navy for nearly 30 years. NSBU, which
employs around 1,000 people, has brought world-class ship and submarine
design, systems, and engineering services, production support and in-service
sustainment capabilities, which are highly complementary to Serco's existing
skills in ship modernisation, hardware integration and naval logistics.
As well as broadening capabilities, the acquisition increases significantly
the scale of our international Defence businesses. Serco Group's revenue mix
from Defence has increased from 30% in 2018 to around 35% of 2019 revenues on
a pro forma basis, which is equivalent to approximately $1.7bn (£1.3bn),
while the Americas Division as a proportion of the Group has increased from
20% in 2018 to around 29% on a pro forma basis, equivalent to approximately
$1.4bn (£1.1bn).
The combined business is a top tier supplier of services to the US Navy, and
increases our exposure to US Navy fleet expansion, which is one of the
fastest-growing areas of public procurement. The US Navy has announced plans
to increase the fleet from 280 to 355 ships by 2034, and we see a long-term
and growing demand for the capabilities that the combination of Serco and NSBU
will be able to provide.
The acquisition was financed through a combination of a new £45m debt
facility together with an Equity Placing for cash of 10% of existing share
capital that raised gross proceeds of around £140m on the day that the
transaction was announced. As stated at the time of the acquisition, in
2020, NSBU is expected to contribute revenue of approximately $370m (£285m),
EBITDA of $28m (£21m) and Underlying Trading Profit of $27m (£20m),
resulting in transaction multiples of 0.6x, 8.1x and 8.3x, respectively.
This includes the benefit of sharing Serco's fixed overheads across a wider
revenue base in North America, which we expect to be worth $3-4m of UTP in the
first year.
Serco received all necessary regulatory approvals, including customary
Hart-Scott-Rodino ('HSR') and Committee on Foreign Investments into the United
States ('CFIUS'), and completed the transaction at the start of August 2019.
The integration has progressed well and the business has traded to plan.
This has included good progress on contract awards such as the $162m contract
to continue the support to the US Navy's Amphibious Warfare Program Office
(PMS 377) and the $43m five-year contract to deliver design and engineering
services for the US Navy's next generation of unmanned and small surface
combatant vessels.
The businesses acquired in 2018 have also performed well in 2019, their first
full year under Serco ownership. BTP Systems deepens the Group's satellite
and radar capabilities, and it too has achieved good progress on contract
awards such as successfully rebidding and expanding its largest operation with
the $49m five-year contract for system engineering technical services on the
Submarine High Data Rate (SubHDR) program. The acquisition of the six
Carillion health facilities management contracts added significant scale to
our UK health business, and has contributed to improved profit performance of
the UK business in 2019.
Electronic Monitoring investigations
In 2013, the UK Serious Fraud Office (SFO) opened an investigation following
allegations of overcharging on our Electronic Monitoring (EM) contracts for
the UK Ministry of Justice (MoJ). The investigations related to these
allegations were finally concluded with the announcement on 3 July 2019 that
one of Serco's UK subsidiaries, Serco Geografix Ltd (SGL), had reached an
agreement to a Deferred Prosecution Agreement (DPA); the agreement received
final judicial approval the following day. The DPA related to three offences
of fraud and two of false accounting committed between 2010 and 2013
associated with the reporting to the UK Ministry of Justice (MoJ) of the
levels of profitability of Serco's EM contract. Investigations into
allegations of wrongful billing which were the subject - understandably - of
significant public and Parliamentary ire in 2013 were concluded without any
criminal charges against Serco. An investigation by the Financial Reporting
Council into misconduct by the Group's auditors at the time concluded with
sanctions and penalties imposed against Deloitte and two of its audit
engagement partners. Nothing in these matters impacts the previously
reported statutory accounts of Serco Group.
The DPA concludes the SFO's investigation into Serco companies. As noted in
the summary of financial performance above, and in note 7 to the financial
statements on pages 56-57 regarding exceptional items, a £22.9m charge was
taken to reflect the payment of the £19.2m fine together with £3.7m related
to the SFO's investigation costs. The fine reflected a discount of 50% as a
result of Serco's self-reporting and significant and substantial cooperation
with the investigation. The SFO determined that no further damages or
disgorgement of profit was payable to the MoJ because Serco had already fully
compensated the Department in December 2013.
As noted in the announcements made in July, the SFO recognised the significant
steps Serco has taken to reform itself, including the thorough implementation
under independent supervision of a comprehensive Corporate Renewal Programme
approved by the UK Government. This programme included over 80 actions and
initiatives, and included rewriting our system of management control, as well
as strengthening our bidding, contract management, internal audit and
management assurance processes. Nobody who sat on the Board of Serco Group,
or who was part of the Executive Management Team at the time these offences
were committed, works for Serco today.
Whilst all financial liability is considered to now have been extinguished
following the SFO's long and very detailed investigation into Serco companies,
as well as the internal and customer-led investigations and reviews which
preceded and ran in parallel with the SFO, Serco has subsequently received a
claim seeking damages for alleged losses following the reduction in Serco's
share price in 2013. This claim will be energetically and robustly
resisted. As referred to in our contingent liabilities note on page 64, the
merit, likely outcome and potential impact on the Group of any such claim is
subject to a number of significant uncertainties.
Market outlook
Our approach to strategy planning is to conduct annual planning exercises,
updating five-year forward plans, using internal resources. Every 4-5 years
we conduct a root-and-branch review, with external help, of our markets. The
last such review was in 2018, and in our 2018 results announcement, we set out
our views on our markets. Other than a new and much stronger Government in
the UK, and certainty that the UK will leave the EU, nothing has happened to
change our previous assessment. In summary:
· We still believe that the Four Forces (relentlessly increasing demand
for public services; expectations of higher service quality; structural fiscal
deficits; electoral resistance to tax increases) will continue to encourage
governments to seek innovative ways to deliver more services, of higher
quality, and at lower cost (what we call 'More and Better for Less').
· In 2018 we estimated that the weighted average rate of growth across
all our geographies and sectors was running at 2-3%, which was lower than the
5%+ seen several years earlier and which we think the market could revert to
in the longer term; the reduction was in large part because of the conditions
in the UK, which represents around 40% of our revenues. A year passing has
not changed our view on market growth.
· The UK Government has been commissioning very little which is new in
the world of public service outsourcing, as it deals with other priorities
such as Brexit. New contracts have tended to be rebids of existing work, and
whilst this may have increased Government spend, this will be because previous
contracts were loss-making and on re-bid the Government is having to spend
more; this represents an adjustment to the market value, not volume growth.
Examples of such "value resets" would be the AASC and PECS tenders, which
Serco won at increased value compared to the previous generation of contracts
following years of losses. There have been some new opportunities in UK
Central Government - notably new MOD programmes around training and fire
services, the new prisons build programme and electronic monitoring for
immigration applications - but they have been few and far between.
· In terms of life post-Brexit, the determination of the UK Government
to "take back control" from the EU and to have its own standards and
regulation is in effect insourcing regulation on a national scale. The UK
will have to invest in rebuilding the regulatory capability that for the last
40 years has been outsourced to the EU. Supporting Government in this work
may produce opportunities for companies like Serco in the longer term. The
Government is also determined to simplify procurement regulations, which may
make bidding a little less expensive and long-winded, and the new Playbook for
outsourcing is a genuine attempt by Government to procure services contracts
in a more effective and balanced way. Our direct exposure to Brexit is small
as Serco neither exports nor imports to any significant degree; our business
in continental Europe is conducted through long-established local
subsidiaries, and we employ relatively few continental European citizens in
the UK.
· Elsewhere, US defence spending, and particularly Navy procurement, is
very robust, and the Department of Defense is busy trying to work out how they
will fulfil the requirement, mandated by Congress with bi-partisan support, to
increase the Navy from around 280 ships to 355. The startling increase in
the valuations accorded to our quoted peers in the US in the last 12 months
suggests that there is confidence that demand will remain strong; our view is
that the rate of growth in US defence spending will likely slow, but that
there is plenty of work to bid for, and the main constraint for us is
availability of labour. If finding welders in the US is difficult at a time
of 3.5% unemployment, finding welders with the security clearances required to
work on sensitive defence contracts is doubly so.
· Australia remains a diverse market in that different states elect
governments who have sharply different views about the private provision of
public services. But overall, the competition amongst different
administrations in the Commonwealth to provide improved services provides a
healthy back-drop to the market, and the Federal Government remains a major
purchaser of public services in defence and immigration.
· We are continuing to search for opportunities to grow our position in
Europe; we have energetic and effective management who have won us our first
European defence contracts, and we are hopeful we can grow our position.
· In Serco Middle East, we also have new management who are bringing
new dynamism and ambition to the business. We have just signed a large and
significant new contract with Dubai airport; our contract in Saudi Arabia with
the Government to provide a framework and processes and procedures for asset
and facility management across the whole of Government is of great
significance to our position in that market. Whilst the Middle East will
always be a volatile and difficult market, we believe that it will continue to
grow.
· Although we have not yet seen any material impact on our business, we
are closely monitoring the developing situation relating to the Coronavirus
(COVID-19). As a major employer and provider of essential frontline
services, the health and safety of our colleagues and service users is
paramount, and supporting our government customers, frequently in very
challenging situations, is at the heart of what Serco does. There is limited
necessity for travel of our employees, and, given the nature of our services,
we consider any supply chain risk to be small at the current time. We will
continue to evaluate this situation and provide any update to our stakeholders
at the appropriate time.
Guidance for 2020
At our Closed Period trading update on 12 December 2019, we provided our
initial outlook for 2020 and remarked that we anticipated continued progress
and further strong growth in line with analyst consensus expectations, taking
into account the previously announced PECS transition costs and recent
currency movements at that time. No element of guidance has changed since
that date, except for more recent currency rates and to take into account the
impact of the resumption of dividend payments to Serco's shareholders
announced with our 2019 results.
Revenue in 2020 is expected to be £3.4-3.5bn, which would represent total
growth of 6-8%. This assumes organic growth of around 4%. Within this, the
performance of the Americas Division is more susceptible to the volumes of
task order work, such as in our Ship & Shore modernisation operations and
the FEMA contract, which have been particularly strong in 2019, and this
creates a tough comparative for 2020. The acquisition of NSBU is expected to
add to revenue growth by about 5-6%, representing the seven months through to
the anniversary of completion of the transaction in August. If recent
currency rates were to prevail throughout 2020, there would be a currency
headwind across the Group of estimated at £80-90m or 2-3% of revenues.
Underlying Trading Profit is expected to be around £145m, which would
represent growth of about 20%, and includes an assumed currency headwind of
approximately £5m. 2020 will benefit from the full-year contribution of the
AASC and AHSC contracts, as well as the annualisation of the NSBU acquisition.
The transition of the recently awarded PECS contract is expected to cost
around £4m in 2020, as set out in our announcement of 30 October, and, as
previously indicated, we expect a significant reduction in contribution from
the US CMS contract.
Net Finance Costs, as previously indicated, are expected to increase by
approximately £5m, which includes the full-year impact of new property leases
related to the AASC contract. The underlying effective tax rate is expected
to continue at around 25%, which reflects the higher proportion of our pre-tax
profits now coming from our international operations, particularly the US.
The weighted average number of shares for diluted EPS purposes, fully
annualising for the Equity Placing conducted in May 2019, is expected to be
approximately 1,250m.
A broadly similar level of Free Cash Flow is anticipated in 2020, and closing
Adjusted Net Debt is expected to reduce to approximately £200m, resulting in
leverage towards the lower end of our normal target range of 1-2x; this
guidance now includes an assumed outflow of around £20m to take account of
the assumption for the resumption of dividend payments if approved by Serco's
shareholders as described above.
Our outlook for 2020 is based upon recent currency rates. The rates used,
along with their estimated impact on revenue and UTP, are shown in the table
on page 3.
Serco gives unusually detailed forward guidance across a large number of key
metrics, giving numbers rather than opaque words, so that investors and other
stakeholders have a clear idea of what we think will happen at a given point
of time. The disadvantage of this approach is that it is almost inevitable
that events will prove us wrong on one or more metrics. We believe however
that transparency and clarity is helpful, albeit that, as we always point out,
our profits can be affected by small percentage changes in revenues and costs,
as well as currency rates.
Summary and concluding thoughts
If 2018 marked an inflection point, where we moved into growth after five
years of declining trading profit, 2019 can perhaps be described as the year
we achieved escape velocity, being the point at which we were able to leave
behind the gravitational drag of previous missteps, and become a "normal"
company again. By "normal", we mean a company with growing revenues, profits
and cash flows; producing good returns on capital; winning profitable
business; executing well; valued by its customers; being a place people want
to work; and a company which has enough confidence in its future to pay
shareholder dividends. From fighting for survival, we can now spend more
time plotting how to find new sources of growth; new ways to build sustainable
competitive advantage; new ways to deliver public services. We also perhaps
have a bit more space to think about how to adapt to a world where a company's
approach to Environmental, Social and Governance (ESG) issues has become so
much more important to many stakeholders than they were even twelve months
ago.
Our position on ESG issues has, for many years, been a strong one, and is at
the very heart of what we do: Serco has a clear social Purpose - "to be a
trusted partner of governments, delivering superb public services, that
transform outcomes and make a positive difference for our fellow citizens".
Our Values of Trust, Pride, Innovation and Care are embedded deeply in our
culture. We have a good track record of delivering high quality services to
often vulnerable individuals on behalf of governments. We have strong
governance and invest heavily in it as well as in the skills of our people.
For the last five years, we have worked hard to make Serco a business which is
both profitable and sustainable.
Notwithstanding this strong position, the fact is that some of the work
governments are expected to do is controversial, and doubly so when they ask
private companies to carry this work out on their behalf. Be it running
prisons, or supporting immigration policy, or helping to deliver strategic
nuclear deterrence the work we do is seen by some as wrong, either because
people object in principle to private companies delivering public services, or
because people object to the nature of the work government asks us to do.
Furthermore, as a provider of public services, and paid for by taxpayers'
money, we are regularly (and rightly) challenged to justify either the quality
of service we deliver and / or the value for money we provide to the
taxpayer.
In short, what we see as a strong Purpose - delivering social value by
supporting governments in providing essential services to protect and support
their citizens - others see as its antithesis. This presents a complex and
confusing picture to investors and ESG analysts who are having to consider
these matters ever more carefully, and part of our job is to help them make
informed judgements. It is our responsibility to ensure that Serco continues
to behave in a sensible, thoughtful, transparent and responsible way towards
all its stakeholders, whilst making a positive difference to the lives of
people who access or pay for public services.
Returning to the operational management of the business, one of the lessons of
the last five years is that providing services to governments is not easy.
By their nature, margins in the sector are slim, and risks are high; the
relationship between risk and reward is asymmetrical. Being successful
requires constant diligence, strong execution, an understanding that no deal
is better than a bad deal, and a willingness to say no. On the other hand,
unlike many other sectors, we can wake up each morning without the fear that
our customers may not be able to pay their bills, or that demand for our
services might evaporate, or that our services might be disintermediated by a
start-up. And running these businesses does not require large amounts of
capital, so slim margins can still deliver attractive returns.
The election of a Government in the UK - our largest market - with a large
majority and a determination to deliver renewal, re-order and change is a good
thing for our market as the more governments want to do, and the more they
care about value for money, the more they need a strong private sector to help
them. The UK Government will need to resolve how it wants to finance new
infrastructure and other initiatives (PFI being, unjustly in our view, the
scoundrel du jour) and how to balance expenditure on new assets with
maintaining existing assets. In the NHS alone, there is a backlog of £6.5bn
on maintenance, as funds are diverted from capital and maintenance budgets to
day-to-day service delivery. But those who provide public services, be they
civil servants or suppliers, tend to thrive when governments know what they
want and have the determination to get it.
2020 will be a busy year for Serco: there are some very large contracts such
as PECS, Clarence Correctional Centre and Dubai Airport Services which need to
be transitioned; we will also be handing over the world's most advanced
icebreaker vessel to the Australian Government. We need to rebuild our
pipeline, denuded (the right way) by three years of strong order intake. And
we need to continue to invest in making our internal systems and processes
sing for their supper.
And we intend to stick with the strategy we developed in 2014, and which has
so far served us well:
What we do: we are an international business providing people-enabled
services, supported by best-in-class systems and processes, to governments.
How we do it: we use a management framework, as set out below.
Our Values: Trust, Care, Innovation, Pride
Our Purpose: to be a trusted partner of governments, delivering superb public
services, that transform outcomes and make a positive difference for our
fellow citizens.
Our Organising Principles: loose-tight, disciplined entrepreneurialism
Our Method: being the best-managed business in the sector.
Our Deliverables: high and rising employee engagement, margins of ~5%, growing
revenues at ~5%.
We intend to continue working hard to deliver this strategy.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional Divisions: UK & Europe
(UK&E); the Americas; the Asia Pacific region (AsPac); and the Middle
East. Reflecting statutory reporting requirements, Serco's share of revenue
from its joint ventures and associates is not included in revenue, while
Serco's share of joint ventures and associates' profit after interest and tax
is included in Underlying Trading Profit (UTP). As previously disclosed and
for consistency with guidance, Serco's Underlying Trading Profit measure
excludes Contract & Balance Sheet Review adjustments (principally OCP
releases or charges).
Year ended 31 December 2019 UK&E Americas AsPac Middle Corporate costs Total
£m East
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
Change +5% +42% +13% +2% +15%
Change at constant currency +5% +35% +16% (2%) +13%
Organic change at constant currency +2% +19% +16% (2%) +8%
UTP excluding the effect of IFRS16 adoption 40.6 79.2 31.1 13.6 (45.5) 119.0
Change +4% +73% +16% (37%) +13% +28%
Change at constant currency +4% +64% +19% (39%) +13% +24%
Margin excluding the effect of IFRS16 3.0% 8.6% 5.0% 3.9% n/a 3.7%
Change 0bps +150bps +10bps (240bps) +40bps
Effect of IFRS16 adoption on UTP (2.2) 2.9 0.2 0.3 - 1.2
UTP 38.4 82.1 31.3 13.9 (45.5) 120.2
Margin 2.8% 9.0% 5.0% 4.0% n/a 3.7%
Contract & Balance Sheet Review adjustments 0.3 9.5 - - (6.2) 3.6
Other one-time items - DFRP settlement 9.6 - - - - 9.6
Trading Profit/(Loss) 48.3 91.6 31.3 13.9 (51.7) 133.4
Amortisation of intangibles arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Operating profit/(loss) before exceptionals 47.1 85.4 31.2 13.9 (51.7) 125.9
Year ended 31 December 2018 UK&E Americas AsPac Middle Corporate costs Total
£m East
Revenue 1,300.7 645.6 548.2 342.3 - 2,836.8
UTP 39.2 45.7 26.8 21.5 (40.1) 93.1
Margin 3.0% 7.1% 4.9% 6.3% n/a 3.3%
Contract & Balance Sheet Review adjustments 12.4 (2.5) 13.7 - - 23.6
Trading Profit/(Loss) 51.6 43.2 40.5 21.5 (40.1) 116.7
Amortisation of intangibles arising on acquisition (0.5) (3.2) (0.6) - - (4.3)
Operating profit/(loss) before exceptionals 51.1 40.0 39.9 21.5 (40.1) 112.4
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 22-38. 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 39-71. Included in
the accompanying notes are the Group's policies on recognising revenue across
the various revenue streams associated with the diverse range of goods and
services discussed within the Divisional Reviews. The various revenue
recognition policies are applied to each individual circumstance as relevant,
taking into account the nature of the Group's obligations under the contract
with the customer and the method of delivering value to the customer in line
with the terms of the contract.
UK & Europe
Serco's UK & Europe Division supports public service delivery across all
five of the Group's chosen sectors: our Justice & Immigration business
provides a wide range of services to support the safeguarding of society, the
reduction of reoffending, and the effective management of the UK's immigration
system, and includes prison management as well as the provision of housing and
welfare services for asylum seekers; in Defence, we are trusted to deliver
critical support services and operate highly sensitive facilities of national
strategic importance; we operate complex public Transport systems and
services; our Health business provides primarily non-clinical support services
to hospitals; and our Citizen Services business provides environmental and
leisure services, as well as a wide range of other front, middle and
back-office services to support public sector customers in the UK and
international organisations across Europe, including the European Patent
Organisation and the European Space Agency. On a Reported Revenue basis,
Serco's operations in the UK represent approximately 39% of the Group's
reported revenue, and those across the rest of Europe approximately 3%.
Revenue for 2019 was £1,361.7m (2018: £1,300.7m), an increase of 4.7%.
Reported Revenue excludes that from our joint venture and associate holdings
which largely comprise the operations of AWE, Merseyrail and Viapath. At
constant currency, the growth in Revenue was also 4.7%, or £62m. The net
contribution to revenue from the acquisition of the Carillion health
facilities management contracts that transferred to Serco between June and
August 2018 was £32m, therefore the organic growth was £30m or 2.4%.
Within the organic growth, the largest contributor was from the expanded
operations of Asylum Accommodation and Support Services Contracts (AASC) which
replaced the previous COMPASS contracts in the second half of the year.
Other examples of contracts with growth included those for the Skills Support
for the Workforce (SSW) Programme and services to the Department for Work
& Pensions (DWP), and the start of our new contract for environmental
services for Hart District Council and Basingstoke & Deane Borough
Council; there was partial offset to this growth from the early exits of the
previously onerous contracts for East Kent Hospitals University NHS Foundation
Trust and for the Anglia Support Partnership, and lower revenue in our
European operations.
Underlying Trading Profit (UTP), excluding the effect of IFRS16 adoption, was
£40.6m (2018: £39.2m), representing an implied margin of 3.0% (2018: 3.0%)
and growth of 4% at constant currency. Trading Profit includes the profit
contribution (from which interest and tax have already been deducted) of joint
ventures and associates; if the £395m (2018: £374m) proportional share of
revenue from joint ventures and associates was also included and if the £6.4m
(2018: £5.7m) share of interest and tax cost was excluded, the overall
Divisional margin would have been 2.7% (2018: 2.7%). The joint venture and
associate profit contribution was modestly lower at £27.3m (2018: £28.1m),
largely as a result of the start of a new three-year pricing period at AWE.
On the AASC contracts, the transition costs that were expensed as they were
incurred largely in the first half of the year were more than offset with the
move to profitability in the second half. There was also improved profit
performance in the healthcare business, driven by the Carillion acquisition.
Within UTP there was a reduced rate of OCP utilisation (excluding
IFRS16-related accelerated utilisation) of £33m (2018: £47m), which served
to offset the Division's loss-making operations, principally the Caledonian
Sleeper, COMPASS and Prisoner Escort & Custody Services (PECS)
contracts. Excluded from UTP is £9.6m of the commercial settlement received
from the Ministry of Defence (MOD) in relation to the Defence Fire and Rescue
Project tender, together with Contract & Balance Sheet Review and other
one-time items that resulted in a £0.3m net credit (2018: £12.4m net credit)
to Trading Profit. Together with the adverse net effect of IFRS16
implementation of £2.2m (2018: n/a), this resulted in Trading Profit of
£48.3m (2018: £51.6m).
The UK & Europe Division's order intake was more than £3bn, or over 50%
of that for the whole Group. By far the largest element of this was the
estimated £1.9bn ten-year value for the AASC contracts. As previously set
out, these are very significant for the Division, and indeed for the Group.
AASC supersedes the prior COMPASS contracts which incurred losses (offset in
the P&L by the utilisation of the OCP) of around £15-20m on average per
year for the past five years. Under the new AASC contracts, we did not
retain the Scotland & Northern Ireland region, but gained the much larger
Midlands & East of England region, whilst retaining our other previous
COMPASS region of the North West; as a consequence, we are now the largest
provider of asylum seeker accommodation in the UK. Given our past
experience, we also bid the regions at prices which we believe should allow us
to make a fair return.
