REG - Serco Group PLC - Half-year Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 3
03/08/2017 07:07
- Part 3: For the preceding part double click ID:nRSC9639Mb
768.7
Trading Profit for the prior twelve months* 64.3 147.3 100.3
ROIC%* 8.0% 16.4% 13.0%
Underlying Trading Profit for the prior twelve months* 66.8 100.8 82.1
Underlying ROIC%* 8.3% 11.2% 10.7%
* Profit measures have been restated following the change in accounting policy to include foreign exchange movements
on investment and financing arrangements in net finance costs. As a result, Trading Profit, ROIC, UTP and Underlying ROIC
have been restated.
Overview of financial performance for the six months ended 30 June 2017
Revenue
Reported revenue increased by 1% in the six month period to £1,508.2m (2016: £1,493.2m), a 7% reduction in constant
currency.
No revenue arose in the six month period from operations classified as discontinued, with total revenues in the six month
period ended 30 June 2016 from continuing and discontinued operations being £1,517.9m.
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 six month period was £35.3m (2016 restated: £71.3m), a 50% reduction when compared with the same
period in the prior year. Trading Profit in the six month ended 30 June 2016 included a loss arising on discontinued
operations of £3.1m.
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 £35.3m (2016 restated: £50.6m), down 30%. At constant currency UTP was £21.4m lower than 2016 at £29.2m, with a
movement of £4.2m relating to the results of discontinued operations in 2016.
Commentary on the underlying performance of the Group is provided in the Chief Executive's Review and the Divisional
Reviews sections.
Trading Profit and UTP were the same in the six months ended 30 June 2017, compared with £20.7m of profit included in
Trading Profit and excluded from UTP in the same period in 2016. In 2017 there have been no charges or releases to OCPs,
compared with net releases of £13.4m in the period same period in 2016. Excluded from UTP in 2016 were net releases of
£3.6m relating to other provisions and accruals for items identified during the 2014 Contract and Balance Sheet Review.
Such items are expected to reduce in scale as these provisions and accruals are utilised and we will only disclose any
profit impact separately if any items are individually material. UTP also excluded the benefit arising from the
non-depreciation of assets classified as held for sale in 2016 of £0.2m; there were no such assets in 2017. Other one-time
items of £3.5m excluded from UTP in 2016 related to a pension scheme settlement arising from the early exit of a UK Local
Authority contract in 2015; there were no adjustments necessary for one-time items in 2017.
The tax impact of items in UTP and other non underlying tax items are discussed in the tax section of this Finance Review.
Discontinued operations
The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in
2015 and 2016. The most significant part of this business was disposed in 2015, and the disposal of one of the two
remaining elements of the offshore business was completed in March 2016 and the final element completed in December 2016.
The residual UK onshore private sector BPO operations were sold or exited in 2016 with the exception of one business for
which the disposal completed in July 2017. Total revenues for the remaining operations were £5.3m and UTP was £0.1m for
the six months ended 30 June 2017, and therefore the results have been included in continuing operations in 2017 on the
grounds of immateriality.
The amounts reported as discontinued operations were as follows:
Six months ended 30 June 2017£m Six months ended 30 June 2016£m Year ended 31 December 2016£m
Revenue - 24.7 36.8
Underlying Trading Loss - (4.2) (4.6)
Onerous contract and Balance Sheet Review adjustments - 0.9 0.8
Benefit from non-depreciation and non-amortisation of assets held for sale - 0.2 0.5
Trading Loss - (3.1) (3.3)
Amortisation and impairment of intangibles arising on acquisition - (0.1) -
Operating loss before exceptional items - (3.2) (3.3)
Exceptional loss on disposal of subsidiaries and operations - (0.3) (2.8)
Other exceptional operating items - (3.9) (11.4)
Exceptional operating items - (4.2) (14.2)
Operating loss - (7.4) (17.5)
Exceptional finance costs - (0.4) (0.4)
Loss before tax - (7.8) (17.9)
Tax charge - (0.1) (0.1)
Net loss on discontinued operations (attributable to equity owners of the Company) as presented in the income statement - (7.9) (18.0)
Joint ventures and associates - share of results for the six months ended 30 June 2017
In 2017 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 £9.9m (2016: £12.2m) and £3.3m (2016: £7.2m)
respectively. Total revenues generated by these businesses were £480.2m (2016: £508.9m) and £78.2m (2016: £75.6m)
respectively. From September 2016 there was a change in the AWE Management Limited shareholding structure, with the
Group's shareholding reducing from 33.3% to 24.5% by way of a return of shares.
