REG - Serco Group PLC - Half-year Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 4
03/08/2017 07:07
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principal risks and uncertainties for the remaining six
months of the year; and
c. the interim management report includes a fair review of the information required by DTR 4.2.8R, being related party
transactions that have taken place in the first six months of the current financial year and that have materially affected
the financial position or performance of the entity during that period; and any changes in the related party transactions
described in the last annual report that could do so.
By order of the Board,
Rupert Soames Group Chief Executive 3 August 2017 Angus CockburnGroup Chief Financial Officer
Independent review report to Serco Group PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report
for the six months ended 30 June 2017 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 Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial
statements in the half-yearly financial report for the six months ended 30 June 2017 is not prepared, in all material
respects, in accordance with IAS34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and
Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for
use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and other review procedures. We read the other information
contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are
responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International
Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of
financial statements included in the half-yearly financial report in accordance with IAS34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the
half-yearly financial report based on our review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting
the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Company those
matters we are required 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 review work, for this report, or for the
conclusions we have reached.
Stephen Wardell
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London, E14 5GL
3 August 2017
Financial StatementsCondensed consolidated income statement
Condensed consolidated income statement
Continuing operations Six months ended 30 June 2017(unaudited)£m Six months ended 30 June 2016 (restated* **)(unaudited)£m Year ended 31 December 2016(restated* **)(audited)£m
Revenue 1,508.2 1,493.2 3,011.0
Cost of sales** (1,374.8) (1,333.0) (2,724.6)
Gross profit** 133.4 160.2 286.4
Administrative expenses
General and administrative expenses* ** (112.7) (103.5) (216.2)
Exceptional profit / (loss) on disposal of subsidiaries and operations 0.1 (0.9) 2.9
Other exceptional operating items (11.5) (6.8) (59.2)
Other expenses - amortisation and impairment of intangibles arising on acquisition (2.2) (1.9) (5.1)
Total administrative expenses* ** (126.3) (113.1) (277.6)
Share of profits in joint ventures and associates, net of interest and tax 14.6 17.7 33.4
Operating profit* 21.7 64.8 42.2
Operating profit before exceptional items* 33.1 72.5 98.5
Investment revenue 3.6 4.7 9.3
Finance costs* (11.2) (11.4) (21.9)
Total net finance costs* (7.6) (6.7) (12.6)
Profit before tax 14.1 58.1 29.6
Tax on profit before exceptional items (16.4) (3.7) (15.8)
Exceptional tax (15.9) (0.1) 3.1
Tax charge (32.3) (3.8) (12.7)
(Loss) / profit for the period from continuing operations (18.2) 54.3 16.9
Loss for the period from discontinued operations - (7.9) (18.0)
(Loss) / profit for the period (18.2) 46.4 (1.1)
Attributable to:
Equity owners of the Company (18.3) 46.5 (1.2)
Non controlling interests 0.1 (0.1) 0.1
(Loss) / Earnings Per share (EPS)
Basic EPS from continuing operations (1.68p) 5.00p 1.55p
Diluted EPS from continuing operations (1.68p) 4.82p 1.50p
Basic EPS from discontinued operations - (0.73p) (1.66p)
Diluted EPS from discontinued operations - (0.70p) (1.66p)
Basic EPS from continuing and discontinued operations (1.68p) 4.27p (0.11p)
Diluted EPS from continuing and discontinued operations (1.68p) 4.12p (0.11p)
* General and administrative expenses and net finance costs have been restated following the change in accounting
policy regarding foreign exchange movements on investment and financing arrangements. See note 1.
** Costs included within costs of sales and general and administrative expenses have been reallocated, resulting in a
restatement. See note 1.
