REG - Serco Group PLC - Half-year Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
03/08/2017 07:07
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the region.
Underlying Trading Profit was £6.8m (2016: £9.7m), representing a margin of 3.9% (2016: 6.3%). While there was a £0.9m
favourable currency movement, there was an overall reduction in profitability due in large part to the heavy costs of
bidding three large rail opportunities simultaneously, as well as the non-repeat of the higher defence logistics volumes
experienced in the comparable period, together with the impact of other contract scope reductions and attrition. There are
no OCP contracts in the division and therefore no OCP utilisation within Underlying Trading Profit.
The Middle East represented around £0.1bn of the Group's aggregate total value of signed contracts during the period.
Amongst smaller contract awards were wins to provide facilities management for Abu Dhabi Investment Authority and defence
training support in Qatar, whilst extensions to existing work included air navigation services and training in Bahrain and
in Iraq. There were no larger rebids or major new bid pipeline decisions due in the period.
Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 12 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. There is a high proportion of work to secure in 2019, when the Dubai
Metro, MELABS and Cleveland Clinic Abu Dhabi contracts each require extending or rebidding.
Our pipeline of major new bid opportunities due for decision within the next 24 months includes three major light rail and
tram operations in the region; in aggregate, these represent approximately 30% of the value of the Group's pipeline. There
are also other smaller opportunities in defence support services and in non-clinical health facilities management in the
current pipeline.
For 2017 as a whole, the organic revenue profile is expected to improve modestly as the pressures from the small amount of
attrition and scope changes ease in the second half and as there will also be an increased contribution from the smaller
new wins secured in recent months. Profitability in the second half will however be shaped to a greater extent by the cost
to progress, and the outcomes of, the major rail opportunities in the region.
Americas
Our Americas division 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 the first half of 2017 was £368.5m (2016: £328.9m), an increase of 12%. In US dollars, the main currency for
operations of the division, revenue for the year was equivalent to approximately US$465m (2016: US$470m). The
strengthening of local currencies against Sterling increased revenue by £47m or 14%; the organic change at constant
currency was therefore a decline of 2%. The decline was driven by the end of the contracts for the Virginia Department of
Transportation (VDOT) and for US Army transition assistance (SFLTAP). These and other smaller reductions were largely
offset by growth from the start of the US Air Force High Altitude Electromagnetic Pulse (HEMP) Protection of Ballistic
Missile Early Warnings Systems radar facility contract that started in the second half of last year and some increases
elsewhere in the volume of workload or task orders.
Underlying Trading Profit was £22.2m (2016: £19.6m), representing a margin of 6.0% (2016: 6.0%). The increase includes a
£2.9m favourable currency movement; the impact from the benefit in the first half of last year from the longer running of
the VDOT and SFLTAP contracts was only partially offset by other growth and cost efficiencies. Within Underlying Trading
Profit there was £3m (2016: £5m) of OCP utilisation, which reflects the offset of losses on the Ontario Driver Examination
Services contract.
Americas represented around £0.3bn of the Group's aggregate total value of signed contracts during the period. The largest
new award was to provide supply chain management services for hazardous materials at three US Navy Fleet Readiness Centers,
valued at a total of $101m for the base period and four one-year options. Smaller new awards included numerous US Navy
ship and shore defence equipment modernisation task orders. Of rebids and extensions secured, the largest was for the US
Patent & Trademark Office (USPTO) for a further ten years, albeit the new contract is for a reduced volume of work, with
others secured including fleet services for Louisville Gas & Electric Company, parking meter management in San Francisco
and support services for the US Government Accountability Office. There were no other larger rebids or major new pipeline
decisions during the period.
Of existing work where an extension or rebid will be required at some point before the end of 2020, there are ten contracts
with annual revenue of over £5m within the Americas division; in aggregate, these represent around 50% of the current level
of annual revenue for the division; this high proportion reflects that our contract supporting the US Affordable Care Act
(ACA), which currently accounts for around 30% of divisional revenue, requires rebidding from 30 June 2018; the Global
Installation Contract covering areas of our defence ship modernisation work also requires securing in 2019, while our
support to the Federal Aviation Administration's (FAA) Contract Tower (FCT) Program will become due for rebid once again in
2020.
