REG - Serco Group PLC - Half-year Report
03/08/2023 07:00
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RNS Number : 1352I Serco Group PLC 03 August 2023
2023 half year results
Serco Group plc
3 August 2023
Partnering with governments to deliver positive impact drives growth in first
half
Six months ended 30 June 2023 2022 Change at reported currency Change at constant currency
Revenue((1)) £2,472m £2,178m 13% 11%
Underlying operating profit((2)) £148m £130m 14% 9%
Reported operating profit((2)) £188m £123m 52%
Underlying earnings per share (EPS), diluted((3)) 9.40p 7.71p 22%
Reported EPS (i.e. after exceptional items), diluted 12.96p 7.41p 75%
Dividend per share (recommended) 1.14p 0.94p 21%
Free cash flow((4)) £98m £96m 3%
Adjusted net debt((5)) £216m £164m 32%
Reported net debt((6)) £654m £596m 10%
( )
Highlights
· Revenue: grew by 13% to £2.5bn, organic revenue growth of 6%
· Underlying operating profit: increased by 14% to £148m, a margin of 6.0%
· Underlying earnings per share: increased by 22% to 9.40p
· Free cash flow: strong at £98m, underlying operating profit cash conversion
of 92%
· Adjusted net debt: better than previous guidance at £216m; covenant leverage
of 0.9x EBITDA
· Order intake: at £2.1bn. New business pipeline of £7.9bn
· Order book: remains strong at £14.1bn
· Dividend per share: interim dividend per share of 1.14p, +21% year on year
· £90m share buyback completed: continued to return capital to shareholders as
a result of strong trading and cash conversion consistent with our capital
allocation priorities
· Revisions to full year guidance: stronger outcome on free cash flow and net
debt now expected
Mark Irwin, Serco Group Chief Executive, said:
"We are making good progress to deliver profitable growth over the medium term
and towards achieving our strategic ambition to be the partner of choice to
governments globally. Our results over the last six months are a good
measure of that progress with double-digit growth in revenue and profit,
backed by excellent cash generation.
Our first half outcomes demonstrate the commitment and capabilities of my
Serco colleagues, the value of our geographic and sector diversity as well as
our agility to respond to demand across our key markets, all in support of our
purpose to impact a better future."
Guidance for 2023
Today we upgrade our guidance for 2023 versus our pre-close trading statement
on 29 June, as we now expect a stronger outcome on free cash flow and net
debt, as well as a small reduction in the underlying effective tax rate.
2022
2023
Actual Prior guidance New guidance
29 June 2023
Revenue £4.5bn At least £4.8bn At least £4.8bn
Organic sales growth (4%) ~4% ~4%
Underlying operating profit £237m ~£245m ~£245m
Net finance costs £20m £25m £25m
Underlying effective tax rate 22% 25% 23%
Free cash flow £159m ~£130m ~£150m
Adjusted Net Debt £204m ~£190m ~£170m
NB: The guidance uses an average GBP:USD exchange rate of 1.26 in 2023,
GBP:AUD of 1.87 and GBP:EUR of 1.15. We expect a weighted average number of
shares in 2023 of 1,111m for basic EPS and 1,130m for diluted EPS.
For further information please contact Serco:
Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or
email: paul.checketts@serco.com (mailto:paul.checketts@serco.com)
Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email:
marcus.deville@serco.com (mailto:marcus.deville@serco.com)
Presentation:
A presentation for institutional investors and analysts will be held at
H/Advisors Maitland, 3 Pancras Square, London, N1C 4AG today starting at
10.00. The presentation will be webcast live at
https://edge.media-server.com/mmc/p/sossz53w
(https://edge.media-server.com/mmc/p/sossz53w) and subsequently available on
demand. A dial-in facility is available on
https://register.vevent.com/register/BI01becbf3511543ec85328a7d04f49447
(https://register.vevent.com/register/BI01becbf3511543ec85328a7d04f49447) .
Notes to financial results summary table and highlights:
(1) Revenue is as defined under IFRS, which excludes Serco's share of revenue
of its joint ventures and associates. Organic revenue growth is the change
at constant currency after adjusting to exclude the impact of relevant
acquisitions or disposals. Change at constant currency is calculated by
translating non-sterling values for the six months ended 30 June 2023 into
sterling at the average exchange rates for the six months ended 30 June 2022.
(2) Underlying operating profit is defined as IFRS Operating Profit excluding
amortisation of intangibles arising on acquisition and exceptional items.
Consistent with IFRS, it includes Serco's share of profit after interest and
tax of its joint ventures and associates. A reconciliation of underlying
operating profit to reported operating profit is as follows:
Six months ended 30 June 2023 2022
£m
Underlying operating profit 147.9 129.5
Amortisation and impairment of intangibles arising on acquisition (11.4) (9.6)
Exceptional operating items 51.2 (0.9)
Other non-underlying items - 4.2
Reported operating profit 187.7 123.2
(3) Underlying EPS is derived from the underlying operating profit measure
after deducting pre-exceptional net finance costs and related tax effects.
(4) Free cash flow is the net cash flow from operating activities adjusted to
remove the impact of non-underlying cash flows from operating activities,
adding dividends we receive from joint ventures and associates and deducting
net interest, net capital expenditure on tangible and intangible asset
purchases and the purchase of own shares to satisfy share awards.
(5) Adjusted net debt is used by Serco as an additional non-IFRS Alternative
Performance Measure (APM). This measure more closely aligns with the
covenant measure for the Group's financing facilities than reported net debt
because it excludes all lease liabilities including those recognised under
IFRS 16 Leases.
(6) Reported net debt includes all lease liabilities, including those
recognised under IFRS 16 Leases. A reconciliation of adjusted net debt to
reported net debt is as follows:
As at 30 June 2023 2022
£m
Adjusted net debt 215.7 163.6
Include: all lease liabilities 438.4 432.5
Reported net debt 654.1 596.1
(7) Refers to non-UK Underlying Operating Profit as a proportion of Group
Underlying Operating Profit before corporate costs. Our Underlying Operating
Profit before corporate costs for six months ended 30 June 2023 was £170.2m.
(8) The currency rates used for our 2023 outlook, along with their estimated
impact on revenue and underlying operating profit are:
Six months ended 30 June 2023 outlook 2022 actual 2021 actual
Average FX rates:
US Dollar 1.26 1.24 1.38
Australian Dollar 1.87 1.78 1.83
Euro 1.15 1.18 1.16
Year-on-year impact:
Revenue ~£(56)m £175m (£73m)
Underlying operating profit ~£(2)m £15m (£7m)
Reconciliations and further detail of financial performance are included in
the Finance Review on pages 13-22. This includes full definitions and
explanations of the purpose and usefulness of each non-IFRS Alternative
Performance Measure (APM) used by the Group. The Condensed Consolidated
Financial Statements and accompanying notes are on pages 26-42.
Chief Executive's update
Our purpose to impact a better future is at the heart of what we do. Every
day our 50,000+ colleagues around the world drive measurable outcomes for our
customers, enable the delivery of great public services and partner with
governments to respond to the considerable challenges they face. Alignment
to this purpose provides us with the opportunity to create value for all our
stakeholders centred around deliberate, sustainable, and profitable growth.
As demonstrated by our results in the first half of 2023, we grew revenue by
13% to £2.5bn, including 6% organic growth, increased underlying operating
profit by 14% to £148m, delivered free cash flow of £98m, representing cash
conversion of 92%, and completed the £90m share buyback announced earlier in
the year.
Growth in our North American business has been driven by robust demand for
defence services and case management. The high order intake at the end of
last year has continued into 2023 and sets the division up for another year
where book-to-bill is expected to exceed 100%. In the UK and Europe, our
international immigration services capability has allowed us to respond to
high demand from national and local governments to provide accommodation and
support services, which we deliver though a framework of dignity, care, and
service quality. Our capability in the Space sector has earned us the
opportunity to lead the implementation of a key element of the European
Commission's flagship initiative Destination Earth (DestinE) Core Service
Platform (DESP) as well as supporting its IRIDE space program. We have also
seen recent growth momentum in our Middle East division with order intake of
more than £100m in the period and further opportunities at the preferred
bidder stage. Performance across our portfolio has more than offset results
in our Asia-Pacific division, which has seen lower revenue and profit due to
reductions in variable volume work in parts of the immigration network and
broader operational challenges caused in part by ongoing labour shortages.
Since the period end, we were pleased to be notified that our Immigration
Detention Facilities and Detainee Services contract with the Australian
Department of Home Affairs has been extended until December 2024.
As we look forward, growth in the second half of the year is expected to be
lower than the first half, primarily because of our CMS contract, which always
has more workflow in the first half and has moved into a new five-year
contract agreement from July. In addition, we will incur further
mobilisation investment for HMP Fosse Way, the new build prison in the UK,
exit from contracts as disclosed in our 2022 results, as well as the potential
variability on volumes of immigration work in the UK, Europe and Australia.
We have also made good progress in the first six months with our three
strategic enablers - Customers, Colleagues and Capabilities - laid out at our
2022 full year results at the end of February.
For Customers, we are working on building stronger and broader relationships,
allowing us to be involved earlier and at all stages of their response from
discovery through to design and delivery. We are advancing opportunities,
such as our new advisory-to-operate business in the Kingdom of Saudi Arabia,
which is focussed on supporting the country in its development of sustainable
future cities. With more than 100 advisory colleagues already active on the
giga projects during the planning and construction phases, we are working to
build the trust of our customers to contribute to delivery of the Kingdom's
Vision 2030.
For Colleagues, our commitment to their safety and wellbeing is unwavering and
we have seen measurable improvement in safety outcomes in the first half. We
continue to explore new and better ways through people, process, and
technology to assure the physical and mental health wellbeing of our
colleagues. We are constantly evolving our employee value proposition which
is purpose-led, values-driven and underpinned by a genuine commitment to
diversity, equity and inclusion.
For Capabilities, we have begun to optimise existing IT platforms as well as
selectively piloting artificial intelligence (AI) systems to enhance
productivity. As we explore the positive impacts AI can have on our
operations, we are mindful that AI is also enabling an expanded cyber threat
landscape that requires adaptive risk and response management, and continuous
vigilance throughout the business and into our supply chain.
With confidence in our strategic priorities, execution remains key to
achieving our growth targets. As part of this we are increasing our focus on
operational excellence, becoming relentless in our attention to exceptional
contract delivery and driving efficient operations to improve productivity to
enhance margins, while maintaining our track record of cash generation.
We are pleased with the progress we have made over the last six months and
confident in our outlook for growth and shareholder value creation through
2023 and beyond.
Mark Irwin
Group Chief Executive
Serco - Impact A Better Future
Group review
Summary of financial performance
Revenue, underlying operating profit and underlying earnings per share
Revenue increased by 13%, or £294m, to £2,472m (2022: £2,178m). Organic
revenue growth was 6% (£129m), acquisitions added 5% (£111m) and currency
contributed 2% (£53m). We delivered this organic growth despite a £78m
year-on-year reduction from Covid-related work in the UK, which fully
concluded in the first half of 2022. This 4% drag was more than offset by
growth in immigration services, defence and case management. ORS, the
business we acquired in September 2022 to enter the European immigration
services market, has traded ahead of expectations with robust underlying
demand due to global migration patterns. It is also worth noting we exclude
the revenue from our joint ventures, however, were this to be included it
would add 6% to the Group's organic growth as our VIVO Defence Services work
for the UK's Defence Infrastructure Organisation continues to ramp up with
higher than expected volumes.
Underlying operating profit increased by 14%, or £18m, to £148m (2022:
£130m). On a constant currency basis, excluding the 5%, or £6m, benefit
from favourable currency movements, underlying operating profit increased by
9%. Strong demand for immigration services and the ramp up of contracts
signed in prior years more than offset a 12% impact from Covid-related work as
well as lower volumes in Asia-Pacific. Improved margins in the UK &
Europe division broadly offset lower margins in the other regions, underlining
the benefit of our geographic and sectoral diversity, and the overall
resilience this brings to our business.
Six months ended 30 June 2023 Americas UK&E AsPac Middle Corporate costs Total
£m East
Revenue 701.0 1,218.5 449.5 103.1 - 2,472.1
Change +13% +23% (5%) +11% +13.5%
Change at constant currency +6% +22% (4%) +5% +11.0%
Organic change at constant currency +6% +11% (4%) +5% +5.9%
Underlying operating profit/(loss) 79.4 69.9 13.9 7.0 (22.3) 147.9
Margin 11.3% 5.7% 3.1% 6.8% (0.9%) 6.0%
Change +5% +86% (56%) (20%) (7%) +14.2%
Amortisation of intangibles arising on acquisition (8.1) (1.5) (1.8) - - (11.4)
Exceptional operating items - 9.9 - - 41.3 51.2
Reported operating profit 71.3 78.3 12.1 7.0 19.0 187.7
Exceptional operating items of £51.2m resulted from the release of £41.3m of
provisions held for indemnities provided on businesses disposed of in 2015,
due to the claims period ending, and £9.9m compensation we received on the
early termination of a contract.
Diluted underlying earnings per share increased by 22% to 9.40p (2022:
7.71p). The percentage improvement was higher than the increase in
underlying operating profit due to a 7% reduction in the weighted average
number of shares because of our share buyback.
The revenue and underlying operating profit performances are discussed in more
detail in the Divisional Reviews.