Condensed consolidated statement of comprehensive income
Condensed consolidated statement of comprehensive income
Six months ended 30 June 2017(unaudited)£m Six months ended 30 June 2016 (unaudited)£m Year ended 31 December 2016(audited)£m
(Loss) / profit for the period (18.2) 46.4 (1.1)
Other comprehensive income for the period:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial (loss) / gain on defined benefit pension schemes* (130.8) 21.7 9.0
Actuarial gain on reimbursable rights* - 0.8 2.9
Tax relating to items not reclassified* 22.4 (4.4) (1.7)
Share of other comprehensive income in joint ventures and associates 0.8 0.2 14.8
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss) / gain on translation of foreign operations** (7.2) 44.0 80.3
Fair value (loss) / gain on cash flow hedges during the period** (0.3) 4.2 2.3
Tax relating to items that may be reclassified** 0.1 (0.1) -
Share of other comprehensive income in joint ventures and associates - 0.6 1.0
Total other comprehensive (expense) / income for the period (115.0) 67.0 108.6
Total comprehensive (loss) / income for the period (133.2) 113.4 107.5
Attributable to:
Equity owners of the Company (133.2) 113.4 107.1
Non controlling interest - - 0.4
* 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.
Condensed consolidated statement of changes in equity
Condensed consolidated statement of changes in equity
Share capital£m Share premium account £m Capital redemption reserve£m Retained earnings£m Retirement benefit obligations reserve£m Share based payment reserve£m Own shares reserve£m Hedging and translation reserve£m Total shareholders' equity£m Non controlling interest£m
At 1 January 2016 22.0 327.9 0.1 68.5 (101.3) 80.9 (59.8) (57.7) 280.6 1.5
Total comprehensive income for the period - - - 47.3 18.1 - - 48.0 113.4 -
Shares transferred to option holders on exercise of share options - - - - - (0.3) 0.3 - - -
Expense in relation to share based payments - - - - - 4.9 - - 4.9 -
At 30 June 2016 (unaudited) 22.0 327.9 0.1 115.8 (83.2) 85.5 (59.5) (9.7) 398.9 1.5
Total comprehensive income for the period - - - (32.7) (7.9) - - 34.3 (6.3) 0.4
Shares transferred to option holders on exercise of share options - - - - - (7.4) 7.4 - - -
Expense in relation to share based payments - - - - - 4.8 - - 4.8 -
Change in non controlling interest - - - - - - - - - (0.5)
At 31 December 2016 (audited) 22.0 327.9 0.1 83.1 (91.1) 82.9 (52.1) 24.6 397.4 1.4
Total comprehensive income for the period - - - (17.3) (108.4) - - (7.5) (133.2) -
Shares transferred to option holders on exercise of share options - - - - - (1.1) 1.1 - - -
Expense in relation to share based payments - - - - - 6.9 - - 6.9 -
Change in non controlling interest - - - - - - - - - -
At 30 June 2017 (unaudited) 22.0 327.9 0.1 65.8 (199.5) 88.7 (51.0) 17.1 271.1 1.4
Condensed consolidated balance sheet
Condensed consolidated balance sheet
At 30 June 2017(unaudited)£m At 30 June 2016(unaudited)£m At 31 December 2016(audited)£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
Interests in joint ventures and associates 16.0 12.6 14.4
Trade and other receivables 51.1 46.9 44.4
Derivative financial instruments 4.5 10.7 14.2
Deferred tax assets 54.1 42.5 50.8
Retirement benefit assets 18.3 153.9 150.4
850.5 971.0 1,005.0
Current assets
Inventories 16.6 27.6 22.4
Trade and other receivables 563.0 561.2 543.5
Current tax assets 14.1 8.2 11.0
Cash and cash equivalents 117.7 166.2 177.8
Derivative financial instruments 11.6 14.8 4.9
723.0 778.0 759.6
Assets classified as held for sale - 19.7 -
723.0 797.7 759.6