Our pipeline of major new bid opportunities due for decision within the next 24 months includes important opportunities to
provide various support functions to the US Navy, one of which is due for adjudication before the end of this year and two
others due in 2018. A further defence opportunity to support US Air Force radar systems has recently been added, as has a
further tender for transport operational support. Opportunities for immigration services have been removed from our
pipeline due to delays in tender processes.
For 2017 as a whole, the organic revenue profile is expected to improve modestly as the pressure from contract attrition
eases in the second half and as there will also be an increased contribution from the new wins secured in recent months.
Profitability in the second half will however be shaped to a greater extent by the cost to progress, and the outcomes of,
the major new bid opportunities in the region, as well as the scale of operation of the ACA contract and its absorption of
overhead costs. Our current view is that structural changes to the ACA will be implemented over a matter of years rather
than months, and we expect the customer to launch in the near future a tender to provide services beyond the expiry of the
current contract in June 2018.
Serco was pleased to announce in June that David J. Dacquino would become Chief Executive Officer of the Americas division,
with Dan Allen having informed the business back in February of his intention to retire. Dave Dacquino joined Serco in
2015 to lead the Americas' Defence business, bringing deep knowledge and experience from across the defence, aeronautics,
logistics and technical services industries.
Corporate Costs
Corporate costs relate to typical central function costs of running the Group, including executive, governance and support
functions such as HR, finance and IT. Where appropriate, these costs are stated after allocation of recharges to operating
divisions. The costs of Group-wide programmes and initiatives are also incurred centrally.
Corporate costs for the first half of 2017 were £20.2m (2016: £18.2m). The increase versus the first half of last year
largely reflects the phasing of various costs, which is expected to reverse in the second half of the year, therefore still
resulting in an overall lower cost in 2017 than 2016.
Finance Review
For the six months ended 30 June 2017 Underlying £m Non underlying items£m Trading £m Amortisation and impairment of intangibles arising on acquisition£m Less discontinued pre exceptional*£m Statutory pre exceptional£m Continuing and discontinued exceptional items£m Less discontinued exceptional items*£m Statutory£m
Revenue 1,508.2 - 1,508.2 - - 1,508.2 - - 1,508.2
Cost of sales (1,374.8) - (1,374.8) - - (1,374.8) - - (1,374.8)
Gross profit 133.4 - 133.4 - - 133.4 - - 133.4
Administrative expenses (112.7) - (112.7) (2.2) - (114.9) (11.4) - (126.3)
Share of profits in joint ventures and associates, net of interest and tax 14.6 - 14.6 - - 14.6 - - 14.6
Profit before interest and tax 35.3 - 35.3 (2.2) - 33.1 (11.4) - 21.7
Margin 2.3% 2.3% 2.2% 1.4%
Net finance costs (7.6) - (7.6) - - (7.6) - - (7.6)
Profit before tax 27.7 - 27.7 (2.2) - 25.5 (11.4) - 14.1
Tax charge (10.7) (6.3) (17.0) 0.6 - (16.4) (15.9) - (32.3)
Effective tax rate (38.6%) (61.4%) (64.3%) (229.1%)
Profit / (loss) for the period 17.0 (6.3) 10.7 (1.6) - 9.1 (27.3) - (18.2)
Minority interest 0.1 - 0.1 - - 0.1 - - 0.1
Earnings / (loss) per share (pence) 1.55 0.97 0.82 (1.68)
* No amounts are recorded as discontinued operations for the six months ended 30 June 2017.