Cash flow and net debt
Free cash flow at £98m was 3% better than the prior year (2022: £96m), which
itself had been a particularly strong outcome, and represented 92% underlying
operating profit cash conversion. The timing of dividends received from joint
ventures meant the cash inflow was lower than profit in the period. Average
working capital days remained at appropriate levels for a government
contractor with debtor days of 21 (2022: 21 days) and creditor days of 22
(2022: 21 days). Of all UK supplier invoices, 93% were paid in under 30 days
(2022: 85%) and 97% were paid in under 60 days (2022: 94%). No working
capital financing facilities were utilised in this or the prior year.
Adjusted net debt was £216m at the end of June. This was an increase of
only £12m since the year end (December 2022: £204m) despite £21m of
dividend payments and £89m being spent on our share buyback programme.
The period end adjusted net debt compares to a daily average of £261m (2022:
£201m) and a peak of £357m (2022: £258m). The variance resulted from the
timing of working capital flows, dividends, share buyback activity,
acquisition spend and currency fluctuations. Receipts towards the end of the
period supported the lower closing balance and our revised full year guidance.
Our measure of adjusted net debt excludes lease liabilities, which aligns
closely with the covenants on our financing facilities. Lease liabilities
totalled £438m at the end of June (2022: £433m), the majority being leases
on housing for asylum seekers under the AASC contract. The terms of these
leases do not extend beyond the expected life of the contract we have with the
customer.
At the closing balance sheet date, our leverage for debt covenant purposes was
0.9x EBITDA (2022: 0.5x). This compares with the covenant requirement for
net debt to be less than 3.5x EBITDA and our target range of 1-2x.
More detailed analysis of earnings, cash flow, financing and related matters
is included in the Finance Review.
Capital allocation and returns to shareholders
We aim to have a strong balance sheet with our target financial leverage of 1x
to 2x net debt to EBITDA, and, consistent with this, the Board's capital
allocation priorities are to:
· Invest in the business to support organic growth.
· Increase ordinary dividends to reward shareholders with a growing and
sustainable income stream.
· Selectively invest in strategic acquisitions that add capability, scale or
access to new markets, enhance the Group's future potential organic growth and
have attractive returns.
· Return any surplus cash to shareholders through share buybacks or other means.
We continued to deliver our capital allocation policy in 2023:
· Invest to support organic growth: significant investment has been put into
business development, which has supported our healthy pipeline of new
opportunities. In the Middle East, we have invested in developing an
advisory business and this has generated good new business wins in the first
half. The half has also seen us invest in new pilot programmes to partner
with both start-up and established technology businesses, as well as academic
and research institutions to create a broader capability ecosystem from which
to deliver future growth.
· Increase ordinary dividends: we will be paying an interim dividend of 1.14p
per share, 21% higher than the prior year, as we continue on our path to
reduce dividend cover progressively towards 3x over the coming years.
· Invest in acquisitions: ORS, the business we acquired in September 2022 to
enter the European immigration services market, has traded ahead of
expectations so far in 2023. We continue to assess other opportunities that
are aligned to our strategy and provide opportunities for future organic
growth.
· Return surplus cash to shareholders: we completed a £90m share buyback in the
first half.
Contract awards, order book, rebids and pipeline
Contract awards
Order intake in the half was £2.1bn, a book-to-bill rate of 83%. The low
book-to-bill reflected the first six months of 2023 being relatively quiet in
terms of contract award decisions, with a significant number of bids currently
submitted and awaiting decision. Having dipped in the second half of 2022,
our win rates on both new work and rebids and extensions moved back up to
around the levels we have delivered on average over recent years.
There were approaching 30 contract awards worth more than £10m each. As in
2022, North America had the strongest book-to-bill at 181%, with robust new
order intake in Defence and Citizen Services as well as the strategically
important rebid of our Centers for Medicare & Medicaid Services (CMS)
contract. Around £1.2bn, or 60%, of the order intake came from the
Americas, £0.7bn, or approximately a third, from the UK & Europe,
£0.1bn, or 6%, from the Middle East and the remainder from Asia Pacific.
Approximately 35% of the order intake value was new business and 65% was
rebids and extensions of existing work. The win rate by value for new work
was around 30% while the win rate by value for retaining existing work was
approximately 90% in the first half.
New wins included a £140m, five-year contract with the Government of Ontario
to assist job seekers develop their skills and match them to employment
opportunities, a £78m, nine-year contract with the UK Home Office to run the
Derwentside Immigration Removal Centre and a £50m, four-year contract to
provide facilities management at a new hospital in the NEOM economic zone in
Saudi Arabia. In the UK, increases in the numbers of service-users led to us
securing additional immigration work that is expected to be worth an estimated
£280m over approximately a year. The successful rebid of our CMS contract
will see us continue to support eligibility determinations for citizens
purchasing health insurance through the Federal Health Insurance Exchanges.
The 4-year and 7-month contract, which started on 1 July 2023, has a one-year
base period and four option periods. The estimated total value to Serco,
subject to workload volumes, is approximately $690m (£570m) if all option
periods are exercised.
Order book
The order book remains high at £14.1bn at the end of June (30 June 2022:
£14.6bn, 31 December 2022: £14.8bn). The reduction since the year-end
reflected currency fluctuations and the first half being relatively quiet for
contract award decisions. Our order book definition gives our assessment of
the future revenue expected to be recognised from the remaining performance
obligations on existing contractual arrangements. This excludes unsigned
extension periods, and the order book would be £2.4bn (2022: £1.5bn) higher
if option periods in our US business, which typically tend to be exercised,
were included. If joint venture work was included this would add a further
£1.8bn (2022: £2.2bn) to our order book.
Rebids
In our portfolio of existing work, we have around 75 contracts with annual
revenue of £5m or more where an extension or rebid will be required before
the end of 2025, with an aggregate annual revenue of £1.5bn. Contracts that
will either need to be rebid or extended in 2023 have an annual contract value
of around £0.2bn. The annual value of rebids is approximately £0.9bn in
2024, including our immigration services work in Australia, which following
the recent extension is scheduled to end in December 2024. It reduces to
around £0.4bn in 2025.
New business pipeline
Our measure of pipeline is probably more narrowly defined than is common in
our industry. It includes only opportunities for new business that have an
estimated annual contract value (ACV) of at least £10m and which we expect to
bid and to be adjudicated within a rolling 24-month timeframe. We cap the
total contract value (TCV) of individual opportunities at £1bn, to lessen the
impact of single large opportunities. The definition does not include rebids
and extension opportunities, and in the case of framework, or call-off,
contracts such as 'ID/IQ' (Indefinite Delivery / Indefinite Quantity
contracts), which are common in the US, we only take the value of individual
task orders into our pipeline as the customer confirms them. Our published
pipeline is thus a relatively small proportion of the total universe of
opportunities, many of which have annual revenues less than £10m, are likely
to be decided beyond the next 24 months or are rebids and extensions.
Our pipeline was £7.9bn at the end of June, slightly lower than the £8.4bn
level at the end of 2022. The pipeline now consists of around 40 bids with
an ACV averaging more than £30m and an average contract length of around
seven years. The pipeline of opportunities for new business with an
estimated ACV of less than £10m now totals £2.2bn, down from £2.5bn at the
end of December.
Guidance for 2023
Our guidance for 2023 is updated from our pre-close trading statement on 29
June, as we now expect a stronger outcome on free cash flow guidance and net
debt. We expect the known headwinds from Covid and some other contracts
ending to be more than compensated for by growth in our immigration and
defence businesses, increased contribution from newer contracts ramping up and
improvement across the portfolio.
Revenue: We expect revenue of at least £4.8bn in 2023, 6% higher than the
£4.5bn reported in 2022. Our organic revenue growth is expected to be in
the region of 4%, acquisitions should contribute 3% and currency is expected
to be a 1% drag. Revenue growth is expected to be driven by the defence and
immigration sectors. Revenues in the second half are expected to be slightly
lower than the first because of our CMS contract, which always has more
workflow in the first half and moved into its new five-year contract agreement
on 1 July, our exit from contracts as disclosed in our 2022 results, and the
strengthening of sterling.
Underlying operating profit: Underlying operating profit is expected to be
around £245m, slightly ahead of 2022. Organic growth on existing work plus
the ramp up of newer contracts is more than offsetting the drag from
Covid-related work and other contract attrition. The inflation protection in
many of our contracts means we continue to expect no material impact from
inflation on underlying operating profit. Profit is expected to be lower in
the second half than the first because of the usual workflow cadence of our
CMS contract and the commencement of the new agreement, our previously
disclosed contract exits, the favourable contract settlement in the first
half, and the strengthening of sterling.
Net finance costs and tax: Net finance costs are expected to be around £25m.
This is higher than 2022 due to higher lease-related interest and higher
interest rates on the portion of our debt that is floating. The underlying
effective tax rate is expected to be around 23%, although this is sensitive to
the geographic mix of our profit and any changes to current corporate tax
rates.
Financial position: Free cash flow is expected to be around £150m in the
year. This is lower than 2022, reflecting the timing of new contracts, but
is consistent with our ongoing expectation of converting at least 80% of
profit into cash. We expect adjusted net debt to end the year at around
£170m.
Divisional Reviews
Serco's operations are reported as four regional divisions: the Americas; UK
& Europe (UK&E); the Asia Pacific region (AsPac); and the Middle
East. Reflecting statutory reporting requirements, Serco's share of revenue
from its joint ventures and associates is not included in revenue, while
Serco's share of joint ventures and associates' profit after interest and tax
is included in underlying operating profit.
Six months ended 30 June 2023 Americas UK&E AsPac Middle Corporate costs Total
£m East
Revenue 701.0 1,218.5 449.5 103.1 - 2,472.1
Change +13% +23% (5%) +11% +13.5%
Change at constant currency +6% +22% (4%) +5% +11.0%
Organic change at constant currency +6% +11% (4%) +5% +5.9%
Underlying operating profit/(loss) 79.4 69.9 13.9 7.0 (22.3) 147.9
Margin 11.3% 5.7% 3.1% 6.8% (0.9%) 6.0%
Change +5% +86% (56%) (20%) (7%) +14.2%
Amortisation of intangibles arising on acquisition (8.1) (1.5) (1.8) - - (11.4)
Exceptional operating items - 9.9 - - 41.3 51.2
Other non-underlying items - - - - - -
Reported operating profit 71.3 78.3 12.1 7.0 19.0 187.7
Six months ended 30 June 2022 Americas UK&E AsPac Middle Corporate costs Total
£m East
Revenue 622.3 991.5 472.0 92.6 - 2,178.4
Underlying operating profit 75.7 37.5 31.6 8.7 (24.0) 129.5
Margin 12.2% 3.8% 6.7% 9.4% (1.1%) 5.9%
Amortisation of intangibles arising on acquisition (7.4) (0.4) (1.8) - - (9.6)
Exceptional operating items (0.9) - 0.1 - (0.1) (0.9)
Other non-underlying items - 4.2 - - - 4.2
Reported operating profit/(loss) 67.4 41.3 29.9 8.7 (24.1) 123.2
The trading performance and outlook for each Division are described on the
following pages. Reconciliations and further detail of financial performance
are included in the Finance Review on pages 13-22. This includes full
definitions and explanations of the purpose of each non-IFRS Alternative
Performance Measure (APM) used by the Group. The Condensed Consolidated
Financial Statements and accompanying notes are on pages 26-42. Included in
note 2 to the Group's Consolidated Financial Statements are the Group's
policies on recognising revenue across the various revenue streams associated
with the diverse range of goods and services discussed within the Divisional
Reviews. The various revenue recognition policies are applied to each
individual circumstance as relevant, taking into account the nature of the
Group's obligations under the contract with the customer and the method of
delivering value to the customer in line with the terms of the contract.
Americas (28% of revenue, 47% of underlying operating profit((7)))
Six months ended 30 June 2023 2022 Growth
£m
Revenue 701.0 622.3 13%
Organic change 6% 3%
Acquisitions 0% 8%
Currency 6% 7%
Underlying operating profit 79.4 75.7 5%
Organic change (2%) 20%
Acquisitions 0% 6%
Currency 7% 7%
Margin 11.3% 12.2% (84bps)
Revenue grew by 13% to £701m (2022: £622m), with organic growth of 6% and a
6% favourable translational effect of currency. The two main sectors for our
Americas business are Defence and Citizen Services, and both saw growth in the
period. Our Defence business delivered organic revenue growth of 6% as the
high level of new work secured in 2022 began to ramp up. Citizen Services
also showed good progress with organic revenue growth driven by higher demand
for our case management services and the start of our new employment services
work in Canada. These contracts with the Government of Ontario were secured
by leveraging the work we do in the UK for the Department of Work and
Pensions.
Underlying operating profit increased by 5% to £79m (2022: £76m).
Excluding the favourable currency movement of £5m, underlying operating
profit reduced by 2%. The profit outcome was lower than revenue as good
performance in case management was more than offset by new contracts being in
a lower margin, mobilisation stage, and some defence IT management work
transitioning from its more profitable installation phase to sustainment
operations. Margins reduced from 12.2% to 11.3% as a result.