Total assets 1,573.5 1,768.7 1,764.6
Current liabilities
Trade and other payables (512.4) (550.5) (524.5)
Derivative financial instruments (3.0) (4.2) (0.6)
Current tax liabilities (28.2) (11.4) (25.9)
Provisions (156.4) (152.8) (172.3)
Obligations under finance leases (9.6) (15.3) (12.3)
Loans (33.1) (9.7) (9.7)
(742.7) (743.9) (745.3)
Liabilities directly associated with assets classified as held for sale - (5.6) -
(742.7) (749.5) (745.3)
Non-current liabilities
Trade and other payables (26.0) (18.7) (16.8)
Deferred tax liabilities (34.1) (28.6) (30.5)
Provisions (220.2) (273.7) (249.4)
Obligations under finance leases (11.9) (20.4) (15.9)
Loans (248.6) (263.8) (290.2)
Retirement benefit obligations (17.5) (13.6) (17.7)
(558.3) (618.8) (620.5)
Total liabilities (1,301.0) (1,368.3) (1,365.8)
Net assets 272.5 400.4 398.8
Equity
Share capital 22.0 22.0 22.0
Share premium account 327.9 327.9 327.9
Capital redemption reserve 0.1 0.1 0.1
Retained earnings 65.8 115.8 83.1
Retirement benefit obligations reserve (199.5) (83.2) (91.1)
Share based payment reserve 88.7 85.5 82.9
Own shares reserve (51.0) (59.5) (52.1)
Hedging and translation reserve 17.1 (9.7) 24.6
Equity attributable to owners of the Company 271.1 398.9 397.4
Non-controlling interest 1.4 1.5 1.4
Total equity 272.5 400.4 398.8
Condensed consolidated cash flow statement
Condensed consolidated cash flow statement
Six months ended 30 June 2017(unaudited)£m Six months ended 30 June 2016 (restated*) (unaudited)£m Year ended 31 December 2016(audited)£m
Net cash outflow from operating activities before exceptional items* (13.3) (17.3) (22.4)
Exceptional items (19.7) (32.1) (39.9)
Net cash outflow from operating activities* (33.0) (49.4) (62.3)
Investing activities
Interest received 0.3 0.9 1.4
Decrease in security deposits - - (0.4)
Dividends received from joint ventures and associates 13.8 19.7 40.0
Proceeds from disposal of property, plant and equipment 0.3 0.1 0.6
Proceeds from disposal of intangible assets 0.1 0.1 0.1
Proceeds on disposal of subsidiaries and operations 0.8 11.2 19.4
Acquisition of subsidiaries, net of cash acquired - (0.1) (0.2)
Purchase of other intangible assets (8.3) (6.8) (15.1)
Purchase of property, plant and equipment (10.2) (7.8) (17.2)
Net cash (outflow) / inflow from investing activities (3.2) 17.3 28.6
Financing activities
Interest paid (9.5) (10.7) (20.1)
Exceptional finance costs paid - (0.3) (0.3)
Capitalised finance costs paid - (0.3) (0.3)
Repayment of loans (3.8) (135.8) (135.5)
Decrease in loans to joint ventures and associates - 0.2 1.1
Capital element of finance lease repayments (7.6) (8.6) (17.0)
Cash (loss) / gains from hedging instruments* (1.6) 24.0 47.0
Proceeds from issue of other share capital and exercise of share options - 0.1 -
Net cash outflow from financing activities* (22.5) (131.4) (125.1)
Net decrease in cash and cash equivalents (58.7) (163.5) (158.8)
Cash and cash equivalents at beginning of period 177.8 323.6 323.6
Net exchange (loss) / gain (1.4) 3.6 7.8
Cash reclassified to assets held for sale - 2.5 5.2
Cash and cash equivalents at end of period 117.7 166.2 177.8
* Net cash outflow from operating activities and net cash (outflow) / inflow from financing activities have been
restated following the change in accounting policy regarding foreign exchange movements on investment and financing
arrangements. See note 1.
Notes to the Consolidated Financial Statements
1. General information, going concern and accounting policies
The basis of preparation in this preliminary announcement is set out below.