For the six months ended30 June 2016 (restated* ** ***) Underlying £m Non underlying items£m Trading £m Amortisation and impairment of intangibles arising on acquisition£m Less discontinued pre exceptional£m Statutory pre exceptional£m Continuing and discontinued exceptional items£m Less discontinued exceptional items£m Statutory£m
Revenue 1,517.9 - 1,517.9 - (24.7) 1,493.2 - - 1,493.2
Cost of sales* (1,378.2) 20.7 (1,357.5) - 24.5 (1,333.0) - - (1,333.0)
Gross profit* 139.7 20.7 160.4 - (0.2) 160.2 - - 160.2
Administrative expenses* ** (106.8) - (106.8) (2.0) 3.4 (105.4) (11.9) 4.2 (113.1)
Share of profits in joint ventures and associates, net of interest and tax 17.7 - 17.7 - - 17.7 - - 17.7
Profit before interest and tax** 50.6 20.7 71.3 (2.0) 3.2 72.5 (11.9) 4.2 64.8
Margin 3.3% 4.7% 4.9% 4.3%
Net finance costs** (6.7) - (6.7) - - (6.7) (0.4) 0.4 (6.7)
Profit before tax 43.9 20.7 64.6 (2.0) 3.2 65.8 (12.3) 4.6 58.1
Tax (charge) / credit*** (8.1) 3.7 (4.4) 0.6 0.1 (3.7) (0.1) - (3.8)
Effective tax rate*** 18.5% 6.8% 5.6% 6.5%
Profit for the period from continuing operations*** 35.8 24.4 60.2 (1.4) 3.3 62.1 (12.4) 4.6 54.3
Loss for the period from discontinued operations - - - - (3.3) (3.3) - (4.6) (7.9)
Profit for the period*** 35.8 24.4 60.2 (1.4) - 58.8 (12.4) - 46.4
Minority interest (0.1) - (0.1) - - (0.1) - - (0.1)
Earnings per share (pence)*** 3.30 5.54 5.40 4.27
* Costs included within costs of sales and general and administrative expenses have been reallocated, resulting in a
restatement. See note 1 to the Consolidated Financial Statements.
** Administrative expenses and net finance costs have been restated following the change in accounting policy in H2 2016
regarding foreign exchange movements on investment and financing arrangements. See note 1 to the Consolidated Financial
Statements.
*** The underlying tax charge has been restated to reflect the deferred tax impact of the movements in
the defined benefit pension scheme valuations, as explained in the tax section of this Finance Review. This has resulted
in the restatement of the post tax underlying profit for the period, the underlying effective tax rate and Underlying EPS.
For the year ended 31 December 2016 (restated*) Underlying £m Non underlying items£m Trading £m Amortisation and impairment of intangibles arising on acquisition£m Less discontinued pre exceptional£m Statutory pre exceptional£m Continuing and discontinued exceptional items£m Less discontinued exceptional items£m Statutory£m
Revenue 3,047.8 - 3,047.8 - (36.8) 3,011.0 - - 3,011.0
Cost of sales* (2,782.9) 18.2 (2,764.7) - 40.1 (2,724.6) - - (2,724.6)
Gross profit* 264.9 18.2 283.1 - 3.3 286.4 - - 286.4
Administrative expenses* (216.2) - (216.2) (5.1) - (221.3) (70.5) 14.2 (277.6)
Share of profits in joint ventures and associates, net of interest and tax 33.4 - 33.4 - - 33.4 - - 33.4
Profit before interest and tax 82.1 18.2 100.3 (5.1) 3.3 98.5 (70.5) 14.2 42.2
Margin 2.7% 3.3% 3.3% 1.4%
Net finance costs (12.6) - (12.6) - - (12.6) (0.4) 0.4 (12.6)
Profit before tax 69.5 18.2 87.7 (5.1) 3.3 85.9 (70.9) 14.6 29.6
Tax charge (24.4) 6.7 (17.7) 1.8 0.1 (15.8) 3.1 - (12.7)
Effective tax rate 35.2% 20.2% 18.4% 42.9%
Profit for the year from continuing operations 45.1 24.9 70.0 3.3 3.4 70.1 (67.8) 14.6 16.9
Loss for the year from discontinued operations - - - - (3.4) (3.4) - (14.6) (18.0)
Profit / (loss) for the year 45.1 24.9 70.0 3.3 - 66.7 (67.8) - (1.1)
Minority interest 0.1 - 0.1 - - 0.1 - - 0.1
Earnings / (loss) per share (pence) 4.13 6.42 6.12 (0.11)
* Costs included within costs of sales and general and administrative expenses have been reallocated, resulting in a
restatement. See note 1 to the Consolidated Financial Statements.