The second largest contract award in the year was with the UK Ministry of
Justice (MoJ) for PECS, estimated at approximately £800m over the ten-year
term which starts on 29 August 2020. Similar to COMPASS/AASC, this is a
successful rebid of a contract previously incurring losses that were being
offset by an OCP, and also similar to AASC is that Serco was selected to
provide these sensitive and demanding services over a significantly increased
geographical area. Other contract awards included: significantly expanding
on rebid our operations for the SSW programme which provides training and
related employment services to Local Enterprise Partnership areas; a new
environmental services contract with the Royal Borough of Windsor and
Maidenhead, together with extensions for our services to numerous other
similar contracts; we have also extended during the year contracts such as for
defence support services to the UK MOD and the US Air Forces in Europe
(USAFE), contact centre operations for Companies House and our operations at
the European Organisation for Nuclear Research (CERN).
We have not included within our order intake the contract to continue
operating the Northern Isles Ferry Services, which was announced by the
customer in September 2019 and has an estimated total contract value of
£450m, as we have not yet signed the contract due to a procurement challenge
by the unsuccessful bidder. In early February 2020, the Scottish Government
announced that all challenges had been resolved, and that they would be
proceeding to sign the contract with Serco in the coming months.
Of existing work where an extension or rebid will be required at some point
before the end of 2022, there are around 25 contracts with annual revenue of
over £5m within the UK & Europe Division; in aggregate, these represent
approximately 25% of the current level of annual revenue for the Division;
this excludes the Northern Isles operations, which would represent a further
5%. The largest to further secure in 2021 include our strategic partnership
contract supporting Hertfordshire County Council, and in 2022 our UK Navy
fleet support contract known as Future Provision of Marine Services (FPMS) and
our UK MOD Skynet satellite support operations.
The rebid profile and the new bid Pipeline both reduced with the successful
outcome of our bidding for AASC. Opportunities in the new bid Pipeline at
the end of 2019 include several defence support opportunities, together with
other tenders such as the first of the new build prison manage and operate
contracts (HMP Wellingborough), in immigration services and in environmental
and other Citizen Services support services. On 20 February 2020, Serco
announced that we had signed a new contract to manage the Gatwick Immigration
Centres valued at approximately £200m. Following a string of important
contract wins, replenishing the UK & Europe pipeline across each of our
five sectors of operation remains a key focus of the business in 2020.
Americas
Our Americas Division accounts for 28% of Serco's reported revenue, and
provides professional, technology and management services focused on Defence,
Transport, and Citizen Services. The US Federal Government, including the
military, civilian agencies and the national intelligence community, are our
largest customers. We also provide services to the Canadian Government and
to some US state and municipal governments.
Revenue for 2019 was £915.7m (2018: £645.6m), an increase of 42% in reported
currency. In US dollars, the main currency for operations of the Division,
revenue for the year was equivalent to approximately US$1,172m (2018:
US$860m). The strengthening of local currency against Sterling increased
revenue by £43m or 7%; as the Naval Systems Business Unit (NSBU) acquisition
completed at the start of August 2019, it contributed five months of revenue
which drove the Divisional growth from acquisitions of 16%; the organic change
at constant currency was therefore growth of 19%, or £119m. A key driver of
this was a significant increase in task order volumes and related procurement
services for our Ship & Shore modernisation and hardware work for the US
Navy, with particularly strong demand and new task order wins under the
Consolidated Afloat Networks Enterprise Services (CANES) Indefinite Delivery /
Indefinite Quantity (ID/IQ) multiple-award contract for various naval vessel
classes. There was also increased task orders on the US Federal Emergency
Management Agency (FEMA) contract framework, as well as growth from new
contract awards started in the year such as support services to the US Pension
Benefit Guaranty Corporation (PBGC) and deploying IT solutions for the US Air
Force.
Underlying Trading Profit, excluding the effect of IFRS16 adoption, was
£79.2m (2018: £45.7m), representing a margin of 8.6% (2018: 7.1%) and growth
of 73%; excluding the favourable currency movement of £4.3m, growth at
constant currency was 64%. Whilst revenue was broadly flat on our health
insurance eligibility support contract for the Center for Medicare &
Medicaid Services (CMS), profitability benefited from an unusually high volume
of fixed priced variable work, particularly in the first half of the year; as
previously described, we do not expect margins to recur at these levels in the
future, and profits on this contract are expected to be noticeably lower in
2020. The increase in profits also included the £8.6m contribution from the
NSBU acquisition, as well as the benefit from the growth in short-term volume
related work on various frameworks and new contracts started in the year.
Within Underlying Trading Profit there was £4m of OCP utilisation required to
offset the previously loss-making Ontario Driver Examination Services (DES)
contract (2018: n/a); an OCP is no longer required on this contract.
Contract & Balance Sheet Review adjustments resulted in a £9.5m net
credit (2018: £2.5m net charge) to Trading Profit which, together with the
beneficial effect of IFRS16 implementation of £2.9m (2018: n/a), increased to
£91.6m (2018: £43.2m).
Americas represented around £1.1bn ($1.4bn) or 20% of the Group's order
intake. The largest award for new work was that for field office services to
the US PBGC with a first task order valued at $112m over five years and a
total potential value of $200m. Other new contracts included career training
and counselling services to transitioning military service members valued at
$95m over five years, and a five-and-a-half year task order valued at $82m was
awarded by the US Air Force to enhance NexGen IT solutions for US Air Force
Civil Engineering, which includes deploying TRIRIGA, an integrated workplace
management system owned by IBM. Across our Ship & Shore modernisation
and hardware services, including the CANES, Naval Electronic Surveillance
Systems (NESS) the Global Installation Contract (GIC) ID/IQ frameworks, the
cumulative value of IT, engineering, maintenance and sustainment support task
orders totalled over $250m. Serco also received 15 task orders for our
Public Assistance Technical Assistance Contract for the Federal Emergency
Management Agency (FEMA) totalling over $100m.
Within awards that were rebid or extended were those for our support to the
Federal Retirement Thrift Investment Board (FRTIB), motorist assistance patrol
operations in Louisiana and for our support to psychological health outreach
services to the US Navy. Serco also resecured places on the ID/IQ frameworks
for both ship and shore-based C4ISR systems modernisation services over the
next ten years that replace the previous GIC frameworks. Serco also secured
a place on a similar ID/IQ framework but which it was not previously on the
predecessor contract; this covers C4I Testing, Integration and Installation
(CTII) services for the Carrier and Air Integration Program Office (PMW 750).
The progress on contract awards of the businesses recently acquired have also
been pleasing. These include for NSBU the $162m contract to continue the
support to the US Navy's Amphibious Warfare Program Office (PMS 377) and the
$43m five-year contract to deliver design and engineering services for the US
Navy's next generation of unmanned and small surface combatant vessels; and
for BTP, a $49m five-year contract for system engineering technical services
on the Submarine High Data Rate (SubHDR) program.
Of existing work where an extension or rebid will be required at some point
before the end of 2022, there are around 25 contracts with annual revenue of
over £5m within the Americas Division; in aggregate, these represent around
40% of the current level of annual revenue for the Division. Those coming up
for rebid or extension in 2020 include the Federal Aviation Administration's
(FAA) Contract Tower (FCT) Program; in 2021, the Anti-Terrorism/Force
Protection (ATFP) framework contract for the US Naval Facilities Command and
our support to support services at the 5 Wing Canadian Forces Base in Goose
Bay; and in 2022, resecuring a position on the successor framework for
CANES. Of the NSBU business, it has a number of contract option periods,
extensions or rebids to secure, including in 2020 its support to the US Navy
Surface Warfare Directorate and in 2021 to the Shipbuilding Command for
surface ships.
Our Pipeline of major new bid opportunities due for decision within the next
24 months includes a broad spread of defence support functions, including
those added with the NSBU acquisition, as well as others such as air traffic
control support within our Transport business. Our Citizen Services business
unit has also had a number of wins during the year, and building further the
Pipeline in this area also remains a target.
AsPac
Serco operates in Australia, New Zealand and Hong Kong in the Asia Pacific
region, providing services in each of the Justice, Immigration, Defence,
Health, Transport and Citizen Services sectors. The AsPac Division accounts
for 19% of the reported revenue for the Group.
Revenue for 2019 was £621.4m (2018: £548.2m), an increase of 13% in reported
currency. In Australian dollars, the main currency for operations of the
Division, revenue for the year was equivalent to approximately A$1,137m (2018:
A$980m). The weakening of local currency against Sterling reduced revenue by
£15m or 3%; the organic change at constant currency was therefore growth of
16%, or £88m. The largest contributor to this growth was the start of
operations on 1 July 2019 of the AHSC defence garrison healthcare services
contract in Australia. There was also strong growth in our Citizen Services
operations, including further expanding our support to the Department of Human
Services and Australia's National Disability Insurance Agency, together with
new contact centre services to the Victoria Police Assistance Line for
non-emergency incidents. There was also an increase in workload in
Immigration Services.
Underlying Trading Profit, excluding the effect of IFRS16 adoption, was
£31.1m (2018: £26.8m), representing a margin of 5.0% (2018: 4.9%) and an
increase of 16%; excluding the adverse currency movement of £0.9m, the
increase at constant currency was 19%. The improvement in profitability
includes the benefit of the growth in our Citizen Services operations, as well
as the AHSC contract moving to its full operational stage quicker than
anticipated, with profitability in the second half of the year more than
offsetting the transition costs mainly incurred in the first half.
Within Underlying Trading Profit there was £3m of OCP utilisation required to
offset the loss-making operations in Hong Kong (2018: £5m). Contract &
Balance Sheet Review adjustments were £nil (2018: £13.7m net credit),
therefore Trading Profit, taking into account the beneficial effect of IFRS16
implementation of £0.2m (2018: n/a), was £31.3m (2018: £40.5m).
AsPac represented around £1.1bn or 20% of the Group's order intake. The
largest was the AHSC contract for the provision of healthcare services
personnel at defence garrisons across Australia, which was valued at AU$1.01bn
(around £560m) over the initial six-year term; working as a sub-contractor to
BUPA, Serco will source and manage more than 1,200 professional healthcare
staff to support the delivery of on-base integrated health care to over 80,000
Australian Defence Force members and reservists across Australia. A further
new contract was the AU$115m seven-year contract to operate Adelaide Remand
Centre on behalf of the South Australia Department for Correctional
Services. Important extensions were also secured during the year, including
the two-year extension for Australian immigration services with an estimated
value of £0.4bn, and South Queensland Correctional Centre also for two
years. Serco was also successful in our rebid for the Victorian Department
of Justice and Community Safety to continue operating the road traffic camera
program across the State. The one rebid of note that was lost in 2019 is
that for transport management of the Tsing Sha Control Area in Hong Kong which
had annual revenue of around £20m but was an onerous contract and therefore
does not impact UTP.
Of existing work where an extension or rebid will be required at some point
before the end of 2022, there are around 10 contracts with annual revenue of
over £5m within the AsPac Division; in aggregate, these represent well over
half of the current level of annual revenue for the Division; this high
proportion reflects that the Australia onshore immigration services contract
requires further extension or rebid again at the end of 2021, with this
accounting for around 30% of current Divisional revenue. Others that will
require extending or rebidding in 2020 are the Australian Department of Human
Services framework contract, while Fiona Stanley Hospital, Acacia Prison,
South Queensland Correctional Centre and the Tax Office framework contract all
become potentially due in 2021. In October 2019, AsPac responded to the
tender for the Royal Australian Navy contracts to replace to the existing
Fleet Marine Services contracts (to be known as the Defence Marine Support
Services (DMSS) contracts). The DMSS contacts awards are anticipated to be
announced in the first half of 2020. Serco's current Fleet Marine Services
contract will continue to operate until 30 September 2021.
As set out above, the largest opportunity in our Pipeline of major new bid
opportunities at the start of 2019 was won - defence health support in
Australia. A number of other opportunities were either lost or removed from
the Pipeline during the year. Rebuilding the Pipeline saw progress in the
second half with a small number of opportunities added across the Justice
& Immigration, Defence and Citizen Services sectors, with further progress
across these and the Transport and Health sectors anticipated in 2020.
Middle East
Operations in the Middle East Division include Transport, Defence, Health and
Citizen Services, with the region accounting for approximately 11% of the
Group's reported revenue.
Revenue for 2019 was £349.6m (2018: £342.3m), an increase of 2% in reported
currency. The strengthening of local currency against Sterling increased
revenue by £15m or 4%; the organic change at constant currency was therefore
a decline of 2%. There was growth from expanded services at the Dubai Metro
and from the new contracts for fire and rescue services at King Fahd
International Airport (KFIA), support services at Dr. Soliman Fakeeh Hospital
(DSFH) and advisory services to Mashroat in Saudi Arabia. These were offset
by reduced revenue on the rebid of the MELABS contract providing defence base
logistics and support services, the loss of the Bahrain air navigation
services contract and a reduction in our Saudi rail operations.
Underlying Trading Profit, excluding the effect of IFRS16 adoption, was
£13.6m (2018: £21.5m), representing a margin of 3.9% (2018: 6.3%) and a
decline of 37%; excluding the favourable currency movement of £0.4m, the
decline at constant currency was 39%. As expected, this decline was driven
by the significant reduction in margins on the MELABS contract, following the
successful rebid which has extended the life of the contract for a further
five years including option periods. There are no OCP contracts in the
Division and therefore no OCP utilisation within Underlying Trading Profit.
There were no Contract & Balance Sheet Review adjustments in the latest or
prior year. Trading Profit, after the beneficial effect of IFRS16
implementation of £0.3m (2018: n/a), was therefore £13.9m (2018: £21.5m).
The Middle East represented £0.2bn of the Group's order intake. Included in
the 2018 order intake following receipt of a letter of intent was the two-year
extension to continue operating and maintaining the Dubai Metro until
September 2021. Intake in the year included new contracts for advisory
services to Mashroat (Saudi Arabia's National Program to Support the
Management of Projects in Public Entities), facilities management and
patient-facing services to DSFH in Jeddah, and several other facilities
management contracts in Abu Dhabi. During the year Serco also secured
further contract extensions for our Air Navigation Services (ANS) support in
Dubai and Baghdad.
Of existing work where an extension or rebid will be required at some point
before the end of 2022, there are around 15 contracts with annual revenue of
over £5m within the Middle East Division; in aggregate, these represent well
over half of the current level of annual revenue for the Division. The
relatively high proportion reflects that the Dubai Metro contract becomes due
for rebid in September 2021, with this accounting for around 30% of current
Divisional revenue. Further extensions or rebids will also be required for
each of the Dubai and Baghdad ANS contracts, together with the MELABS and
Saudi rail operations.
Our Pipeline of major new bid opportunities in the Middle East includes a
small number in the Transport sector. The Pipeline remains significantly
lower than in prior years, and effort is ongoing to rebuild it across all
Serco's sectors of operation in the region. We still believe that the
dynamism and ambition of governments in the GCC offers the opportunity to
deliver truly innovative and world-leading services. Therefore, we have
recently established a new ExperienceLab, mirroring what we have in the UK,
for user-centred design to deliver exciting improvements to existing and new
customers in 2020.
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.
While there are ongoing actions to deliver savings and improve efficiencies of
our central functions, in 2019 there were some areas of investment and
increases in costs which resulted in overall corporate costs at the Underlying
Trading Profit level that were £5.4m higher at £45.5m (2018: £40.1m).
The Group operates a large number of long-term contracts at different phases
of their contract life cycle. Within the Group's portfolio, there are a
small number of contracts where the balance of risks and opportunities
indicates that they might be onerous if transformation initiatives or contract
changes are not successful. The Group has concluded that these contracts do
not require an onerous contract provision on an individual basis. Following
the individual contract reviews, the Group has also undertaken a top down
assessment which assumes that, whilst the contracts may not be onerous on an
individual basis, as a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to avoid a
contract loss, will not be fully successful, and it is more likely than not
that one or more of these contracts will be onerous. Therefore, in
considering the Group's overall onerous contract provision, the Group has made
a best estimate of the provision required to take into consideration this
portfolio risk. As a result, the risk of OCPs and the monitoring of
individual contracts for indicators remains a critical estimate for the Group.
The amount recognised in the year is £6.2m at the Trading Profit level
within the Corporate costs segment, which after this charge is therefore
£51.7m (2018: £40.1m).
Finance Review
For the year ended Underlying Non underlying items Trading Amortisation and impairment of intangibles arising on acquisition Statutory pre exceptional Exceptional items Statutory
31 December 2019 £m £m £m £m £m £m £m
Revenue 3,248.4 - 3,248.4 - 3,248.4 - 3,248.4
Cost of sales (2,941.5) 13.2 (2,928.3) - (2,928.3) - (2,928.3)
Gross profit 306.9 13.2 320.1 - 320.1 - 320.1
Administrative expenses (214.2) - (214.2) (7.5) (221.7) (23.4) (245.1)
Share of profits in joint ventures and associates, net of interest and tax 27.5 - 27.5 - 27.5 - 27.5
Profit before interest and tax 120.2 13.2 133.4 (7.5) 125.9 (23.4) 102.5
Margin 3.7% 4.1% 3.9% 3.2%
Net finance costs (21.8) - (21.8) - (21.8) - (21.8)
Profit before tax 98.4 13.2 111.6 (7.5) 104.1 (23.4) 80.7
Tax charge (24.4) (4.5) (28.9) 1.5 (27.4) (2.7) (30.1)
Effective tax rate (24.8%) (25.9%) (26.3%) (37.3%)
Profit / (loss) for the period 74.0 8.7 82.7 (6.0) 76.7 (26.1) 50.6
Minority interest 0.2 0.2 0.2 0.2
Earnings per share - basic (pence) 6.31 7.05 6.54 4.31
Earnings per share - diluted (pence) 6.16 6.89 6.39 4.21
For the year ended Underlying Non underlying items Trading Amortisation and impairment of intangibles arising on acquisition Statutory pre exceptional Exceptional items Statutory
31 December 2018 £m £m £m £m £m £m £m
Revenue 2,836.8 - 2,836.8 - 2,836.8 - 2,836.8
Cost of sales (2,570.2) 23.6 (2,546.6) - (2,546.6) - (2,546.6)
Gross profit 266.6 23.6 290.2 - 290.2 - 290.2
Administrative expenses (202.3) - (202.3) (4.3) (206.6) (31.9) (238.5)
Share of profits in joint ventures and associates, net of interest and tax 28.8 - 28.8 - 28.8 - 28.8
Profit before interest and tax 93.1 23.6 116.7 (4.3) 112.4 (31.9) 80.5
Margin 3.3% 4.1% 4.0% 2.8%
Net finance costs (13.9) - (13.9) - (13.9) 7.5 (6.4)
Profit before tax 79.2 23.6 102.8 (4.3) 98.5 (24.4) 74.1
Tax charge (20.6) 8.7 (11.9) 3.1 (8.8) 2.1 (6.7)
Effective tax rate (26.0%) (11.6%) (8.9%) (9.0%)
Profit / (loss) for the period 58.6 32.3 90.9 (1.2) 89.7 (22.3) 67.4
7
Minority interest 0.0 0.0 0.0 0.0
Earnings per share - basic (pence) 5.36 8.31 8.20 6.16
Earnings per share - diluted (pence) 5.21 8.08 7.97 5.99
Alternative Performance Measures (APMs) and other related definitions
Overview
APMs used by the Group are reviewed below to provide a definition and
reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain
the purpose and usefulness of each APM.
In general, APMs are presented externally to meet investors' requirements for
further clarity and transparency of the Group's financial performance. The
APMs are also used internally in the management of our business performance,
budgeting and forecasting, and for determining Executive Directors'
remuneration and that of other management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being included in an
APM, this reflects revenues presented elsewhere within the reported financial
information, except where amounts are recalculated to reflect constant
currency. Where items of profits or costs are being excluded in an APM, these
are included elsewhere in our reported financial information as they represent
actual profits or costs of the Group, except where amounts are recalculated to
reflect constant currency. As a result, APMs allow investors and other readers
to review different kinds of revenue, profits and costs and should not be used
in isolation. Other commentary within the Strategic Report, including the
other sections of this Finance Review, as well as the Consolidated Financial
Statements and their accompanying notes, should be referred to in order to
fully appreciate all the factors that affect our business. We strongly
encourage readers not to rely on any single financial measure, but to
carefully review our reporting in its entirety.
With effect from 1 January 2019, the Group has applied IFRS16 Leases in the
preparation of its financial results. The prior period financial information
has not been restated under IFRS16 in accordance with the modified
retrospective approach to transition taken by the Group. This approach has
been taken as it most closely aligns to the full retrospective approach
without requiring an extensive review of historical changes to lease
agreements within the Group. The following APMs have been redefined to take
into consideration the impact of IFRS16 and to ensure they continue to be
useful measures for investors and readers of the accounts, and the impact of
the definition change has been illustrated within the Finance Review: Free
Cash Flow; Trading Cash Flow and Invested Capital. A new APM has also been
introduced which has been termed Adjusted Net Debt, the definition of which is
provided below.
Certain APMs for the current period have been provided on a basis consistent
with the accounting standards applied for the prior period to illustrate the
impact of IFRS16 and to assist with comparability. This information has been
provided at the end of this Finance Review.
The methodology applied to calculating the APMs has not changed during the
year for any measure other than those outlined above.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Consolidated Income Statement on
page 39, reflects revenue translated at the average exchange rates for the
period. In order to provide a comparable movement on the previous year's
results, reported revenue is recalculated by translating non-Sterling values
for the year to 31 December 2019 into Sterling at the average exchange rate
for the year ended 31 December 2018.
For the year ended 31 December 2019
£m
Reported revenue at constant currency 3,206.2
Foreign exchange differences 42.2
Reported revenue at reported currency 3,248.4
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses acquired during a
particular year from the date of acquisition and/or generated by businesses
sold during a particular year up to the date of disposal. In order to provide
a comparable movement which ignores the effect of both acquisitions and
disposals on the previous year's results, Organic Revenue at constant currency
is recalculated by excluding the impact of any relevant acquisitions or
disposals.
There are three acquisitions excluded for the calculation of Organic Revenue
in the year to 31 December 2019:
· The acquisition of 100% of the issued share capital of BTP
Systems, LLC (BTP) on 26 January 2018.
· The acquisition of six UK health facilities management contracts
which were transferred from Carillion plc between June 2018 and August 2018.
· The acquisition of the Naval Systems Business Unit (NSBU) from
Alion Science and Technology Corporation on 1 August 2019.
An adjustment is required for one disposal:
· The disposal of certain contracts within the Anglia Support
Partnership on 31 October 2018.
Organic Revenue growth is calculated by comparing the current year Organic
Revenue at constant currency exchange rates with the prior year Organic
Revenue at reported currency exchange rates.
For the year ended 31 December 2019
£m
Organic Revenue at constant currency 3,014.1
Foreign exchange differences 34.5
Organic Revenue at reported currency 3,048.6
Impact of any relevant acquisitions or disposals 199.8
Reported revenue at reported currency 3,248.4
For the year ended 31 December 2018
£m
Organic Revenue at reported currency 2,784.5
Impact of any relevant acquisitions or disposals 52.3
Reported revenue at reported currency 2,836.8
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group's Consolidated Income Statement on
page 39, excludes the Group's share of revenue from joint ventures and
associates, with Serco's share of profits in joint ventures and associates
(net of interest and tax) consolidated within reported operating profit as a
single line further down the Consolidated Income Statement. The alternative
measure includes the share of joint ventures and associates for the benefit of
reflecting the overall change in scale of the Group's ongoing operations,
which is particularly relevant for evaluating Serco's presence in market
sectors such as Defence and Transport. The alternative measure allows the
performance of the joint venture and associate operations themselves, and
their impact on the Group as a whole, to be evaluated on measures other than
just the post-tax result.
For the year ended 31 December 2019 2018
£m £m
Revenue plus share of joint ventures and associates 3,643.0 3,211.9
Exclude share of revenue from joint ventures and associates (394.6) (375.1)
Reported revenue 3,248.4 2,836.8
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading Profit, to make
adjustments for unusual items that occur and to remove the impact of
historical issues. UTP therefore provides a measure of the underlying
performance of the business in the current year.