The information contained herein for the year ended 31 December 2016 does not constitute statutory accounts as defined in
section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar
of Companies. The auditor's report on those accounts was not qualified and did not contain statements made under s498(2)
or (3) of the Companies Act 2006 and did not draw attention to any matters by way of emphasis of matter.
The annual financial statements of Serco Group plc are prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union (EU). The condensed set of financial statements included in this half
yearly financial report has been prepared in accordance with International Accounting Standard (IAS) 34 Interim financial
reporting, as adopted by the EU.
In the six months ended 30 June 2017, there have been no significant changes to accounting under IFRS which have impacted
the Group's consolidated financial statements. The same accounting policies, presentation and methods of computation are
followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements
except for as noted below. The significant judgements made by management in applying the Group's accounting policies and
the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as
at and for the year ended 31 December 2016.
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.
IFRS15 Revenue from contracts with customers
IFRS15 has been endorsed by the EU and will be effective from 1 January 2018.
This new standard supersedes: IAS11 Construction contracts; IAS18 Revenue; IFRIC13 Customer loyalty programmes; IFRIC15
Agreements for the construction of real estate; IFRIC18 Transfers of assets from customers; and SIC-31 Revenue - Barter
transactions involving advertising services.
The new standard is intended to bring greater transparency and comparability to financial reporting.
Some areas of accounting in the outsourcing sector could be significantly impacted by IFRS15. However, due to the
composition of our contract base and the impact of our Contract and Balance Sheet Review in 2014 and our current accounting
policies, the impact for Serco from the adoption of IFRS15 is not expected to fundamentally change the presentation of our
income statement or the level of profit recognised in the periods disclosed. In addition, some of the Group's most complex
contracts which could be impacted by IFRS15 have OCPs and therefore any adjustment to profits under IFRS15 does not impact
the profitability of the Group since 2014. Contracts with OCPs by their very nature are reported at a break even position,
such that any increase or decrease in profitability as a result of IFRS15 would impact only the initial OCP calculations
determined in 2014, unless the adjustments are so significant to have turned a loss making contract into a profitable one.
This level of adjustment is not expected for the Group's contracts.
IFRS15 could result in a delay of revenues and profits over those previously recognised, in particular with respect of
percentage to completion accounting, which is not a significant area of accounting for the Group, or where elements of
revenues associated with transition activities (also referred to as 'phase in') have been recognised in the early stages of
contracts. Such transition payments, or payments made to compensate for expenditure on bid activity may be made by
customers to match with a company's up-front investment, but under IFRS15 such cash flows are less likely to result in
revenue being recognised than under historic accounting. IFRS15 is of more relevance to the Group in relation to the
accounting for new contracts rather than those which were in place at the time of adoption of the new standard.
A project to assess the full impact of the new standard is well advanced and will be completed in the second half of the
year and subject to audit by the Group's external auditors.
Under the transition rules IFRS15 will be applied retrospectively to the prior period in accordance with IAS8 Accounting
policies, changes in accounting estimates and errors, subject to the following expedients:
· contracts completed prior to 1 January 2018 and that begin and end within the same annual reporting period will not
be restated;
· for contracts that have variable consideration and which have completed prior to 1 January 2018, the revenues
recognised will reflect the actual outcome, rather than being estimated and trued up; and
· the disclosures required for comparative periods in respect of amount of revenue allocated to the remaining
performance obligations and an explanation of when that amount is expected to be recognised will not be made.
The cumulative effect of initially applying the standard will be shown as an adjustment to brought forward retained
earnings as at 1 January 2017.
Prior period restatements
Change in accounting policy regarding the classification of foreign exchange movements on investment and financing
arrangements
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. The new policy is to include foreign exchange movements on investment and financing
arrangements within investment revenue or finance costs as appropriate. Such transactions include foreign exchange
movements on non Sterling cash and financing arrangements, related derivative financial instruments and any income or costs
associated with such balances. As a result of this change in accounting policy, the prior period income statement and cash
flow statement have been restated, together with the Net Debt definition which has been changed to include derivative
financial instruments that relate to other components of Net Debt. No restatement was required to the balance sheet as a
result of the change in policy.