Order intake was strong at £1.3bn, around 60% of the total for the Group and
a book-to-bill ratio of 1.8x. Of this, new business wins were around 25% of
the order intake, continuing the strong momentum of 2022. The largest single
new business win was in Canada. Following on from our success in 2022, we
were again selected by the Government of Ontario to support part of their
Employment Services Transformation program, which will help unemployed people
back into work. The contract signed this year is expected to be worth around
£140m over five years. It was an active period for rebids and extensions,
and we were pleased to achieve a win rate of over 95% on these, above our
usual 80-90% range. This included the successful rebid of our Centers for
Medicare & Medicaid Services (CMS) contract, which will see us continue to
support eligibility determinations for citizens purchasing health insurance
through the Federal Health Insurance Exchanges. The 4 year and 7-month
contract, which started on 1 July 2023, has a one-year base period and four
option periods. The estimated total value to Serco, subject to workload
volumes, is approximately $690m (£570m) if all option periods are exercised.
The pipeline of major new bid opportunities due for decision within the next
24 months in the Americas has increased from £2.5bn at the end of 2022 to
£2.9bn at the end of June. It is pleasing to see the pipeline at such a
healthy level given the high order intake in both 2022 and the first six
months of 2023. The Americas represents approximately 35% of the total Group
pipeline. Defence makes up around three-quarters of the Americas pipeline,
with a broad spread of types of work. Citizen Services, where we have been
actively seeking to grow, represents the remainder of the pipeline.
UK & Europe (49% of revenue, 41% of underlying operating profit((7)))
Six months ended 30 June 2023 2022 Growth
£m
Revenue 1,218.5 991.5 23%
Organic change 11% (5%)
Acquisitions 11% 0%
Currency 1% (0%)
Underlying operating profit 69.9 37.5 86%
Organic change 64% (34%)
Acquisitions 20% 1%
Currency 2% (0%)
Margin 5.7% 3.8% 195bps
Revenue increased by 23% to £1,219m (2022: £992m), with 11% organic growth,
an 11% contribution from acquisitions and a 1% favourable translational effect
of currency. ORS, the business we acquired in September 2022 to enter the
European immigration services market, has traded ahead of expectations with
robust underlying demand due to global migration patterns. Covid-related
work, which fully concluded in the first half of 2022, was a drag of £78m, or
8%. This was more than offset by strong growth for our immigration services
in both the UK and Europe, and good growth in our defence business. We
exclude the revenue from our joint ventures, however, our VIVO Defence
Services work for the Defence Infrastructure Organisation, which when won in
2021 included one of the largest contracts ever secured by Serco, continues to
ramp up. Were joint ventures included in revenue it would add a further 13%
to organic growth.
Underlying operating profit increased by 86% to £70m (2022: £38m). Strong
demand for immigration services, the ramp up of contracts signed in prior
years, improved performance across a range of existing contracts and the ORS
acquisition more than offset the drag from Covid-related work. The half also
benefited from a £6m one-off settlement of a dispute on a contract. The
margin increased by nearly 200bp to 5.7% (2022: 3.8%) as a result of these
factors.
Underlying operating profit includes the profit contribution of joint ventures
and associates, from which interest and tax have already been deducted. If
the proportional share of revenue from joint ventures and associates was
included and the share of interest and tax cost was excluded, the overall
divisional margin would have been 5.2% (2022: 3.5%). The joint venture and
associate profit contribution increased to £18m (2022: £3m) due to our VIVO
work continuing to ramp up, Merseyrail seeing improved performance and the
one-off settlement mentioned above being included.
Order intake was around £0.7bn, a book-to-bill ratio of 0.5x and around 30%
of the total intake for the Group. The low book-to-bill reflected the first
six months of 2023 being relatively quiet in terms of contract award
decisions. Some large contracts on which we had expected a decision remain
under adjudication with a conclusion now anticipated in the second half. Our
win rates, which after a dip in the second half of 2022, rebounded in the
first six months of 2023. New wins represented approximately 45% of the
order intake and our win rate on new work was more than 30%. We were
successful on all our rebids in the period. Agreements signed in the first
half included a contract with the UK Home Office to run the Derwentside
Immigration Removal Centre. The new contract has an estimated value of
around £80m over the initial nine-year term. Also in the Justice &
Immigration sector, increases in the numbers of service-users led to us
securing additional immigration work that is expected to be worth an estimated
£280m over two years.
The pipeline of new opportunities in the UK & Europe remains healthy at
£3.0bn (December 2022: £3.7bn), with significant new opportunities across
Justice & Immigration, Defence and Citizen Services.
Asia Pacific (18% of revenue, 8% of underlying operating profit((7)))
Six months ended 30 June 2023 2022 Growth
£m
Revenue 449.5 472.0 (5%)
Organic change (4%) 3%
Acquisitions 0% 1%
Currency (1%) (1%)
Underlying operating profit 13.9 31.6 (56%)
Organic change (56%) 29%
Acquisitions 0% (3%)
Currency 0% 0%
Margin 3.1% 6.7% (360bps)
Our Asia Pacific business had a difficult first half of the year.
Volume-variable work, which as part of a portfolio we expect to ebb and
flow, reduced in the period, tight labour markets created operational
challenges and new business wins did not meet our expectations. We have
taken actions to ensure the business is well positioned for the opportunities
we expect in the coming years in what remains an important and attractive
market. A search for a new leader for the business is under way with Mark
Irwin providing additional oversight of the division until an appointment is
made.
Revenue reduced by 5% to £450m (2022: £472m). The business contracted by
4% organically and adverse currency moves had a 1% impact. Revenue fell
because of lower volume-variable work in parts of the immigration network,
reduced work in facilities management and a combination of tight labour
markets and some lost work in the Citizen Services sector.
Underlying operating profit reduced by 56% to £14m (2022: £32m),
representing a margin of 3.1% (2022: 6.7%). Profit fell more than revenue
due to a negative mix impact from the lower immigration volumes, some initial
stranded costs on lost contracts and labour market disruption making it
difficult to recruit enough people to meet customer headcount targets.
Order intake in the first six months of 2023 was less than £0.1bn, continuing
a recent record of low win rates on new work. Our investor pipeline for new
business currently stands at £1.4bn in the year. Defence makes up the bulk
of the pipeline with opportunities also in the Justice & Immigration and
Citizen Services sectors.
Since the period end, we were pleased to be notified that our Immigration
Detention Facilities and Detainee Services contract with the Australian
Department of Home Affairs has been extended until December 2024.
Middle East (4% of revenue, 4% of underlying operating profit ((7)))
Six months ended 30 June 2023 2022 Growth
£m
Revenue 103.1 92.6 11%
Organic change 5% (38%)
Acquisitions 0% 0%
Currency 6% 3%
Underlying operating profit 7.0 8.7 (20%)
Organic change (22%) 17%
Acquisitions 0% 0%
Currency 2% 4%
Margin 6.8% 9.4% (261bps)
Revenue grew by 11% to £103m (2022: £93m). The business grew by 5%
organically and favourable currency moves added 6% to revenue. Organic
growth was driven by the Citizen Services sector, where our new advisory
business unit is gaining traction.
Underlying operating profit reduced to £7m (2022: £9m). Profit was
negatively impacted by stopping services with a customer where we have had
debtor collection issues and by costs on some health & facilities
management work we exited. These more than offset the higher margins being
achieved on our advisory work. Margins decreased from 9.4% to 6.8% as a
result.
Order intake was around £0.1bn, or 5% of the total for the Group and a
book-to-bill ratio of 1.0x. More than 95% of the order intake was new
business. The largest win was a contract to provide facilities management at
a new hospital in the NEOM economic zone in Saudi Arabia, which is estimated
to be worth around £50m over four years. Since the end of our contract to
run the Dubai Metro, our Middle East business has been exploring new potential
areas of demand and in particular has put investment into developing an
advisory business in the region. The first half saw this begin to pay off
with several agreements being secured to advise customers in the region as
they embark on ambitious new multi-year projects.
Our pipeline of major new bid opportunities in the Middle East totals around
£0.7bn and includes significant opportunities in Citizen Services and
potential work in the Transport and Defence sectors.
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 saw a short-term reduction of £1.7m to £22.3m (2022:
£24.0m).
Dividend
The Board has declared an interim dividend of 1.14p per share. The interim
dividend will be paid on 6 October 2023, with an ex-dividend date of 7
September 2023 and a record date of 8 September 2023.
LEI: 549300PT2CIHYN5GWJ21
Finance Review
For the six months ended 30 June 2023 2023 Reported 2022 2022
2023 Non £m 2022 Non Reported
Underlying underlying Underlying underlying £m
£m items £m items
£m £m
Revenue 2,472.1 - 2,472.1 2,178.4 - 2,178.4
Cost of sales (2,210.5) - (2,210.5) (1,927.2) 4.2 (1,923.0)
Gross profit 261.6 - 261.6 251.2 4.2 255.4
Administrative expenses (131.7) - (131.7) (125.1) - (125.1)
Exceptional operating items - 51.2 51.2 - (0.9) (0.9)
Amortisation and impairment of intangibles arising on acquisition - (11.4) (11.4) - (9.6) (9.6)
Share of profits in joint ventures and associates, net of interest and tax 18.0 - 18.0 3.4 - 3.4
Operating profit/(loss) 147.9 39.8 187.7 129.5 (6.3) 123.2
Margin 6.0% 7.6% 5.9% 5.7%
Net finance costs (11.0) - (11.0) (9.2) - (9.2)
Profit/(loss) before tax 136.9 39.8 176.7 120.3 (6.3) 114.0
Tax (charge)/credit (29.8) 0.7 (29.1) (25.8) 2.7 (23.1)
Effective tax rate 21.8% 16.5% 21.4% 20.3%
Profit/(loss) for the period 107.1 40.5 147.6 94.5 (3.6) 90.9
Attributable to
Equity owners of the Company 107.1 40.5 147.6 94.5 (3.6) 90.9
Non-controlling interest - - - - - -
Earnings per share (EPS) - basic (pence) 9.52 13.11 7.83 7.53
Earnings per share (EPS) - diluted (pence) 9.40 12.96 7.71 7.41
Alternative Performance Measures (APMs) and other related definitions
Overview
APMs used by the Group are reviewed below to provide a definition and
reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain
the purpose and usefulness of each APM.
In general, APMs are presented externally to meet investors' requirements for
further clarity and transparency of the Group's financial performance. The
APMs are also used internally in the management of our business performance,
budgeting and forecasting, and for determining Executive Directors'
remuneration and that of other Management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being included in an
APM, this reflects revenues presented elsewhere within the reported financial
information, except where amounts are recalculated to reflect constant
currency. Where items of income or expense are being excluded in an APM, these
are included elsewhere in our reported financial information as they represent
actual income or expense of the Group, except where amounts are recalculated
to reflect constant currency. As a result, APMs allow investors and other
readers to review different kinds of revenue, profits and costs and should not
be used in isolation. Other commentary within 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.
Consolidation of profit measures
The Group is simplifying its profit measures by removing Trading Profit and
renaming Underlying Trading Profit (UTP) to Underlying Operating Profit (UOP).
The historic UOP presented is consistent with the equivalent reported UTP in
that period.
The UTP definition was introduced in 2015 to exclude onerous contract
provision (OCP) releases or charges, other Contract and Balance Sheet Review
adjustments, depreciation and amortisation of assets held for sale, and some
other one-time items. It was maintained to ensure there was transparency
outside the underlying results of large charges and releases from the
portfolio of onerous contracts recorded in 2014. These definitions are no
longer required as the Contract and Balance Sheet Adjustments recorded in 2014
are now at an insignificant level. In the future, no items will be recorded
between UTP and Trading Profit, meaning the additional measure no longer adds
any value.
Items excluded from UOP will be the amortisation of intangibles arising on
acquisition and exceptional operating items, which is consistent with the
items previously excluded from Trading Profit. The methodology applied to
calculating other APMs has not changed since 31 December 2022.
Alternative revenue measures
For the six months ended 30 June 2023 2022
£m £m
Reported revenue at constant currency(1) 2,418.7 2,178.4
Foreign exchange differences(1) 53.4 -
Reported revenue at reported currency 2,472.1 2,178.4
1. In order to provide a comparable movement on the previous period's
results, reported revenue is recalculated by translating non-Sterling values
into Sterling at the average exchange rates for the six months ended 30 June
2022.
For the six months ended 30 June 2023 2022 2023 2022
Organic Comparable Revenue plus share of joint ventures and associates(2) Revenue plus share of joint ventures and associates(2)
Revenue(1) Organic £m £m
£m Revenue(1)
£m
Alternative revenue measure at constant currency 2,307.5 2,178.4 2,647.1 2,267.3
Foreign exchange differences(3) 48.3 - 53.4 -
Alternative revenue measure at reported currency 2,355.8 2,178.4 2,700.5 2,267.3
Impact of relevant acquisitions or disposals 116.3 - - -
Share of joint venture and associates - - (228.4) (88.9)
Reported revenue at reported currency 2,472.1 2,178.4 2,472.1 2,178.4
1. 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 the relevant acquisitions or
disposals. The prior year figure is recalculated on a consistent basis to the
acquisitions or disposals removed in the current year and therefore may not
agree to the organic revenue previously reported.
2. The alternative measure includes the share of joint ventures and
associates for the benefit of reflecting the overall change in scale of the
Group's ongoing operations, which is particularly relevant for evaluating
Serco's presence in market sectors such as Defence and Transport. The
alternative measure allows the performance of the joint venture and associate
operations themselves, and their impact on the Group as a whole, to be
evaluated on measures other than just the post-tax result.