While the revenues and individual line items are not consolidated in the Group's Condensed Consolidated Income Statement,
summary financial performance measures for our proportion of the aggregate of all joint ventures and associates are set out
below for information purposes.
Six months ended 30 June 2017£m Six months ended 30 June 2016£m Year ended 31 December 2016£m
Revenue 180.2 293.6 480.8
Operating profit 17.8 21.4 40.7
Net investment finance costs - (0.3) (0.6)
Income tax expense (3.2) (3.4) (6.7)
Profit after tax 14.6 17.7 33.4
Dividends received from joint ventures and associates 13.8 19.7 40.0
Exceptional items for the six months ended 30 June 2017
Exceptional items are non-recurring 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.
Exceptional items arose on both the continuing and discontinued operations of the Group in 2016. Exceptional items arising
on discontinued operations are disclosed on the face of the Condensed Consolidated Income Statement within the profit or
loss attributable to discontinued operations. There were no discontinued operations in 2017.
Six months ended 30 June 2017£m Six months ended 30 June 2016£m Year ended 31 December 2016£m
Exceptional items arising on continuing operations
Exceptional profit / (loss) on disposal of subsidiaries and operations 0.1 (0.9) 2.9
Other exceptional operating items on continuing operations
Impairment of goodwill - - (17.8)
Restructuring costs (13.3) (6.2) (17.2)
Aborted transaction costs - 0.3 (0.1)
Costs associated with UK Government review (0.4) (0.9) (0.1)
Release of UK frontline clinical health contract provisions - - 0.6
Settlement of defined benefit pension obligations - - (10.7)
Impairment of interest in joint venture and related loan balances 2.2 - (13.9)
Other exceptional operating items (11.5) (6.8) (59.2)
Exceptional operating items arising on continuing operations (11.4) (7.7) (56.3)
Exceptional items arising on discontinued operations
Exceptional loss on disposal of subsidiaries and operations - (0.3) (2.8)
Other exceptional operating items on discontinued operations
Restructuring costs - (0.4) (1.1)
Movements in indemnities provided on business disposals - (7.8) (13.7)
Movement in the fair value of assets transferred to held for sale - 4.3 3.4
Other exceptional operating items - (3.9) (11.4)
Exceptional operating items arising on discontinued operations - (4.2) (14.2)
Exceptional operating items arising on continuing and discontinued operations - (11.9) (70.5)
Exceptional finance costs - discontinued - (0.4) (0.4)
Exceptional tax - continuing (15.9) (0.1) 3.1
Total operating and financing exceptional items in continuing and discontinued operations (27.3) (12.4) (67.8)
Exceptional profit / (loss) on disposals of continuing operations
There were no material disposals of continuing operations in the six months ended 30 June 2017 or the six months ended 30
June 2016.
Other exceptional operating items arising on continuing operations
In the six months ended 30 June 2017, a charge of £13.3m (2016: £6.2m) arose in relation to the restructuring programme
resulting from the Strategy Review, as discussed in the Chief Executive's Review in the Group's 2016 Annual Report and
Accounts. This included redundancy charges, asset impairments and other incremental costs. Due to the nature and scale of
the impact of the transformation stage of our Strategy Review, the incremental costs associated with this programme were
considered to be exceptional in the prior year and have been treated consistently in 2017.
There were exceptional costs totalling £0.4m (2016: £0.9m) associated with the UK Government reviews and the programme of
Corporate Renewal. These costs were treated as exceptional when the matter first arose and consistent treatment is applied
in 2017.
In the second half of 2016 the equity investment of a joint venture and the related loan balances with this business were
impaired. In the six months ended 30 June 2017 a payment of £2.2m was received against the impaired loan.
Exceptional tax
Exceptional tax items resulted in a tax charge of £15.9m (2016: charge of £0.1m on continuing operations), including a
£0.2m credit on exceptional items within operating profit and a £16.1m charge in respect of other exceptional tax items.
The other exceptional tax items relate to the tax impact of the pension buy-in disclosed in note 15 to the Consolidated
Financial Statements, which led to a £95.0m reduction in the IFRS valuation of the Group's defined benefit pension schemes
and consequently to a deferred tax charge to the income statement of £16.1m. Further detail of the impact of movements in
the valuation of defined benefit pension schemes is discussed in the tax section of this Finance Review.