The impact on the relevant line items in the consolidated financial statements and Net Debt for the six months ended 30
June 2016 is as follows:
Consolidated income statement Six months ended 30 June 2016 as previously stated£m Adjustment£m Six months ended 30 June 2016 as restated£m
General and administrative expenses* (109.4) (0.4) (109.8)
Finance costs (11.8) 0.4 (11.4)
* General and administrative expenses are further restated by £6.3m to £103.5m as noted in the change in accounting
policy regarding the classification of cost items within cost of sales and administrative expenses below.
Consolidated cash flow statement Six months ended 30 June 2016 as previously stated£m Adjustment£m Six months ended 2016 30 June as restated£m
Net cash outflow from operating activities (25.4) (24.0) (49.4)
Net cash outflow from financing activities (155.4) 24.0 (131.4)
Analysis of Net Debt At 30 June 2016as previously stated £m Adjustment£m At 30 June 2016as restated £m
Cash and cash equivalents 166.2 - 166.2
Loan receivables 20.4 - 20.4
Loans payable (273.5) - (273.5)
Obligations under finance leases (35.7) - (35.7)
Derivatives relating to Net Debt - 20.5 20.5
(122.6) 20.5 (102.1)
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.
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.
The impact on the relevant line items in the consolidated income statement for the six months ended 30 June 2016 and the
year ended 31 December 2016 is as follows:
Consolidated income statement Six months ended 30 June 2016 as previously stated£m Adjustment£m Six months ended 30 June 2016 as restated£m
Cost of sales (1,326.7) (6.3) (1,333.0)
Gross profit 166.5 (6.3) 160.2
General and administrative expenses* (109.8) 6.3 (103.5)
* Restated from the reported actual of £109.4m as covered above in the change in accounting policy regarding the
classification of foreign exchange movements on investment and financing arrangements above.
Consolidated income statement Year ended 31 December 2016 as previously stated£m Adjustment£m Year ended 31 December 2016 as restated£m
Cost of sales (2,767.6) 43.0 (2,724.6)
Gross profit 243.4 43.0 286.4
General and administrative expenses (173.2) (43.0) (216.2)
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 six months ended 30 June 2017, 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'; namely 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. 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. The Group's current principal debt facilities at the period end
comprised a £480m revolving credit facility, and £271m of US private placement notes. As at 30 June 2017, the Group had
£751m of committed credit facilities and committed headroom of £593m.
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 31 December 2018.
Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group's accounting policies, 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.
Prior period restatement: Change in accounting policies
The accounting policy regarding the classification of foreign exchange movements in relation to investment and financing
arrangements was changed in the second half of the prior year. The accounting policy regarding the classification of cost
items within cost of sales and administrative expenses was changed in the six months ended 30 June 2017. Judgement was
applied in reaching the conclusion that these changes provide more relevant financial information to the users of these
financial statements.
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, non-recurring and outside of the normal operating practice
of the Company to be suitable for separate presentation and explanation.
The segmental analysis of continuing operations in note 3 includes the additional performance measure of Trading Profit on
continuing operations which is reconciled to operating profit in that note. The Group uses Trading Profit as an
alternative measure to operating profit by making the following two adjustments. Firstly, Trading Profit excludes
exceptional items, as described above. 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 Chief Operating Decision
Maker (CODM) reviews the segmental analysis for continuing operations together with discontinued operations.
Provisions for onerous contracts
Determining whether provisions are required for loss making contracts requires significant judgements to be made regarding
the ability of the company to maintain or improve operational performance. Judgements can also be made regarding the
outcome of matters dependent on the behaviour of the customer in question or other parties involved in
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