For the year ended 31 December 2019 2018
£m £m
Underlying Trading Profit 120.2 93.1
Non-underlying items:
OCP charges and releases 0.8 12.8
Other Contract & Balance Sheet Review adjustments and one-time items 12.4 10.8
Total non-underlying items 13.2 23.6
Trading Profit 133.4 116.7
Operating exceptional items (23.4) (31.9)
Amortisation and impairment of intangibles arising on acquisition (7.5) (4.3)
Operating profit 102.5 80.5
Charges and releases on all Onerous Contract Provisions (OCPs) that arose
during the 2014 Contract & Balance Sheet Review are excluded from UTP in
the current and prior years. Charges associated with the creation of new OCPs
identified are included within UTP to the extent that they are not considered
sufficiently material to require separate disclosure on an individual basis.
OCPs reflect the future multiple year cost of delivering onerous contracts and
do not reflect only the current cost of operating the contract in the latest
individual year. It should be noted that, as for operating profit, UTP
benefits from OCP utilisation of £53.6m in 2019 (2018: £51.8m). The
utilisation, which neutralises the in-year losses on previously identified
onerous contracts, consists of £12.7m accelerated utilisation associated with
the impairment of right of use assets on onerous contracts created during the
period, in accordance with IFRS16, and £40.9m against other contract
losses. In addition, an amount of £3.8m in respect of impairment of right
of use assets was recognised within underlying profit.
Revisions to accounting estimates and judgements which arose during the 2014
Contract & Balance Sheet Review are reported alongside other one-time
items where the impact of an individual item is material. Items in 2019 which
were recorded within this category included the impairment of assets created
in accordance with IFRS16 on the Caledonian Sleepers contract for which the
provision had been fully utilised, the receipt of an insurance claim for costs
previously reported outside of UTP recognised in the 2014 Contract &
Balance Sheet Review and monies in respect of the DFRP settlement amounting to
£9.6m.
Both OCP adjustments and other Contract & Balance Sheet Review and
one-time items are identified and separated from the APM in order to give
clarity of the underlying performance of the Group and to separately disclose
the progress made on these items.
Underlying trading margin is calculated as UTP divided by statutory revenue.
The non-underlying column in the summary income statement on page 22 includes
the tax impact of the above items and tax items that, in themselves, are
considered to be non-underlying. Further detail of such items is provided in
the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to operating profit,
as shown on the Group's Consolidated Income Statement on page 39, by making
two adjustments.
Firstly, Trading Profit excludes exceptional items, being those considered
material and outside of the normal operating practices of the Group to be
suitable for separate presentation and detailed explanation.
Secondly, amortisation and impairment of intangibles arising on acquisitions
are excluded, because these charges are based on judgements about the value
and economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating practice.
UTP at constant currency
UTP disclosed above has been translated at the average foreign exchange rates
for the year. In order to provide a comparable movement on the previous year's
results, UTP is recalculated by translating non-Sterling values for the year
to 31 December 2019 into Sterling at the average exchange rate for the year
ended 31 December 2018.
For the year ended 31 December 2019
£m
Underlying Trading Profit at constant currency 116.5
Foreign exchange differences 3.7
Underlying Trading Profit at reported currency 120.2
Alternative Earnings Per Share (EPS) measures
For the year ended 31 December 2019 2018
pence pence
Underlying EPS, basic 6.31 5.36
Net impact of non-underlying items and amortisation and impairment of 0.23 2.84
intangibles arising on acquisition
EPS before exceptional items, basic 6.54 8.20
Impact of exceptional items (2.23) (2.04)
Reported EPS, basic 4.31 6.16
For the year ended 31 December 2019 2018
pence pence
Underlying EPS, diluted 6.16 5.21
Net impact of non-underlying items and amortisation and impairment of 0.23 2.76
intangibles arising on acquisition
EPS before exceptional items, diluted 6.39 7.97
Impact of exceptional items (2.18) (1.98)
Reported EPS, diluted 4.21 5.99
EPS before exceptional items
EPS, as shown on the Group's Consolidated Income Statement on page 39,
includes exceptional items charged or credited to the income statement in the
year. EPS before exceptional items aids consistency with historical operating
performance.
Underlying EPS
Reflecting the same adjustments made to operating profit to calculate UTP as
described above and including the related tax effects of each adjustment and
any other non-underlying tax adjustments as described in the tax charge
section below, an alternative measure of EPS is presented. This aids
consistency with historical results and enables performance to be evaluated
before the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS is provided in the
summary income statements on page 22.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect cash flow from
operating activities before exceptional items, which is the measure shown on
the Consolidated Cash Flow Statement on page 43. This IFRS measure is adjusted
to include dividends we receive from joint ventures and associates and
deducting net interest paid, the capital element of lease payments and net
capital expenditure on tangible and intangible asset purchases. This is a
change to the definition applied in the prior year, where the capital element
of finance leases was excluded from FCF. The adjustment has been made
following the implementation of IFRS16, under which all leases, excluding
short term and low value leases, are accounted for as lease liabilities under
the new standard and cash payments associated with the lease liabilities
include a capital and interest component. The previous definition of FCF
would result in the capital component of leases being excluded from FCF which
is not considered to be reflective of the operating cash flow of the Group.
For the year ended 31 December 2019 2018
£m (*restated)
£m
Free Cash Flow 62.0 16.3
Exclude dividends from joint ventures and associates (25.4) (29.7)
Exclude net interest paid 21.0 16.1
Exclude capitalised finance costs paid 1.2 2.0
Exclude capital element of lease repayments 70.2 8.7
Exclude proceeds received from exercise of share options (0.2) -
Exclude purchase of intangible and tangible assets net of proceeds from 23.3 29.5
disposal
Cash flow from operating activities before exceptional items 152.1 42.9
Exceptional operating cash flows (49.2) (40.2)
Cash flow from operating activities 102.9 2.7
* Following the implementation of IFRS16 Leases, the definition of Free Cash
Flow has been amended to include the capital element of lease payments in
2018.
For the year ended 31 December 2019 2018
£m £m
Free Cash Flow under previous definition 132.2 25.0
Include capital element of lease payments (70.2) (8.7)
Free Cash Flow 62.0 16.3
The high Free Cash Flow in 2019 under the previous definition excludes the
cash payments associated with operating leases which are cash outflows
associated with a combination of capital and interest payments under IFRS16
Leases. This supports the rationale behind the change in definition for Free
Cash Flow adopted in 2019.
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In order to
calculate an appropriate cash conversion metric equivalent to UTP, Trading
Cash Flow is derived from FCF by excluding tax and interest items. UTP cash
conversion therefore provides a measure of the efficiency of the business in
terms of converting profit into cash before taking account of the impact of
interest, tax and exceptional items.
For the year ended 31 December 2019 2018
£m (*restated)
£m
Free Cash Flow 62.0 16.3
Add back:
Tax paid 31.2 10.6
Non-cash R&D expenditure 0.1 0.1
Net interest paid 21.0 16.1
Capitalised finance costs paid 1.2 2.0
Trading Cash Flow 115.5 45.1
Underlying Trading Profit 120.2 93.1
Underlying Trading Profit cash conversion 96% 48%
* Following the implementation of IFRS16 Leases, the definition of Free Cash
Flow has been amended to include the capital element of lease payments in
2018.
Net Debt and Adjusted Net Debt
We present an alternative measure to bring together the various funding
sources that are included on the Group's Consolidated Balance Sheet on page 42
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 recognised under IFRS16 and therefore the Group has introduced the
alternative measure of Adjusted Net Debt which excludes all lease liabilities
recognised under IFRS16 for the year ended 31 December 2019. For the year
ended 31 December 2018, liabilities for leases previously categorised as
finance leases are excluded in arriving at Adjusted Net Debt.
The Adjusted Net Debt measure has been 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 IFRS16. Principally as a result of the Asylum
Accommodation and Support Services Contract (AASC), the Group has entered into
a significant number of leases which contain a termination option. The use
of Adjusted Net Debt removes the volatility that would result from estimations
of lease periods and the recognition of liabilities associated with such
leases where the Group has the right to cancel the lease and hence the
corresponding obligation. Though the intention is not to exercise the
options to cancel the leases, it is available unlike other debt obligations.
For the year ended 31 December 2019 2018
£m £m
Cash and cash equivalents 89.5 62.5
Loans payable (305.0) (239.5)
Lease liabilities (369.9) (14.8)
Derivatives relating to Net Debt 1.0 3.8
Net Debt (584.4) (188.0)
Add back: Lease liabilities 369.9 14.8
Adjusted Net Debt (214.5) (173.2)
Pre-tax Return on Invested Capital (ROIC)
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 UTP and Trading Profit using
the Income Statement for the year and a two-point average of the opening and
closing balance sheets. The composition of Invested Capital and calculation of
ROIC are summarised in the table below.
The definition of Invested Capital has been adjusted from the prior year to
exclude right of use assets recognised under IFRS16 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 within the
Group, which would previously have been classified as operating leases, where
termination options exist and commitments for expenditure are in future
years. The impact of the change in the alternative performance measure has
been set out below. In the prior year, only finance lease assets have been
removed as no right of use assets existed for operating leases prior to the
adoption of IFRS16.
For the year ended 31 December 2019 2018
£m (*restated)
£m
ROIC excluding right of use assets
Non-current assets
Goodwill 671.2 579.6
Other intangible assets 96.5 63.7
Property, plant and equipment 47.3 44.3
Interest in joint ventures and associates 23.6 20.6
Trade and other receivables 26.5 30.3
Current assets
Inventory 18.3 22.9
Contract assets, trade and other receivables 609.2 543.8
Total invested capital assets 1,492.6 1,305.2
Current liabilities
Contract liabilities, trade and other payables (555.8) (494.0)
Non-current liabilities
Contract liabilities, trade and other payables (72.7) (109.9)
Total invested capital liabilities (628.5) (603.9)
Invested Capital 864.1 701.3
Two-point average of opening and closing Invested Capital 782.7 686.3
Trading Profit 133.4 116.7
ROIC% 17.0% 17.0%
Underlying Trading Profit 120.2 93.1
Underlying ROIC% 15.4% 13.6%
* The ROIC calculation at 31 December 2018 has been restated to exclude right
of use assets. The measure at 31 December 2018 has been adjusted from that
disclosed within the 30 June 2019 Stock Exchange Announcement so the 31
December 2017 balance sheet, used in the two-point average, is in accordance
with IFRS15. For reference, using the same principles for the calculation as
at 30 June 2018 yields a ROIC of 7.9%.
2019 2018
For the year ended 31 December £m (*restated)
£m
ROIC including right of use assets
Invested Capital including right of use assets 1,209.4 725.4
Impact of including right of use assets (345.3) (24.1)
Invested Capital 864.1 701.3
ROIC% including right of use assets 13.8% 16.4%
Impact of including right of use assets 3.2% 0.6%
ROIC% 17.0% 17.0%
Underlying ROIC% including right of use assets 12.4% 13.1%
Impact of including right of use assets 3.0% 0.5%
Underlying ROIC% 15.4% 13.6%
* The ROIC calculation at 31 December 2018 has been restated to exclude right
of use assets. The measure at 31 December 2018 has been adjusted from that
disclosed within the 30 June 2019 Stock Exchange Announcement so the 31
December 2017 balance sheet, used in the two-point average, is in accordance
with IFRS15. For reference, using the same principles for the calculation as
at 30 June 2018 yields a ROIC of 7.9%.
Overview of financial performance
Revenue
Reported revenue increased by 14.5% in the year to £3,248.4m (2018:
£2,836.8m), a 13.0% increase in constant currency. Organic revenue growth at
constant currency was 8.2%.
Commentary on the revenue performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Trading Profit
Trading Profit for the year was £133.4m (2018: £116.7m).
Commentary on the trading performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Underlying Trading Profit
UTP was £120.2m (2018: £93.1m), up 29.1%. At constant currency, UTP was
£116.5m, up 25.1%.
Commentary on the underlying performance of the Group is provided in the Chief
Executive's Review and the Divisional Reviews sections.
Excluded from UTP were net releases from OCPs of £0.8m (2018: net releases of
£12.8m) following the detailed reassessment undertaken as part of the
budgeting process. Also excluded from UTP were net releases and additional
profits of £12.4m (2018: net releases and additional profits of £10.8m)
relating to items identified during the 2014 Contract & Balance Sheet
Review, and other one-time items.
The cumulative to date improvement to Trading Profit as a result of OCP
charges and releases and adjustments to items identified during the 2014
Contract & Balance Sheet Review is within 2% of the 2014 total charge to
Trading Profit arising from the review.
The tax impact of items in UTP and other non-underlying tax items is discussed
in the tax section of this Finance Review.
Joint ventures and associates - share of results
In 2019, the most significant joint ventures and associates in terms of scale
of operations were AWE Management Limited and Merseyrail Services Holding
Company Limited, with dividends received of £17.6m (2018: £20.0m) and £7.8m
(2018: £8.7m) respectively. Total revenues generated by these businesses were
£1,065.4m (2018: £1,024.7m) and £177.9m (2018: £160.8m) respectively.
While the revenues and individual line items are not consolidated in the Group
Consolidated Income Statement, summary financial performance measures for the
Group's proportion of the aggregate of all joint ventures and associates are
set out below for information purposes.
For the year ended 31 December 2019 2018
£m £m
Revenue 394.6 375.1
Operating profit before exceptional items 33.8 34.6
Net investment revenue 0.3 0.3
Income tax expense (6.6) (6.1)
Profit after tax before exceptional charge 27.5 28.8
Exceptional pension charge (see exceptional items below) - (0.3)
Profit after tax 27.5 28.5
Dividends received from joint ventures and associates 25.4 29.7
Revenue across both of the Group's material joint ventures has increased
during the year due to changes in the volumes transacted by the underlying
contracts. Profitability on both remained consistent with the prior year.
Exceptional items
Exceptional items are items of financial performance that are outside normal
operations and are material to the results of the Group either by virtue of
size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the
performance of the Group.
For the year ended 31 December 2019 2018
£m £m
Exceptional items arising
Exceptional loss on disposal of subsidiaries and operations - (0.5)
Other exceptional operating items
Restructuring costs (12.8) (32.3)
Increase in onerous lease provision - (1.8)
Costs associated with SFO investigation (25.2) 0.4
Reversal of impairment of interest in joint venture and related loan balances - 0.8
Reversal of impairment on loan balances - 13.9
Cost of Guaranteed Minimum Pension equalisation - (9.6)
Release of/(increase in) other provisions and other items 19.3 (2.8)
Costs associated with the acquisition of Naval Systems Business Unit (4.7) -
Other exceptional operating items (23.4) (31.4)
Exceptional operating items (23.4) (31.9)
Exceptional finance income - 7.5
Exceptional tax (2.7) 2.1
Total operating and financing exceptional items net of tax (26.1) (22.3)
Other exceptional operating items
The Group is incurring costs in relation to restructuring programmes resulting
from the Strategy Review. These costs include redundancy payments, provisions
(including onerous leases), external advisory fees and other incremental
costs. Due to the nature and scale of the impact of the transformation phase
of the Strategy Review, the incremental costs associated with this programme
are considered to be exceptional. Costs associated with the restructuring
programme resulting from the Strategy Review must meet the following criteria:
that they are directly linked to the implementation of the Strategy Review;
they are incremental costs as a result of the activity; and they are non
business as usual costs. In 2019, a charge of £12.8m (2018: £32.3m) arose in
relation to the restructuring programme resulting from the Strategy Review.
The Strategy Review is discussed in more detail in the Group's Strategic
Report which forms part of the Consolidated Annual Report and Accounts. The
transformation activities associated with this are complete and, as such, all
exceptional restructuring costs related to this programme have ended in 2019.
Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £8.9m (2018: £6.3m)
and were included within operating profit before exceptional items.
There was an exceptional charge totalling £25.2m (2018: credit of £0.4m)
associated with the SFO's investigation and the programme of Corporate
Renewal. These costs have historically been treated as exceptional and
consistent treatment is applied in 2019. During the year the Group paid
£22.9m in penalties and legal costs associated with the SFO's investigation.
The final judgement was provided on 4 July 2019. The credit in 2018 reflects
the recovery of costs from the Group's insurance providers. The remaining
£2.3m relates to legal costs incurred by the Group in respect of the
investigation.
In 2018, an exceptional charge of £9.6m was recorded to recognise the Group's
obligations associated with equalising the Guaranteed Minimum Pension (GMP)
payments between male and female employees for the Group's defined benefit
pension schemes following a High Court ruling made in October 2018. The Serco
Pension and Life Assurance Scheme (SPLAS) recorded the largest charge being
£9.0m. There was no equivalent charge in 2019.
The decrease in other provisions and other items of £19.3m (2018: increase of
£2.8m) predominantly relates to a commercial dispute which was settled in
2019. The treatment of the reduction as exceptional is consistent with the
recognition of the original charge associated with the same matter in 2014.
The Group completed the acquisition of the Naval Systems Business Unit (NSBU)
from Alion Science and Technology Corporation in 2019. The acquisition
achieved final regulatory approvals and completed in August 2019. The
transaction and implementation costs of £4.7m have been treated as
exceptional in line with the Group's accounting policy.
An exceptional profit of £13.9m was recognised in 2018 for the settlement of
consideration associated with the sale of Serco GmbH in 2012 through the
offsetting of outstanding loan balances, the receivable of which had been
impaired. An exceptional loss on disposal of £27.7m was recorded in 2012 in
respect of the sale. No such transactions took place in 2019.
Exceptional finance costs
There were no exceptional finance costs in the year ended 31 December 2019.
During 2018, part of the consideration for the sale of the Group's private
sector BPO business in 2015 was a loan note with a face value of £30m
accruing compound interest of 7%. The receivable associated with this loan
note was recorded at a fair value of £19.5m. The discount on the loan note
was unwound through the Group's net finance cost on an annual basis. During
October 2018, the Intelenet business was sold and therefore repayment of the
loan note was triggered resulting in a gain of £7.5m. As this gain was
outside the normal financing arrangements of the Group and significant in size
it was recorded as exceptional finance income.
Exceptional tax
Exceptional tax for the year was a charge of £2.7m (2018: credit of £2.1m)
which arises on exceptional items within operating profit. This charge arises
mainly in connection with the decrease in provisions in respect of commercial
disputes and legal claims for which a tax credit had been recorded when the
provisions were originally recognised. This charge is partially offset by tax
deductions in respect of the global restructuring programme and in the US on
acquisition costs.
No tax credit arises on the exceptional charge associated with the costs in
connection with the SFO investigation.
Pre-exceptional finance costs and investment revenue
Investment revenue of £2.7m (2018: £4.3m) includes interest accruing on net
retirement benefit assets of £2.1m (2018: £0.8m), interest earned on
deposits and other receivables of £0.5m (2018: £2.3m) and the movement in
discounting of other receivables of £0.1m (2018: £1.2m). The decrease in the
year is the result of the repayment of the loan note, as noted above, which
was previously accruing interest and did so for nine months during 2018. No
such interest income arose during 2019.
Finance costs of £24.5m (2018: £18.2m) includes interest incurred on the
USPP loans and the Revolving Credit Facility of £13.9m (2018: £13.8m),
facility fees and other charges of £1.7m (2018: £3.1m), lease interest
payable of £6.9m (2018: £0.6m) which has increased as a result of the
adoption of IFRS16 Leases, the movement in discount on provisions of £1.2m
(2018: £0.5m) and a loss for foreign exchange on financing activities of
£0.8m (2018: £0.2m).
Tax
Tax charge
Underlying tax
In 2019 we recognised a tax charge of £24.4m on underlying trading profits
after finance costs. The effective tax rate (24.8%) is slightly lower than in
2018 (26.0%). This is due to a relative reduction in permanent disallowable
items which is only partially offset by the geographic mix of where profits
have been made, notably the substantial increase in profits in the US.
Pre-exceptional tax
We recognised a tax charge of £27.4m (2018: £8.8m) on pre-exceptional
profits which includes underlying tax (£24.4m), tax credit from amortisation
of intangibles arising on acquisition of £1.5m and a £4.5m charge arising on
non-underlying items. This £4.5m charge consists of the tax impact on
non-underlying items together with tax items, that are in themselves
considered to be non-underlying:
· The tax on non-underlying items which consists of Contract and
Balance Sheet Review adjustments and other material one-time items during the
period, totalled a charge of £2.6m reflecting the impact of current or future
tax charges (2018: £3.2m charge).
· During the current period we have recognised an additional £0.8m
of deferred tax asset in relation to UK losses to reflect the improved
forecast taxable income of our UK operations (2018: £2.9m).
· Generally, movements in the valuation of the Group's defined
benefit pension schemes and the associated deferred tax impact are reported in
the Statement of Comprehensive Income (SOCI) and do not flow through the
income statement, therefore do not impact profit before tax or the tax
charge. However, the net amount of deferred tax recognised in the balance
sheet relates to both the pension accounting and other timing differences,
such as recoverable losses. As the net deferred tax balance sheet position
is at the maximum level supported by future profit forecasts, the decrease in
the deferred tax liability associated with the pension scheme (with the
benefit reported in the SOCI) leads to a corresponding decrease in the
deferred tax asset to match the future profit forecasts. Such a decrease in
the deferred tax asset therefore leads to a charge to tax in the income
statement. Where deferred tax charges or releases are the result of
movements in the pension scheme valuations rather than trading activity, these
are excluded from the calculation of tax on underlying profit and the
underlying effective tax rate. These amounted to £2.7m charge for 2019
(2018: £9.0m credit).
The tax rate on profits before exceptional items, at 26.3%, is higher than the
UK standard corporation tax rate of 19%. This is due to the impact of the
absence of any deferred tax credit for current year losses incurred,
predominantly in the UK, and the impact of higher rates of tax on profits
arising on our international operations which is only partially offset by the
impact of our joint ventures whose post-tax results are included in our
pre-tax profits. Our tax charge in future years could continue to be
materially impacted by our accounting for UK deferred taxes. To the extent
that future UK tax losses are incurred and are not recognised, our effective
tax rate will be driven higher than prevailing standard corporation tax rates.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items section
above.
Contingent tax assets
At 31 December 2019, the Group has gross estimated unrecognised deferred tax
of £1.1bn (tax effected £195m asset), which are potentially available to
offset against future taxable income. These principally relate to tax
trading losses of £900m. Of these tax losses, £760m have arisen in the UK
business (tax effected £129m).
A £21.1m UK tax asset has been recognised at 31 December 2019 (2018: £20.3m)
on the basis of forecast utilisation against future taxable income.
Taxes paid
Net corporate income tax of £31.2m (2018: £10.6m) was paid during the year,
relating primarily to our operations in AsPac of £19.4m (2018: £8.7m), North
America of £12.1m (2018: nil), Europe of £1.1m (2018: £4.1m) and Middle
East of £1.1m (2018: £1.1m). The Group's UK operations have transferred tax
losses to its profitable joint ventures and associates giving a cash tax
inflow in the UK of £2.5m (2018: £3.3m).
The amount of tax paid (£31.2m) differs from the tax charge in the period
(£30.1m) mainly due to the effect of future expected cash tax outflows for
which a charge has been taken in the current period. In addition, taxes
paid/received from Tax Authorities can arise in later periods to the
associated tax charge/credit and also there is a time lag on receipts of cash
from joint ventures and associates for losses transferred to them.
Further detail is shown below of taxes that have been paid during the year.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as determined by
local legislation in the countries in which we operate, means that we pay a
variety of taxes across the Group. In order to increase the transparency of
our tax profile, we have shown below the cash taxes that we have paid across
our regional markets.
In total during 2019, Serco globally contributed £625.7m of tax to government
in the jurisdictions in which we operate.