3.
In order to provide a comparable movement on the previous period's results,
the alternative revenue measures are recalculated by translating non-Sterling
values into Sterling at the average exchange rates for the six months ended 30
June 2022.
Alternative profit measures
For the six months ended 30 June 2023 2022
£m £m
Underlying operating profit at constant currency(1) 141.7 129.5
Foreign exchange differences(1) 6.2 -
Underlying operating profit at reported currency(2) 147.9 129.5
Non-underlying items:
Amortisation and impairment of intangibles arising on acquisition(3) (11.4) (9.6)
Exceptional operating items(4) 51.2 (0.9)
Other non-underlying items(4) - 4.2
Reported operating profit 187.7 123.2
1. In order to provide a comparable movement on the previous period's
results, reported UOP is recalculated by translating non-Sterling values into
Sterling at the average exchange rates for the six months ended 30 June 2022.
2. The Group uses an alternative measure, UOP, to make adjustments for
items considered material and outside of the normal operating practice of the
Group to be suitable for separate presentation and detailed explanation.
3. Amortisation and impairment of intangibles arising on acquisitions
are excluded, because these charges are based on judgements about the value
and economic life of assets that, in the case of items such as customer
relationships, would not be capitalised in normal operating practice.
4. Exceptional operating items (and in the prior year other
non-underlying items), being those considered material and outside of the
normal operating practice of the Group to be suitable for separate
presentation and detailed explanation. Where items are not material, their
inclusion is to ensure they are treated consistently with prior periods.
Alternative Earnings per share (EPS) measures
2023 2022 2023 2022
basic basic diluted diluted
For the six months ended 30 June pence pence pence pence
Underlying EPS(1) 9.52 7.83 9.40 7.71
Non-underlying items:
Net impact of non-underlying operating items, non underlying tax and (0.75) (0.25) (0.74) (0.25)
amortisation and impairment of intangibles arising on acquisition
Exceptional operating items, net of tax 4.34 (0.05) 4.30 (0.05)
Reported EPS 13.11 7.53 12.96 7.41
1. Reflecting the same adjustments made to operating profit to calculate
UOP 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.
Alternative cash flow and Net Debt measures
Free cash flow (FCF)
For the six months ended 30 June 2023 2022
£m £m
Free cash flow(1) 98.4 95.6
Exclude dividends from joint ventures and associates (4.7) (3.6)
Exclude net interest paid 12.4 10.9
Exclude capital element of lease repayments 63.0 58.1
Exclude purchase of own shares to satisfy share awards 22.8 15.9
Exclude purchase of intangible and tangible assets net of proceeds from 7.2 8.3
disposal
Net cash inflow from underlying operating activities 199.1 185.2
Non-underlying cash flows from operating activities 9.7 (1.1)
Net cash inflow from operating activities 208.8 184.1
1. Free cash flow (FCF) is an alternative cash flow measure which is
reconciled above to net cash flow from operating activities, the measure shown
on the Condensed Consolidated Cash Flow Statement on page 30. This IFRS
measure is adjusted to remove the impact of non-underlying cash flows from
operating activities and include dividends we receive from joint ventures and
associates, net interest paid, the capital element of lease payments, cash
flows on the purchase of own shares to satisfy share awards and net capital
expenditure on tangible and intangible asset purchases.
UOP cash conversion
For the six months ended 30 June 2023 2022
£m £m
Free cash flow(1) 98.4 95.6
Add back:
Tax paid 24.7 24.9
Net interest paid 12.4 10.9
Trading cash flow 135.5 131.4
Underlying operating profit 147.9 129.5
Underlying operating profit cash conversion(1) 92% 101%
1. FCF, as defined above, includes interest and tax cash flows. In order
to calculate an appropriate cash conversion metric equivalent to UOP, trading
cash flow is derived from FCF by excluding tax and interest items. UOP 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 operating items.
Net Debt and Adjusted Net Debt
As at As at 31 December 2022
30 June £m
2023
£m
Cash and cash equivalents 98.7 57.2
Loans payable (315.3) (262.9)
Lease liabilities (438.4) (446.0)
Derivatives relating to Net Debt 0.9 1.8
Net Debt(1) (654.1) (649.9)
Add back: Lease liabilities 438.4 446.0
Adjusted Net Debt(2) (215.7) (203.9)
1. 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 29 and the accompanying notes. Net Debt is a measure to
reflect the net indebtedness of the Group and includes all cash and cash
equivalents and any debt or debt-like items, including any derivatives entered
into in order to manage risk exposures on these items. Net Debt includes all
lease liabilities, whilst Adjusted Net Debt is derived from Net Debt by
excluding liabilities associated with leases.
2. The Adjusted Net Debt measure was introduced because it more closely
aligns to the Consolidated Total Net Borrowings measure used for the Group's
debt covenants, which is prepared under accounting standards applicable prior
to the adoption of IFRS 16 Leases. Principally as a result of the Asylum
Accommodation and Support Services Contract (AASC), the Group has entered into
a significant number of leases which contain a termination option. The use of
Adjusted Net Debt removes the volatility that would result from estimations of
lease periods and the recognition of liabilities associated with such leases
where the Group has the right to cancel the lease and hence the corresponding
obligation. Though the intention is not to exercise the options to cancel the
leases, it is available unlike other debt obligations.
Return on invested capital (ROIC)
30 June 31 December 30 June
2023 2022 2022
£m £m £m
ROIC excluding right of use assets
Non-current assets
Goodwill 908.5 945.0 922.7
Other intangible assets - owned 134.0 158.0 143.5
Property, plant and equipment 41.7 48.1 52.3
Interests in joint ventures and associates 37.3 23.3 18.6
Loans to joint ventures 10.0 10.0 7.5
Contract assets, trade and other receivables 14.3 16.1 18.8
Current assets
Inventory 23.1 22.4 21.4
Contract assets, trade and other receivables 646.0 719.6 655.5
Total invested capital assets 1,814.9 1,942.5 1,840.3
Current liabilities
Contract liabilities, trade and other payables (618.9) (683.3) (631.0)
Non-current liabilities
Contract liabilities, trade and other payables (40.6) (42.8) (55.3)
Total invested capital liabilities (659.5) (726.1) (686.3)
Invested capital(1) 1,155.4 1,216.4 1,154.0
Two-point average of opening and closing Invested capital 1,154.7 1,151.8 1,096.0
Underlying operating profit, 12 months ended 255.4 237.0 235.7
Underlying ROIC%(2) 22.1% 20.6% 21.5%
1. Invested capital excludes right of use assets recognised under IFRS
16 Leases. This is because the Invested capital of the Group are those items
within which resources are, or have been, committed, which is not the case for
many leases which would have been classified as operating leases under IAS 17
Leases where termination options exist and commitments for expenditure are in
future years.
2. ROIC is a measure to assess the efficiency of the resources used by
the Group and is a metric used to determine the performance and remuneration
of the Executive Directors. ROIC is calculated based on UOP, using the income
statement for the period and a two-point average of the opening and closing
balance sheets. The composition of Invested capital and calculation of ROIC
are summarised in the table above.
Overview of financial performance
Revenue and Underlying operating profit (UOP)
Commentary on the revenue and operating performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews sections.
Joint ventures and associates - share of results
In 2023, the most significant joint ventures and associates in terms of scale
of operations were Merseyrail Services Holding Company Limited (Merseyrail)
and VIVO Defence Services Limited (VIVO), with dividends received of £4.7m
and £nil (2022: £2.0m and £nil), respectively, and total revenues of
£116.1m and £387.9m, respectively (2022: £90.2m and £96.2m).
The split of the share of profits in joint ventures and associates, net of
interest and tax for the first six month of 2023 was £18.0m (2022: £3.4m),
comprising of profit from Merseyrail £12.2m (2022: £1.7m), VIVO £5.8m
(2022: £1.4m) and other joint ventures and associates £nil (2022: £0.3m).
The change in revenue is due to the increase of operations in VIVO, increased
passenger volumes and a commercial settlement within the Merseyrail joint
venture relating to current and prior periods. Profit has increased due to the
increased revenue, with VIVO incurring higher costs during the ramp up phase
of its operations. Dividends received are broadly the same as the prior year.
While the revenues and individual line items are not consolidated in the Group
Condensed Consolidated Income Statement, summary financial performance
measures for the Group's proportion of the aggregate of all joint ventures and
associates are set out below for information purposes.
For the six months ended 30 June 2023 2022
£m £m
Revenue 228.4 88.9
Operating profit 23.4 3.9
Net investment charge - (0.1)
Income tax charge (5.4) (0.4)
Profit after tax 18.0 3.4
Dividends received from joint ventures and associates 4.7 3.6
Exceptional operating items
Exceptional operating items are items of financial performance that are
outside normal operations and are material to the results of the Group either
by virtue of size or nature. These require separate disclosure on the face of
the income statement to assist in the understanding of the performance of the
Group. In 2023, the total exceptional credit net of tax was £48.9m (2022:
charge of £0.6m).
The Group released provisions held for indemnities provided on disposed
businesses totalling £41.3m due to the claims period ending. The Group also
received £9.9m compensation on the early termination of a contract.
Exceptional tax for the period was a tax charge of £2.3m (2022: credit of
£0.3m) which arises on exceptional operating items within operating profit.
Finance costs and investment revenue
Net finance costs were £11.0m (2022: £9.2m) and net interest paid was
£12.4m (2022: £10.9m).
Investment revenue of £3.5m (2022: £2.0m) consists of interest accruing on
net retirement benefit assets of £1.5m (2022: £1.4m) and interest income of
£2.0m (2022: £0.6m).
Finance costs of £14.5m (2022: £11.2m) include interest incurred on the US
private placement loan notes and the revolving credit facility of £8.3m
(2022: £6.7m) and lease interest expense of £5.6m (2022: £3.6m) as well as
other financing related costs including the impact of foreign exchange on
financing activities.
Tax
Underlying tax
An underlying tax charge of £29.8m has been recognised in the period on
underlying profits after finance costs. The effective tax rate (21.8%) is
marginally higher than at half year 30 June 2022 (21.4%) and slightly lower
than the year end 31 December 2022 (22.1%). The rate is lower than the
December 2022 rate due mainly to a change in mix of the businesses where
profits have arisen.
The current rate of 21.8% is lower than the UK statutory rate of 23.5%. This
is due to profits of Joint Ventures, where post tax profits are included in
the Group's profits before tax (reducing the rate by 3.1%). This is only
partially offset by higher rates of tax on profits arising on our
international operations (increasing the rate by 2.5%). There is also a
smaller impact of changes in provisions for uncertain tax positions, as part
of regular reassessment of tax exposures across the Group (decreasing the rate
by 0.9%) and other adjustments (reducing the rate by 0.2%).
Non-underlying tax
Exceptional tax for the period was a tax charge of £2.3m arising on
compensation received for early termination of a contract. The other
exceptional credits, which arise in the UK on the release of the indemnities,
are not subject to tax. A tax credit on amortisation of intangibles arising
on acquisition of £3.0m nets against this to give a total tax credit on
non-underlying items of £0.7m.
Deferred tax assets
At 30 June 2023 there is a net deferred tax asset of £186.5m (31 December
2022: £190.4m). This consists of a deferred tax asset of £234.1m (31
December 2022: £244.2m) and a deferred tax liability of £47.6m (31 December
2022: £53.8m). A £183.4m UK deferred tax asset is recognised on the Group's
balance sheet at 30 June 2023 (31 December 2022: £186.9m).
Taxes paid
Net corporate income tax of £24.7m was paid during the period, relating
primarily to operations in AsPac (£10.0m), North America (£13.6m), Middle
East (£0.5m), and Europe (£0.6m). The UK business made tax payments on
account in relation to 2023 and received a tax repayment in relation to the
2021 year during the period, with these balances netting against each other.
The amount of tax paid (£24.7m) differs from the tax charge in the period
(£29.1m) mainly because taxes paid to or received from Tax Authorities can
arise in later periods to the associated tax charge/credit. This is
particularly the case with regards to movements in deferred tax and provisions
for uncertain tax positions.
Dividend, share buyback, and share count
During the six months to 30 June 2023, the Group paid dividends of £21.2m
(2022: £19.3m) in respect of the final dividend for the year ended 31
December 2022. As noted in the Chief Executive's Review, the Board has decided
to declare an interim dividend of 1.14p per share in respect of the six months
ended 30 June 2023 (2022: 0.94p per share).
On 28 February 2023, the Group announced its intention to repurchase ordinary
shares with a value of up to £90m. The buyback programme took place between 3
March and 22 June 2023. During this period, the Group repurchased 58,956,118
shares at an average cost of £1.506 for total cost including fees of £88.8m.
As at 30 June 2023 these shares were held as treasury shares.
The weighted average number of shares for EPS purposes was 1,125.5m for the
six months ended 30 June 2023 (2022: 1,207.2m) and diluted weighted average
number of shares was 1,139.2m (2022: 1,226.3m). The decrease in the weighted
average number of shares is primarily due to the full year impact of the
repurchase of 55,506,704 shares during 2022; and the weighted average impact
of the repurchase of 58,956,118 in the first half of 2023.