Pre exceptional finance costs and investment revenue for the six months ended 30 June 2017
Investment revenue of £3.6m (2016: £4.7m) includes interest accruing on net retirement benefit assets of £1.6m (2016:
£2.3m), interest earned on deposits and other receivables of £1.4m (2016: £1.9m) and the movement in discounting of other
receivables of £0.6m (2016: £0.5m).
Finance costs of £11.2m (2016 restated: £11.4m) includes loan interest incurred on the USPP loans of £7.2m (2016: £7.9m),
facility fees and other charges of £1.4m (2016: £2.0m), interest payable on finance leases of £0.8m (2016: £1.0m), the
movement in discount on provisions of £1.7m (2016: £0.9m) and a charge for foreign exchange on financing activities of
£0.1m (2016: credit of £0.4m). The last of these items was previously included in operating profit for the six months
ended 30 June 2016 and therefore represents a restatement on the previously reported results.
Tax charge for the six months ended 30 June 2017
Six months ended 30 June 2017£m Six months ended 30 June 2016(restated*)£m Year ended 31 December 2016£m
Profit before tax Tax charge Profit before tax Tax charge Profit before tax Tax charge
Underlying profit before tax* 27.7 (10.7) 43.9 (8.1) 69.5 (24.4)
Effective tax rate* 38.6% 18.5% 35.2%
Non underlying items - - 20.7 (0.7) 18.2 6.7
Impact of pension deferred tax movement on tax charge* ** - (6.3) - 4.4 - -
Amortisation and impairment of intangibles arising on acquisition (2.2) 0.6 (2.0) 0.6 (5.1) 1.8
Discontinued pre exceptional - - 3.2 0.1 3.3 0.1
Profit before tax, pre exceptional items 25.5 (16.4) 65.8 (3.7) 85.9 (15.8)
Effective tax rate 64.3% 5.6% 18.4%
Exceptional items** (11.4) (15.9) (12.3) (0.1) (70.9) 3.1
Discontinued exceptional items - - 4.6 - 14.6 -
Statutory (continuing operations only) 14.1 (32.3) 58.1 (3.8) 29.6 (12.7)
* As explained in more detail below, 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.
** The total impact of pension deferred tax movements in the six months ended 30 June 2017 was a charge of £22.4m,
£16.1m of which relates to the pension buy-in disclosed in note 15 to the Consolidated Financial Statements, which is
included in the exceptional tax charge for the period.
The tax charge on an underlying basis, reflecting UTP of £35.3m (2016 restated: £50.6m) net of finance costs of £7.6m
(2016: £6.7m), was £10.7m (2016 restated: £8.1m), representing an underlying effective tax rate of 38.6% (2016 restated:
18.5%). The increase in rate is primarily due to differences in the proportions of profits and losses made in the various
geographic regions in which we operate which affects the tax charge due to both the varying tax rates and the impact of not
recognising the tax benefits arising on UK losses.
In the six months ended 30 June 2017, a total tax charge of £32.3m (2016: £3.9m) was recognised, being £32.3m (2016: £3.8m)
on continuing operations profit of £14.1m (2016: £58.1m) and £nil (2016: £0.1m) on discontinued operations losses of £nil
(2016: £7.8m).
In respect of the results of our continuing operations, the profit before interest, exceptional items and tax of £33.1m
(2016: £72.5m) less pre-exceptional finance costs of £7.6m (2016 : £6.7m) is £25.5m (2016: £65.8m), which incurs a tax
charge of £16.4m (2016: £3.7m), giving a tax rate of 64.3% (2016: 5.6%).
The principal reasons why the tax rate on profit before exceptional items and tax from continuing operations at 64.3% is
higher than the UK standard corporation tax rate of 19.25% is due to the pension movement commented on below. In addition,
higher rates of tax on profits arise on our international operations, and there is an absence of a deferred tax credit for
losses incurred in the UK, because a deferred tax asset cannot be recognised against these losses until we can confidently
forecast these losses being utilised against future profits (which includes the result of UK divisions and the majority of
corporate costs). These factors are partially offset by the impact of our joint ventures whose post-tax results are
included in our pre-tax profit.