Taxes by category
For the year ended 31 December 2019 Taxes Taxes collected Total
borne £m £m
£m
Corporation tax 33.5 - 33.5
VAT and similar 9.6 173.0 182.6
People taxes 109.6 291.9 401.5
Other taxes 7.6 0.5 8.1
Total 160.3 465.4 625.7
Taxes by region
For the year ended 31 December 2019 Taxes Taxes collected Total
borne £m £m
£m
UK & Europe 80.8 251.1 331.9
AsPac 37.9 131.6 169.5
Americas 39.1 79.6 118.7
Middle East 2.5 3.1 5.6
Total 160.3 465.4 625.7
Corporation tax, which is the only cost to be separately disclosed in our
Financial Statements, is only one element of our tax contribution. For
every £1 of corporate tax paid directly by the Group (tax borne), we bear a
further £3.78 in other business taxes. The largest proportion of these is
in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect £2.90 on behalf of
national governments (taxes collected). This amount is directly impacted by
the people that we employ and the sales that we make.
Dividends
When dividend payments were suspended in 2014, the Board committed to resuming
dividend payments to Serco's shareholders as soon as it judged it prudent to
do so. 2019 has been a year of very strong operational and financial
performance. It is also the last year of significant outflows of cash
related to OCPs and restructuring exceptional costs. Our expectations for
2020 are for further good progress in increasing underlying earnings reducing
financial leverage.
The Board is therefore recommending the payment of a final dividend in respect
of the 2019 financial year of 1.0p, aligned to the recommended dividend and
outlook as described in the Chief Executive's Review. The dividend, subject
to shareholder approval at the Annual General Meeting on 14 May 2020, would be
paid on 5 June 2020.
Share count and EPS
The weighted average number of shares for EPS purposes was 1,171.4m for the
year ended 31 December 2019 (2018: 1,094.4m) and diluted weighted average
number of shares was 1,199.0m (2018: 1,125.4m).
In May 2019, the company completed a placement of 111,216,400 new ordinary
shares of 2p each raising net proceeds of £138.7m (2018: nil).
Additionally, in March 2019, 13,600,000 shares were issued to the Employee
Share Ownership Trust to satisfy awards under the Group's share award schemes.
Basic EPS before exceptional items was 6.54p per share (2018: 8.20p);
including the impact of exceptional items, Basic EPS was 4.31p (2018: 6.16p).
Basic Underlying EPS was 6.31p per share (2018: 5.36p).
Diluted EPS before exceptional items was 6.39p per share (2018: 7.97p);
including the impact of exceptional items, Diluted EPS was 4.21p (2018:
5.99p). Diluted Underlying EPS was 6.16p per share (2018: 5.21p).
Cash flows
The UTP of £120.2m (2018: £93.1m) converts into a trading cash inflow of
£115.5m (2018 restated: £45.1m). The improvement in 2019 cash conversion
reflects the increase in profitability from revenue growth and cost
efficiencies. In 2019, operating profit for the year has increased by £22.0m,
the working capital outflow was £0.1m (2018: £21.6m) and OCP utilisation was
£53.6m (2018: £51.8m), although in 2019, £12.7m of the utilisation was not
related to a cash cost but rather was related to the impairment of right of
use assets created on adoption of IFRS16 within onerous contracts.
The table below shows the operating profit and FCF reconciled to movements in
Net Debt. FCF for the year was an inflow of £62.0m compared to £16.3m in
2018. The improvement in FCF is largely as a result of improved trading cash
inflows as discussed above. Offsetting the improvement in trading cash
inflows is an increase in tax outflows of £20.6m principally arising in our
AsPac and Americas operations as described above.
The movement in Adjusted Net Debt is an increase of £41.3m in 2019, a
reconciliation of which is provided at the bottom of the following table. The
movement includes a net inflow of £138.7m from the placement of 111.2m new
shares in May 2019 and exceptional items of £49.2m (2018: £19.2m).
The net cash outflow on acquisition includes the net cash outflow on the
acquisition of NSBU of £183.9m and £9.3m of deferred consideration paid in
respect of historic acquisitions. In addition, £4.7m of acquisition related
costs associated with the NSBU acquisition were recognised as exceptional in
the year.
Exceptional cash outflows are higher than the exceptional income statement
charge largely due to the provision release of £19.4m seen in the income
statement which was a non-cash item.
For the year ended 31 December 2019 2018
£m (*restated)
£m
Operating profit 102.5 80.5
Remove exceptional items 23.4 31.9
Operating profit before exceptional items 125.9 112.4
Less: profit from joint ventures and associates (27.5) (28.8)
Movement in provisions (43.1) (68.1)
Depreciation, amortisation and impairment of leased property, plant and 75.6 6.8
equipment and intangible assets
Depreciation, amortisation and impairment of owned property, plant and 43.3 36.4
equipment and intangible assets
Other non-cash movements 9.3 16.5
Operating cash inflow before movements in working capital, exceptional items 183.5 75.2
and tax
Working capital movements (0.1) (21.6)
Tax paid (31.2) (10.6)
Non-cash R&D expenditure (0.1) (0.1)
Cash flow from operating activities before exceptional items 152.1 42.9
Dividends from joint ventures and associates 25.4 29.7
Interest received 0.4 0.6
Interest paid (21.4) (16.7)
Capital element of lease repayments (70.2) (8.7)
Capitalised finance costs paid (1.2) (2.0)
Purchase of intangible and tangible assets net of proceeds from disposals (23.3) (29.5)
Proceeds received from exercise of share options 0.2 -
Free Cash Flow 62.0 16.3
Net cash outflow on acquisition and disposal of subsidiaries (193.2) (31.3)
Issue of share capital 138.7 -
Other movements on investment balances 0.2 (0.3)
Capitalisation and amortisation of loan costs 0.1 1.3
Unwind of discounting and capitalisation of interest on loans receivable - 3.0
Exceptional items (49.2) (19.2)
Cash movements on hedging instruments (2.0) 0.2
Foreign exchange gain/(loss) on Adjusted Net Debt 2.1 (22.3)
Movement in Adjusted Net Debt (41.3) (52.3)
Opening Adjusted Net Debt (173.2) (120.9)
Closing Adjusted Net Debt (214.5) (173.2)
Lease liabilities (369.9) (14.8)
Closing Net Debt at 31 December (584.4) (188.0)
* Following the implementation of IFRS16 Leases, the definition of Free
Cash Flow has been amended to exclude the capital element of lease payments.
In addition, proceeds from the exercise of share options has been included
within Free Cash Flow.
Net Debt
As at 31 December 2019 2018
£m £m
Cash and cash equivalents 89.5 62.5
Loans payable (305.0) (239.5)
Lease liabilities (369.9) (14.8)
Derivatives relating to Net Debt 1.0 3.8
Net Debt (584.4) (188.0)
Exclude Lease Liabilities 369.9 14.8
Adjusted Net Debt (214.5) (173.2)
Average Adjusted Net Debt as calculated on a daily basis for the year ended 31
December 2019 was £231.0m (2018 restated: £218.7m). Peak Adjusted Net Debt
was £356.8m (2018 restated: £292.0m).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks that include
liquidity, the effects of changes in foreign currency exchange rates, interest
rates and credit risk. The Group has a centralised Treasury function whose
principal role is to ensure that adequate liquidity is available to meet the
Group's funding requirements as they arise and that the financial risk arising
from the Group's underlying operations is effectively identified and managed.
Treasury operations are conducted in accordance with policies and procedures
approved by the Board and are reviewed annually. Financial instruments are
only executed for hedging purposes and speculation is not permitted. A monthly
report is provided to senior management outlining performance against the
Treasury Policy and the treasury function is subject to periodic internal
audit review.
Liquidity and funding
As at 31 December 2019, the Group had committed funding of £508m (2018:
£492m), comprising £213m of private placement notes, a £45m acquisition
loan facility which was fully drawn and a £250m revolving credit facility
(RCF), of which £200m was undrawn. In addition, during December 2019, the
Group cancelled its receivables financing facility of £30m (2018: facility of
£30m which was unutilised).
The Group's RCF provides £250m of committed funding for five years from the
arrangement date in December 2018.
Interest rate risk
Given the nature of the Group's business, we have a preference for fixed rate
debt to reduce the volatility of net finance costs. Our Treasury Policy
requires us to maintain a minimum proportion of fixed rate debt as a
proportion of overall Adjusted Net Debt and for this proportion to increase as
the ratio of EBITDA to interest expense falls. As at 31 December 2019, 99% of
the Group's Adjusted Net Debt was at fixed rates.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of
its net investments in overseas subsidiaries. The Group manages this risk
where appropriate, by borrowing in the same currency as those investments.
Group borrowings are predominantly denominated in Sterling and US Dollar. The
Group manages its currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward contracts
where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk
on the amounts due from counterparties. The Group manages this risk by
adhering to counterparty exposure limits based on external credit ratings of
the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private
placement loan notes and revolving credit facility, with a maximum
Consolidated Total Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and
minimum covenant EBITDA to net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set out in the
table below.
Following the refinancing in December 2018, the debt covenants have been
amended to include the impact of IFRS15. The covenants continue to exclude the
future impact of IFRS16 on the Group's results.
For the year ended 31 December 2019 2018
£m £m
Operating profit before exceptional items 125.9 112.4
Remove: Amortisation and impairment of intangibles arising on acquisition 7.5 4.3
Trading Profit 133.4 116.7
Exclude: Share of joint venture post-tax profits (27.5) (28.8)
Include: Dividends from joint ventures 25.4 29.7
Add back: Net non-exceptional charges to OCPs 7.2 -
Add back: Depreciation, amortisation and impairment of owned property, plant 35.8 32.1
and equipment and non-acquisition intangible assets
Add back: Depreciation, amortisation and impairment of property, plant and 5.8 6.8
equipment and non-acquisition intangible assets held under finance leases - in
accordance with IAS17 Leases
Add back: Foreign exchange credit on investing and financing arrangements (0.8) (0.2)
Add back: Share based payment expense 11.6 14.7
Other covenant adjustments to EBITDA 9.8 -
Covenant EBITDA 200.7 171.0
Net finance costs 21.8 13.9
Exclude: Net interest receivable on retirement benefit obligations 2.1 0.8
Exclude: Movement in discount on other debtors 0.1 1.2
Exclude: Foreign exchange on investing and financing arrangements (0.8) (0.2)
Add back: Movement in discount on provisions (1.2) (0.5)
Other covenant adjustments to net finance costs resulting from IFRS16 (6.6) -
Covenant net finance costs 15.4 15.2
Adjusted net debt 214.5 173.2
Obligations under finance leases - in accordance with IAS17 Leases 8.9 14.8
Recourse Net Debt 223.4 188.0
Exclude: Disposal vendor loan note, encumbered cash and other adjustments 4.1 2.3
Covenant adjustment for average FX rates 7.6 (8.8)
CTNB 235.1 181.5
CTNB / covenant EBITDA (not to exceed 3.5x) 1.17x 1.06x
Covenant EBITDA / covenant net finance costs (at least 3.0x) 13.0x 11.2x
Net assets summary
As at 31 December 2019 2018
£m £m
Non-current assets
Goodwill 671.2 579.6
Other intangible assets 96.5 67.3
Property, plant and equipment 392.6 64.8
Other non-current assets 50.1 51.0
Deferred tax assets 63.9 60.9
Retirement benefit assets 78.3 85.8
1,352.6 909.4
Current assets
Inventories 18.3 22.9
Contract assets, trade receivables and other current assets 612.2 551.5
Current tax assets 6.8 7.3
Cash and cash equivalents 89.5 62.5
Total current assets 726.8 644.2
Total assets 2,079.4 1,553.6
Current liabilities
Contract liabilities, trade payables and other current liabilities (557.7) (497.7)
Current tax liabilities (18.7) (29.2)
Provisions (58.4) (120.1)
Lease obligations (84.6) (5.7)
Loans (56.1) (21.9)
Total current liabilities (775.5) (674.6)
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities (72.7) (109.9)
Deferred tax liabilities (26.7) (21.4)
Provisions (103.4) (119.3)
Lease obligations (285.3) (9.1)
Loans (248.9) (217.6)
Retirement benefit obligations (24.0) (14.9)
(761.0) (492.2)
Total liabilities (1,536.5) (1,166.8)
Net assets 542.9 386.8
At 31 December 2019 the balance sheet had net assets of £542.9m, a movement
of £156.1m from the closing net asset position of £386.8m as at 31 December
2018. The increase in net assets is mainly due to the following movements:
· A decrease in provisions of £77.6m. Further details on provision
movements is provided below.
· Adjusted Net Debt increased by £41.3m. Further details of these
movements are provided in the cash flow and Net Debt sections above.
· An increase in property, plant and equipment of £327.8m, which
includes right of use assets with a net book value of £345.3m at 31 December
2019 following the adoption of IFRS16 Leases, although this is offset by a
combined increase in lease liabilities of £355.1m. Of the total increase in
the lease liability, £78.9m is recognised in current liabilities which has
contributed to the increase in net current liabilities to £48.7m.
· An increase in goodwill and intangibles of £115.3m and £52.6m
respectively as a result of the acquisition of NSBU, offset by movements in
exchange rates and amortisation of intangibles charged in the year.
Provisions
The total of current and non-current provisions has decreased by £77.6m since
31 December 2018. The movement is predominantly due to:
· A decrease in onerous contract provisions of £65.6m.
· A £19m net release of other provisions excluded from UTP as the
provisions related to items created as an exceptional cost.
· £7m net charges on end of contract employee related provisions
and other items, none of which were individually material.
Movements in onerous contract provisions since the 31 December 2018 balance
sheet date, are as follows:
Onerous Contract Provisions
£m
At 1 January 2019 82.1
Opening adjustment - IFRS16 (13.3)
Charged to the income statement during the year - trading 10.6
Released to the income statement - trading (9.6)
Utilisation during the year (53.6)
Unwinding of discount 0.2
Foreign exchange 0.1
At 31 December 2019 16.5
The balance of OCPs at 31 December 2019 was £16.5m (2018: £82.1m). OCP
balances are subject to ongoing review and a full bottom-up assessment of the
forecasts that form the basis of the OCPs is conducted as part of the annual
budgeting process. The net non-exceptional charge to OCPs was £1.0m (2018:
£12.8m release) and utilisation was £53.6m (2018: £51.8m).
In 2019, the release from OCPs is reflective of the Group's ability to
forecast the final years of contracts which are nearing completion. Additional
charges of £10.6m (2018: £3.4m) have been made in respect of future losses
on new and existing onerous contract provisions to reflect the updated
forecasts and releases of £9.6m (2018: £16.2m) as settlements are agreed and
contracts near completion. The Group undertakes a robust assessment at each
reporting date to determine whether any individual customer contracts, which
the Group has entered into, are onerous and require a provision to be
recognised in accordance with IAS37.
The Group operates a large number of long-term contracts at different phases
of their contract life cycle. Within the Group's portfolio, there are a
small number of contracts where the balance of risks and opportunities
indicates that they might be onerous if transformation initiatives or contract
changes are not successful. The Group has concluded that these contracts do
not require an onerous contract provision on an individual basis. Following
the individual contract reviews, the Group has also undertaken a top down
assessment which assumes that, whilst the contracts may not be onerous on an
individual basis, as a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to avoid a
contract loss, will not be fully successful, and it is more likely than not
that one or more of these contracts will be onerous. Therefore, in
considering the Group's overall onerous contract provision, the Group has made
a best estimate of the provision required to take into consideration this
portfolio risk. As a result, the risk of OCPs and the monitoring of
individual contracts for indicators remains a critical estimate for the
Group. The amount recognised in the year is £6.2m at the Trading Profit
level within the Corporate costs segment, which after this charge is therefore
£51.7m (2018: £40.1m).
Acquisitions
On 1 August 2019, the Group acquired the Naval Systems Business Unit and a
small number of related contracting entities (collectively, 'NSBU'), from
Alion Science & Technology Corporation. Serco acquired the net assets of
the business as well as the Alion Canada and Alion IPS legal entities. The
acquired business contributed £109.8m of revenue and £8.1m of operating
profit before exceptional items to the Group's results during the year to 31
December 2019. As a result of the acquisition, Alion Canada, now known as
Serco Canada Marine, and Alion IPS are 100% owned, indirect subsidiaries of
Serco Group plc.
NSBU is a leading provider of naval design, systems engineering, as well as
production and lifecycle support services to the US Navy, US Army and Royal
Canadian Navy. The combined business will be a top tier supplier of services
to the US Navy and increases our exposure to US Navy fleet expansion, which is
one of the fastest-growing areas of public procurement. The US Navy has
announced plans to increase the fleet from 280 to 355 ships by 2034, and we
see a long-term and growing demand for the capabilities that the combination
of Serco and NSBU will be able to provide.
The total annual revenue of NSBU in 2020 is expected to be around $370m
(£285m) and the estimated operating profit before exceptional items,
including an appropriate allocation of charges for shared support services and
fully allocated overheads, of around $27m (£20m).
IFRS16
A new leasing standard, IFRS16 Leases was adopted by the Group with effect
from 1 January 2019. IFRS16 requires the recognition of a lease liability and
corresponding right of use asset for any lease not covered by a low-value or
short-term exemption.
The following table illustrates the impact which IFRS16 has had on the results
for the year ended 31 December 2019 for key Alternative Performance Measures.
This has been provided to assist the reader in understanding the business
performance outside of changes to accounting standards.
No restatement has been made to the results for the year ended 31 December
2018 in accordance with the modified retrospective approach to transition
adopted by the Group.
Impact of IFRS16 APM pre-IFRS16
As reported 31 December 2019 31 December 2019
31 December 2019 31 December 2018
Underlying Trading Profit (£m) 120.2 1.2 119.0 93.1
Trading Profit (£m) 133.4 2.3 131.1 116.7
Operating Profit (£m) 102.5 2.3 100.2 80.5
Net Finance Costs (£m) 21.8 6.6 15.2 6.4
Profit Before Tax (£m) 80.7 (4.3) 85.0 74.1
Diluted Underlying EPS (p) 6.16 (0.46) 6.62 5.21
Net Debt (£m) 584.4 360.9 223.5 188.0
Serious Fraud Office Investigation
On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary, received
judicial approval of a Deferred Prosecution Agreement (DPA) with the UK
Serious Fraud Office (SFO). This ruling concluded the SFO's investigation into
Serco companies announced in November 2013. As part of the DPA, the Group has
paid a fine of £19.2m during the year and also paid SFO investigation costs
of £3.7m.
The Group has received a claim seeking damages for alleged losses following
the reduction in Serco's share price in 2013. 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 is subject to a number of
significant uncertainties and, therefore, it is not possible to assess the
quantum of any such litigation as at the date of this disclosure.
Financial Statements
Consolidated Income Statement
For the year ended 31 December
2019 2018
£m £m
Revenue 3,248.4 2,836.8
Cost of sales (2,928.3) (2,546.6)
Gross profit 320.1 290.2
Administrative expenses
Other general and administrative expenses (214.2) (202.3)
Exceptional loss on disposal of subsidiaries and operations - (0.5)
Other exceptional operating items (23.4) (31.4)
Other expenses - amortisation and impairment of intangibles arising on (7.5) (4.3)
acquisition
Total administrative expenses (245.1) (238.5)
Share of profits in joint ventures and associates, net of interest and tax 27.5 28.8
Operating profit 102.5 80.5
Operating profit before exceptional items 125.9 112.4
Investment revenue 2.7 4.3
Finance costs (24.5) (18.2)
Exceptional finance income - 7.5
Total net finance costs (21.8) (6.4)
Profit before tax 80.7 74.1
Profit before tax and exceptional items 104.1 98.5
Tax on profit before exceptional items (27.4) (8.8)
Exceptional tax (2.7) 2.1
Tax charge (30.1) (6.7)
Profit for the year 50.6 67.4
Attributable to:
Equity owners of the Company 50.4 67.4
Non controlling interests 0.2 -
Earnings per share (EPS)
Basic EPS 4.31p 6.16p
Diluted EPS 4.21p 5.99p
The accompanying notes form an integral part of the condensed consolidated
financial statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 December
2019 2018
£m £m
Profit for the year 50.6 67.4
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial (loss)/gain on defined benefit pension schemes* (20.3) 52.1
Actuarial gain/(loss) on reimbursable rights* 3.2 (0.2)
Tax relating to items not reclassified* 2.7 (9.2)
Share of other comprehensive income in joint ventures and associates 1.3 2.0
Items that may be reclassified subsequently to profit or loss:
Net exchange loss on translation of foreign operations** (33.3) (5.3)
Fair value (loss)/gain on cash flow hedges during the year** (0.1) 0.6
Total other comprehensive (loss)/income for the year (46.5) 40.0
Total comprehensive income for the year 4.1 107.4
Attributable to:
Equity owners of the Company 4.0 107.3
Non controlling interest 0.1 0.1
* Recorded in retirement benefit obligations reserve in the Consolidated
Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Consolidated Statement
of Changes in Equity.
The accompanying notes form an integral part of the condensed consolidated
financial statements.
Consolidated Statement of Changes in Equity
Share capital Share premium account Capital redemption reserve Retained earnings Retirement benefit obligations reserve Share based payment reserve Own shares reserve Hedging and translation reserve Total shareholders' equity Non controlling interest
£m £m £m £m £m £m £m £m £m £m
At 1 January 2018 22.0 327.9 0.1 41.8 (180.1) 88.3 (46.1) 10.1 264.0 1.3
Total comprehensive income for the year - - - 69.3 42.7 - - (4.7) 107.3 0.1
Shares transferred to option holders on exercise of share options - - - - - (28.0) 27.4 - (0.6) -
Expense in relation to share based payments - - - - - 14.7 - - 14.7 -
At 1 January 2019 22.0 327.9 0.1 111.1 (137.4) 75.0 (18.7) 5.4 385.4 1.4
Opening balance adjustment - IFRS16 (note 2) - - - 3.0 - - - - 3.0 -
Total comprehensive income for the year - - - 51.8 (14.4) - - (33.4) 4.0 0.1
Issue of share capital 2.5 135.0 - - - - (0.3) - 137.2 -
Shares transferred to option holders on exercise of share options - - - - - (14.4) 14.6 - 0.2 -
Expense in relation to share based payments - - - - - 11.6 - - 11.6 -
At 31 December 2019 24.5 462.9 0.1 165.9 (151.8) 72.2 (4.4) (28.0) 541.4 1.5
The accompanying notes form an integral part of the condensed consolidated
financial statements.
Consolidated Balance Sheet
At 31 December 2019 At 31 December 2018
£m £m
Non current assets
Goodwill 671.2 579.6
Other intangible assets 96.5 67.3
Property, plant and equipment 392.6 64.8
Interests in joint ventures and associates 23.6 20.6
Trade and other receivables 26.5 30.3
Derivative financial instruments - 0.1
Deferred tax assets 63.9 60.9
Retirement benefit assets 78.3 85.8
1,352.6 909.4
Current assets
Inventories 18.3 22.9
Contract assets 293.5 244.3
Trade and other receivables 315.7 299.5
Current tax assets 6.8 7.3
Cash and cash equivalents 89.5 62.5
Derivative financial instruments 3.0 7.7
726.8 644.2
Total assets 2,079.4 1,553.6
Current liabilities
Contract liabilities (66.8) (74.3)
Trade and other payables (489.0) (419.7)
Derivative financial instruments (1.9) (3.7)
Current tax liabilities (18.7) (29.2)
Provisions (58.4) (120.1)
Lease obligations (84.6) (5.7)
Loans (56.1) (21.9)
(775.5) (674.6)
Non current liabilities
Contract liabilities (58.2) (86.6)
Trade and other payables (14.5) (23.3)
Deferred tax liabilities (26.7) (21.4)
Provisions (103.4) (119.3)
Lease obligations (285.3) (9.1)
Loans (248.9) (217.6)
Retirement benefit obligations (24.0) (14.9)
(761.0) (492.2)
Total liabilities (1,536.5) (1,166.8)
Net assets 542.9 386.8
Equity
Share capital 24.5 22.0
Share premium account 462.9 327.9
Capital redemption reserve 0.1 0.1
Retained earnings 165.9 111.1
Retirement benefit obligations reserve (151.8) (137.4)
Share based payment reserve 72.2 75.0
Own shares reserve (4.4) (18.7)
Hedging and translation reserve (28.0) 5.4
Equity attributable to owners of the Company 541.4 385.4
Non controlling interest 1.5 1.4
Total equity 542.9 386.8
The accompanying notes form an integral part of the condensed consolidated
financial statements.