Change in accounting policy for foreign exchange movements on investment and financing activities
In order to provide more relevant information about the impact of the underlying transactions of trading operations, the
accounting policy regarding the classification of foreign exchange movements on investment and financing arrangements was
changed in the second half of 2016. These movements are excluded from Trading Profit and included instead within net
finance costs. As a result of this change in accounting policy, the income statement and cash flow statement for the six
months ended 30 June 2016 have been restated, together with the definition of Net Debt which now includes derivatives
relating to Net Debt components. The impact of this change has been to increase Trading Profit in the six months ended 30
June 2017 by £0.1m (six months ended 30 June 2016: decrease by £0.4m), with an equal and opposite impact recognised within
net finance costs, increase Free Cash Flow by £1.6m (six months ended 30 June 2016: decrease by £24.0m), with an equal and
opposite impact recognised below Free Cash Flow, and decrease Net Debt by £13.1m (six months ended 30 June 2016: decrease
by £20.5m).
Change in accounting policy regarding the classification of cost items within cost of sales and administrative expenses
The Group has undergone a programme of work on its financial data structures to appropriately allocate and charge costs to
the relevant divisions and between cost of sales and administration expenses. As a result of the activities performed in
this area, the Group's accounting policy for the classification of cost items in the income statement has changed. The
prior periods' results have been restated to reflect the current year accounting policy, in addition to a reclassification
for the full year results in 2016, where no reallocation of costs was made. The change in policy has no impact on
operating profit, any other item below this on the income statement, or any of the Group's performance measures.
Cost of sales are considered to be the direct costs of operating ongoing contracts. This includes the unavoidable costs of
servicing contracts and all costs that a contract would incur purely on its own without a parent company, regardless of how
those services are delivered within the wider Group, such as IT or Human Resource management services provided centrally.
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 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. As a result, APMs allow investors and other readers to
review different kinds of revenue, profits and costs and should not be used in isolation. Other commentary within this
announcement, including the other sections of this Finance Review, as well as the Condensed Consolidated Financial
Statements and their accompanying notes, should be referred to in order to fully appreciate all the factors that affect our
business. We strongly encourage readers not to rely on any single financial measure, but to carefully review our reporting
in its entirety.
The methodology applied to calculating the APMs has not changed during the period for any measure, but the APMs do reflect
the impact of the prior period restatement.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, reflects revenue translated
at the average exchange rates for the period. In order to provide a comparable movement on the previous periods' results,
reported revenue is recalculated by translating non-Sterling values for each of the six months to 30 June 2017 into
Sterling at the average exchange rate for the six months ended 30 June 2016.
Six months ended 30 June 2017£m
Reported revenue at constant currency (continuing activities only) 1,385.7
Foreign exchange differences 122.5
Reported revenue at reported currency (continuing activities only) 1,508.2
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses acquired during a particular period and/or by businesses sold
during a particular period up to the date of disposal. In order to provide a comparable movement which ignores the effect
of both acquisitions and disposals, Organic Revenue at constant currency is recalculated by excluding the impact of any
acquisitions or disposals. For the six months ended 30 June 2017, the only adjustment required was for a UK private sector
BPO business, consisting of a single contract, sold on 3 July 2017. This business was previously reported within
discontinued operations but included as continuing in 2017 as it does not have a material impact on the Group's results,
and is considered to be a disposal within these calculations due to the proximity to the period end of the transaction
closing. No adjustments were required for the six months ended 30 June 2016 nor the year ended 31 December 2016 as no
disposed businesses were included within continuing operations and no acquisitions generated third party revenues.
Organic Revenue growth is calculated by comparing the current period Organic Revenue at constant currency exchanges rates
with the prior period Organic Revenue at reported currency exchange rates.