Cash flows and net debt
UOP of £147.9m (2022: £129.5m) converts into net cash inflow from underlying
operating activities of £199.1m (2022: £185.2m). The increase in cash inflow
from operating activities in 2023 compared with 2022 is in line with the
increase in UOP for the same period. The dividends received from Joint
Ventures were lower than the profit recognised in the period, however this was
offset by a working capital inflow driven by improved cash collections for
volume-variable work.
The table below shows the cash flow from underlying operating activities and
FCF reconciled to movements in Net Debt. FCF for the period was an inflow of
£98.4m compared to £95.6m in 2022.
Adjusted Net Debt increased by £11.8m in the six months to 30 June 2023.
Average Adjusted Net Debt as calculated on a daily basis for the six months
ended 30 June 2023 was £261m (2022: £201m). Peak Adjusted Net Debt was
£357m (2022: £258m).
For the six months ended 30 June 2023 2022
£m £m
Underlying operating profit 147.9 129.5
Share of profit from joint ventures and associates (18.0) (3.4)
Movement in provisions (0.3) 1.5
Depreciation, amortisation and impairment of property, plant and equipment and 13.9 15.4
intangible assets
Depreciation and impairment of right of use assets 63.1 56.7
Other non-cash movements 4.4 7.5
Working capital movements 12.8 2.9
Tax paid (24.7) (24.9)
Net cash inflow from underlying operating activities 199.1 185.2
Dividends received from joint ventures and associates 4.7 3.6
Net interest paid (12.4) (10.9)
Capital element of lease repayments (63.0) (58.1)
Purchase of intangible and tangible assets net of proceeds from disposals (7.2) (8.3)
Purchase of own shares to satisfy share awards (22.8) (15.9)
Free cash flow 98.4 95.6
Net cash outflow on acquisition and disposal of subsidiaries, joint ventures (6.7) (0.1)
and associates
Dividends paid to shareholders (21.2) (19.3)
Dividends paid to non-controlling interests (1.7) -
Purchase of own shares (88.8) (25.1)
Movements on other investment balances (3.1) -
Net loans advanced to joint ventures - (7.5)
Exceptional operating items 9.7 (1.1)
Capitalisation and amortisation of loan costs (0.4) (0.7)
Cash movements on hedging instruments (7.7) 2.7
Foreign exchange gain/(loss) on Adjusted Net Debt 9.7 (30.1)
Movement in Adjusted Net Debt (11.8) 14.4
Opening Adjusted Net Debt (203.9) (178.0)
Closing Adjusted Net Debt (215.7) (163.6)
Lease liabilities (438.4) (432.5)
Closing Net Debt (654.1) (596.1)
Risk management and treasury operations
The Group's operations expose it to a variety of financial risks that include
access to liquidity, the effects of changes in foreign currency exchange
rates, interest rates and credit risk. The Group has a centralised treasury
function whose principal role is to ensure that adequate liquidity is
available to meet the Group's funding requirements as they arise and that the
financial risk arising from the Group's underlying operations is effectively
identified and managed.
Treasury operations are conducted in accordance with policies and procedures
approved by the Board and are reviewed annually. Financial instruments are
only executed for hedging purposes and speculation is not permitted. A monthly
report is provided to senior management outlining performance against the
Treasury Policy.
Liquidity and funding
As at 30 June 2023, the Group had committed funding of £603.7m (at 31
December 2022: £616.4m), comprising £253.7m of US private placement loan
notes, and a £350.0m revolving credit facility (RCF) of which £65.0m was
drawn (at 31 December 2022: £nil). The Group does not engage in any external
financing arrangements associated with either receivables or payables.
The Group's RCF provides £350.0m of committed funding for five years from the
arrangement date in November 2022. The facility includes an accordion option,
providing a further £100.0m of funding (uncommitted and therefore not
incurring any fees) if required without the need for additional documentation.
This option has not been included in the Group's assessment of available
liquidity as approvals are required to access the funding. The US private
placement loan notes are repayable in bullet payments between 2023 and 2032.
Interest rate risk
The Group has a preference for fixed rate debt to reduce the volatility of net
finance costs. The Group's Treasury Policy requires it to maintain a minimum
proportion of fixed rate debt as a proportion of overall Adjusted Net Debt and
for this proportion to increase as the ratio of EBITDA to interest expense
falls. As at 30 June 2023, £253.7m of debt was held at fixed rates and
Adjusted Net Debt was £215.7m.
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 Dollars. The
Group manages its currency flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward contracts
where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk
on the amounts due from counterparties. The Group manages this risk by
adhering to counterparty exposure limits based on external credit ratings of
the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private
placement loan notes and revolving credit facility, with a maximum
Consolidated Total Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and
minimum covenant EBITDA to covenant net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set out in the
table below.
The covenants exclude the impact of IFRS 16 Leases on the Group's results.
For the twelve months ended 30 June 31 December 2022 30 June
2023 £m 2022
£m £m
Operating profit 281.7 217.2 223.1
Remove: Exceptional items (49.7) 2.4 (0.6)
Remove: Amortisation and impairment of intangibles arising on acquisition 23.4 21.6 19.0
Exclude: Share of joint venture post-tax profits (26.6) (12.0) (5.7)
Include: Dividends from joint ventures 10.2 9.1 7.5
Add back: Net non-exceptional (releases)/charges to OCPs (0.9) (1.0) 0.9
Add back: Net covenant OCP utilisation (3.2) (1.3) (0.7)
Add back: Depreciation, amortisation and impairment of owned property, plant 31.6 33.1 31.2
and equipment and non-acquisition intangible assets
Add back: Depreciation, amortisation and impairment of property, plant and 4.7 4.8 5.0
equipment and non-acquisition intangible assets held under finance leases - in
accordance with IAS 17 Leases
Add back: Foreign exchange on investing and financing arrangements 0.5 0.4 0.1
Add back: Share based payment expense 14.9 15.6 15.5
Other covenant adjustments to EBITDA (1.0) (1.0) 3.7
Covenant EBITDA 285.6 288.9 299.0
Net finance costs 22.2 20.4 20.6
Exclude: Net interest receivable on retirement benefit obligations 2.8 2.7 1.9
Exclude: Movement in discount on other debtors 0.1 0.1 0.1
Exclude: Other dividends received - - 0.2
Exclude: Foreign exchange on investing and financing arrangements 0.6 0.4 0.1
Add back: Movement in discount on provisions - - (0.1)
Other covenant adjustments to net finance costs resulting from IFRS 16 Leases (9.5) (7.5) (6.9)
Covenant net finance costs 16.2 16.1 15.9
Adjusted Net Debt 215.7 203.9 163.6
Obligations under finance leases - in accordance with IAS 17 Leases 19.6 21.8 24.1
Recourse Net Debt 235.3 225.7 187.7
Exclude: Encumbered cash, amortised costs and other adjustments 4.6 6.9 (2.0)
Covenant adjustment for average FX rates 13.3 (8.2) (25.5)
CTNB 253.2 224.4 160.2
CTNB/covenant EBITDA (not to exceed 3.5x) 0.89x 0.78x 0.54x
Covenant EBITDA/covenant net finance costs (at least 3.0x) 17.6x 17.9x 18.8x
Net assets
At 30 June 2023, the condensed consolidated balance sheet shown on page 29 had
net assets of £983.5m, a movement of £46.2m from the closing net asset
position of £1,029.7m as at 31 December 2022.
Key movements since 31 December 2022 on the condensed consolidated balance
sheet shown on page 29 include:
● A decrease in goodwill of £36.5m driven predominantly by an adverse foreign
exchange movement.
● Other intangible assets reduction of £24.0m due to amortisation and a
revision of the provisional fair values of intangibles recognised in respect
of the ORS acquisition (£6.4m).
● A decrease in the net retirement benefit asset of £25.7m (see pensions
section below).
● Provisions have reduced by £49.4m due to the exceptional release of
provisions previously held for indemnities given on disposed businesses.
● Cash and cash equivalents have increased by £41.5m. In the period the Group
has generated cash inflows of £199.1m from underlying operations. The net
advance of loans was £65.0m and the capital element of lease repayments in
the period was £63.0m. Including associated costs, the spend on shares
repurchased totals £111.6m (£88.8m held in treasury and £22.8m for the
Employee Share Ownership Trust) and dividends totalling £21.2m have been paid
to shareholders.
● Net loan balances have increased by £52.4m due to the £65.0m drawdown on the
Group's RCF in the period offset by the impact of foreign exchange on US
private placement loan notes.
● The increase in contract assets, trade receivables and other assets have
largely offset increases in contract liabilities, trade payables and other
liabilities and are as a result of normal working capital movements.
Pensions
There has been a high degree of volatility in the valuation of pension
obligations primarily driven by the change in discount rates which have been
rising since 31 December 2021 against the backdrop of concerns over high
global inflation and the increased risk of recession. This has been fuelled by
the ongoing disruption to supply chains and rising interest rates.
Serco's pension schemes remain in a strong funding position, and show an
accounting surplus, before tax, of £25.1m (31 December 2022: £50.8m) on
scheme gross assets of £1.0bn (31 December 2022: £1.1bn) and gross
liabilities of £1.0bn (31 December 2022 £1.0bn). The decrease in the net
retirement benefit asset of £25.7m reflects the experience adjustment from
actual pension increases in Serco Pension and Life Assurance Scheme (SPLAS) as
a result of higher CPI in 2023 compared to the year-end assumption and the
high degree of volatility as noted above resulting in a reduction in pension
scheme assets particularly investments in bonds, and amounts held by insurance
companies. There has been a reduction in pension scheme obligations as
discount rates have risen but this has only partially offset the reduction in
assets as the liabilities are hedged on an actuarial basis rather than an IAS
19 basis.
Based on the 2021 actuarial funding valuation which was finalised in 2022 for
SPLAS, the Group has committed to make deficit recovery payments of £6.6m per
year from 2022 to 2030.
The opening net asset position led to a net interest income within net finance
costs of £1.5m (2022: £1.4m).
Claim for losses in respect of the 2013 share price reduction
Following the announcement during 2020 that the Group has received a claim
seeking damages for alleged losses as a result of the reduction in Serco's
share price in 2013, the Group has continued to assess the merit, likely
outcome and potential impact on the Group of any such litigation that either
has been or might potentially be brought against the Group. Any outcome is
subject to a number of significant uncertainties. The Group does not currently
assess the merits as strong, especially given the legal uncertainties in such
actions.
Information on other contingent liabilities can be found in note 10 to the
Condensed Consolidated Financial Statements.
Nigel Crossley
Group Chief Financial Officer
3 August 2023
Principal risks and uncertainties
Risk Management
Since the date of the approval of the Annual Report and Financial statements
our risk management process has continued to operate as described on page 95
of our 2022 Annual Report.
The Executive Committee and the Risk Committee reviewed the principal risks
and uncertainties of the Group and have determined that those reported in the
2022 Annual Report and Accounts remain valid for the remaining half of the
financial year. These and any emerging risks will be reviewed again by the
Executive Committee in October and remain under review on a quarterly basis by
the Risk Committee.
The following summarises the risks and uncertainties detailed further in the
Annual Report:
● Major Information Security Breach (including Cyber-attack and Data Privacy),
resulting in the loss or compromise of sensitive information or wilful damage;
● Failure to Grow Profitably as a result of failing to win material bids or
renew material contracts profitably, or a lack of opportunities in our chosen
markets;
● Material Legal and Regulatory Compliance that may cause significant loss and
damage to the Group including exposure to regulatory prosecution, reputational
damage and the potential loss of licences and authorisations;
● Significant Failure of the Supply Chain that may result in Serco being unable
to meet customer obligations, perform business critical operations or win new
business;
● Failure to Act with Integrity including engagement in significant corrupt,
illegal or dishonest acts;
● Contract Non-Compliance including failure to deliver contractual requirements
and to meet agreed service performance levels and report against them
accurately;
● Financial Control Failure impacting our ability to accurately report,
forecast, create suitable capital structures and make critical financial
transactions;
● Catastrophic Risk focusing on the risk of an event as a result of our actions
or failure to respond to an event that results in multiple fatalities, severe
property/asset damage or loss or very serious long term environmental damage;
● Health, Safety and Wellbeing as a result of the diversity of our operations
and the inherent risks in our operations in both work and public environments;
and
● Failure to Attract and Retain Good People restricting our ability to deliver
customer obligations, execute our strategy and achieve business objectives
whilst driving employee pride in the organisation.
Further detail on our principal risks and uncertainties and the associated
controls and mitigations can be found on page 98 in our 2022 Annual Report.
Statement of Directors' Responsibilities
We confirm that to the best of our knowledge:
● The condensed set of financial statements has been prepared in accordance with
IAS 34 Interim Financial Reporting as adopted for use in the UK.
● The interim management report includes a fair review of the information
required by:
- DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, 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 principal risks and uncertainties for the
remaining six months of the year; and
- DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, 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:
Mark
Irwin
Nigel Crossley
Group Chief Executive
Officer Group Chief
Financial Officer
3 August
2023
3 August 2023
INDEPENDENT REVIEW REPORT TO SERCO GROUP PLC
Conclusion
We have been engaged by Serco Group Plc ("the Company") to review the
condensed set of financial statements in the half-yearly financial report for
the six months ended 30 June 2023 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 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 2023 is not prepared, in all
material respects, in accordance with IAS 34 Interim Financial Reporting as
adopted for use in the UK and the Disclosure Guidance and Transparency Rules
("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued 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.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the directors
have inappropriately adopted the going concern basis of accounting, or that
the directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410. However, future events or conditions may cause the group to
cease to continue as a going concern, and the above conclusions are not a
guarantee that the group will continue in operation.