The financial statements were approved by the Board of Directors on 25
February 2020 and signed on its behalf by:
Rupert
Soames
Angus Cockburn
Group Chief Executive
Officer Group
Chief Financial Officer
Consolidated Cash Flow Statement
For the year ended 31 December
2019 2018
£m £m
Net cash inflow from operating activities before exceptional items 152.1 42.9
Exceptional items (49.2) (40.2)
Net cash inflow from operating activities 102.9 2.7
Investing activities
Interest received 0.4 0.6
Increase/(decrease) in security deposits 0.2 (0.3)
Dividends received from joint ventures and associates 25.4 29.7
Proceeds from disposal of property, plant and equipment 1.0 5.3
Proceeds from disposal of intangible assets - 0.5
Net cash inflow on disposal of subsidiaries and operations - 1.5
Acquisition of subsidiaries, net of cash acquired (193.2) (32.8)
Proceeds from loans receivable - 29.9
Exceptional finance income received - 7.5
Purchase of other intangible assets (6.8) (8.9)
Purchase of property, plant and equipment (17.5) (26.4)
Net cash (outflow)/inflow from investing activities (190.5) 6.6
Financing activities
Interest paid (21.4) (16.7)
Capitalised finance costs paid (1.2) (2.0)
Advances/(repayment) of loans 72.3 (31.3)
Capital element of lease repayments (70.2) (8.7)
Cash movements on hedging instruments (2.0) 0.2
Issue of share capital 138.7 -
Proceeds received from exercise of share options 0.2 -
Net cash inflow/(outflow) from financing activities 116.4 (58.5)
Net increase/(decrease) in cash and cash equivalents 28.8 (49.2)
Cash and cash equivalents at beginning of year 62.5 112.1
Net exchange loss (1.8) (0.4)
Cash and cash equivalents at end of year 89.5 62.5
The accompanying notes form an integral part of the condensed consolidated
financial statements.
Notes to the Condensed Consolidated Financial Statements
1. General information, going concern and changes in accounting standards
The basis of preparation in this preliminary announcement is set out below.
The financial information in this announcement does not constitute the Group's
or the Company's statutory accounts as defined in section 434 of the Companies
Act 2006 for the years ended 31 December 2019 or 2018, but is derived from
those accounts. Statutory accounts for 2018 have been delivered to the
registrar of companies, and those for 2019 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
The preliminary announcement has been prepared in accordance with
International Financial Reporting Standards adopted for use in the European
Union (IFRS). Whilst the financial information included in this preliminary
announcement has been computed in accordance with IFRS, this announcement does
not itself contain sufficient information to comply with IFRS. The Company
expects to publish full Group and parent company only financial statements
that comply with IFRS and FRS101 respectively, in March 2020 and this includes
the Group's and parent company's accounting policies.
The financial statements have been prepared on the historical cost basis,
except for the revaluation of financial instruments. Historical cost is
generally based on the fair value of the consideration given in exchange for
goods and services. The following principal accounting policies adopted have
been applied consistently in the current and preceding financial year except
as stated below:
Going concern
The Directors have a reasonable expectation that the Company and the Group
will be able to operate within the level of available facilities and cash for
the foreseeable future, and accordingly believe that it is appropriate to
prepare the financial statements on a going concern basis.
In assessing the basis of preparation of the financial statements for the year
ended 31 December 2019, 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 Directors have undertaken a rigorous assessment of going concern and
liquidity, taking into account financial forecasts, which indicate sufficient
capacity in our financing facilities and associated covenants to support the
Group. In order to satisfy themselves that they have adequate resources for
the future, the Directors have reviewed the Group's existing debt levels, the
committed funding and liquidity positions under our debt covenants, and our
ability to generate cash from trading activities and working capital
requirements.
The Group's current principal debt facilities as at 31 December 2019 comprised
a £250m revolving credit facility, a three year term acquisition facility of
£45m and £213m of US private placement notes. As at 31 December 2019, the
Group had £508m of committed credit facilities and committed headroom of
£286m. In undertaking this review the Directors have considered the business
plans which provide financial projections for the foreseeable future. For the
purposes of this review, we consider that to be the period ending 30 June
2021.
Adoption of new and revised standards
IFRS16 Leases (effective 1 January 2019), specifies how to recognise, measure,
present and disclose leases. The standard provides a single lessee accounting
model, requiring lessees to recognise assets and liabilities for all leases
unless the lease term is 12 months or less or the underlying asset is of a low
value. Lessors continue to classify leases as operating or finance, with the
IFRS16 approach to lessor accounting remaining substantially unchanged from
its predecessor, IAS 17.
Under the applicable transition rules a lessee shall either apply IFRS16 with
full retrospective effect or alternatively not restate comparative information
but recognise the cumulative effect of initially applying IFRS16 as an
adjustment to opening equity at the date of initial application, subject to
the Group's application of the following expedients:
No reassessment is required as to whether a contract is, or contains, a lease
at the date of initial application.
No reassessment is required for:
o leases with a lease term end date within one year of the date of initial
application; or
o leases for low value assets, which the Group considers to be those with an
initial cost value less than £5,000 except for circumstances where those
assets form part of a bundle of leased assets accounted for as a single lease
contract.
The Group has adopted the modified retrospective transition approach and as
such the valuation of the right of use asset at 1 January 2019 is calculated
as if the lease had always existed and hence the net book value of the asset
on 1 January 2019 is based on the assumption of straight line amortisation.
The lease liability at 1 January 2019 is calculated as the present value of
future payments in relation to the lease, discounted at the applicable
incremental borrowing rate.
The impact for the Group of adopting IFRS16 is as follows:
As at 1 January
2019
£m
Retained earnings at 31 December 2018 111.1
Lease liability recognised (129.1)
Right of use asset recognised, net of impairments 104.2
Impact of IFRS16 on opening provisions 12.5
Impact of IFRS16 on other creditors 10.6
Deferred tax asset recognised 5.1
Adjustment to retained earnings due to the implementation of IFRS16 3.3
Impact of IFRS16 on interest in joint ventures at 1 January 2019 (0.3)
Retained earnings at 1 January 2019 114.1
The impact of IFRS16 on the Group's income statement is to increase finance
costs and improve trading profit as lease costs are replaced with a lower
depreciation charge. The impact to 2019 is outlined in the Divisional
Reviews on pages 16-21 and to key metrics in the Finance Review on page 38.
In calculating the lease liability to be recognised on transition, the Group
used a weighted average incremental borrowing rate on 1 January 2019 of 3.50%.
Applying this weighted average incremental borrowing rate to the operating
lease commitments recognised as at 31 December 2018 gives a liability of
£187.2m. This differs from the lease liability recognised as a result of
transitioning to IFRS16 for the following reasons:
£m
Minimum lease payments under non-cancellable operating leases recognised in
accordance with IAS17 Leases as at 31 December 2018:
Within one year 73.2
Between one and five years 95.1
After five years 22.1
190.4
Finance leases 14.8
Operating lease commitments discounted at the weighted average incremental 187.2
borrowing rate
Less: leases ending within 12 months of the transition date to IFRS16 covered (44.8)
by the practical expedient
Less: leases included in the operating lease commitment not meeting the (13.3)
recognition criteria of IFRS16
Lease liability on transition to IFRS16 143.9
The implementation of IFRS16 Leases has required the Group to make a number of
judgements and estimates. The key judgements applied relate to the likelihood
of lease extension options being exercised, the certainty of the exercise of
termination options and the identification of leases embedded within other
contracts. The key estimates used in assessing the impact of adopting the new
standard are the incremental borrowing rates applied in calculating the
present value of future lease payments to identify the lease liability at 1
January 2019.
In addition to the areas where a financial impact has been identified as a
result of adoption of IFRS16 as identified above, there are certain accounting
policies which are new or change existing policies applied by the Group and
may have an impact on the future financial performance of the Group. The
policies in these areas to be adopted by the Group are set out below:
(i) Lease amendments. Where changes in a lease occur, this
will trigger a reassessment of the lease liability. Changes in the lease
liability will be recognised via an adjustment to the right of use asset.
However, if the carrying amount of the right-of-use asset is reduced to zero
and there is a further reduction in the measurement of the lease liability,
any remaining amount of the remeasurement will be recognised in profit or
loss.
(ii) Lease incentives. Where a lease incentive is received
prior to the commencement of a lease, the amount is offset against the right
of use asset at inception. Where a lease includes a period or periods of
reduced or free rentals, these are included in the calculation of the present
value of the lease liability on inception.
(iii) Variable lease payments. Where a contract to lease an
asset has a pricing mechanism that allows for changes after the commencement
date, other than those that change simply due to the passage of time, it is
considered to have variable lease payments. These payments will depend on an
index or rate and are included in the calculated lease liability at the lease
commencement date according to the rate or index as at that date.
(iv) Sub-leases. Where a group entity leases an asset and this
asset is subsequently leased to another entity, this is considered to be a
sub-lease if the original head lease remains in place. In this instance the
entity which has entered into the head lease is acting as both a lessee and a
lessor simultaneously. As a result, the head lease is accounted for in
accordance with the group's lease accounting policy. When acting as a lessor,
there is a requirement to determine whether the sub-lease is an operating
lease or a finance lease, with the accounting following this determination.
(v) Separate lease and non-lease components. Lease contracts can
often contain elements related to the use of an asset and elements that are
unrelated, for example where a property lease also includes a charge for
insurance or maintenance. The lease component and the associated non-lease
component are accounted for as a single lease component.
(vi) Lease terminations. Where a lease is terminated before the
end of the lease term the right of use asset is disposed of with the carrying
value being charged to the income statement whilst the lease liability is
extinguished from the balance sheet resulting in a credit to the income
statement. The net charge or credit to the income statement is added to any
cost of exiting the lease to result in a profit or loss on lease termination.
As an interpretation, IFRIC23 Uncertainty over Income Tax Treatments clarifies
the application of the recognition and measurement criteria of IAS12 when
there is uncertainty over income tax treatments yet to be accepted by tax
authorities. The interpretation had an effective date of 1 January 2019 so is
reflected in the Group's financial statements for the period ended 31 December
2019. Application of this interpretation did not have a significant impact
on the Group's financial statements.
2. Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group's accounting policies, which are
described in note 2 above, management has made the following judgements that
have the most significant effect on the amounts recognised in the financial
statements. As described below, many of these areas of judgement also involve
a high level of estimation uncertainty.
Key sources of estimation uncertainty
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions requires
assumptions and complex judgements to be made about the future performance of
the Group's contracts. The level of uncertainty in the estimates made, either
in determining whether a provision is required, or in the measurement of a
provision booked, is linked to the complexity of the underlying contract and
the form of service delivery. Due to the level of uncertainty and combination
of variables associated with those estimates there is a significant risk that
there could be material adjustment in respect of onerous contract provisions
within the next financial year.
Major sources of uncertainty which could result in a material adjustment
within the next financial year are:
· The ability of the company to maintain or improve operational
performance to ensure costs or performance related penalties are in line with
expected levels.
· Volume driven revenue and costs being within the expected
ranges.
· The outcome of matters dependent on the behaviour of the
customer, such as a decision to extend a contract where it has the unilateral
right to do so.
· The outcome of open claims made by or against a customer
regarding contractual performance.
· The ability of suppliers to deliver their contractual obligations
on time and on budget.
In the current year, an amount of £2.5m was charged to historic provisions,
and releases of £9.6m have been made. One new OCP was recognised during the
year with the charge being £1.9m. Further details are provided in the Finance
Review within the Strategic Report. All of these revisions have resulted from
triggering events in the current year, either through changes in contractual
positions or changes in circumstances which could not have been reasonably
foreseen at the previous balance sheet date. To mitigate the level of
uncertainty in making these estimates Management regularly compares actual
performance of the contracts against previous forecasts and considers whether
there have been any changes to significant judgements. A detailed bottom up
review of the provisions is performed as part of the Group's formal annual
budgeting process.
The future range of possible outcomes in respect of those assumptions and
significant judgements made to determine the carrying value of onerous
contracts could result in either a material increase or decrease in the value
of onerous contract provisions in the next financial year. The extent to
which actual results differ from estimates made at the reporting date depends
on the combined outcome and timing of a large number of variables associated
with performance across multiple contracts.
The individual provisions are discounted where the impact is assessed to be
significant. Discount rates used are calculated based on the estimated
risk-free rate of interest for the region in which the provision is located
and matched against the ageing profile of the provision.
During the year, the Group's existing OCPs have continued to be utilised with
the closing balance being significantly lower than at the prior year-end. The
Group does not expect to enter into new OCPs, however given the nature of the
Group's operations, there is an inherent risk that a contract can become
onerous. The Group operates a large number of long-term contracts at different
phases of their contract life cycle. Within the Group's portfolio, there are
a small number of contracts where the balance of risks and opportunities
indicates that they might be onerous if transformation initiatives or contract
changes are not successful. The Group has concluded that these contracts do
not require an onerous contract provision on an individual basis. Following
the individual contract reviews, the Group has also undertaken a top down
assessment which assumes that, whilst the contracts may not be onerous on an
individual basis, as a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to avoid a
contract loss, will not be fully successful, and it is more likely than not
that one or more of these contracts will be onerous. Therefore, in
considering the Group's overall onerous contract provision, the Group has made
a best estimate of the provision required to take into consideration this
portfolio risk. As a result, the risk of OCPs and the monitoring of
individual contracts for indicators remains a critical estimate for the
Group. The amount recognised in the year is £6.2m at the Trading Profit
level within the Corporate costs segment, which after this charge is therefore
£51.7m (2018: £40.1m).
Impairment of assets
Identifying whether there are indicators of impairment for assets involves a
high level of judgement and a good understanding of the drivers of value
behind the asset. At each reporting period an assessment is performed in order
to determine whether there are any such indicators, which involves considering
the performance of our business and any significant changes to the markets in
which we operate.
We seek to mitigate the risk associated with this judgement by putting in
place processes and guidance for the finance community and internal review
procedures.
Determining whether assets with impairment indicators require an actual
impairment involves an estimation of the expected value in use of the asset
(or CGU to which the asset relates). The value in use calculation involves an
estimation of future cash flows and also the selection of appropriate discount
rates, both of which involve considerable judgement. The future cash flows are
derived from approved forecasts, with the key assumptions being revenue
growth, margins and cash conversion rates. Discount rates are calculated with
reference to the specific risks associated with the assets and are based on
advice provided by external experts. Our calculation of discount rates are
performed based on a risk free rate of interest appropriate to the geographic
location of the cash flows related to the asset being tested, which is
subsequently adjusted to factor in local market risks and risks specific to
Serco and the asset itself. Discount rates used for internal purposes are
post tax rates, however for the purpose of impairment testing in accordance
with IAS36 Impairment of Assets we calculate a pre tax rate based on post tax
targets.
A key area of focus in recent years has been in the impairment testing of
goodwill as a result of the pressure on the results of the Group. However, no
impairment of goodwill was noted in the year ended 31 December 2019.
Current tax
Liabilities for tax contingencies require management judgement and estimates
in respect of tax audits and also tax exposures in each of the jurisdictions
in which we operate. Management is also required to make an estimate of the
current tax liability together with an assessment of the temporary differences
that arise as a consequence of different accounting and tax treatments. Key
judgement areas include the correct allocation of profits and losses between
the countries in which we operate and the pricing of intercompany services.
Where management conclude that a tax position is uncertain, a current tax
liability is held for anticipated taxes that are considered probable based on
the current information available.
These liabilities can be built up over a long period of time but the ultimate
resolution of tax exposures usually occurs at a point in time, and given the
inherent uncertainties in assessing the outcomes of these exposures, these
estimates are prone to change in future periods. It is not currently possible
to estimate the timing of potential cash outflow, but on resolution, to the
extent this differs from the liability held, this will be reflected through
the tax charge/(credit) which could be material for that period to the extent
that the outcomes differ from the current estimates. Each potential liability
and contingency is revisited on an annual basis and adjusted to reflect any
changes in positions taken by the company, local tax audits, the expiry of the
statute of limitations following the passage of time and any change in the
broader tax environment.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit obligation as a result
of contractual arrangements entered into requires a level of judgement,
largely driven by the legal position held between the Group, the customer and
the relevant pension scheme. The Group's retirement benefit obligations and
other pension scheme arrangements are covered in note 31.
The calculation of retirement benefit obligations is dependent on material key
assumptions including discount rates, mortality rates, inflation rates and
future contribution rates.
In accounting for the defined benefit schemes, the Group has applied the
following principles:
· The asset recognised for the Serco Pension and Life Assurance
Scheme is equal to the full surplus that will ultimately be available to the
Group as a future refund.
· No foreign exchange item is shown in the disclosures as the non
UK liabilities are not material.
· No pension assets are invested in the Group's own financial
instruments or property.
· Pension annuity assets are remeasured to fair value at each
reporting date based on the share of the defined benefit obligation covered by
the insurance contract.
Critical accounting judgements
Use of Alternative Performance Measures: Operating profit before exceptional
items
IAS1 requires material items to be disclosed separately in a way that enables
users to assess the quality of a company's profitability. In practice, these
are commonly referred to as 'exceptional' items, but this is not a concept
defined by IFRS and therefore there is a level of judgement involved in
arriving at an Alternative Performance Measure which excludes such exceptional
items. We consider items which are material and outside of the normal
operating practice of the company to be suitable for separate presentation.
There is a level of judgement required in determining which items are
exceptional on a consistent basis and require separate disclosure. Further
details can be seen in note 7.
The segmental analysis of operations in note 3 includes the additional
performance measure of Trading Profit on operations which is reconciled to
reported operating profit in that note. The Group uses Trading Profit as an
alternative measure to reported operating profit by making several
adjustments. Firstly, Trading Profit excludes exceptional items, being those
we consider material and outside of the normal operating practice of the
company to be suitable of separate presentation and detailed explanation.
Secondly, amortisation and impairment of intangibles arising on acquisitions
are excluded, because these charges are based on judgments about the value and
economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating practice. The CODM
reviews the segmental analysis for operations.
Investigation by the Serious Fraud Office
On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary, received
judicial approval of a Deferred Prosecution Agreement (DPA) with the UK
Serious Fraud Office (SFO). This ruling concludes the SFO's investigation into
Serco companies announced in November 2013. As part of the DPA, the Group has
paid a fine of £19.2m during the year and also paid SFO investigation costs
of £3.7m. As at the end of 2019, this is no longer a critical accounting
judgement.
Claim for losses in respect of the 2013 share price reduction
The Group has received a claim seeking damages for alleged losses following
the reduction in Serco's share price in 2013. 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 is subject to a number of
significant uncertainties and, therefore, it is not possible to assess the
quantum of any such litigation as at the date of this disclosure. Given the
uncertainties associated with this claim, it has been disclosed as a
contingent liability in note 29.
Deferred tax
Deferred tax assets are recognised for unused tax losses to the extent that it
is probable that taxable profit will be available against which the losses can
be utilised. Significant management judgement is required to determine the
amount of deferred tax assets that can be recognised, based upon the likely
timing and the level of future taxable profits. Recognition has been based on
forecast future taxable profits.
Further details on taxes are disclosed in note 16.
3. Segmental information
The Group's operating segments reflecting the information reported to the
Board in 2019 under IFRS8 Operating Segments are as set out below.
Reportable segments Operating segments
UK & Europe Services for sectors including Citizen Services, Defence, Health, Justice
& Immigration and Transport delivered to UK Government, UK devolved
authorities and other public sector customers in the UK and Europe
Americas Services for sectors including Citizen Services, Defence and Transport
delivered to US federal and civilian agencies, selected state and municipal
governments and the Canadian Government
AsPac Services for sectors including Citizen Services, Defence, Justice &
Immigration, Health and Transport in the Asia Pacific region including
Australia, New Zealand and Hong Kong
Middle East Services for sectors including Defence, Health and Transport in the Middle
East region
Corporate Central and head office costs
Each operating segment is focused on a narrow group of customers in a specific
geographic region and is run by a local management team which report directly
to the CODM on a regular basis. As a result of this focus, the sectors in each
region have similar economic characteristics and are aggregated at the
operating segment level in these financial statements. The accounting policies
of the reportable segments are the same as the Group's accounting policies
described in note 2 to the Group's consolidated financial statements.
Information about major customers
The Group has four major governmental customers which each represent more than
5% of Group revenues. The customers' revenues were £1,043.3m (2018:
£1,113.1m) for the UK Government within the UK & Europe segment, £734.9m
(2018: £522.8m) for the US Government within the Americas segment, £597.5m
(2018: £498.7m) for the Australian Government within the AsPac segment and
£255.5m (2018: £232.9m) for the Government of the United Arab Emirates
within the Middle East segment.
The following is an analysis of the Group's revenue, results, assets and
liabilities by reportable segment:
Year ended 31 December 2019 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
Result
Trading profit/(loss) from operations* 48.2 91.7 31.2 13.9 (51.6) 133.4
Amortisation and impairment of intangibles arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Operating profit/(loss) before exceptional items 47.0 85.5 31.1 13.9 (51.6) 125.9
Other exceptional operating items** (24.8) 15.3 (3.0) - (10.9) (23.4)
Operating profit/(loss) 22.2 100.8 28.1 13.9 (62.5) 102.5
Investment revenue 2.7
Finance costs (24.5)
Profit before tax 80.7
Tax charge (27.4)
Tax on exceptional items (2.7)
Profit for the year from operations 50.6
* Trading profit/(loss) is defined as operating profit/(loss) before
exceptional items and amortisation and impairment of intangible assets arising
on acquisition.
** Exceptional restructuring costs incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that will
benefit the wider business.
Year ended 31 December 2019 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 27.3 - 0.2 - - 27.5
Depreciation of plant, property and equipment (37.3) (17.4) (9.0) (4.7) (6.0) (74.4)
Impairment of plant, property and equipment (18.9) - - - - (18.9)
Total depreciation and impairment of plant, property and equipment (56.2) (17.4) (9.0) (4.7) (6.0) (93.3)
Amortisation of intangible assets arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Amortisation of other intangible assets (0.3) (1.2) (4.8) (0.4) (11.4) (18.1)
Total amortisation and impairment of intangible assets (1.5) (7.4) (4.9) (0.4) (11.4) (25.6)
Segment assets
Interests in joint ventures and associates 22.4 - 0.8 0.4 - 23.6
Other segment assets*** 645.4 756.3 227.3 132.0 131.6 1,892.6
Total segment assets 667.8 756.3 228.1 132.4 131.6 1,916.2
Unallocated assets 163.2
Consolidated total assets 2,079.4
Segment liabilities
Segment liabilities***(/)**** (536.3) (232.8) (151.8) (103.0) (160.3) (1,184.2)
Unallocated liabilities (352.3)
Consolidated total liabilities (1,536.5)
*** 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.
**** Following the adoption of IFRS16 Leases all recognised lease liabilities
are included within segment liabilities. Previously, finance lease
liabilities were considered to be unallocated liabilities.
Year ended 31 December 2018 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 1,300.7 645.6 548.2 342.3 - 2,836.8
Result
Trading profit/(loss) from operations* 51.6 43.2 40.5 21.5 (40.1) 116.7
Amortisation and impairment of intangibles arising on acquisition (0.5) (3.2) (0.6) - - (4.3)
Operating profit/(loss) before exceptional items 51.1 40.0 39.9 21.5 (40.1) 112.4
Exceptional loss on disposal of subsidiaries and operations (0.5) - - - - (0.5)
Other exceptional operating items** (11.0) (2.8) (4.5) - (13.1) (31.4)
Operating profit/(loss) 39.6 37.2 35.4 21.5 (53.2) 80.5
Investment revenue 4.3
Finance costs (18.2)
Other gains 7.5
Profit before tax 74.1
Tax charge (8.8)
Tax on exceptional items 2.1
Profit for the year from operations 67.4
* Trading profit/(loss) is defined as operating (loss)/profit before
exceptional items and amortisation and impairment of intangible assets arising
on acquisition.
** Exceptional restructuring costs incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that will
benefit the wider business.