Our tax charge continues 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 higher than prevailing standard corporation
tax rates as we will not be able to recognise the associated tax benefits arising. When our UK business returns to
sustainable profitability our existing UK tax losses will be recognised or utilised, and the effective rate will be
reduced.
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 capped at the level supported by future profit forecasts, the decrease in the deferred tax
liability associated with the pension changes (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 reduction 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 in the
six months ended 30 June 2017, and the underlying effective tax rate for the six months ended 30 June 2016 has been
restated to be presented on a comparable basis. Although the net impact of the restatement is zero for the full year 2016
results, for the six months ended 30 June 2017, the total impact of such movements on the statutory tax charge was £22.4m,
£16.1m of which arose as a result of the pension buy-in disclosed in note 15 to the Consolidated Financial Statements and
has been treated as an exceptional tax item, and £6.3m relates to other pension movements and is treated as an adjustment
to the underlying tax charge.
Deferred tax assets as at 30 June 2017
As at 30 June 2017 there is a net deferred tax asset of £20.0m, this consists of a deferred tax asset of £54.1m and
deferred tax liability of £34.1m.
A £10.0m UK deferred tax asset has been recognised at 30 June 2017 (2016: £10.5m) on the basis of forecast utilisation
against future taxable profits. An expected change in the UK loss utilisation laws in the second half of 2017 is estimated
to reduce the value of this deferred tax asset by £3.7m; this will be reported in the second half of the year once the
change in legislation has been passed.
Taxes paid in the six months ended 30 June 2017
Net corporate income tax of £7.9m was paid during the six months ended 30 June 2017, relating primarily to our operations
in AsPac (£3.6m), Europe (£1.3m), Middle East (£0.9m) and Americas (£2.0m).
The amount of tax paid (£7.9m) differs from the tax charge in the period (£10.7m) mainly due to the effect of future
expected cash tax outflows for which a charge has been taken in the current period and the impact of the time lag on
receipts of cash from joint ventures and associates for losses transferred to them.
Dividends
The Board has not declared an interim dividend for 2017. The Board's appraisal of the appropriateness of dividend payments
takes into account the Group's underlying earnings, cash flows and financial leverage, together with the requirement to
maintain an appropriate level of dividend cover and the prevailing market outlook. Although the Board is committed to
resuming dividend payments as soon as it believes it prudent to do so, in assessing whether we should resume dividend
payments in respect of 2017, we have been mindful of the fact that our forecasts for 2017 anticipate a reduction in
earnings, a free cash outflow and an increase in net debt. In these circumstances, the Board believes that it would not be
prudent to resume dividend payments at the current juncture.
Share count and EPS
The weighted average number of shares for EPS purposes was 1,091.1m at 30 June 2017 compared to 1,088.8m at 30 June 2016.
EPS before exceptional items from both continuing and discontinued operations was 0.82p per share (2016: 5.40p); including
the impact of exceptional items EPS was a loss of 1.68p (2016: profit of 4.27p). Underlying EPS was 1.55p per share (2016
restated: 3.28p).
Cash flows
UTP of £35.3m for the six months ended 30 June 2017 (2016 restated: £50.6m) converts into a trading cash outflow of £9.7m
(2016 restated: outflow of £5.3m). The negative conversion is primarily due to the cash outflows arising on the
utilisation of contract provisions of £40.4m (2016: £44.8m).
The table below shows the operating profit and FCF reconciled to movements in Net Debt. FCF for the six months ended 30
June 2017 was an outflow of £26.8m (2016 restated: £22.5m). Commentary on the FCF performance of the Group is provided in
the Chief Executive's Review. It should be noted that during the half year 2017, within the working capital movement of
£15.1m, we unwound £7.7m of the receivables financing facility, which has a zero balance at 30 June 2017.
The movement in Net Debt since 31 December 2016 is an increase of £39.6m in 2017, primarily relating to £26.8m of FCF
outflow and £19.7m of exceptional items, together with foreign exchange gains on items included in Net Debt of £8.5m.