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 UK-adopted international accounting standards.
The directors are responsible for preparing the condensed set of financial
statements included in the half-yearly financial report in accordance with IAS
34 as adopted for use in the UK.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the group's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Group or to cease operations, or have no realistic alternative
but to do so.
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. Our conclusion, including our conclusions relating to going concern,
are based on procedures that are less extensive than audit procedures, as
described in the Basis for conclusion section of this report.
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.
Juliette Lowes
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London,E14 5GL
3 August 2023
Financial Statements
Condensed Consolidated Income Statement
For the six months ended 30 June (unaudited) 2023 2023 Reported 2022 2022
Non underlying items £m Non underlying items Reported
2023 £m 2022 £m £m
Underlying Underlying
£m £m
Revenue 2,472.1 - 2,472.1 2,178.4 - 2,178.4
Cost of sales (2,210.5) - (2,210.5) (1,927.2) 4.2 (1,923.0)
Gross profit 261.6 - 261.6 251.2 4.2 255.4
Administrative expenses (131.7) - (131.7) (125.1) - (125.1)
Exceptional operating items - 51.2 51.2 - (0.9) (0.9)
Amortisation and impairment of intangibles arising on acquisition - (11.4) (11.4) - (9.6) (9.6)
Share of profits in joint ventures and associates, net of interest and tax 18.0 - 18.0 3.4 - 3.4
Operating profit/(loss) 147.9 39.8 187.7 129.5 (6.3) 123.2
Margin 6.0% 7.6% 5.9% 5.7%
Net finance costs (11.0) - (11.0) (9.2) - (9.2)
Profit/(loss) before tax 136.9 39.8 176.7 120.3 (6.3) 114.0
Tax (charge)/credit (29.8) 0.7 (29.1) (25.8) 2.7 (23.1)
Effective tax rate 21.8% 16.5% 21.4% 20.3%
Profit/(loss) for the period 107.1 40.5 147.6 94.5 (3.6) 90.9
Attributable to
Equity owners of the Company 107.1 40.5 147.6 94.5 (3.6) 90.9
Non-controlling interest - - - - - -
Earnings per share (EPS) - basic (pence) 9.52 13.11 7.83 7.53
Earnings per share (EPS) - diluted (pence) 9.40 12.96 7.71 7.41
The notes on pages 31 to 42 form part of these condensed consolidated
financial statements.
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2023 2022
(unaudited) (unaudited)
£m £m
Profit for the period 147.6 90.9
Other comprehensive income for the period:
Items that will not be reclassified subsequently to profit or loss:
Share of other comprehensive income in joint ventures and associates 0.8 1.3
Remeasurements of post-employment benefit obligations(1) (25.8) (42.0)
Actuarial loss on reimbursable rights(1) (3.2) (8.2)
Income tax relating to these items(1) 6.9 12.4
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss)/gain on translation of foreign operations(1) (43.3) 58.9
Fair value (loss)/gain on cash flow hedges during the period(1) (0.7) 0.8
Tax relating to items that may be reclassified(1) 0.2 (0.2)
Total other comprehensive (loss)/income for the period (65.1) 23.0
Total comprehensive income for the period 82.5 113.9
Attributable to:
Equity owners of the Company 82.5 113.6
Non-controlling interest - 0.3
1 Recorded in other reserves in the Condensed Consolidated Statement
of Changes in Equity.
The notes on pages 31 to 42 form part of these condensed consolidated
financial statements
Condensed Consolidated Statement of Changes in Equity
Share capital Share premium account Retained earnings Other reserves Total shareholders' equity Non-
£m £m £m £m £m controlling
interest
£m
At 1 January 2022 (audited) 24.4 463.1 542.8 (23.6) 1,006.7 1.7
Total comprehensive income for the period - - 92.1 21.5 113.6 0.3
Dividends paid - - (19.3) - (19.3) -
Shares purchased and held in treasury - - - (25.1) (25.1) -
Shares committed to be purchased and held in treasury - - - (15.0) (15.0) -
Shares purchased and held in own share reserve - - - (15.9) (15.9) -
Expense in relation to share based payments - - - 7.9 7.9 -
Tax credit on items taken directly to equity - - - 3.8 3.8 -
At 30 June 2022 (unaudited) 24.4 463.1 615.6 (46.4) 1,056.7 2.0
Share premium account Total shareholders' equity Non- controlling interest
Share capital £m Retained earnings Other reserves £m £m
£m £m £m
At 1 January 2023 (audited) 24.4 463.1 670.6 (129.9) 1,028.2 1.5
Total comprehensive income/(loss) for the period - - 148.4 (65.9) 82.5 -
Dividends paid - - (21.2) - (21.2) (1.7)
Shares purchased and held in treasury - - - (88.8) (88.8) -
Shares purchased and held in own share reserve - - - (22.8) (22.8) -
Change in non-controlling interests - - (1.2) - (1.2) (0.1)
Expense in relation to share based payments - - - 7.1 7.1 -
At 30 June 2023 (unaudited) 24.4 463.1 796.6 (300.3) 983.8 (0.3)
The notes on pages 31 to 42 form part of these condensed consolidated
financial statements
Condensed Consolidated Balance Sheet
As at As at
30 June 31 December
2023 2022
(unaudited) (audited)
£m £m
Non-current assets
Goodwill 908.5 945.0
Other intangible assets 134.0 158.0
Property, plant and equipment 41.7 48.1
Right of use assets 427.8 434.2
Interests in joint ventures and associates 37.3 23.3
Loans to joint ventures 10.0 10.0
Trade and other receivables 14.3 16.1
Derivative financial instruments - 0.3
Deferred tax assets 234.1 244.2
Retirement benefit assets 32.1 57.0
1,839.8 1,936.2
Current assets
Inventories 23.1 22.4
Contract assets 300.8 345.0
Trade and other receivables 345.2 374.6
Current tax assets 8.7 11.5
Cash and cash equivalents 98.7 57.2
Derivative financial instruments 3.4 3.3
779.9 814.0
Total assets 2,619.7 2,750.2
Current liabilities
Contract liabilities (64.8) (60.5)
Trade and other payables (554.1) (622.8)
Derivative financial instruments (2.0) (1.1)
Current tax liabilities (7.3) (16.0)
Provisions (92.0) (134.9)
Lease obligations (134.6) (144.4)
Loans (159.3) (44.5)
(1,014.1) (1,024.2)
Non-current liabilities
Contract liabilities (32.1) (36.3)
Trade and other payables (8.5) (6.5)
Derivative financial instruments (0.1) -
Deferred tax liabilities (47.6) (53.8)
Provisions (67.0) (73.5)
Lease obligations (303.8) (301.6)
Loans (156.0) (218.4)
Retirement benefit obligations (7.0) (6.2)
(622.1) (696.3)
Total liabilities (1,636.2) (1,720.5)
Net assets 983.5 1,029.7
Equity
Share capital 24.4 24.4
Share premium account 463.1 463.1
Retained earnings 796.6 670.6
Other reserves (300.3) (129.9)
Equity attributable to owners of the Company 983.8 1,028.2
Non controlling interest (0.3) 1.5
Total equity 983.5 1,029.7
The notes on pages 31 to 42 form part of these condensed consolidated
financial statements
Condensed Consolidated Cash Flow Statement
For the six months ended 30 June 2023 2022
(unaudited) (unaudited)
£m £m
Net cash inflow from underlying operating activities 199.1 185.2
Non-underlying items 9.7 (1.1)
Net cash inflow from operating activities 208.8 184.1
Investing activities
Interest received 1.9 0.7
Dividends received from joint ventures and associates 4.7 3.6
Other investing activities (3.1) -
Loans advanced to joint ventures (5.0) (7.5)
Loans repaid by joint ventures 5.0 -
Purchase of other intangible assets (4.0) (3.3)
Purchase of property, plant and equipment (5.4) (5.2)
Proceeds from disposal of property, plant and equipment 0.9 0.2
Proceeds from disposal of intangible assets 1.3 -
Proceeds on disposal of subsidiaries and operators 0.2 -
Acquisition of subsidiaries, net of cash acquired (6.9) (0.1)
Net cash outflow from investing activities (10.4) (11.6)
Financing activities
Interest paid (14.3) (11.6)
Advances of loans 65.0 60.1
Repayments of loans - (127.6)
Capital element of lease repayments (63.0) (58.1)
Cash movements on hedging instruments (7.7) 2.7
Dividends paid to shareholders (21.2) (19.3)
Dividends paid to non-controlling interests (1.7) -
Purchase of Own Shares by the Employee Share Ownership Trust (22.8) (15.9)
Own shares repurchased (88.8) (25.1)
Net cash outflow from financing activities (154.5) (194.8)
Net increase/(decrease) in cash and cash equivalents 43.9 (22.3)
Cash and cash equivalents at beginning of period 57.2 198.4
Net exchange (loss)/gain (2.4) 2.8
Cash and cash equivalents at end of period 98.7 178.9
The notes on pages 31 to 42 form part of these condensed consolidated
financial statements
Notes to the Condensed Consolidated Financial Statements
1. General information, accounting policies and going concern
The financial information herein for the period ended 31 December 2022 does
not constitute the Company's statutory accounts as defined in section 434 of
the Companies Act 2006 but is derived from those accounts. The auditor's
report on the 2022 accounts was (i) unqualified, (ii) did not include a
reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report and (iii) did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006.
The annual financial statements of Serco Group plc are prepared in accordance
with international accounting standards in conformity with the requirements of
the Companies Act 2006 (Adopted IFRS) and are prepared in accordance with
UK-adopted International Accounting Standards. 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 for use in the UK. 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.
IFRS 17 Insurance Contracts is effective from 1 January 2023 and though
expected to primarily impact the insurance sector, there appear to be some
unintended consequences which may result in IFRS 17 applying more widely than
contracts issued by traditional insurance entities. Management has concluded
none of its contracts or obligations should be classified as insurance
contracts.
No new or amended accounting standards that became effective during the six
months ended 30 June 2023 have had a significant impact on the Group. No new
standards or interpretations that have been issued but are not yet effective
are expected to have a significant impact on the Group.
In the six months ended 30 June 2023, 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 with the exception of the change to alternative profit measures
(APMs) as set out below.
Consolidation of profit measures
The Group is simplifying its profit measures by removing Trading Profit and
renaming Underlying Trading Profit (UTP) to Underlying Operating Profit (UOP).
The historic UOP will be the same as the reported UTP.
The UTP definition was introduced in 2015 to exclude onerous contract
provision (OCP) releases or charges, other Contract and Balance Sheet Review
adjustments, depreciation and amortisation of assets held for sale, and some
other one-time items. It was maintained to ensure that there was transparency
outside the underlying results of large charges and releases from the
portfolio of onerous contracts recorded in 2014. These definitions are no
longer required as the Contract and Balance Sheet Adjustments recorded in 2014
are now at an insignificant level. In the future, no items will be recorded
between UTP and Trading Profit, meaning the additional measure no longer adds
any value.
Items excluded from UOP will be the amortisation of intangibles arising on
acquisition and exceptional operating items, which is consistent with the
items currently excluded from Trading Profit.
The methodology applied to calculating other APMs has not changed since 31
December 2022.
Going concern
In assessing the basis of preparation of the condensed set of financial
statements for the six months ended 30 June 2023, the Directors have
considered the principles of the Financial Reporting Council's 'Guidance on
Risk Management, Internal Control and Related Financial and Business
Reporting, 2014'; particularly in assessing the applicability of the going
concern basis, the review period and disclosures. The period of assessment is
considered to be at least 12 months from the date of approval of these
condensed financial statements.
At 30 June 2023, the Group's principal debt facilities comprised a £350m
revolving credit facility (of which £65m was drawn), and £254m of US private
placement notes, giving £604m of committed credit facilities and committed
headroom of £379m. The principal financial covenant ratios are consistent
across the private placement loan notes and revolving credit facility. As at
30 June 2023 the Group's primary restricting covenant, its leverage ratio, is
below the covenant of 3.5x and is below the Group's target range of 1x-2x at
0.89x.
The Directors have undertaken a rigorous assessment of going concern and
liquidity, taking into account financial forecasts, as well as the potential
impact of key uncertainties and sensitivities on the Group's future
performance. In making this assessment the Directors have considered the
Group's existing debt levels, the committed funding and liquidity positions
under its debt covenants, its ability to generate cash from operating
activities and its working capital requirements. The Directors have also
identified a series of mitigating actions that could be used to preserve cash
in the business should the need arise.
The basis of the assessment continues to be the Board-approved budget updated
to take account of known changes since, including the impact of the Group's
results for the six months to 30 June 2023. The budget is prepared annually
for the next two-year period and is based on a bottom-up approach to all of
the Group's existing contracts, potential new contracts and administrative
functions.