Year ended 31 December 2018 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 28.6 - 0.2 - - 28.8
Depreciation of plant, property and equipment (11.4) (3.3) (2.5) (0.7) (1.6) (19.5)
Impairment of plant, property and equipment (0.7) - - - - (0.7)
Total depreciation and impairment of plant, property and equipment (12.1) (3.3) (2.5) (0.7) (1.6) (20.2)
Amortisation of intangible assets arising on acquisition (0.5) (3.2) (0.6) - - (4.3)
Amortisation of other intangible assets (0.4) (1.5) (4.9) (0.3) (11.5) (18.6)
Exceptional impairment of other intangible assets (0.1) - - - - (0.1)
Total amortisation and impairment of intangible assets (1.0) (4.7) (5.5) (0.3) (11.5) (23.0)
Segment assets
Interests in joint ventures and associates 19.6 - 0.6 0.4 - 20.6
Other segment assets*** 487.6 426.4 222.1 123.4 135.0 1,394.5
Total segment assets 507.2 426.4 222.7 123.8 135.0 1,415.1
Unallocated assets 138.5
Consolidated total assets 1,553.6
Segment liabilities
Segment liabilities*** (339.4) (130.3) (152.1) (93.6) (142.8) (858.2)
Unallocated liabilities (308.6)
Consolidated total liabilities (1,166.8)
***The Corporate segment assets and liabilities include balance sheet items
which provide benefit to the wider Group, including defined benefit pension
schemes and corporate intangible assets.
4. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding Company Limited
(MSHCL) were the only equity accounted entities which were material to the
Group during the year or prior year. Dividends of £17.6m (2018: £20.0m) and
£7.8m (2018: £8.7m) respectively were received from these companies in the
year.
Summarised financial information of AWEML and MSHCL and an aggregation of the
other equity accounted entities in which the Group has an interest is as
follows:
31 December 2019
Summarised financial information AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Revenue 1,065.4 177.9 350.0 44.6 394.6
Operating profit 95.4 18.9 32.7 1.1 33.8
Net investment revenue 0.8 0.2 0.3 - 0.3
Income tax charge (18.8) (3.8) (6.4) (0.2) (6.6)
Profit from operations 77.4 15.3 26.6 0.9 27.5
Other comprehensive income - 2.5 1.3 - 1.3
Total comprehensive income 77.4 17.8 27.9 0.9 28.8
Non current assets 510.0 23.2 136.6 2.4 139.0
Current assets 186.8 64.6 78.1 18.7 96.8
Current liabilities (163.0) (48.4) (64.1) (14.7) (78.8)
Non current liabilities (509.3) (12.7) (131.2) (2.2) (133.4)
Net assets 24.5 26.7 19.4 4.2 23.6
Proportion of group ownership 24.5% 50.0% - - -
Carrying amount of investment 6.0 13.4 19.4 4.2 23.6
* Total results of the entity multiplied by the respective proportion of
Group ownership.
AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Cash and cash equivalents 101.3 39.9 44.8 7.4 52.2
Current financial liabilities excluding trade and other payables and (7.6) (7.3) (5.6) (0.2) (5.8)
provisions
Non current financial liabilities excluding trade and other payables and (0.1) (12.5) (6.3) (2.3) (8.6)
provisions
Depreciation and amortisation - (1.6) (0.8) (0.9) (1.7)
Interest income 0.8 0.2 0.3 - 0.3
* Total results of the entity multiplied by the respective proportion of
Group ownership.
The Group's share of liabilities within joint ventures is £212.2m. Of this,
an amount of £124.8m relates to a defined benefit pension obligation, against
which Serco is fully indemnified, and a further £69.6m is trade and other
payables which arise as part of the day to day operations carried out by those
entities. The Group has no material exposure to third party debt or other
financing arrangements within any of its joint ventures and associates.
The financial statements of MSHCL are for a period which is different from
that of the Group, being for the 52 week period ended 4 January 2020 (2018: 52
week period ended 5 January 2019). The 52 week period reflects the joint
venture's internal reporting structure and is sufficiently close so as to not
require adjustment to match that of the Group.
Certain employees of the groups headed by AWEML and MSHCL are members of
sponsored defined benefit pension schemes. Given the significance of the
schemes to understanding the position of the entities, the following key
disclosures are made:
Main assumptions: 2019 AWEML MSHCL
Rate of salary increases (%) 2.1% 3.1%
Inflation assumption (CPI %) 2.1% 2.2%
Discount rate (%) 2.1% 2.1%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.9 N/A
Future male industrial pensioners at 65 (years) 25.0 N/A
Retirement benefit funding position (100% of results) £m £m
Present value of scheme liabilities (2,213.6) (374.5)
Fair value of scheme assets 1,716.6 218.5
Net amount recognised (497.0) (156.0)
Members' share of deficit - 62.4
Franchise adjustment* - 93.6
Related asset, right to reimbursement 497.0 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
AWEML is not liable for any deficiency in the defined benefit pension scheme
under current contractual arrangements. The deficit reflected in the financial
statements of MSHCL covers only that portion of the deficit that is expected
to be funded over the term of the franchise arrangement the entity operates
under. In addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
31 December 2018
Summarised financial information AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Revenue 1,024.7 160.8 331.5 43.6 375.1
Operating profit before exceptional items 100.4 17.1 33.2 1.4 34.6
Exceptional items - (0.6) (0.3) - (0.3)
Operating profit 100.4 16.5 32.9 1.4 34.3
Net investment revenue 0.6 0.2 0.2 0.1 0.3
Income tax (charge)/credit (18.6) (3.3) (6.2) 0.1 (6.1)
Profit from operations 82.4 13.4 26.9 1.6 28.5
Profit from operations before exceptional items 82.4 14.0 27.2 1.6 28.8
Other comprehensive income - 4.1 2.0 - 2.0
Total comprehensive income 82.4 17.5 28.9 1.6 30.5
Non current assets 518.5 8.0 131.0 2.6 133.6
Current assets 210.1 45.7 74.3 15.4 89.7
Current liabilities (190.6) (28.0) (60.7) (12.5) (73.2)
Non current liabilities (517.6) (0.8) (127.2) (2.3) (129.5)
Net assets 20.4 24.9 17.4 3.2 20.6
Proportion of group ownership 24.5% 50.0% - - -
Carrying amount of investment 5.0 12.4 17.4 3.2 20.6
* Total results of the entity multiplied by the respective proportion of
Group ownership.
AWEML MSHCL Group portion of material joint ventures and associates* Group portion of other joint venture arrangements and associates* Total
(100% of results) (100% of results) £m £m £m
£m £m
Cash and cash equivalents 98.1 34.3 41.2 5.1 46.3
Current financial liabilities excluding trade and other payables and (9.7) (2.0) (3.4) (0.2) (3.6)
provisions
Non current financial liabilities excluding trade and other payables and - - - (2.3) (2.3)
provisions
Depreciation and amortisation - (2.0) (1.0) (1.0) (2.0)
Interest income 0.6 0.2 0.2 0.1 0.3
* Total results of the entity multiplied by the respective proportion of
Group ownership.
In 2018, the cost associated with the Group's share of MSHCL's obligation in
respect of the equalisation of guaranteed minimum pension (GMP) payments was
recorded as exceptional to ensure consistent treatment across all defined
benefit pension schemes the Group is liable for. There was no equivalent
charge in 2019. More information is provided in note 11.
Key disclosures with respect of the defined benefit pension schemes of
material joint ventures and associates:
Main assumptions: 2018 AWEML MSHCL
Rate of salary increases 2.2% 3.1%
Inflation assumption (CPI) 2.2% 2.2%
Discount rate 3.0% 2.9%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 23.0 N/A
Future male industrial pensioners at 65 (years) 25.6 N/A
Retirement benefit funding position (100% of results) AWEML MSHCL
£m (**restated)
£m
Present value of scheme liabilities (2,030.4) (290.3)
Fair value of scheme assets 1,512.8 193.3
Net amount recognised (517.6) (97.0)
Members' share of deficit - 38.8
Franchise adjustment* - 58.2
Related asset, right to reimbursement 517.6 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
** An adjustment has been made to the relative amounts of the Members' share
of deficit and the Franchise adjustment for MSHCL as at 31 December 2018.
The amounts previously disclosed had been transposed meaning the Members'
share of deficit was incorrectly disclosed as £58.2m and the Franchise
adjustment was incorrectly disclosed as £38.8m.
AWEML is not liable for any deficiency in the defined benefit pension scheme
under current contractual arrangements. The deficit reflected in the financial
statements of MSHCL covers only that portion of the deficit that is expected
to be funded over the term of the franchise arrangement the entity operates
under. In addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
5. Acquisitions
On 1 August 2019, the Group acquired the Naval Systems Business Unit and a
small number of related contracting entities (collectively, 'NSBU'), from
Alion Science & Technology Corporation. Serco acquired the net assets of
the business as well as the Alion Canada and Alion IPS legal entities. The
acquired business contributed £109.8m of revenue and £7.2m of operating
profit before exceptional items to the Group's results during the year to 31
December 2019. As a result of the acquisition, Alion Canada, now known as
Serco Canada Marine, and Alion IPS are 100% owned, indirect subsidiaries of
Serco Group plc.
NSBU is a leading provider of naval design, systems engineering, as well as
production and lifecycle support services to the US Navy, US Army and Royal
Canadian Navy. The combined business will be a top tier supplier of services
to the US Navy and increases our exposure to US Navy fleet expansion, which is
one of the fastest-growing areas of public procurement. The US Navy has
announced plans to increase the fleet from 280 to 355 ships by 2034, and we
see a long-term and growing demand for the capabilities that the combination
of Serco and NSBU will be able to provide.
The total annual revenue of NSBU in 2020 is expected to be around $370m
(£285m) and the estimated operating profit before exceptional items,
including an appropriate allocation of charges for shared support services and
fully allocated overheads, of around $27m (£20m).
The total consideration payable in relation to the acquisition of NSBU was
£186.3m.
Fair value
NSBU
£m
Goodwill 115.3
Acquisition related intangible assets 52.6
Property, plant and equipment 3.6
Trade and other receivables 46.6
Cash and cash equivalents 0.4
Deferred tax asset 0.9
Trade and other payables (30.7)
Deferred tax liability (2.4)
Acquisition date fair value of consideration transferred 186.3
Satisfied by:
Cash 184.3
Deferred consideration - working capital adjustment 2.0
Total consideration 186.3
The net cash outflow as a result of acquisitions made during the year was
£197.9m made up of £184.3m consideration paid on the acquisition of NSBU,
costs related to the acquisition of NSBU of £4.7m, consideration related to
historic acquisitions of £9.3m and £0.4m of cash acquired.
Goodwill on the acquisition of NSBU represents the premium associated with
taking over the operations which are considered to enhance Serco's ability to
deliver in the growth areas of US Navy fleet expansion within our US Defence
business. The acquisition is considered to be accretive to the Group's
financial performance. All goodwill on the acquisition is deductible for tax
purposes over fifteen years. Future US tax deductions will be available for
£76.0m of acquired goodwill. The acquisition related intangible represents
customer relationships which have been valued using our best estimate of
forecast cashflows discounted to present value.
Based on estimates made of the full year impact of the acquisition of NSBU,
had the acquisition taken place on 1 January 2019, Group revenue and operating
profit before exceptional items for the period would have increased by
approximately £153m and £10m respectively, taking total Group revenue to
£3,401m and total Group operating profit before exceptional items to £136m.
The total impact of acquisitions to the Group's cash flow position in the
period was as follows:
£m
Net cash outflow on acquisition of NSBU 183.9
Deferred consideration paid in respect of historic acquisition:
Clarence Correctional Centre 8.0
Anglia Support Partnership 1.3
Net cash outflow arising in the year on acquisitions 193.2
Exceptional acquisition related costs - NSBU 4.7
Net cash impact in the year on acquisitions 197.9
Costs associated with the acquisition of NSBU which were not directly related
to the issue of shares or arrangement of the acquisition facility are shown as
exceptional costs in the Consolidated Income Statement for the year. The total
acquisition related costs recognised in exceptional items for the year ended
31 December 2019 was £4.7m.
6. Revenue from contracts with customers
Revenue
Information regarding the Group's major customers and a segmental analysis of
revenue is provided in note 4.
An analysis of the Group's revenue from its key market sectors, together with
the timing of revenue recognition across the Group's revenue from contracts
with customers, is as follows:
Year ended 31 December 2019 UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Key sectors
Defence 215.9 575.5 89.5 28.1 909.0
Justice & Immigration 311.9 - 279.6 - 591.5
Transport 143.5 99.7 19.7 215.3 478.2
Health 259.9 - 94.8 30.2 384.9
Citizen Services 430.5 240.5 137.8 76.0 884.8
1,361.7 915.7 621.4 349.6 3,248.4
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods 3.3 - (0.4) - 2.9
Revenue recognised at a point in time 19.0 - 2.6 - 21.6
Products and services transferred over time 1,339.4 915.7 619.2 349.6 3,223.9
1,361.7 915.7 621.4 349.6 3,248.4
UK&E Americas AsPac Middle East Total
Year ended 31 December 2018 (restated*) £m £m £m £m £m
Key sectors
Defence 213.5 337.6 56.2 40.8 648.1
Justice & Immigration 269.8 - 271.4 - 541.2
Transport 141.6 90.2 18.3 204.6 454.7
Health 232.4 - 96.4 28.5 357.3
Citizen Services 443.4 217.8 105.9 68.4 835.5
1,300.7 645.6 548.2 342.3 2,836.8
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods 1.6 - 3.2 - 4.8
Revenue recognised at a point in time 38.9 - 1.8 - 40.7
Products and services transferred over time 1,260.2 645.6 543.2 342.3 2,791.3
1,300.7 645.6 548.2 342.3 2,836.8
Transaction price allocated to remaining performance obligations
The following table shows the transaction price allocated to remaining
performance obligations. This represents revenue expected to be recognised in
subsequent periods arising on existing contractual arrangements. The Group has
not taken the practical expedient in IFRS15.121 not to disclose information
about performance obligations that have original expected durations of one
year or less and therefore no consideration from contracts with customers is
excluded from the amounts included below. Forecast variable revenue is
included only to the extent that it is measurable and highly probable that a
significant reversal will not occur.
UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Within 1 year (2020) 1,149.4 592.9 559.6 297.3 2,599.2
Between 2 - 5 years (2021 - 2024) 3,507.8 173.1 1,097.6 294.9 5,073.4
5 years and beyond (2025+) 4,648.5 - 1,571.7 173.5 6,393.7
9,305.7 766.0 3,228.9 765.7 14,066.3
7. Exceptional items
Exceptional items are items of financial performance that are outside normal
operations and are material to the results of the Group either by virtue of
size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the
underlying performance of the Group.
Other exceptional operating items
For the year ended 31 December 2019 2018
£m £m
Exceptional items arising
Exceptional loss on disposal of subsidiaries and operations - (0.5)
Other exceptional operating items
Restructuring costs (12.8) (32.3)
Increase in onerous lease provision - (1.8)
Costs associated with SFO investigation (25.2) 0.4
Reversal of impairment of interest in joint venture and related loan balances - 0.8
Reversal of impairment on loan balances - 13.9
Cost of Guaranteed Minimum Pension equalisation - (9.6)
Release of/(increase in) other provisions and other items 19.3 (2.8)
Cost associated with the acquisition of Naval Systems Business Unit (4.7) -
Other exceptional operating items (23.4) (31.4)
Exceptional operating items (23.4) (31.9)
Exceptional finance income - 7.5
Exceptional tax (2.7) 2.1
Total operating and financing exceptional items net of tax (26.1) (22.3)
Exceptional loss on disposals
There were no material disposals of operations in 2019 (2018: none).
Other exceptional operating items
The Group is incurring costs in relation to restructuring programmes resulting
from the Strategy Review. These costs include redundancy payments, provisions
(including onerous leases), external advisory fees and other incremental
costs. Due to the nature and scale of the impact of the transformation phase
of the Strategy Review, the incremental costs associated with this programme
are considered to be exceptional. Costs associated with the restructuring
programme resulting from the Strategy Review must meet the following criteria:
that they are directly linked to the implementation of the Strategy Review;
they are incremental costs as a result of the activity; and they are non
business as usual costs. In 2019, a charge of £12.8m (2018: £32.3m) arose in
relation to the restructuring programme resulting from the Strategy Review.
The Strategy Review is discussed in more detail in the Group's Strategic
Report which forms part of the Consolidated Annual Report and Accounts. The
transformation activities associated with this are complete and, as such, all
exceptional restructuring costs related to this programme have ended in 2019.
Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £8.9m (2018: £6.3m)
and were included within operating profit before exceptional items.
There was an exceptional charge totalling £25.2m (2018: credit of £0.4m)
associated with the SFO's investigation and the programme of Corporate
Renewal. These costs have historically been treated as exceptional and
consistent treatment is applied in 2019. During the year, the Group paid
£22.9m in penalties and legal costs associated with the SFO's investigation.
The final judgement was provided on 4 July 2019. The credit in 2018 reflects
the recovery of costs from the Group's insurance providers. The remaining
£2.3m relates to legal costs incurred by the Group in respect of the
investigation.
In 2018, an exceptional charge of £9.6m was recorded to recognise the Group's
obligations associated with equalising the Guaranteed Minimum Pension (GMP)
payments between male and female employees for the Group's defined benefit
pension schemes following a High Court ruling made in October 2018. The Serco
Pension and Life Assurance Scheme (SPLAS) recorded the largest charge being
£9.0m. There was no equivalent charge in 2019.
The decrease in other provisions and other items of £19.3m (2018: increase of
£2.8m) predominantly relates to a commercial dispute which was settled in
2019. The treatment of the reduction as exceptional is consistent with the
recognition of the original charge associated with the same matter in 2014.
The Group completed the acquisition of the Naval Systems Business Unit (NSBU)
from Alion Science and Technology in 2019. The acquisition achieved final
regulatory approvals and completed in August 2019. The transaction and
implementation costs of £4.7m have been treated as exceptional costs in line
with the Group's accounting policy.
An exceptional profit of £13.9m was recognised in 2018 for the settlement of
consideration associated with the sale of Serco GmbH in 2012 through the
offsetting of outstanding loan balances, the receivable of which had been
impaired. An exceptional loss on disposal of £27.7m was recorded in 2012 in
respect of the sale. No such transactions took place in 2019.
Exceptional finance costs
There were no exceptional finance costs in the year ended 31 December 2019.
During 2018, part of the consideration for the sale of the Group's private
sector BPO business in 2015, was a loan note with a face value of £30m
accruing compound interest of 7%. The receivable associated with this loan
note was recorded at a fair value of £19.5m. The discount on the loan note
had been unwinding through the Group's net finance cost on an annual basis.
During October 2018, the Intelenet business was sold and therefore repayment
of the loan note was triggered resulting in a gain of £7.5m. As this gain
was outside the normal financing arrangements of the Group and significant in
size it was recorded as exceptional finance income.
Exceptional tax
Exceptional tax for the year was a charge of £2.7m (2018: £2.1m credit)
which arises on exceptional items within operating profit. This charge
arises mainly in connection with the decrease in provisions in respect of
commercial disputes and legal claims for which a tax credit had been recorded
when the provisions were originally recognised. This charge is offset by tax
deductions in respect of the global restructuring programme and in the US on
acquisition costs.
No tax credit arises on the exceptional charge associated with the costs in
connection with the SFO investigation.
8. Investment revenue
Year ended 31 December 2019 2018
£m £m
Interest receivable on other loans and deposits 0.5 2.3
Net interest receivable on retirement benefit obligations (note 31) 2.1 0.8
Movement in discount on other debtors 0.1 1.2
2.7 4.3
9. Finance costs
Year ended 31 December 2019 2018
£m £m
Interest payable on lease liabilities 6.9 0.6
Interest payable on other loans 13.9 13.8
Facility fees and other charges 1.7 3.1
Movement in discount on provisions 1.2 0.5
23.7 18.0
Foreign exchange on financing activities 0.8 0.2
24.5 18.2
10. Tax
10 (a) Income tax recognised in the income statement
Year ended 31 December Before exceptional items Exceptional items Total Before exceptional items Exceptional items Total
2019 2019 2019 2018 2018 2018
£m £m £m £m £m £m
Current income tax
Current income tax charge/(credit) 22.7 (1.1) 21.6 23.6 (1.4) 22.2
Adjustments in respect of prior years (0.2) - (0.2) (0.9) - (0.9)
Deferred tax
Current year charge / (credit) 4.7 3.8 8.5 (13.8) (0.7) (14.5)
Adjustments in respect of prior years 0.2 - 0.2 (0.1) - (0.1)
27.4 2.7 30.1 8.8 (2.1) 6.7
The tax expense for the year can be reconciled to the profit in the
consolidated income statement as follows:
Year ended 31 December Before exceptional items Exceptional items Total Before exceptional items Exceptional items Total
2019 2019 2019 2018 2018 2018
£m £m £m £m £m £m
Profit before tax 104.1 (23.4) 80.7 98.5 (24.4) 74.1
Tax calculated at a rate of 19.00% (2018: 19.00%) 19.7 (4.4) 15.3 18.7 (4.6) 14.1
Expenses not deductible for tax purposes* 0.9 4.4 5.3 5.3 - 5.3
UK unprovided deferred tax** 3.5 2.1 5.6 (7.5) 3.5 (4.0)
Other unprovided deferred tax 3.0 - 3.0 2.5 - 2.5
Effect of the use of unrecognised tax losses - - - (0.3) - (0.3)
Impact of changes in statutory tax rates on current income tax (0.2) - (0.2) 1.7 - 1.7
Overseas rate differences 5.9 0.6 6.5 7.3 (0.7) 6.6
Statutory tax benefits (0.2) - (0.2) - - -
Other non taxable income (3.1) - (3.1) (2.5) (0.4) (2.9)
Adjustments in respect of prior years - - - (1.0) - (1.0)
Adjustments in respect of deferred tax on pensions 3.0 - 3.0 (10.1) - (10.1)
Adjustments in respect of equity accounted investments (5.1) - (5.1) (5.3) 0.1 (5.2)
Tax charge 27.4 2.7 30.1 8.8 (2.1) 6.7
* Relates to costs that are not allowable for tax deduction under local
tax law.
** Arises due to timing differences between when an amount is recognised in
the income statement and when the amount is subject to UK tax. In the current
year, the Group has received tax credits for amounts which have been charged
to the income statement in previous periods in connection with items such as
fixed assets. Additional tax credit is recognised in relation to brought
forward losses as shown in the deferred tax note below. UK unprovided
deferred tax in relation to exceptional items relates to amounts which have
been charged to the income statement in the current period for which no tax
credit has yet been taken, for items such as restructuring costs.
The income tax charge for the year is based on the UK statutory rate of
corporation tax for the period of 19.00% (2018:19.00%). Taxation for other
jurisdictions is calculated at the rates prevailing in the respective
jurisdictions.
10 (b) Income tax recognised in the SOCI
Year ended 31 December 2019 2018
£m £m
Current tax
Taken to retirement benefit obligations reserve - -
Deferred tax
Relating to cash flow hedges 0.1 -
Taken to retirement benefit obligations reserve 2.7 (9.2)
2.8 (9.2)
11. Deferred tax
Deferred income taxes are calculated in full on temporary differences under
the liability method using local substantively enacted tax rates.