Six months ended 30 June 2017£m Six months ended 30 June 2016(restated*)£m Year ended 31 December 2016£m
Operating profit on continuing operations* 21.7 64.8 42.2
Operating loss on discontinued operations - (7.4) (17.5)
Remove exceptional items 11.4 11.9 70.5
Operating profit before exceptional items on continuing and discontinued operations* 33.1 69.3 95.2
Less: profit from joint ventures and associates (14.6) (17.7) (33.4)
Movement in provisions (42.1) (77.8) (118.4)
Depreciation, amortisation and impairment of property, plant and equipment and intangible assets 26.5 24.3 52.4
Other non-cash movements* 6.8 5.5 11.5
Operating cash inflow before movements in working capital, exceptional items and tax* 9.7 3.6 7.3
Working capital movements (15.1) (14.2) (23.7)
Tax paid (7.9) (6.6) (5.6)
Non-cash R&D expenditure - (0.1) (0.4)
Cash flow from operating activities before exceptional items* (13.3) (17.3) (22.4)
Dividends from joint ventures and associates 13.8 19.7 40.0
Interest received 0.3 0.9 1.4
Interest paid (9.5) (11.1) (20.1)
Capitalised finance costs paid - (0.3) (0.3)
Purchase of intangible and tangible assets net of proceeds from disposals (18.1) (14.4) (31.6)
Free Cash Flow* (26.8) (22.5) (33.0)
Net cash inflow on acquisition and disposal of subsidiaries 0.8 11.1 19.2
Purchase of own shares net of share option proceeds - 0.1 -
Other movements on investment balances - 0.2 0.7
Capitalisation and amortisation of loan costs (0.4) (0.2) (0.7)
Unwind of discounting and capitalisation of interest on loans receivable 0.6 0.4 2.9
New, acquired and disposed finance leases (1.0) - (0.5)
Exceptional items (19.7) (32.4) (40.2)
Cash movements on hedging instruments* (1.6) 24.0 47.0
Foreign exchange loss on Net Debt* 8.5 (17.5) (41.8)
Movement in Net Debt including assets and liabilities held for sale* (39.6) (36.8) (46.4)
Assets held for sale movement in Net Debt - 2.3 4.7
Net Debt at 1 January* (109.3) (67.6) (67.6)
Net Debt at end of period* (148.9) (102.1) (109.3)
Net Debt at 1 January including assets and liabilities held for sale* (109.3) (62.9) (62.9)
Net Debt at end of period including assets and liabilities held for sale* (148.9) (99.7) (109.3)
* Operating profit, other non-cash movements, cash movements on hedging instruments, foreign exchange loss on Net Debt
and Net Debt have been restated following the change in accounting policy regarding foreign exchange movements on
investment and financing arrangements and the change in definition of Net Debt to include derivative financial instruments
that relate to other components of Net Debt. The sub totals including Free Cash Flow have changed as a result.
Net Debt
Including assets and liabilities held for sale as at 30 June 2017£m Including assets and liabilities held for sale as at 30 June 2016 (restated*)£m Including assets and liabilities held for sale as at 31 December 2016£m
Cash and cash equivalents 117.7 168.9 177.8
Loans receivable 23.5 20.4 22.9
Other loans (281.7) (273.5) (299.9)
Obligations under finance leases (21.5) (36.0) (28.2)
Derivatives relating to Net Debt components* 13.1 20.5 18.1
Net Debt* (148.9) (99.7) (109.3)
* As explained above, Net Debt has been restated to include derivative financial instruments that relate to other
components of Net Debt.
Average Net Debt as calculated on a daily basis for the six months ended 30 June 2017 was £178.2m (2016 restated: £115.4m),
compared with the opening and closing positions of £109.3m and £148.9m respectively. Peak Net Debt was £242.7m (2016
restated: £165.2m).
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, 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 30 June 2017, the Group had committed funding of £751m (31 December 2016: £770m), comprising £271m of private
placement notes and a £480m revolving credit facility with a syndicate of banks which was undrawn. In addition, the Group
had a receivables financing facility of £30.0m, which was fully utilised as at 30 June 2016 but was unutilised as at 30
June 2017 (31 December 2016: £7.7m utilised).
Following the further small disposal relating to the private sector BPO business, the Group was required to offer two
thirds of the net disposal proceeds to the debt holders in prepayment. As a result of this process, £3.7m ($4.9m) of
private placement notes were repaid at par on 29 June 2017.
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 policies require us to maintain a minimum proportion of fixed rate debt as a proportion of overall Net
Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 30 June 2017, more than
100% of the Group's Net Debt was at fixed rates. Interest on the revolving credit facility is at floating rate, however it
was undrawn.
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, receivables financing
facility 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.