Owing to the unprecedented levels of inflation driven by geopolitical factors,
the Directors have considered the Group's resilience to rising costs. Due to
the contracting nature of the Group's operations, almost all of the revenue
base has some form of inflationary protection, whether it be through
contractual indexation mechanisms, cost plus billing or being short term in
nature. Though the timing of such protections becoming effective may, in the
short term, differ from the impact of cost pressures, it is expected that the
current inflation levels will not have a material impact on the Group's
profitability.
The Directors believe that appropriate sensitivities in assessing the Group's
ability to continue as a going concern are to model reductions in the Group's
win rates for bids and extensions, and reductions in profit margins. Due to
the diversity in the Group's operations, the Directors believe that a reverse
stress test of these sensitivities to assess the headroom available under the
Group's debt covenants and available liquidity provides meaningful analysis of
the Group's ability to continue as a going concern. Based on the headroom
available, the Directors are then able to assess whether the reductions
required to breach the Group's financial covenants, or exhaust available
liquidity, are plausible.
This reverse stress test shows that, even after assuming that the US private
placement notes totalling £95m due to mature during the assessment period are
repaid, and that no additional refinancing occurs, the Group can afford to be
unsuccessful on 80% of its bids and extensions, combined with a profit margin
80 basis points below the Group's forecast, and still retain sufficient
liquidity to meet all liabilities as they fall due and remain compliant with
the Group's financial covenants.
In respect of win rates, rebids and extensions have a more significant impact
on the Group's revenue than new business wins during the assessment period.
The Group has won more than 85% of its rebids and available contract
extensions over the last two years by volume. Including new business, win
rates by volume remain high at 68%. Therefore, a reduction of 80% or more to
the budgeted bid and extensions rates is not considered plausible.
In respect to margin reduction, due to the diversified nature of the Group's
portfolio of long-term contracts and the fact that the Group has met or
exceeded its full year guidance for the last five years, a reduction in margin
of 80bps versus the Group's budget is not considered plausible within the
assessment period combined with a 80% reduction in bid and extensions rates.
Consequently, the Directors are confident that the Group and Company will have
sufficient funds to continue to meet their liabilities as they fall due for at
least 12 months from the date of approval of the financial statements and
therefore have prepared the financial statements on a going concern basis.
2. Critical accounting judgements and key sources of estimation uncertainty
In the six months ended 30 June 2023, there have been no changes to the
critical accounting judgements and key sources of estimation uncertainty from
those disclosed in the Group's latest annual audited financial statements.
3. Segmental information
The Group's operating segments reflecting the information reported to the
Board in the six months ended 30 June 2023 are consistent with those reported
in the Group's latest annual audited financial statements.
An analysis of the Group's revenue from its key market sectors is as follows:
For the six months ended 30 June 2023 UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Key sectors
Defence 180.7 462.4 77.8 15.6 736.5
Justice & Immigration 620.7 - 183.1 - 803.8
Transport 86.0 51.9 8.0 34.6 180.5
Health 122.8 - 108.4 42.6 273.8
Citizen Services 208.3 186.7 72.2 10.3 477.5
1,218.5 701.0 449.5 103.1 2,472.1
For the six months ended 30 June 2022 (restated(1)) UK&E Americas AsPac Middle East Total
£m £m £m £m £m
Key sectors
Defence 153.2 411.5 71.6 14.7 651.0
Justice & Immigration 325.9 - 201.7 - 527.6
Transport 83.4 43.0 3.8 33.1 163.3
Health 130.1 - 112.1 44.1 286.3
Citizen Services 298.9 167.8 82.8 0.7 550.2
991.5 622.3 472.0 92.6 2,178.4
1. The prior period balances have been restated to ensure consistent
application of the sector definitions used for the current period and those
used in the full year 2022 results as stated in the Annual Report and
Accounts. The change has no impact to the income statement or the balance
sheet of the Group.
The following is an analysis of the Group's results, assets and liabilities by
reportable segment:
For the six months ended 30 June 2023 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 1,218.5 701.0 449.5 103.1 - 2,472.1
Result
Underlying operating profit/(loss)(1) 69.9 79.4 13.9 7.0 (22.3) 147.9
Amortisation and impairment of intangibles arising on acquisition (1.5) (8.1) (1.8) - - (11.4)
Exceptional operating items(2) 9.9 - - - 41.3 51.2
Operating profit 78.3 71.3 12.1 7.0 19.0 187.7
Net finance costs (11.0)
Profit before tax 176.7
Tax charge (26.8)
Tax charge on exceptional items (2.3)
Profit for the year 147.6
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 18.0 - - - - 18.0
Total depreciation and impairment of property, plant and equipment and right (50.5) (10.5) (5.3) (1.1) (5.6) (73.0)
of use assets
Amortisation and impairment of other intangible assets (1.0) (0.5) (0.5) - (2.0) (4.0)
1. Underlying operating profit/(loss) is defined as operating
profit/(loss) before exceptional operating items, amortisation and impairment
of intangible assets arising on acquisition, and other non-underlying items.
2. Included within exceptional operating items are releases of
provisions previously held for indemnities given on disposed businesses of
£41.3m and compensation received on the early termination of a contract of
£9.9m. Exceptional items incurred by the Corporate segment are not allocated
to other segments. Such items may represent costs that will benefit the wider
business.
For the six months ended 30 June 2022 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Revenue 991.5 622.3 472.0 92.6 - 2,178.4
Result
Underlying operating profit/(loss)(1) 37.5 75.7 31.6 8.7 (24.0) 129.5
Other non-underlying items(2) 4.2 - - - - 4.2
Amortisation and impairment of intangibles arising on acquisition (0.4) (7.4) (1.8) - - (9.6)
Exceptional operating items(3) - (0.9) 0.1 - (0.1) (0.9)
Operating profit/(loss) 41.3 67.4 29.9 8.7 (24.1) 123.2
Net finance costs (9.2)
Profit before tax 114.0
Tax charge (23.1)
Profit for the year 90.9
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 3.4 - - - - 3.4
Total depreciation and impairment of property, plant, and equipment and right (36.7) (13.6) (6.1) (0.9) (5.7) (63.0)
of use assets
Amortisation of other intangible assets (0.5) (0.3) (1.1) - (3.0) (4.9)
1. Underlying operating profit/(loss) is defined as operating
profit/(loss) before exceptional operating items, amortisation and impairment
of intangible assets arising on acquisition, and other non-underlying items.
2. Non-underlying items include the reversal of an impairment in respect
of assets which is no longer required due to contractual changes which the
Group has agreed with its customer.
3. Included within exceptional operating items are total
acquisition-related costs of £0.9m.
As at 30 June 2023 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Segment assets
Interests in joint ventures and associates 36.9 - - 0.4 - 37.3
Other segment assets(1) 907.5 918.5 284.2 72.3 55.1 2,237.6
Total segment assets 944.4 918.5 284.2 72.7 55.1 2,274.9
Unallocated assets(2) 344.8
Consolidated total assets 2,619.7
Segment liabilities
Segment liabilities(1) (711.4) (162.2) (234.0) (51.1) (105.2) (1,263.9)
Unallocated liabilities(2) (372.3)
Consolidated total liabilities (1,636.2)
Supplementary information
Additions to non-current assets(3) 16.9 (49.5) (17.5) 0.4 (31.1) (80.8)
Segment non-current assets 682.5 700.2 159.0 14.5 49.5 1,605.7
Unallocated non-current assets 234.1
1. The corporate segment assets and liabilities include balance sheet
items which provide benefit to the wider Group, including defined benefit
pension schemes and corporate intangible assets.
2. Unallocated assets and liabilities include deferred tax, cash and
cash equivalents, derivative financial instruments and loans.
3. Additions to non-current assets reflects additions and amounts
arising on acquisition for goodwill, other intangible assets, property plant
& equipment and right of use assets.
As at 31 December 2022 UK&E Americas AsPac Middle East Corporate Total
£m £m £m £m £m £m
Segment assets
Interests in joint ventures and associates 22.9 - - 0.4 - 23.3
Other segment assets(1) 960.8 948.0 309.6 68.7 123.3 2,410.4
Total segment assets 983.7 948.0 309.6 69.1 123.3 2,433.7
Unallocated assets(2) 316.5
Consolidated total assets 2,750.2
Segment liabilities
Segment liabilities(1) (720.2) (178.3) (248.1) (61.1) (179.0) (1,386.7)
Unallocated liabilities(2) (333.8)
Consolidated total liabilities (1,720.5)
Supplementary information
Additions to non-current assets(3) 173.7 14.5 7.4 3.0 12.1 210.7
Segment non-current assets 701.1 718.6 177.1 14.1 80.8 1,691.7
Unallocated non-current assets 244.5
1. The corporate segment assets and liabilities include balance sheet
items which provide benefit to the wider Group, including defined benefit
pension schemes and corporate intangible assets.
2. Unallocated assets and liabilities include deferred tax, cash and
cash equivalents, derivative financial instruments and loans.
3. Additions to non-current assets reflects additions and amounts
arising on acquisition for goodwill, other intangible assets, property plant
& equipment and right of use assets.
4. Exceptional operating items
Exceptional operating items are items of financial performance that are
outside normal operations and are material to the results of the Group either
by virtue of size or nature. As such, the items set out below require separate
disclosure on the face of the income statement to assist in the understanding
of the performance of the Group.
For the six months ended 30 June 2023 2022
£m £m
Exceptional operating items
Release of provisions held for indemnities given on disposed businesses 41.3 -
Compensation received on the early termination of contractual services 9.9 -
Costs associated with successful acquisition - (0.9)
Exceptional operating items 51.2 (0.9)
Exceptional tax (charge)/credit (2.3) 0.3
Total exceptional items net of tax 48.9 (0.6)
The Group released provisions held for indemnities given on disposed
businesses of £41.3m during the six months ended 30 June 2023 due to the
claims period ending. The Group also received compensation on the early
termination of a contract of £9.9m.
Exceptional tax for the period was a tax charge of £2.3m (2022: credit of
£0.3m) which arises on exceptional operating items within operating profit.
5. Tax
The tax charge for the six months ended 30 June 2023 is calculated using the
full year forecasted effective tax rate by taxable entity which is then
applied to the actual profit for the period in each taxable entity. The tax
impacts of items specific to the period are then included to provide the half
year actual tax charge.
A total tax charge of £29.1m includes an underlying tax charge of £29.8m, a
tax credit on amortisation of intangibles arising on acquisition of £3.0m and
a tax charge of £2.3m on exceptional income.
The tax rate on underlying profits at 21.8% is lower than the UK standard
corporation tax rate of 23.5%. This is mainly due to the impact of profits
made by joint ventures whose post tax profits are included in the Group's
profit before tax. In addition, there is a credit associated with a reduction
in provisions for uncertain tax positions during the period, as part of
regular reassessment of tax exposures across the Group. This is partially
offset by higher rates of tax on profits arising on international operations.
A £186.5m deferred tax asset is recognised on the balance sheet at 30 June
2023 (31 December 2022: £190.4m) of which £183.4m relates to the UK (31
December 2022: £186.9m).
6. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in
accordance with IAS 33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares 2023 2022
For the six months end 30 June millions millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,125.5 1,207.2
Effect of dilutive potential ordinary shares: Shares under award 13.7 19.1
Weighted average number of ordinary shares for the purpose of diluted EPS 1,139.2 1,226.3
Basic EPS Earnings Per share Earnings Per share
For the six months end 30 June 2023 amount 2022 amount
£m 2023 £m 2022
pence pence
Earnings for the purpose of basic EPS 147.6 13.11 90.9 7.53
Effect of dilutive potential ordinary shares (0.15) (0.12)
Diluted EPS 147.6 12.96 90.9 7.41
7. Goodwill
Goodwill is stated at cost less any provision for impairment and is compared
against the associated recoverable amount at least annually. The value of each
cash generating unit (CGU) is based on value in use calculations derived from
forecast cash flows based on past experience, adjusted to reflect market
trends, economic conditions and key risks. These forecasts include an estimate
of new business wins and an assumption that the final year forecast continues
on into perpetuity at a CGU specific growth rate.
Goodwill is required to be tested for impairment at least once every financial
year, irrespective of whether there is any indication of impairment. The
annual impairment review typically takes place in the final quarter of the
year. However, if there are indicators of impairment, an earlier review is
also required.
There have been no indicators of impairment since the full impairment test
undertaken for the 2022 year end. In assessing for potential indicators of
impairment, the Group has gathered information at both macro and micro levels,
globally and on the basis of the individual geographies in which the Group
operates.
The Group has not been impacted in a manner which would indicate the existence
of impairment indicators and will prepare a full goodwill assessment at the
end of the year. When considering the potential existence of both internal and
external impairment indicators, the Group assessed certain key measures and
other sources of available information which included, but were not limited
to, the absence of:
● Any obsolescence indicators within the Group's physical assets;
● Any plans to dispose of CGUs;
● Indicators of worse than expected performance to an extent that would have
caused an impairment had they been known at the time of the latest full
impairment review;
● Net operating cash outflows or operating losses;
● A significant decline in market value; or
● Carrying amounts of net assets in excess of market capitalisation.
As noted at year end 2022, within the forecast cash flows for the AsPac CGU,
there are few large opportunities which have a binary outcome the loss of
which could result in an impairment of the goodwill. The current trading
environment and win rates have been considered, however given the
opportunities available within the region no indicator of impairment has been
identified. Should the scale of any Division in the Group decline to a level
which does not make it economically viable, it is likely that the Group would
review the overhead and support structures in place to ensure they are
appropriate for the scale of the business and opportunities available. The
Group will undertake a five-year strategy review during the second half of
2023 for all Divisions, and as required a full impairment review will take
place for the 31 December 2023 reporting period.