Six months ended 30 June 2017£m Six months ended 30 June 2016£m
Organic Revenue at constant currency 1,380.4 N/A
Foreign exchange differences 122.5 N/A
Organic Revenue at reported currency 1,502.9 1,493.2
Impact of any acquisitions or disposals or discontinued operations on reported revenue at reported currency 5.3 -
Reported revenue at reported currency (continuing activities only) 1,508.2 1,493.2
Revenue from continuing and discontinued operations
Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, reflects only that from
continuing operations, with the post tax result of discontinued operations consolidated as a single line at the bottom of
the Condensed Consolidated Income Statement. The alternative measure includes discontinued operations for the benefit of
consistency with previously reported results and to reflect the overall change in scale of the Group's operations. The
alternative measure allows the performance of the discontinued operations themselves, and their impact on the Group as a
whole, to be evaluated on measures other than just the post tax result. No operations were classified as discontinued in
2017 as there was a single remaining business as at 1 January 2017 which generated insignificant revenue and profit in the
period. Discontinued operations in prior periods reflect the former Global Services division which consisted of our
private sector BPO operations.
Six months ended 30 June 2017£m Six months ended 30 June 2016£m Year ended 31 December 2016£m
Revenue from continuing and discontinued operations 1,508.2 1,517.9 3,047.8
Exclude revenue from discontinued operations - (24.7) (36.8)
Reported revenue (continuing activities only) 1,508.2 1,493.2 3,011.0
Revenue from continuing operations, including share of joint ventures and associates
Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, 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 operating profit as a single line further down the Condensed Consolidated Income Statement.
The alternative measure includes the share of revenues from 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.
Six months ended 30 June 2017£m Six months ended 30 June 2016£m Year ended 31 December 2016£m
Revenue from continuing operations, including share of joint ventures and associates 1,688.4 1,786.8 3,491.8
Exclude share of revenue from joint ventures and associates (180.2) (293.6) (480.8)
Reported revenue (continuing activities only) 1,508.2 1,493.2 3,011.0
Alternative profit measures
Six months ended 30 June 2017£m Six months ended 30 June 2016(restated*)£m Year ended 31 December 2016£m
Underlying Trading Profit* 35.3 50.6 82.1
Non-underlying items:
Include OCP charges and releases - 13.4 9.6
Include other Contract and Balance Sheet Review adjustments - 3.6 4.6
Include benefit from non-depreciation and amortisation of assets held for sale - 0.2 0.5
Include other one-time items - 3.5 3.5
- 20.7 18.2
Trading Profit* 35.3 71.3 100.3
Include operating exceptional items (continuing operations only) (11.4) (7.7) (56.3)
Include amortisation and impairment of intangibles arising on acquisition from continuing and discontinued operations (2.2) (2.0) (5.1)
Exclude operating loss from discontinued operations - 3.2 3.3
Operating profit (continuing activities only)* 21.7 64.8 42.2
* Profit measures down to operating profit have been restated following the change in accounting policy to exclude
foreign exchange movements on investment and financing arrangements, including them instead in net finance costs.
Trading Profit
The Group uses Trading Profit as an alternative measure to operating profit, as shown on the Group's Condensed Consolidated
Income Statement on page 34, by making three adjustments. Trading Profit is a metric used to determine the performance and
remuneration of the Executive Directors.
Firstly, Trading Profit excludes exceptional items, being those considered material, non-recurring and outside of the
normal operating practice of the Company. These require separate presentation and detailed explanation.
Secondly, amortisation and impairment of intangible assets 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.
Thirdly, the Trading Profit of discontinued operations is included, since as with our alternative measure of revenue, this
benefits from consistency with previously reported results, reflects the overall change in scale of the Group's operations
and takes account of the performance of the discontinued operations themselves. This allows their impact on the Group as a
whole to be evaluated on measures other than just the post tax result.
Underlying Trading Profit (UTP)
The Group uses a further alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur
within Trading Profit and to remove the impact of historical issues. UTP therefore provides a measure of the underlying
performance of the business in the current period. For 2016 and 2015 there were four items excluded from UTP, none of
which required adjustment in the six months ended 30 June 2017.