The movement in net deferred tax assets during the year was as follows:
2019 2018
£m £m
At 1 January - asset (39.5) (39.3)
IFRS16 restatement (5.1) -
Opening asset restated (44.6) (39.3)
Income statement charge/(credit) 8.7 (14.7)
Items recognised in equity and in other comprehensive income (2.8) 9.2
Arising on acquisition 1.5 2.3
Exchange differences - 3.0
At 31 December - asset (37.2) (39.5)
The movement in deferred tax assets and liabilities during the year was as
follows:
Temporary differences on assets/intangibles Share based payment and employee benefits Retirement benefit schemes OCPs Tax Other temporary differences Total
losses
£m £m £m £m Derivative financial instruments
£m £m
£m
£m
At 1 January 2019 24.6 (13.7) 9.9 (7.4) - (20.6) (32.3) (39.5)
IFRS16 restatement (5.1) - - - - - - (5.1)
Opening asset restated 19.5 (13.7) 9.9 (7.4) - (20.6) (32.3) (44.6)
Charged/(credited) to income statement (note 15a) 4.1 (1.6) (0.4) 5.4 - (0.4) 1.6 8.7
Items recognised in equity and in other comprehensive income (note 15b) - - (2.7) - (0.1) - - (2.8)
Arising on acquisition 2.4 (0.9) - - - - 1.5
Exchange differences (1.6) 0.6 - 0.1 0.1 - 0.8 -
At 31 December 2019 24.4 (15.6) 6.8 (1.9) - (21.0) (29.9) (37.2)
Of the amount credited to the income statement, £nil (2018: credit of £0.1m)
has been taken to cost of sales in respect of the R&D Expenditure credit.
The movement in deferred tax assets and liabilities during the previous year
was as follows:
Temporary differences on assets/intangibles Share based payment and employee benefits Retirement benefit schemes OCPs Tax Other temporary differences Total
losses
£m £m £m £m
£m £m
£m
At 1 January 2018 25.8 (12.2) 2.5 (7.9) (18.7) (28.8) (39.3)
(Credited)/charged to income statement (note 15a) (4.7) (1.8) (1.7) 0.8 (1.9) (5.4) (14.7)
Items recognised in equity and in other comprehensive income (note 15b) - - 9.2 - - - 9.2
Arising on acquisition 2.3 - - - - - 2.3
Exchange differences 1.2 0.3 (0.1) (0.3) - 1.9 3.0
At 31 December 2018 24.6 (13.7) 9.9 (7.4) (20.6) (32.3) (39.5)
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal
authority. The following is the analysis of the deferred tax balances (after
offset) for financial reporting purposes:
2019 2018
£m £m
Deferred tax liabilities 26.7 21.4
Deferred tax assets (63.9) (60.9)
(37.2) (39.5)
As at the balance sheet date, the UK has a potential deferred tax asset of
£180.8m (2018: £168.8m) available for offset against future profits. A
deferred tax asset has currently been recognised of £21.1m (2018: £20.3m).
Recognition has been based on forecast future taxable profits. No deferred tax
asset has been recognised in respect of the remaining asset (net £159.7m)
based on current forecasts; additional asset recognition is contingent on
further improvement in the UK profit forecast. Measures enacted during 2016
cut the future tax rate from April 2020 from 19% to 17%. These measures will
reduce the Group's future current tax charge accordingly. The deferred tax
balance at 31 December 2019 has been calculated reflecting the reduced rate.
Losses of £0.1m (2018: £0.2m) expire within 5 years, losses of £0.1m (2018
£0.1m) expire within 6-10 years, losses of £0.7m (2018 £0.7m) expire within
20 years and losses of £1,063.9m (2018 £1,015.2m) may be carried forward
indefinitely.
12. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in
accordance with IAS33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares 2019 2018
millions Millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,171.4 1,094.4
Effect of dilutive potential ordinary shares: Share options 27.6 31.0
Weighted average number of ordinary shares for the purpose of diluted EPS 1,199.0 1,125.4
At 31 December 2019 options over nil (2018: 145,238) shares were excluded from
the weighted average number of shares used for calculating diluted earnings
per share in accordance with IFRS2 Share Based Payment because their exercise
price was above the average share price for the year and they were, therefore,
anti-dilutive.
Earnings per share
Basic EPS Earnings Per share amount Earnings Per share amount
2019
2019
2018
2018
pence
£m
£m Pence
Earnings for the purpose of basic EPS 50.4 4.31 67.4 6.16
Effect of dilutive potential ordinary shares - (0.10) - (0.17)
Diluted EPS 50.4 4.21 67.4 5.99
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS 50.4 4.31 67.4 6.16
Add back exceptional items 23.4 2.00 24.4 2.23
Add back tax on exceptional items 2.7 0.23 (2.1) (0.19)
Earnings excluding exceptional items for the purpose of basic EPS 76.5 6.54 89.7 8.20
Effect of dilutive potential ordinary shares - (0.15) - (0.23)
Excluding exceptional items, diluted 76.5 6.39 89.7 7.97
13. Goodwill
Cost Accumulated impairment losses Carrying
amount
£m £m
£m
At 1 January 2018 878.0 (326.7) 551.3
Exchange differences 24.4 (12.9) 11.5
Acquisitions 16.8 - 16.8
At 1 January 2019 919.2 (339.6) 579.6
Exchange differences (31.5) 7.8 (23.7)
Acquisitions 115.3 - 115.3
At 31 December 2019 1,003.0 (331.8) 671.2
Goodwill balance Additions Exchange differences Impairment Goodwill balance Headroom on impairment analysis Headroom on impairment analysis
1 January 2019 2019 2019 31 December 2019 2019 2018
2019 £m £m £m £m £m £m
£m
UK & Europe 184.3 - (1.1) - 183.2 799.2 593.6
Americas 278.9 115.3 (18.1) - 376.1 420.3 159.4
AsPac 105.9 - (4.2) - 101.7 162.7 307.8
Middle East 10.5 - (0.3) - 10.2 63.3 57.9
579.6 115.3 (23.7) - 671.2 1,445.5 1,118.7
Movements in the balance since the prior year end can be seen as follows:
Included above is the detail of the headroom on the CGUs existing at the
year-end which reflects where future discounted cash flows are greater than
the underlying assets and includes all relevant cash flows, including where
provisions have been made for future costs and losses. The increase in
headroom compared to 2018 is predominantly due to a reduction in discounts
rates in 2019 and additionally from higher forecast cashflows partially offset
by an increase in underlying assets.
The key assumptions applied in the impairment review are set out below:
Discount Discount Terminal Terminal
rate
rate
growth
growth
rates
rates
2019 2018
2019 2018
% %
% %
UK & Europe 9.4 10.0 1.7 2.0
Americas 10.4 10.6 2.2 2.4
AsPac 9.7 10.0 2.3 2.4
Middle East 11.9 11.8 1.8 2.5
Discount rate
Pre-tax discount rates derived from the Group's post-tax weighted average cost
of capital have been used in discounting the projected cash flows. These rates
are reviewed annually with external advisers and are adjusted for risks
specific to the market in which the CGU operates.
Short term growth rates
The annual impairment test is performed immediately prior to the year end,
based initially on five-year cash flow forecasts approved by senior
management. Short term revenue growth rates used in each CGU five-year plan
are based on internal data regarding our current contracted position, the
pipeline of opportunities and forecast growth for the relevant market.
Short term profitability and cash conversion is based on our historic
experiences and a level of judgement is applied to expected changes in both.
Where businesses have been poor performers in recent history, turnaround has
only been assumed where a detailed and achievable plan is in place and all
forecasts include cash flows relating to contracts where onerous contract
provisions have been made.
Terminal growth rates
The calculations include a terminal value based on the projections for the
fifth year of the short-term plan, with a growth rate assumption applied which
extrapolates the business into perpetuity. The terminal growth rates are based
on long term inflation rates of the geographic market in which the CGUs
operate and therefore do not exceed the average long-term growth rates
forecast for the individual markets. These are provided by external sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption, a 1% movement
in discount rates and a 1% movement in terminal growth rates are considered to
be reasonably possible. No impairment results from these changes being made to
the key assumptions either individually or in combination.
In the CGU with the lowest and most sensitive headroom, a reduction in short
term growth rates of approximately 50% would be required to reduce the
headroom to nil.
14. Lease obligations
Amounts payable under leases Minimum lease payments Minimum lease payments
2019 2018
£m £m
Within one year 93.3 6.1
Between one and five years 226.5 8.6
After five years 69.7 0.9
389.5 15.6
Less: future finance charges (19.6) (0.8)
Present value of lease obligations 369.9 14.8
Less: amount due for settlement within one year (shown within current (84.6) (5.7)
liabilities)
Amount due for settlement after one year 285.3 9.1
On 1 January 2019, the Group implemented IFRS16 Leases, replacing IAS17
Leases. In applying the modified retrospective approach to transition,
comparative financial information has not been restated. As a result, the
amounts shown as being payable under leases in the table above as at 31
December 2018 represent amounts payable on leases that were classified as
finance leases in accordance with IAS17.
The Directors estimate that the fair value of the Group's lease obligations
approximates their carrying amount. The Group uses leases in the delivery of
its contractual obligations and the services required to support the delivery
of those contracts, including administrative functions. There are no material
future cash flows relating to leases in place as at 31 December 2019 that are
not reflected in the minimum lease payments disclosed above and the Group does
not have any leases to which it is contracted but which are not yet reflected
in the minimum lease payments.
No lease liability is recognised in respect of leases which have a lease term
of less than twelve months in duration at the point of entering into the
lease, or where the purchase price of the underlying right of use asset is
less than £5,000.
15. 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 2019 Opening adjustment - IFRS16** Cash Acquisitions* Exchange differences Non cash movements At 31 December 2019
flow
£m £m
£m £m £m £m
£m
Loans payable (239.5) - (72.3) - 6.7 0.1 (305.0)
Lease obligations (14.8) (129.1) 70.2 - 4.7 (300.9) (369.9)
Liabilities arising from financing activities (254.3) (129.1) (2.1) - 11.4 (300.8) (674.9)
Cash and cash equivalents 62.5 - 28.4 0.4 (1.8) - 89.5
Derivatives relating to Net Debt 3.8 - - - (2.8) - 1.0
Net Debt (188.0) (129.1) 26.3 0.4 6.8 (300.8) (584.4)
** The opening Net Debt balance has been adjusted to include lease liabilities
recognised on the adoption of IFRS16 Leases.
At 1 January 2018 Cash Acquisitions* Exchange differences Non cash movements At 31 December 2018
flow
£m
£m £m £m £m
£m
Loans payable (271.5) 33.3 - (12.9) 11.6 (239.5)
Lease obligations (20.2) 8.7 - 0.1 (3.4) (14.8)
Liabilities arising from financing activities (291.7) 42.0 - (12.8) 8.2 (254.3)
Cash and cash equivalents 112.1 (50.4) 1.2 (0.4) - 62.5
Loan receivables 25.7 (37.4) - - 11.7 -
Derivatives relating to Net Debt 12.8 - - (9.0) - 3.8
Net Debt (141.1) (45.8) 1.2 (22.2) 19.9 (188.0)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
16. Provisions
Employee related Property Contract Other Total
£m £m £m £m £m
At 1 January 2019 59.5 12.4 82.1 85.4 239.4
Opening adjustment - IFRS16 (note 2) - 0.8 (13.3) - (12.5)
Charged to income statement - exceptional 0.4 - - - 0.4
Charged to income statement - other 18.2 2.1 10.6 12.9 43.8
Released to income statement - exceptional (0.3) - - (19.1) (19.4)
Released to income statement - other (1.1) (1.9) (9.6) (4.8) (17.4)
Utilised during the year (12.4) (1.1) (53.6) (4.0) (71.1)
Unwinding of discount - 1.1 0.2 - 1.3
Exchange differences (2.2) (0.1) 0.1 (0.5) (2.7)
At 31 December 2019 62.1 13.3 16.5 69.9 161.8
Analysed as:
Current 8.7 6.7 15.9 27.1 58.4
Non-current 53.4 6.6 0.6 42.8 103.4
62.1 13.3 16.5 69.9 161.8
Contract provisions relate to onerous contracts which will be utilised over
the life of each individual contract. The present value of the estimated
future cash outflow required to settle the contract obligations as they fall
due over the respective contracts has been used in determining the provision.
The individual provisions are discounted where the impact is assessed to be
significant. Discount rates used are calculated based on the estimated risk
free rate of interest for the region in which the provision is located and
matched against the ageing profile of the provision. In 2019, the release from
OCPs is reflective of the Group's ability to forecast the final years of
contracts which are nearing completion. Additional charges of £10.6m (2018:
£3.4m) have been made in respect of future losses on new and existing onerous
contract provisions to reflect the updated forecasts as settlements are agreed
and contracts near completion. The additional charges represent certain
operational issues and the associated risks which arise as a result.
The Group operates a large number of long-term contracts at different phases
of their contract life cycle. Within the Group's portfolio, there are a
small number of contracts where the balance of risks and opportunities
indicates that they might be onerous if transformation initiatives or contract
changes are not successful. The Group has concluded that these contracts do
not require an onerous contract provision on an individual basis. Following
the individual contract reviews, the Group has also undertaken a top down
assessment which assumes that, whilst the contracts may not be onerous on an
individual basis, as a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to avoid a
contract loss, will not be fully successful, and it is more likely than not
that one or more of these contracts will be onerous. Therefore, in
considering the Group's overall onerous contract provision, the Group has made
a best estimate of the provision required to take into consideration this
portfolio risk. As a result, the risk of OCPs and the monitoring of
individual contracts for indicators remains a critical estimate for the
Group. The amount recognised in the year is £6.2m at the Trading Profit
level within the Corporate costs segment, which after this charge is therefore
£51.7m (2018: £40.1m).
A full analysis is performed at least annually of the future profitability of
all contracts with marginal performances and of the balance sheet items
directly linked to these contracts.
Due to the significant size of the balance and the inherent level of
uncertainty over the amount and timing of the related cash flows upon which
onerous contract provisions are based, 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.
Employee related provisions are for long-term service awards and terminal
gratuity liabilities which have been accrued and are based on contractual
entitlement, together with an estimate of the probabilities that employees
will stay until rewards fall due and receive all relevant amounts. There are
also amounts included in relation to restructuring. The provisions will be
utilised over various periods driven by local legal or regulatory
requirements, the timing of which is not certain.
The majority of property provisions relate to leased properties and are
associated with the requirement to return properties to either their original
condition, or to enact specific improvement activities in advance of exiting
the lease. Dilapidations associated with leased properties are held as a
provision until such time as they fall due, with the longest running lease
ending in April 2039.
Other provisions are held for indemnities given on disposed businesses, legal
and other costs that the Group expects to incur over an extended period, in
respect of past events. These costs are based on past experience of similar
items and other known factors and represent management's best estimate of the
likely outcome and will be utilised with reference to the specific facts and
circumstances. The timing of utilisation is dependent on future events which
could occur within the next twelve months or over a longer period with the
majority expected to be settled by 31 March 2023. The exceptional release has
been recorded in respect of a commercial dispute which was settled in 2019.
The treatment as exceptional is consistent with the recognition of the
original charge associated with the same matter in 2014.
17. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities
of its joint ventures and associates up to a maximum value of £4.3m (2018:
£4.3m). The actual commitment outstanding at 31 December 2019 was £4.3m
(2018: £4.3m).
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 2019 was £257.5m (2018: £225.3m).
The Group has received a claim seeking damages for alleged losses following
the reduction in Serco's share price in 2013. 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 is subject to a number of
significant uncertainties and, therefore, it is not possible to reliably
assess the quantum of any such litigation as at the date of this disclosure.
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.
18. Defined benefit schemes
Characteristics
The Group contributes to defined benefit schemes for qualifying employees of
its subsidiaries in the UK and Europe. The normal contributions expected to be
paid during the financial year ending 31 December 2020 are £12.7m (2019:
£4.9m).
Among our non-contract specific schemes, the largest is the Serco Pension and
Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of
this scheme was undertaken as at 5 April 2018 and resulted in an actuarially
assessed deficit of £26.0m for funding purposes. Pension obligations are
valued separately for accounting and funding purposes and there is often a
material difference between these valuations. As at 31 December 2019 the
estimated actuarial deficit of SPLAS was £27.0m (2018: £27.8m) based on the
actuarial assessment on the funding basis whereas the accounting valuation
resulted in an asset of £78.3m (2018: £85.8m). The primary reason a
difference arises is that pension scheme accounting requires the valuation to
be performed on the basis of a best estimate whereas the funding valuation
used by the trustees makes more prudent assumptions. A revised schedule of
contributions for SPLAS was agreed during 2019, with 30.8% of pensionable
salaries due to be paid from 1 November 2019, changing to 30.3% from 1
November 2020. The schedule of contributions also determined that additional
shortfall contributions were required - a total of £5.2m of these have
already been made, with further amounts of £4m due in both March 2020 and
March 2021 then £1.7m for the years 2022 to 2028.
Events in the year
In June 2019, the company and the Trustees of SPLAS finalised the 2018
valuation. This led to a new schedule of contributions. Following a 60-day
consultation, most active SPLAS members agreed to a small increase in their
own contributions, enabling a reduction in employer contributions.
Values recognised in total comprehensive income in the year
The amounts recognised in the financial statements for the year are analysed
as follows:
Recognised in the income statement Contract Non contract specific Total
specific
2019
2019
2019
£m £m
£m
Current service cost - employer 1.1 3.2 4.3
Past service cost 0.2 1.2 1.4
Administrative expenses and taxes - 2.0 2.0
Recognised in arriving at operating profit after exceptionals 1.3 6.4 7.7
Interest income on scheme assets - employer (0.4) (37.5) (37.9)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.5 35.4 35.9
Finance income - (2.1) (2.1)
Included within the SOCI Contract Non contract specific Total
specific
2019
2019
2019
£m £m
£m
Actual return on scheme assets 2.8 125.3 128.1
Less: interest income on scheme assets (0.5) (37.6) (38.1)
2.3 87.7 90.0
Effect of changes in demographic assumptions (0.7) 40.6 39.9
Effect of changes in financial assumptions (4.8) (143.8) (148.6)
Effect of experience adjustments - (1.6) (1.6)
Remeasurements (3.2) (17.1) (20.3)
Change in franchise adjustment 2.0 - 2.0
Change in members' share 1.1 0.1 1.2
Actuarial profit on reimbursable rights 3.1 0.1 3.2
Total pension gain recognised in the SOCI (0.1) (17.0) (17.1)
Recognised in the income statement Contract Non contract specific Total
specific
2018
2018
2018
£m £m
£m
Current service cost - employer 1.1 4.6 5.7
Past service cost - 9.3 9.3
Administrative expenses and taxes - 3.9 3.9
Recognised in arriving at operating profit 1.1 17.8 18.9
Interest income on scheme assets - employer (0.4) (33.3) (33.7)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.4 32.6 33.0
Finance income (0.1) (0.7) (0.8)
Included within the SOCI Contract Non contract specific Total
specific
2018 (restated*)
2018
2018
£m (restated*)
£m
£m
Actual return on scheme assets (0.5) 40.7 40.2
Less: interest income on scheme assets (0.4) (33.4) (33.8)
(0.9) 7.3 6.4
Effect of changes in demographic assumptions - (48.9) (48.9)
Effect of changes in financial assumptions 1.7 74.0 75.7
Effect of experience adjustments - 18.9 18.9
Remeasurements 0.8 51.3 52.1
Change in members' share (0.3) 0.1 (0.2)
Actuarial losses on reimbursable rights (0.3) 0.1 (0.2)
Total pension gain recognised in the SOCI 0.5 51.4 51.9
* For the year ended 31 December 2018 a reassessment of the causes of changes
in the liability associated with the SPLAS scheme Identified that the
previously disclosed effect of experience adjustments contained a component
that related to a change in demographic assumptions. There is no impact on the
closing liability associated with the SPLAS scheme and no Impact on the
Group's gross or net pension assets or obligations.
Balance sheet values
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value Contract Non contract specific Total
specific
2019
2019
2019
£m £m
£m
Equities 10.8 43.9 54.7
Bonds except LDIs 4.1 298.1 302.2
LDIs - 447.4 447.4
Property 1.7 - 1.7
Cash and other 4.1 5.1 9.2
Annuity policies - 614.0 614.0
Fair value of scheme assets 20.7 1,408.5 1,429.2
Present value of scheme liabilities (31.1) (1,353.4) (1,384.5)
Net amount recognised (10.4) 55.1 44.7
Franchise adjustment* 5.8 - 5.8
Members' share of deficit 3.8 - 3.8
Net retirement benefit asset (0.8) 55.1 54.3
Net pension liability (0.8) (23.2) (24.0)
Net pension asset - 78.3 78.3
Net retirement benefit asset (0.8) 55.1 54.3
Deferred tax liabilities - (9.2) (9.2)
Net retirement benefit asset (after tax) (0.8) 45.9 45.1
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
Scheme assets at fair value Contract Non contract specific Total
specific
2018
2018
2018
£m £m
£m
Equities 9.7 39.9 49.6
Bonds except LDIs 3.8 93.4 97.2
LDIs - 580.7 580.7
Property 1.2 - 1.2
Cash and other 2.9 8.7 11.6
Private debt mandates - 11.4 11.4
Annuity policies - 600.2 600.2
Fair value of scheme assets 17.6 1,334.3 1,351.9
Present value of scheme liabilities (23.8) (1,263.2) (1,287.0)
Net amount recognised (6.2) 71.1 64.9
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.3 - 2.3
Net retirement benefit asset (0.2) 71.1 70.9
Net pension liability (0.2) (14.7) (14.9)
Net pension asset - 85.8 85.8
Net retirement benefit asset (0.2) 71.1 70.9
Deferred tax liabilities - (9.9) (9.9)
Net retirement benefit asset (after tax) (0.2) 61.2 61.0
* The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period.
The SPLAS Trust Deed gives the Group an unconditional right to a refund of
surplus assets, assuming the full settlement of plan liabilities in the event
of a plan wind-up. Pension assets are deemed to be recoverable and there are
no adjustments in respect of minimum funding requirements as economic benefits
are available to the Group either in the form of future refunds or, for plans
still open to benefit accrual, in the form of possible reductions in future
contributions.
As required by IAS19, the Group has considered the extent to which the pension
plan assets should be classified in accordance with the fair value hierarchy
of IFRS13. Virtually all equity and debt instruments have quoted prices in
active markets. Annuity policies, private debt mandates and property assets
can be classified as Level 3 instruments, and LDIs are classified as Level 2.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 91% of total
liabilities and 94% of total assets of the defined benefit pension scheme in
which the Group participates. The significant actuarial assumptions with
regards to the determination of the defined benefit obligation are set out
below.
The Group has updated its approach to setting RPI and CPI inflation
assumptions in light of the RPI reform proposals published on the 4th
September 2019 by the UK Chancellor and UK Statistics Authority.
The Group continued to set RPI inflation in line with the market break even
expectations less an inflation risk premium. The inflation risk premium has
been increased from 0.2% at 31 December 2018 to 0.4% at 31 December 2019,
reflecting an allowance for additional market distortions caused by the RPI
reform proposals. For CPI, the Group reduced the assumed difference between
the RPI and CPI by 0.4% to an average of 0.6% per annum.
The estimated impact of the change in the methodology is an approximately
£20m increase in the defined benefit obligation in respect of the SPLAS
scheme.
The average duration of the benefit obligation at the end of the reporting
period is 16.8 years (2018: 16.1 years).
Main assumptions 2019 2018
% %
Rate of salary increases 2.70 2.80
Rate of increase in pensions in payment 2.20 (CPI) and 3.00 (RPI) 2.20 (CPI) and 3.00 (RPI)
Rate of increase in deferred pensions 2.30 (CPI) and 3.30 (RPI) 2.30 (CPI) and 3.30 (RPI)
Inflation assumption 2.20 (CPI) and 3.20 (RPI) 2.30 (CPI) and 3.30 (RPI)
Discount rate 2.10 2.90
Post retirement mortality 2019 2018
years years
Current pensioners at 65 - male 21.6 22.6
Current pensioners at 65 - female 24.1 25.1
Future pensioners at 65 - male 23.8 24.4
Future pensioners at 65 - female 26.2 27.0
Sensitivity analysis is provided below, based on reasonably possible changes
of the assumptions occurring at the end of the reporting period, assuming all
other assumptions are held constant. The sensitivities have been derived in
the same manner as the defined benefit obligation as at 31 December 2019 where
the defined benefit obligation is estimated using the Projected Unit Credit
method. Under this method each participant's benefits are attributed to years
of service, taking into consideration future salary increases and the scheme's
benefit allocation formula. Thus, the estimated total pension to which each
participant is expected to become entitled at retirement is broken down into
units, each associated with a year of past or future credited service. The
defined benefit obligation as at 31 December 2019 is calculated on the
actuarial assumptions agreed as at that date. The sensitivities are calculated
by changing each assumption in turn following the methodology above with all
other things held constant. The change in the defined benefit obligation from
updating the single assumption represents the impact of that assumption on the
calculation of the defined benefit obligation.