Twelve months ended 30 June 2017£m Twelve months ended 30 June 2016 (restated*)£m Year ended 31 December 2016£m
Operating profit before exceptional items on continuing and discontinued operations* 59.0 143.3 95.2
Remove: Amortisation and impairment of intangibles arising on acquisition 5.3 4.0 5.1
Trading Profit* 64.3 147.3 100.3
Exclude: Share of joint venture post-tax profits (30.3) (40.8) (33.4)
Include: Dividends from joint ventures 34.1 36.4 40.0
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non acquisition intangible assets 49.3 64.9 47.3
Add back: Foreign exchange on investing and financing arrangements* 0.7 (0.7) 1.2
Add back: Share based payment expense 11.7 10.6 9.7
Covenant EBITDA 129.8 217.7 165.1
Net finance costs on continuing and discontinued operations* 13.5 21.2 12.6
Exclude: Net interest receivable on retirement benefit obligations 4.0 4.7 4.7
Exclude: Movement in discount on other debtors 1.1 0.6 1.0
Exclude: Foreign exchange on investing and financing arrangements* 0.7 (0.7) 1.2
Add back: Movement in discount on provisions (3.2) (3.6) (2.4)
Covenant net finance costs 16.1 22.2 17.1
Recourse net debt (including assets and liabilities held for sale)* 148.9 99.7 109.3
Less: Disposal vendor loan note, encumbered cash and other adjustments 27.5 36.0 28.5
Covenant adjustment for average FX rates 3.7 (20.1) (23.0)
CTNB 180.1 115.6 114.8
CTNB / covenant EBITDA (not to exceed 3.5x) 1.4x 0.5x 0.7x
Covenant EBITDA / Covenant net finance costs (at least 3.0x) 8.1x 9.8x 9.7x
* As explained above, operating profit, Trading Profit and net finance costs have been restated following the change
in accounting policy regarding foreign exchange movements on investment and financing arrangements. These adjustments have
been reversed in order to maintain the definition of EBITDA and net finance costs per the covenant. CTNB is consistent
with the new definition of Net Debt and is unaffected by the change in accounting policy.
Net assets summary
30 June 2017£m 30 June 2016£m 30 June 2016£m 30 June 2016£m 31 December 2016£m
As reported* Including assets held for sale Adjustment for assets held for sale As reported As reported*
Non-current assets
Goodwill 564.4 547.6 (2.4) 545.2 577.9
Other intangible assets 75.5 88.5 - 88.5 83.6
Property, plant and equipment 66.6 70.7 - 70.7 69.3
Other non-current assets 71.6 70.2 - 70.2 73.0
Deferred tax assets 54.1 42.5 - 42.5 50.8
Retirement benefit assets 18.3 153.9 - 153.9 150.4
850.5 973.4 (2.4) 971.0 1,005.0
Current assets
Inventories 16.6 27.6 - 27.6 22.4
Trade and other current assets 574.6 585.9 (9.9) 576.0 548.4
Current tax 14.1 12.9 (4.7) 8.2 11.0
Cash and cash equivalents 117.7 168.9 (2.7) 166.2 177.8
723.0 795.3 (17.3) 778.0 759.6
Assets classified as held for sale - - 19.7 19.7 -
Total current assets 723.0 795.3 2.4 797.7 759.6
Total assets 1,573.5 1,768.7 - 1,768.7 1,764.6
Current liabilities
Trade and other current liabilities (515.4) (557.9) 3.2 (554.7) (525.1)
Current tax liabilities (28.2) (11.5) 0.1 (11.4) (25.9)
Provisions (156.4) (153.9) 1.1 (152.8) (172.3)
Obligations under finance leases (9.6) (15.6) 0.3 (15.3) (12.3)
Loans (33.1) (9.7) - (9.7) (9.7)
(742.7) (748.6) 4.7 (743.9) (745.3)
Amounts classified as held for sale - - (5.6) (5.6) -
Total current liabilities (742.7) (748.6) (0.9) (749.5) (745.3)
Non-current liabilities
Other non-current liabilities (26.0) (18.7) - (18.7) (16.8)
Deferred tax liabilities (34.1) (28.6) - (28.6) (30.5)
Provisions (220.2) (274.6) 0.9 (273.7) (249.4)
Obligations under finance leases (11.9) (20.4) - (20.4) (15.9)
Loans (248.6) (263.8) - (263.8) (290.2)
Retirement benefit obligations (17.5) (13.6) - (13.6) (17.7)
(558.3) (619.7) 0.9 (618.8) (620.5)
Total liabilities (1,301.0) (1,368.3) - (1,368.3) (1,365.8)
Net assets 272.5 400.4 - 400.4 398.8
* No amounts were included in held for sale as at 30 June 2017 or as at 31 December 2016.