Releases and charges on all Onerous Contract Provisions (OCPs) are excluded in the current and prior periods. OCP charges
and releases reflect the future multiple year cost of delivering onerous contracts and do not reflect therefore just the
current cost of operating the contract in the latest individual period. It should be noted that, as for operating profit,
UTP benefits from OCP utilisation (of £40.4m in the six months ended 2017 and £47.3m in the six months ended 30 June 2016)
which neutralises the losses on previously identified onerous contracts, therefore it is only the initial or subsequent
charges or releases of OCPs that are adjusted for.
In addition, revisions to accounting estimates and judgements which arose during the 2014 Contract and Balance Sheet Review
were excluded in 2015 and 2016.
Both OCP adjustments and other Contract and Balance Sheet Review adjustments 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. As expected, Contract and Balance Sheet Review adjustments were insignificant for the first six months of 2017, and
will no longer be separately reported unless they are individually material.
The benefit of depreciation and amortisation charges not being taken in the Group accounts in relation to assets held for
sale were excluded in prior periods. Such charges were being taken in the subsidiary accounts to reflect the reduction in
value of the underlying assets, and we consider it relevant to show the effect this would have on the Group performance
measure. No assets are included as held for sale in 2017 and therefore no adjustment is required for the six months ended
30 June 2017.
Finally, any other significant items that have a one-time financial impact are excluded, which for the periods under review
are the benefit of a profit on early exit of a UK local authority contract in 2015 and the associated one-time pension
settlement in 2016. These one-time items are distinct from exceptional items in that they have arisen from normal contract
exit conditions. No such one-time items exist in the six months ended 30 June 2017.
Underling trading margin is calculated as UTP divided by revenue from continuing and discontinued operations.
The non-underlying column in the summary income statement on page 13 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.
UTP at constant currency
UTP disclosed above has been translated at the average foreign exchange rates for the period. In order to provide a
comparable movement on the previous period's results, UTP is recalculated by translating non-Sterling values for each of
the six months to 30 June 2017 into Sterling at the average exchange rate for the six months ended 30 June 2016.
Six months ended 30 June 2017£m
Underlying Trading Profit at constant currency 29.2
Foreign exchange differences 6.1
Underlying Trading Profit at reported currency 35.3
Alternative Earnings or Loss Per Share (EPS) measures
Six months ended 30 June 2017pence Six months ended 30 June 2016(restated*)pence Year ended 31 December 2016pence
Underlying EPS from continuing and discontinued operations, basic* 1.55 3.30 4.13
Impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition* (0.73) 2.10 1.99
EPS from continuing and discontinued operations before exceptional items 0.82 5.40 6.12
Impact of exceptional items (2.50) (1.13) (6.23)
Reported EPS from continuing and discontinued operations, basic (1.68) 4.27 (0.11)
* As explained in the tax charge section of this Finance Review, the underlying tax charge for the six months ended 30
June 2016 has been restated to reflect the deferred tax impact of movements in the defined benefit pension scheme
valuations, resulting in a restatement of Underlying EPS.
EPS from continuing and discontinued operations before exceptional items
EPS from continuing and discontinued operations, as shown on the Group's Condensed Consolidated Income Statement on page
34, includes exceptional items charged or credited to the income statement in the period. EPS before exceptional items
aids consistency with historical results and is a metric used in assessing the performance and remuneration of the
Executive Directors.
Underlying EPS from continuing and discontinued operations
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 from continuing and discontinued operations is provided in the summary income statements on page 13.
Alternative cash flow and net debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect net cash inflow from operating activities before exceptional
items, which is the measure shown on the Condensed Consolidated Cash Flow Statement on page 38, but adjusting this IFRS
measure to include dividends we receive from joint ventures and associates and deducting net interest paid and net capital
expenditure on tangible and intangible asset purchases. FCF is considered relevant to reflect the cash performance of
business operations after meeting usual obligations of financing and tax. It is therefore a measure that is before all
other remaining cash flows, being those related to exceptional items, acquisitions and disposals, other equity-related and
debt-related funding movements, and foreign exchange impacts on financing and investing activities. FCF is therefore a
measure to assess the cash flow generated by the business and aids consistency for comparison to historical results. FCF
is a metric used to determine the performance and remuneration of the Executive Directors.