(Increase)/decrease in defined benefit obligation 2019 2018
£m £m
Discount rate - 0.5% increase (108.5) (102.8)
Discount rate - 0.5% decrease 122.9 112.2
Inflation - 0.5% increase 88.9 66.9
Inflation - 0.5% decrease (83.3) (64.7)
Rate of salary increase - 0.5% increase 3.2 2.4
Rate of salary increase - 0.5% decrease (3.1) (2.3)
Mortality - one-year age rating 48.6 39.9
Management acknowledges that the method used of presuming that all other
assumptions remaining constant has inherent limitation given that it is more
likely for a combination of changes, but highlights the value of each
individual risk and is therefore a suitable basis for providing this analysis.
Assumptions in respect of the expected return on scheme assets are required
when calculating the franchise adjustment for the contract-specific plans.
These assumptions are based on market expectations of returns over the life of
the related obligation. Due consideration has been given to current market
conditions as at 31 December 2019 in respect to inflation, interest, bond
yields and equity performance when selecting the expected return on assets
assumptions.
The expected yield on bond investments with fixed interest rates is derived
from their market value. The yield on equity investments contains an
additional premium (an 'equity risk premium') to compensate investors for the
additional anticipated risks of holding this type of investment, when compared
to bond yields. The Group applies an equity risk premium of 4.6% (2018: 4.6%).
The overall expected return on assets is calculated as the weighted average of
the expected returns for the principal asset categories held by the scheme.
19. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are
related parties, have been eliminated on consolidation and are not disclosed
in this note. Transactions between the Group and its joint venture
undertakings and associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with
joint ventures and associates:
Transactions 2019 Current outstanding at 31 December 2019 Non current outstanding at 31 December 2019
£m £m £m
Sale of goods and services
Joint ventures 1.3 0.1 -
Associates 8.4 0.5 -
Other
Dividends received - joint ventures 7.8 - -
Dividends received - associates 17.6 - -
Receivable from consortium for tax - joint ventures 4.4 4.8 -
Total 39.5 5.4 -
Joint venture receivable and loan amounts outstanding have arisen from
transactions undertaken during the general course of trading, are unsecured,
and will be settled in cash. Interest arising on loans is based on LIBOR, or
its equivalent, with an appropriate margin. No guarantee has been given or
received.
Current outstanding at 31 December 2018 Non current outstanding at 31 December 2018
£m £m
Transactions 2018
£m
Sale of goods and services
Joint ventures 0.4 0.1 -
Associates 7.3 0.6 -
Other
Dividends received - joint ventures 9.7 - -
Dividends received - associates 20.0 - -
Receivable from consortium for tax - joint ventures 4.8 5.3 -
Total 42.2 6.0 -
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group
during the year other than service contracts and Directors' liability
insurance.
The remuneration of the key management personnel of the Group is set out below
in aggregate for each of the categories specified in IAS24 Related Party
Disclosures:
2019 2018
£m £m
Short-term employee benefits 8.9 9.5
Share based payment expense 5.3 5.3
14.2 14.8
The key management personnel comprise the Executive Directors, Non-Executive
Directors and members of the Executive Committee (2019: 17 individuals, 2018:
17 individuals).
Aggregate directors' remuneration
The total amounts for directors' remuneration in accordance with Schedule 5 to
the Accounting Regulations were as follows:
2019 2018
£m £m
Salaries, fees, bonuses and benefits in kind 3.9 4.0
Amounts receivable under long-term incentive schemes 3.0 3.1
Gains on exercise of share options 5.1 1.8
12.0 8.9
None of the directors are members of the company's defined benefit pension
scheme.
One director is a member of the money purchase scheme.
20. Notes to the consolidated cash flow statement
Year ended 31 December 2019 2019 Exceptional items 2019 2018 2018 Exceptional items 2018
Before exceptional items £m Total Before exceptional items £m Total
£m £m £m £m
Operating profit for the year 125.9 (23.4) 102.5 112.4 (31.9) 80.5
Adjustments for:
Share of profits in joint ventures and associates (27.5) - (27.5) (28.8) - (28.8)
Share based payment expense 11.6 - 11.6 14.7 - 14.7
Impairment of property, plant and equipment 18.9 - 18.9 0.7 - 0.7
Impairment of intangible assets - - - 0.1 - 0.1
Depreciation of property, plant and equipment 74.4 - 74.4 19.5 - 19.5
Amortisation of intangible assets 25.6 - 25.6 22.9 - 22.9
Exceptional loss on disposal of subsidiaries and operations - - - - 0.5 0.5
Reversal of impairment on loan balances - - - - (13.9) (13.9)
Profit on early termination of leases (0.9) - (0.9) - - -
(Profit)/loss on disposal of property, plant and equipment (0.6) - (0.6) 0.5 - 0.5
Loss on disposal of intangible assets 0.4 - 0.4 1.5 - 1.5
Exceptional Interest in JV - - - - 0.3 0.3
Decrease in provisions (43.1) (20.5) (63.6) (68.1) (13.8) (81.9)
Other non cash movements (1.2) - (1.2) (0.2) - (0.2)
Total non cash items 57.6 (20.5) 37.1 (37.2) (26.9) (64.1)
Operating cash inflow/(outflow) before movements in working capital 183.5 (43.9) 139.6 75.2 (58.8) 16.4
Decrease/(increase) in inventories 4.4 - 4.4 (5.0) - (5.0)
(Increase)/decrease in receivables (36.7) - (36.7) (22.9) 0.4 (22.5)
Increase/(decrease) in payables 32.2 (5.3) 26.9 6.3 18.2 24.5
Movements in working capital (0.1) (5.3) (5.4) (21.6) 18.6 (3.0)
Cash generated by operations 183.4 (49.2) 134.2 53.6 (40.2) 13.4
Tax paid (31.2) - (31.2) (10.6) - (10.6)
Non cash R&D expenditure (0.1) - (0.1) (0.1) - (0.1)
Net cash inflow/(outflow) from operating activities 152.1 (49.2) 102.9 42.9 (40.2) 2.7
Additions to property, plant and equipment during the year amounting to
£304.3m (2018: £3.6m) were financed by new leases.
21. Post balance sheet events
Subsequent to the year-end, the Board has recommended the payment of a final
dividend in respect of the year ended 31 December 2019 of 1.0p. 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
financial statements.
Following the balance sheet date the UK formally left the European Union,
which happened as expected following the result of the General Election in
December 2019. The transition period is expected to end on 31 December 2020
and the current shape of the economic and political partnership between the UK
and EU is not known. Notwithstanding this, as outlined in the Chief
Executive's review on page 13 the Group's direct exposure to Brexit is small
as Serco neither exports nor imports to any significant degree; our business
in continental Europe is conducted through long-established local
subsidiaries, and we employ relatively few continental European citizens in
the UK.
REPORT OF KPMG LLP TO SERCO GROUP PLC ("THE COMPANY") IN RELATION TO THE
COMPANY'S PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER
2019
The UK Listing Rules require that we, as independent auditor, agree to the
publication of the Company's preliminary announcement of results for the year
ended 31 December 2019 which comprises the Condensed Consolidated Income
Statement, the Condensed Consolidated Statement of Comprehensive Income, the
Condensed Consolidated Statement of Changes in Equity, the Condensed
Consolidated Cash Flow Statement and the Notes to the Condensed Consolidated
Financial Statements as well as the Stock Exchange Announcement including the
Chief Executive's Review, the Divisional Reviews and the Finance Review.
At your request we have provided this report to set out the procedures
performed by us to agree to the publication, the status of the audit report on
the statutory financial statements, and the key audit matters addressed in
that audit report in respect of the consolidated financial statements of the
group.
Our audit of the statutory financial statements is complete and we have issued
an unmodified audit opinion
The annual report and statutory financial statements of Serco Group plc for
the year ended 31 December 2019 were approved by the board on 25 February
2020.
Our audit of those financial statements is complete and we signed our
auditor's report on 25 February 2020. Our opinion in that report is not
modified and does not include a material uncertainty related to going concern,
or emphasis of matter, paragraph.
This report is in addition to, should not be regarded as a substitute for, our
auditor's report on the statutory financial statements, which has been
released to the Company and will be available when the Company publishes its
annual report.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were
of most significance in the audit of the consolidated financial statements and
include the most significant assessed risks of material misstatement (whether
or not due to fraud) identified by us, including those which had the greatest
effect on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team.
Key audit matters were addressed, and our findings are based on procedures
undertaken, in the context of, and solely for the purpose of, our audit of the
consolidated financial statements as a whole, and in forming our opinion
thereon, and consequently are incidental to that opinion, and we do not
provide a separate opinion on these matters. The overall materiality applied
in the audit of the consolidated financial statements as a whole was £5.0
million.
In our auditor's report on the statutory financial statements of the Company,
we reported on the key audit matters in respect of the consolidated financial
statements of the group described below. No additional work in relation to
key audit matters has been undertaken for the purpose of this report.
The impact of uncertainties due to Britain exiting the European Union on our
audit
Assessment of risk vs. prior year: Unchanged
The risk Our response
Unprecedented levels of uncertainty We developed a standardised firm-wide approach to the consideration of the
uncertainties arising from Brexit in planning and performing our audits. Our
procedures included:
All audits assess and challenge the reasonableness of estimates, in particular · Our Brexit knowledge: We considered the directors'
as described in Recoverability of group goodwill and of parent's investment in assessment of Brexit-related sources of risk for the Group's business and
subsidiaries below, and related disclosures and the appropriateness of the financial resources compared with our own understanding of the risks. We
going concern basis of preparation of the financial statements (see below). considered the directors' plans to take action to mitigate the risks.
All of these depend on assessments of the future economic environment and the
Group's future prospects and performance. · Sensitivity analysis: When addressing Recoverability of
group goodwill and of parent's investment in subsidiaries and other areas that
In addition, we are required to consider the other information presented in depend on forecasts, we compared the directors' sensitivity analysis to our
the Annual Report including the principal risks disclosure and the viability assessment of the full range of reasonably possible scenarios resulting from
statement and to consider the directors' statement that the annual report and Brexit uncertainty and, where forecast cash flows are required to be
financial statements taken as a whole is fair, balanced and understandable and discounted, considered adjustments to discount rates for the level of
provides the information necessary for shareholders to assess the Group's remaining uncertainty.
position and performance, business model and strategy.
· Assessing transparency: As well as assessing individual
Brexit is one of the most significant economic events for the UK and its disclosures as part of our procedures on Recoverability of group goodwill and
effects are subject to unprecedented levels of uncertainty of consequences, of parent's investment in subsidiaries we considered all of the Brexit related
with the full range of possible effects unknown. disclosures together, including those in the strategic report, comparing the
overall picture against our understanding of the risks.
Our findings
As reported under Recoverability of group goodwill and of parent's investment
in subsidiaries, Valuation of acquired intangibles, we found the resulting
estimates and related disclosures of the carrying value of goodwill and
disclosures in relation to going concern to be balanced (2018: balanced).
However, no audit should be expected to predict the unknowable factors or all
possible future implications for a Group and this is particularly the case in
relation to Brexit.
Revenue and margin recognition
Revenue £3,248.4m (2018: £2,836.8m), operating profit £102.5m (2018:
£80.5m) and Onerous Contract Provisions £16.5m (2018: £82.1m)
Assessment of risk vs. prior year: Unchanged
Refer to note 2 Critical accounting judgements and key sources of estimation
uncertainty and note 16 Provisions
The risk Our response
Accounting application Our audit procedures included:
Revenue is the most material account in the financial statements and is Contracts were selected for substantive audit procedures based on qualitative
considered to be a main driver of results, and as such had the greatest effect factors, such as commercial complexity, and quantitative factors, such as
on our allocation of resources in planning and completing the audit. financial significance and profitability that we considered to be indicative
of risk. Our audit testing for the contracts selected included the
In addition, the contractual arrangements that underpin the measurement and following:
recognition of revenue by the Group can be complex, with judgements involved
in the assessment of current and estimation of future financial performance of · Assessing application: We inspected customer contracts to assess
those contracts. the method of revenue recognition to determine that it is in accordance with
IFRS 15, including the appropriate recognition of revenue as the performance
Our key areas of focus have been: obligation is satisfied on service contracts.
· Accounting analysis: We inspected and challenged accounting
papers prepared by the Group to understand the support and assess the position
· Interpretations of terms and conditions in relation to the required provided in respect of key contract judgements and onerous contract
service obligations in accordance with contractual arrangements; provisions.
· The identification of performance obligations within contracts and · Tests of details: We inspected customer contracts for the sample
the allocation of revenue and costs to performance obligations where multiple which we selected for testing and where applicable, obtained evidence of
deliverables exist; correspondence with customers and third parties, in instances where
contractual variations and claims have arisen, to inform our assessment of the
· Assessment of the stage of completion by reference to the estimate revenue (including variable revenue) and costs recorded up to the balance
of cost to complete, where the input method of accounting is used to determine sheet date.
percentage completion;
· Test of details: We assessed a sample of unbilled revenue against
· Consideration of the Group's performance against contractual documents such as post year end invoices or purchase orders, or customer
obligations and the impact on revenue (including variable revenue) and costs agreements for the work performed
of delivery; and
· Site visits and enquiry: We met with contract management and
· The recognition and recoverability assessments of contract related Business Unit management teams responsible for the contracts we selected for
assets, including those recognised as direct incremental costs prior to testing as well as attending a sample of monthly Divisional and Business Unit
service commencement, are reliant on the estimation of future profitability of Performance Reviews used to assess business performance in order to inform our
the contract. assessment of operational and financial performance of the contracts. We also
visited a number of key contract locations to observe the contract operations
and meet with contract delivery teams to further assess the operational
performance. For onerous and potentially onerous contracts identified through
Subjective estimate application of quantitative or qualitative selection criteria, our procedures
also included:
· Benchmarking assumptions: We compared contract level forecast
Where an onerous contract provision is required, judgement is required in revenues and costs to the Group's annual budgets and longer-term forecasts
assessing the level of provision, including estimated cost to complete taking approved by the directors. We challenged key assumptions made by the Group
into account contractual obligations to the end of the contract, extension in preparing these forecasts, including those in relation to revenue growth
periods and customer negotiations. and cost reductions, checking to external evidence where possible and
assessing against business plans.
• Our sector experience: We assessed the contractual terms and
The effect of these matters is that, as part of our risk assessment, we conditions to identify the key obligations of the contract and compare these
determined that the assessment of onerous contract provisions has a high with common industry risk factors to inform our challenge of completeness of
degree of estimation uncertainty, with a potential range of reasonable forecast costs and cost accruals recorded at the balance sheet date. For a
outcomes greater than our materiality for the financial statements as a whole, specific contract we used our own major project specialists to assess the
and possibly many times that amount. reasonableness of the contract projections.
• Historical comparisons: We compared the contract forecasts to
historic and in year performance to assess the historical accuracy of the
forecasts.
• Test of details: for contracts assessed as potentially onerous,
we compared the allocation of central costs to the group's policy and
challenged the underlying assumptions using our understanding of the contract
operations.
For selected contract related assets, representing capitalised bid and phase
in costs, our procedures included:
• Assessing application: We assessed whether these had been
recognised in accordance with the Group's accounting policy and relevant
accounting standards.
• Comparing valuations: We inspected actual and forecast
contractual cash flows and profits to assess whether these supported the
carrying value of the assets.
• Historical comparisons: We inspected the underlying contracts to
inform our assessment of the forecast cash flows, and compared actual cash
flows to forecasts to assess reasonableness.
• Independent reperformance: We compared the amortisation period
with the duration of the contract and checked that the amortisation had been
calculated correctly.
Assessing transparency: We also assessed whether the Group's disclosures about
the estimates and judgements applied reflected the risks related to the
estimation of onerous contracts.
Our findings
We found no material errors in the group's application of its revenue
accounting policy (2018: no material errors). We found the resulting estimate
of onerous contract provision to be balanced (2018: balanced).
Recoverability of group goodwill and of parent's investment in subsidiaries
Group: £671.2m (2018: £579.6m)
Assessment of risk vs. prior year: reduced
Refer to note 13 Goodwill
The risk Our response
Forecast-based valuation Our procedures included:
Goodwill in the Group and the carrying amount of the parent Company's · Benchmarking assumptions: With the assistance of our valuation
investments in subsidiaries are significant and at risk of irrecoverability specialists, we challenged the growth rate and discount rate for each CGU used
due to uncertainty regarding forecast contract extensions and new contract in the value in use calculation by comparing certain of the key inputs to
wins. these assumptions to external data (such as bond yields and gearing). We
challenged forecast assumptions around new contract wins or extensions,
contract attrition as well as cost reductions on existing contracts.
The estimated recoverable amount of these balances through value in use · Historical comparisons: We compared current year actual cash
calculations is subjective due to the inherent uncertainty involved in flows to historic forecasts to assess the historical accuracy of the forecasts
forecasting and discounting future cash flows. We considered the risk of in the impairment model and we have also compared forecast cash flows against
recoverability of the goodwill to have reduced due to the re-organisation of budgets.
cash generating units (CGUs) in the last year and consequently the higher
levels of headroom of the value in use of the business compared to the · Sensitivity analysis: We tested the sensitivity of impairment
carrying amounts. calculations to changes in key underlying assumptions, which were discount
rate and terminal growth rate for all CGUs. For CGUs that had the lowest
headroom, which were: AsPac and Middle East, we challenged the projected win
probabilities (including contract extensions) on key contracts within the
The CGUs which were most sensitive to a deterioration in the division's cash pipeline and sensitised the five year cash flow forecasts by reducing new wins
flow projections or an increase in discount rate were the AsPac CGU and Middle and extensions within the pipeline.
East CGU. As at year end 31 December 2019, the AsPac CGU has headroom of
£169m and Middle East has headroom of £77m. · Comparing valuations: We considered whether the forecast cash
flow assumptions used in the value in use calculation were consistent with the
assumptions used to calculate the expected loss on onerous contract
provisions, the recognition of deferred tax assets and the Directors'
The effect of these matters is that, as part of our risk assessment, we assessment of going concern and viability.
determined that the value in use of goodwill and value in use of investments
in subsidiaries have a high degree of estimation uncertainty, with a potential · Assessing transparency: We also assessed whether the Group's
range of reasonable outcomes greater than our materiality for the financial disclosures about the sensitivity of outcomes reflected the risks inherent in
statements as a whole, and possibly many times that amount. The financial the valuation of goodwill.
statements (note 13) disclose the sensitivity for goodwill estimated by the
Group.
Our findings:
We found the Group's assessment that there is no impairment of the carrying
amount of the Group's goodwill and of parent's investment in subsidiaries to
be balanced (2018: balanced), and the related sensitivity disclosures to be
proportionate (2018: proportionate).
Classification of Exceptional Items £23.4m (2018: £31.9m)
Assessment of risk vs. prior year: unchanged
Refer to note 2 Critical accounting judgements and key sources of estimation
uncertainty and note 7 Exceptional items
The risk Our response
Presentation appropriateness Our procedures included:
Significant judgement is involved in determining the classification of costs · Assessing principle: We assessed the Group's accounting policies
and income as exceptional items in the financial statements. We consider this and principles for recognised elements of costs and income as exceptional.
area to be particularly susceptible to the generic risk of management bias.
· Assessing application: We assessed the classification of items
selected by the Group as exceptional against the Group policy. We inspected
accounting papers prepared by the Group to understand the key factors
considered and judgements made. We also evaluated whether other material items
should be classified as exceptional items in line with the Group's policy.
· Consistency of Application: We compared the classification of
exceptional items where these relate to, or bear similar characteristics to,
historical items to check that these are treated in a consistent manner.
· Assessing transparency: We also assessed whether the Group's
disclosures regarding the classification of exceptional items appropriately
reflects the judgements made.
Our findings:
In determining the presentation of profit or loss items as exceptional under
the Group's accounting policy, there is room for judgement. We found that
the Group's judgement was balanced (2018: balanced).
Valuation of acquired intangibles (£52.6 million)
A new key audit matter identified in 2019. Refer to note 5 Acquisitions
The risk Our response
Forecast-based valuation Our procedures included:
The Group has recognised significant customer relationship intangible assets · Test of details: For the businesses acquired in the year (NSBU's
as part of the NSBU acquisition. There is inherent uncertainty involved in US and Canadian businesses), we compared the forecast revenue and profit
forecasting the cash flows of the acquired businesses and discounting them to margins, used as the basis for the calculation of the fair value of the
the present day, which determines the fair value of the intangibles at the acquired intangibles at the acquisition date, with the forecasts included in
acquisition date. the due diligence reports obtained prior to the acquisition, current year
performance of the business and current forecasts.
· Our sector experience: We compared the identified intangible
The effect of these matters is that, as part of our risk assessment, we assets with our expectation of the categories of assets we would expect based
determined that the fair value of the acquired intangibles has a high degree on similar acquisitions in the industry.
of estimation uncertainty, with a potential range of reasonable outcomes
greater than our materiality for the financial statements as a whole. · Assessing valuer's credentials: We assessed the competence and
objectivity of the external experts who prepared the due diligence reports
used to support the valuation methodology and assumptions used within the
forecasts.
· Our valuation expertise: We used our internal specialists to
assess the reasonableness of valuation methodologies used and to benchmark key
assumptions used in setting the discount rate to market data. We also compared
the discount rate set by the Group with our own expectations of an appropriate
discount rate.
· Sensitivity analysis: We calculated the impact of increasing and
decreasing certain key assumptions on the valuation of the acquired intangible
assets.
Our findings:
As a result of our work we found the valuation of the acquired intangible
assets to be balanced.
Procedures performed to agree to the preliminary announcement of annual
results
In order to agree to the publication of the preliminary announcement, we
conducted procedures having regard to the Financial Reporting Council's
Bulletin: The auditors' association with preliminary announcements made in
accordance with the requirements of the UK Listing Rules. Our work included
considering whether:
· the financial information included in the preliminary
announcement has been accurately extracted from the audited statutory
financial statements, and that it reflects the presentation adopted in the
audited statutory financial statements;
· based on our statutory financial statements audit work, the
financial information included in the preliminary announcement is materially
misstated;
· the information included in the preliminary announcement
(including the management commentary) is materially consistent with the
content of the annual report;
· based on our statutory financial statements audit work, the
assessment of the Company's position and prospects in the preliminary
announcement is fair, balanced and understandable; and
· the preliminary announcement includes the disclosures required
under the UK Listing Rules and s435 of the Companies Act 2006.
Directors' responsibilities
The preliminary announcement is the responsibility of, and has been approved
by, the directors. The directors are responsible for: preparing, presenting
and publishing the preliminary announcement in accordance with the Listing
Rules of the UK FCA; ensuring that its content is consistent with the
information included in the annual report and audited statutory financial
statements; and, as required under the UK Corporate Governance Code, for
ensuring that the assessment of the Company's position and prospects in the
preliminary announcement is fair, balanced and understandable.
Our responsibility
Our responsibility under the Listing Rules is to agree to the publication of
the preliminary announcement based on our work. In addition, under the terms
of our engagement our responsibility is to report to the Company setting out
the procedures performed by us to agree to the publication, the status of the
audit report on the statutory financial statements, and the key audit matters
addressed in that audit report.
We do not express an audit opinion on the preliminary announcement.
We are not required to agree to the publication of presentations to analysts
or webcasts.
This report is made solely to the Company in accordance with the terms of our
engagement. Our work has been undertaken so that we might state to the
Company those matters we have agreed to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company for our work, for this
report, or for the conclusions we have reached.
This report is not the auditor's report on the Company's statutory financial
statements. It relates only to the matters specified and does not extend to
the Company's statutory financial statements taken as a whole.
John Luke
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London E14 5GL
25 February 2020
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" and
similar expressions 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; and cyber-attacks. 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, 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.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
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