Following all the above analysis undertaken, no indicators of impairment have
been identified.
8. Analysis of Net Debt
30 June 2023
As at Cash Acquisitions Exchange differences Non-cash As at
1 January flow £m £m movements(1) 30 June
2023 £m £m 2023
£m £m
Loans payable (262.9) (65.0) - 13.0 (0.4) (315.3)
Lease obligations (446.0) 63.0 - 3.9 (59.3) (438.4)
Liabilities arising from financing activities (708.9) (2.0) - 16.9 (59.7) (753.7)
Cash and cash equivalents 57.2 43.9 - (2.4) - 98.7
Derivatives relating to Net Debt 1.8 - - (0.9) - 0.9
Net Debt (649.9) 41.9 - 13.6 (59.7) (654.1)
1. Non-cash movements relate to the net impact of entering into new
leases and exiting certain leases before the end of the lease term without
payment of a cash termination cost.
31 December 2022
As at Cash Acquisitions(1) Exchange Non-cash movements(2) As at
1 January flow £m differences £m 31 December
2022 £m £m 2022
£m £m
Loans payable (377.0) 149.3 (6.5) (30.1) 1.4 (262.9)
Lease obligations (430.3) 120.5 (13.1) (8.0) (115.1) (446.0)
Liabilities arising from financing activities (807.3) 269.8 (19.6) (38.1) (113.7) (708.9)
Cash and cash equivalents 198.4 (151.1) 6.2 3.7 - 57.2
Derivatives relating to Net Debt 0.6 - - 1.2 - 1.8
Net Debt (608.3) 118.7 (13.4) (33.2) (113.7) (649.9)
1. Acquisitions represent the net cash/(debt) acquired on acquisition.
2. Non-cash movements relate to the net impact of entering into new
leases and exiting certain leases before the end of the lease term without
payment of a cash termination cost.
9. Provisions
Employee Property Contract Claims Other Total
related £m £m £m £m £m
£m
As at 1 January 2023 82.5 19.6 11.6 24.2 70.5 208.4
Arising on acquisition - - - - 0.4 0.4
Transfer from working capital - 0.6 - - - 0.6
Eliminated on disposal of subsidiary (1.2) (0.9) - - (0.3) (2.4)
Charged to income statement 9.2 1.5 1.3 5.2 4.4 21.6
Released to income statement (0.6) (0.4) (0.7) - (4.5) (6.2)
Released to exceptional items - - - - (41.3) (41.3)
Utilised during the period (4.1) (2.0) (2.2) (3.6) (4.0) (15.9)
Exchange differences (5.4) (0.2) - - (0.6) (6.2)
As at 30 June 2023 80.4 18.2 10.0 25.8 24.6 159.0
Analysed as:
Current 50.7 7.3 9.6 4.3 20.0 92.0
Non-current 29.7 10.9 0.4 21.5 4.6 67.0
80.4 18.2 10.0 25.8 24.6 159.0
Employee-related provisions include amounts for long-term service awards and
terminal gratuity liabilities which have been accrued and are based on
contractual entitlement, together with an estimate of the probabilities that
employees will stay until rewards fall due and receive all relevant amounts.
There are also amounts included in relation to restructuring. The provisions
will be utilised over various periods driven by local legal or regulatory
requirements, the timing of which is uncertain.
The majority of property provisions relate to leased properties and are
associated with the requirement to return properties to either their original
condition, or to enact specific improvement activities in advance of exiting
the lease. Dilapidations associated with leased properties are held as a
provision until such time as they fall due, with the longest running lease
ending in March 2037.
A contract provision is recorded when a contract is deemed to be unprofitable
and therefore is considered onerous. The present value of the estimated future
cash outflow required to settle the contract obligations as they fall due over
the respective contracts has been used in determining the provision.
Individual provisions are only discounted where the impact is assessed to be
significant. Currently, no contract provisions are discounted.
Claims provisions relate to claims made against the Group. These claims are
varied in nature, although they typically come from either the Group's service
users, claimants for vehicle-related incidents or the Group's employees.
Whilst there is some level of judgement on the amount to be recorded, in
almost all instances the variance to the actual claim paid out will not
individually be material, however the timing of when the claims are reported
and settled is less certain.
Included within other provisions is:
● £1.4m related to indemnities provided in respect of a historic business
transaction. During the six months to 30 June 2023 £41.3m was released due to
the claim period ending on 31 March 2023.
● £23.2m related to legal and other costs that the Group expects to incur in
respect of past events for which a provision has been recorded, none of which
are individually material.
10. Contingent liabilities
The Group has guaranteed overdrafts, leases and bonding facilities of its
joint ventures and associates up to a maximum value of £5.7m (31 December
2022: £5.7m). The actual commitment outstanding at 30 June 2023 was £5.7m
(31 December 2022: £5.7m).
The Group has provided certain guarantees and indemnities in respect of
performance and other bonds, issued by banks on its behalf, in the ordinary
course of business. The total commitment outstanding as at 30 June 2023 was
£206.8m (31 December 2022: £222.7m).
Following the announcement during 2020 that the Group has received a claim
seeking damages for alleged losses as a result of the reduction in Serco's
share price in 2013, the Group has continued to assess the merit, likely
outcome and potential impact on the Group of any such litigation that either
has been or might potentially be brought against the Group. Any outcome is
subject to a number of significant uncertainties and it is therefore not
possible to assess the quantum of any such litigation as at the date of this
disclosure.
The Group is also aware of other claims and potential claims which involve or
may involve legal proceedings against the Group although the timing of
settlement of these claims remains uncertain. The Directors are of the
opinion, having regard to legal advice received and the Group's insurance
arrangements, that it is unlikely that these matters will, in aggregate, have
a material effect on the Group's financial position.
11. Financial risk management
The vast majority of financial instruments are held at amortised cost. The
classification of the fair value measurement falls into three levels, based on
the degree to which the fair value is observable. The levels are as follows:
Level 1: Inputs derived from unadjusted quoted prices in active markets for
identical assets or liabilities.
Level 2: Inputs, other than quoted prices included within Level 1, that are
observable for the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable inputs for the asset or liability.
Based on the above, the derivative financial instruments held by the Group at
30 June 2023 and the comparison fair values for loans and leases, are all
considered to fall into Level 2. There are no Level 3 items. As at 30 June
2023, the Group held Level 2 derivative instruments in designated hedge
relationships or designated as fair value through the P&L made up of
financial assets of £3.4m (31 December 2022: £3.6m) and financial
liabilities of £2.1m (31 December 2022: £1.1m).
There have been no transfers between levels in the six months to 30 June 2023.
12. Defined benefit schemes
Recognised in the income statement:
2023 2022
For the six months ended 30 June £m £m
Current service cost - employer 2.8 2.5
Settlement gain recognised - (0.4)
Administrative expenses and taxes 0.8 0.9
Recognised in arriving at operating profit 3.6 3.0
Interest income on scheme assets - employer (25.3) (14.0)
Interest on franchise adjustment - (0.1)
Interest cost on scheme liabilities - employer 23.8 12.7
Finance income (1.5) (1.4)
Total recognised in the income statement 2.1 1.6
Included within the SOCI:
For the six months ended 30 June 2023 2022
£m £m
Actual return on scheme assets (18.2) (367.7)
Less: interest income on scheme assets (25.3) (14.0)
(43.5) (381.7)
Effect of changes in demographic assumptions - 16.0
Effect of changes in financial assumptions 37.1 399.8
Effect of experience adjustments (19.4) (76.1)
Remeasurements (25.8) (42.0)
Change in franchise adjustment (1.9) (4.7)
Change in members' share (1.3) (3.5)
Actuarial loss on reimbursable rights (3.2) (8.2)
Total pension loss recognised in the SOCI (29.0) (50.2)
The total assets and liabilities of all schemes are:
At 30 June 2023 At 31 December 2022
Fair value of scheme assets Present value of scheme liabilities Fair value of scheme assets Present value of scheme liabilities
£m £m £m £m
Surplus/ Surplus/
(deficit) (deficit)
£m £m
SPLAS 885.7 (860.4) 25.3 925.3 (877.8) 47.5
Other schemes 126.9 (127.1) (0.2) 134.4 (134.1) 0.3
Total 1,012.6 (987.5) 25.1 1,059.7 (1,011.9) 47.8
Franchise adjustment(1) - 1.8
Members' share of deficit - 1.2
Net retirement benefit asset(2) 25.1 50.8
1. The franchise adjustment represents the amount of scheme deficit that
is expected to be funded outside the contract period, the balance is now nil
following the transfer of the pension obligations for Caledonian Sleepers at
the end of the franchise agreement in June 2023.
2. Net retirement benefit asset (before tax) is split between schemes
with a pension asset £32.1m (31 December 2022: £57.0m) and a pension
liability £7.0m (31 December 2022: £6.2m)
Actuarial assumptions:
The assumptions set out below are for Serco Pension and Life Assurance Scheme
(SPLAS), which represents 87% of total liabilities and 87% of total assets of
the defined benefit pension schemes in which the Group participates.
Main assumptions 30 June 31 December
2023 2022
% %
Discount rate 5.35 5.00
Rate of salary increases 2.95 2.85
RPI Inflation 3.15 3.15
CPI Inflation 2.45 2.35
Post retirement mortality 30 June 31 December
2023 2022
Years years
Current pensioners at 65 - male 21.6 21.5
Current pensioners at 65 - female 24.2 24.1
Future pensioners at 65 - male 23.6 23.6
Future pensioners at 65 - female 26.3 26.2
13. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are
related parties, have been eliminated on consolidation and are not disclosed
in this note. Related party transactions with the Group's key management
personnel and retirement benefit plans, are set out in the Group's financial
statements for the year ended 31 December 2022. Transactions between the Group
and its joint venture undertakings and associates are disclosed below.
Transactions
During the period, Group companies entered into the following transactions
with joint ventures and associates:
Transactions for the six months ended 30 June Current outstanding at 30 June Non-current outstanding at 30 June
2023 2023 2023
£m £m £m
Sale of goods and services
Joint ventures 6.9 2.2 -
Other
Dividends received - joint venture 4.7 - -
Loan receivable from joint ventures(1) - - 10.0
Receivable from consortium for tax - joint ventures 3.8 0.8 7.0
Total 15.4 3.0 17.0
1. During the period a £5.0m loan was advanced to VIVO, and the amount
was subsequently repaid.
Joint venture receivable amounts outstanding have arisen from transactions
undertaken during the general course of trading, are unsecured, and will be
settled in cash. No guarantees have been given or received.
Transactions for the six months ended 30 June Current outstanding at 30 June Non-current outstanding at 30 June
2022 2022 2022
£m £m £m
Sale of goods and services
Joint ventures 5.7 - -
Associates 0.8 0.1 -
Other
Dividends received - joint venture 2.0 - -
Dividends received - associate 1.6 - -
Loan receivable from joint ventures 7.5 - 7.5
Receivable from consortium for tax - joint ventures 1.1 0.2 1.9
Total 18.7 0.3 9.4
14. Notes to the Condensed Consolidated Cash Flow Statement
For the six months ended 30 June 2023 2023 2023 2022 2022
Underlying Non Reported Underlying Non 2022
£m underlying items £m £m underlying Reported
£m items £m
£m
Operating profit/(loss) for the period 147.9 39.8 187.7 129.5 (6.3) 123.2
Adjustments for:
Share of profits in joint ventures and associates (18.0) - (18.0) (3.4) - (3.4)
Share based payment expense 7.1 - 7.1 7.8 - 7.8
Impairment of property, plant and equipment - owned 0.9 - 0.9 - - -
Impairment of property, plant and equipment - leased - - - - (4.2) (4.2)
Depreciation of property, plant and equipment -owned 9.0 - 9.0 10.5 - 10.5
Depreciation of property, plant and equipment -leased 63.1 - 63.1 56.7 - 56.7
Amortisation of intangible assets - owned 4.0 11.4 15.4 4.9 9.6 14.5
Profit on early termination of leases - - - (0.1) - (0.1)
Profit on disposal of property, plant and equipment (0.2) - (0.2) (0.1) - (0.1)
(Profit)/loss on disposal of intangible assets (1.2) - (1.2) 0.1 - 0.1
(Decrease)/increase in provisions (0.3) (41.5) (41.8) 1.5 (0.2) 1.3
Other non-cash movements (1.3) - (1.3) (0.2) - (0.2)
Total non-cash items 63.1 (30.1) 33.0 77.7 5.2 82.9
Increase in inventories (1.5) - (1.5) (1.1) - (1.1)
Decrease in receivables 43.0 - 43.0 9.1 - 9.1
Decrease in payables (28.7) - (28.7) (5.1) - (5.1)
Movements in working capital 12.8 - 12.8 2.9 - 2.9
Tax paid (24.7) - (24.7) (24.9) - (24.9)
Net cash inflow/(outflow) from operating activities 199.1 9.7 208.8 185.2 (1.1) 184.1
15. Post balance sheet events
Dividends
Subsequent to the period end, the Board has declared an interim dividend 1.14p
per share in respect of the six months ended 30 June 2023.
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