The breakdown of the Group's net assets is summarised above, showing the impact of the assets and liabilities held for sale
for each line item for 30 June 2016.
At 30 June 2017 the balance sheet had net assets of £272.5m, a movement of £126.3m from the closing net asset position of
£398.8m as at 31 December 2016. The decrease in net assets is mainly due to the following movements:
· A decrease in the retirement benefit assets of Group funded defined benefit pension schemes of £131.9m. In June
2017, the Trustees of the Group's primary defined benefit pension scheme entered into a bulk annuity purchase whereby an
insurer will fund future benefit payments to the relevant members. The liability to pay the members remains with the
pension scheme, which therefore continues to include the relevant pension liabilities, but an insurance asset is held which
is an equal and opposite amount to the liability. This removes the risk of longevity and investment movements for this
portion of the scheme on a funding basis, and also removes the accounting risk of movements in underlying assumptions on
the liabilities. The transaction resulted in a significant reduction in the surplus of the pension scheme under IFRS
accounting convention, but resulted in a reduction in the deficit that is actuarially assessed for funding purposes of
approximately £12m.
· A decrease in provisions of £45.1m. Further details on the provision balance is provided below.
· Trade and other current assets and liabilities increased by £35.9m, and Net Debt increased by £39.6m. Further
details of these movements are provided in the cash flow and Net Debt sections above.
· A decrease in goodwill by £13.5m caused by movements in foreign exchange rates.
Provisions
The total of current and non-current provisions has decreased by £45.1m since 31 December 2016. The movement is primarily
due to a decrease in contract provisions of £39.9m as set out below:
Onerous Contract Provisions£m
At 1 January 2017 (220.2)
Utilised during the period 40.4
Unwinding of discount (1.7)
FX 1.2
At 30 June 2017 (180.3)
In the first half of the year we have analysed the performance of the contracts with OCPs to assess whether there have been
any triggering events that would require the provisions to be re-calculated. Our assessment is that there have been no
triggering events in the first half of the year. However, we are aware that there are a number of material milestones in
the second half of the year, including negotiations with customers, closing out contracts that end in the period, the
implementation of new technology and the impact on operating performance. The outcomes of these material milestones could
result in the provisions being re-assessed. At this point in time, our assessment is that any potential risks and
opportunities associated with these outcomes are balanced across our contract portfolio.
Angus Cockburn
Group Chief Financial Officer
3 August 2017
Principal risks and uncertainties
The principal risks and uncertainties that could materially affect Serco's results and operations are set out on pages 16
to 23 of the 2016 Annual Report and Accounts and the key headline risks for the remainder of 2017 are restated below. This
summary is not intended, and should not be used, as a substitute for reading the appropriate pages of the 2016 Annual
Report and Accounts which include further commentary on the risks and the Group's management of them.
· Failure to grow profitably
· Failure to build our reputation or act with integrity
· Failure to transform and deliver the Group strategy
· Financial control failure and finance IT systems failure
· Major information security breach
· Misreporting of performance
· Failure to attract and retain leaders fit for the future
· Catastrophic event
· Contract non-compliance and contract non-performance
· Material legal and regulatory compliance failure
In addition to the principal risks and uncertainties listed above, there may be additional risks unknown to Serco and other
risks, currently believed to be immaterial, which could turn out to be material. These risks, whether they materialise
individually or simultaneously, could significantly affect the Group's business and financial results.
Responsibility statement
We confirm to the best of our knowledge:
a. the condensed set of financial statements has been prepared in accordance with IAS34 Interim financial reporting;
b. the interim management report includes a fair review of the information required by the DTR 4.2.7R, being an
indication of important events that have occurred during the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
- More to follow, for following part double click ID:nRSC9639MdRecent news on Serco
See all newsREG - Serco Group PLC - Director/PDMR Shareholding
AnnouncementREG - Serco Group PLC - Director/PDMR Shareholding
AnnouncementREG - Serco Group PLC - Result of AGM and Director Declaration
AnnouncementREG - Serco Group PLC - Director/PDMR Shareholding
AnnouncementREG - Serco Group PLC - Director/PDMR Shareholding
Announcement