Six months ended 30 June 2017£m Six months ended 30 June 2016(restated*)£m Year ended 31 December 2016£m
Free Cash Flow* (26.8) (22.5) (33.0)
Exclude dividends from joint ventures and associates (13.8) (19.7) (40.0)
Exclude net interest paid 9.2 10.2 18.7
Exclude capitalised finance costs paid - 0.3 0.3
Exclude purchase of intangible and tangible assets net of proceeds from disposal 18.1 14.4 31.6
Cash flow from operating activities before exceptional items* (13.3) (17.3) (22.4)
Exceptional operating cash flows (19.7) (32.1) (39.9)
Cash flow from operating activities* (33.0) (49.4) (62.3)
* Free Cash Flow has been restated following the change in accounting policy to exclude foreign exchange movements on
investment and financing arrangements.
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 the 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. As Trading Cash Flow is currently an outflow, a conversion
percentage of UTP is not shown.
Six months ended 30 June 2017£m Six months ended 30 June 2016(restated*)£m Year ended 31 December 2016£m
Free Cash Flow* (26.8) (22.5) (33.0)
Add back:
Tax paid 7.9 6.6 5.6
Non-cash R&D expenditure - 0.1 0.4
Net interest paid 9.2 10.2 18.7
Capitalised finance costs paid - 0.3 0.3
Trading Cash Flow* (9.7) (5.3) (8.0)
Underlying Trading Profit* 35.3 50.6 82.1
Underlying Trading Profit cash conversion* N/A N/A N/A
* As explained above, FCF and UTP have been restated, resulting in a restatement of Trading Cash Flow and the
Underlying Trading Profit cash conversion.
Net Debt including assets held for sale
We present an alternative measure to bring together the various funding sources that are included on the Group's Condensed
Consolidated Balance Sheet on page 37 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.
Six months ended 30 June 2017£m Six months ended 30 June 2016(restated*)£m Year ended 31 December 2016£m
Cash and cash equivalents 117.7 166.2 177.8
Loans receivable 23.5 20.4 22.9
Loans payable (281.7) (273.5) (299.9)
Obligations under finance leases (21.5) (35.7) (28.2)
Derivatives relating to Net Debt* 13.1 20.5 18.1
Net Debt (excluding assets and liabilities held for sale)* (148.9) (102.1) (109.3)
Net Debt balances within assets held for sale** - 2.4 -
Net Debt (including that for assets and liabilities held for sale)* (148.9) (99.7) (109.3)
* Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt.
** There were no assets or liabilities held for sale on the balance sheet as at 30 June 2017 or 31 December 2016.
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure used to assess the efficiency of the resources used by the Group and 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 twelve months to the closing balance sheet date and a two point average of the closing balance sheet and the balance
sheet twelve months ago. The composition of Invested Capital and calculation of ROIC are summarised in the table below.
30 June 2017£m 30 June 2016(restated*)£m 31 December 2016£m
Non-current assets
Goodwill 564.4 545.2 577.9
Other intangible assets 75.5 88.5 83.6
Property, plant and equipment 66.6 70.7 69.3
Interest in joint ventures and associates 16.0 12.6 14.4
Trade and other receivables 51.1 46.9 44.4
Current assets
Inventory 16.6 27.6 22.4
Trade and other receivables 563.0 561.2 543.5
Assets classified as held for sale - 19.7 - -
Total invested capital assets 1,353.2 1,372.4 1,355.5
Current liabilities
Trade and other payables (512.4) (550.5) (524.5)
Liabilities classified as held for sale - (5.6) - -
Non-current liabilities
Trade and other payables (26.0) (18.7) (16.8)
Total invested capital liabilities (538.4) (574.8) (541.3)
Invested capital 814.8 797.6 814.2
Two point average of opening and closing invested capital 806.2 897.9
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