REG - Serco Group PLC - Half Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
29/10/2014 12:02
- Part 2: For the preceding part double click ID:nRSL8461Oa
£m £m £m
Costs associated with UK Government reviews (5.7) - (11.6)
Settlement amounts relating to UK Government reviews - - (66.3)
UK clinical health onerous contract provisions (3.9) - (17.6)
Restructuring costs (14.5) - (14.9)
Provision for settlement relating to pension deficit funding (7.5) - -
Asset impairment - - (9.6)
Deferred consideration relating to prior year acquisition - - 10.3
Total other exceptional operating items (31.6) - (109.7)
Gain on disposal of UK transport maintenance business - - 23.2
Loss on disposal of occupational health business - - (3.9)
Loss on disposal of Ascot College - - (0.1)
Gain on disposal of Braintree Community Hospital 0.5 - -
Loss on disposal of Collectica business (3.7) - -
Gain on disposal of the nuclear assurance technical consulting services business disposed in prior period 5.4 - -
Profit on disposal of businesses 2.2 - 19.2
Total exceptional items (29.4) - (90.5)
Costs associated with UK Government reviews
In the six months to 30 June 2014 there have been external adviser and other directly-related incremental costs that
amounted to £5.7m.
UK clinical health withdrawal and onerous contract provisions
During the period we continued to monitor performance on the UK clinical health operations, against which an onerous
contract provision was made in the prior year and where the Group's intention is to withdraw from the UK clinical health
market. Two contracts, Cornwall Out of Hours and Braintree Clinic al Services which was disposed of in the period, are
being exited early and a third loss-making contract, Suffolk Community Health, is being run through to the end of the
contract term in 2015. Following a further review of the costs of delivering improved service levels and meeting
performance obligations through to the end of the contracts and the intended withdrawal from this market, we have revised
upwards our estimate of the costs of running the contracts to term, resulting in an additional charge of £3.9m.
Restructuring
As a result of the 2013 review of the cost structures in the UK businesses, a restructuring charge of £14.5m was taken in
the period. This principally reflects the cost of headcount reductions (£6.4m) and property related exit costs (£7.1m).
These have been treated as exceptional costs as they have arisen directly as a result of the 2013 restructuring programme
in response to the effect of the UK Government reviews.
Provision for settlement relating to pension deficit funding
The Group is in dispute with the Trustees of the Docklands Light Railway (DLR) pension scheme over the extent of its
liability to fund the deficit on the pension scheme. As part of the contract we are obliged to make contributions towards a
reduction in the overall deficit during the contract period. This has been reflected in our annual profits over the life of
the contract in line with franchise accounting. The Scheme Trustees have however recently completed a valuation and we have
a dispute over the extent of liability that Serco has to fund the deficit. At 30 June 2014 the Group has recognised a £7.5m
provision in relation to this matter for the estimated settlement, together with associated costs.
In normal circumstances any pension deficit payment arising from such a review would be a charge to the Statement of Other
Comprehensive Income (SOCI). However, given the resolution of any legal process is likely to occur after the end the
franchise period, we have treated the potential payment as a settlement of a legal dispute within the income statement.
This has been disclosed as an exceptional item as it is material and considered a non-recurring event as the dispute arises
from a disagreement over the extent of liability to fund the deficit.
Exceptional net profit on disposal of subsidiaries and operations
On 10 March 2014 the Group disposed of its Braintree Community Hospital business to the Mid Essex Clinical Hospital Trust.
There was a payment of £0.5m to the purchaser and the gain on disposal was £0.5m, reflecting the net liabilities disposed.
On 19 June 2014 the Group disposed of its debt collection business, Collectica Limited. The initial cash consideration
received was £6.5m and the resulting loss on disposal was £3.7m.
There was a gain of £5.4m recognised in the period in relation to the disposal of the nuclear assurance technical
consulting services business sold in 2012. This reflected disposal costs and other pension costs that had been previously
provided, but are no longer deemed to be required.
1.6 Net finance costs
Six months ended30 June2014 Six months ended 30 June 2013 Change at constant Year ended 31 December 2013
£m £m Change currency £m
Adjusted net finance costs (17.4) (19.2) (9.4%) (10.4%) (37.6)
Less: Share of joint venture interest 0.2 0.2 0.4
Net finance costs (17.2) (19.0) (9.5%) (10.5%) (37.2)
Adjusted net finance costs decreased by £1.8m in the period, due principally to a lower movement in the discount unwind on
provisions and deferred consideration and a foreign exchange benefit from the translation of US dollar denominated interest
costs.
1.7 Profit before tax
Six months ended 30 June2014 Six months ended 30 June 2013 Change at constant Year ended31 December 2013
£m £m Change currency £m
Adjusted profit before tax 33.3 127.1 (73.8%) (66.4%) 254.4
Amortisation of intangibles arising on acquisition (5.8) (12.5) (21.4)
Transaction related costs - (2.7) (3.5)
Share of joint venture tax (2.7) (5.8) (11.4)
Management estimation of charges related to UK Government reviews (2.7) - (21.0)
Profit before tax before exceptional items 22.1 106.1 (79.2%) (71.1%) 197.1
Net profit on disposal of subsidiaries and operations 2.2 - 19.2
Other exceptional operating items (31.6) - (109.7)
(Loss)/profit before tax (7.3) 106.1 (106.9%) (99.2%) 106.6
Adjusted profit before tax reduced by 74% to £33.3m (66% decline at constant currency).
1.8 Tax
Six monthsended Six monthsended Yearended
30 June 2014 30 June 2013 Change at constant 31 December2013
£m £m Change currency £m
Adjusted tax (8.3) (30.6) (72.9%) (65.2%) (61.1)
Tax on amortisation of intangibles arising on acquisition 1.8 2.9 5.5
Share of joint venture tax 2.7 5.8 11.4
Tax on management estimation of charges related to UK Government reviews 0.5 - 4.2
Tax before exceptional items (3.3) (21.9) (84.9%) (75.0%) (40.0)
Tax on exceptional items 4.2 - 28.8
Tax 0.9 (21.9) (104.1%) (94.2%) (11.2)
Adjusted effective tax rate 24.9% 24.1% 24.0%
Effective tax rate before exceptional items 14.9% 20.6% 20.3%
Excluding the tax effect on adjusted items and including the proportional consolidated results of the joint ventures, the
Adjusted effective tax rate was 24.9% in the period compared with 24.1% in the comparable period.
1.9 Earnings per share (EPS)
Six months ended 30 June 2014pence Six months ended 30 June 2013pence Change Change at constant currency Year ended 31 December 2013pence
Adjusted earnings per share 4.96 19.69 (74.8%) (67.7%) 39.53
Amortisation of intangibles arising on acquisition (0.79) (1.96) (3.25)
Transaction related costs - (0.55) (0.72)
Management estimation of charges related to UK Government reviews (0.44) - (3.43)
Earnings per share before exceptional item 3.73 17.18 (78.3%) (70.9%) 32.13
Exceptional items (5.00) - (12.62)
Earnings per share (1.27) 17.18 (107.4%) (100.5%) 19.51
Adjusted EPS decreased by 75% to 4.96p (68% decline at constant currency). Measures of basic EPS are calculated on a
weighted average share base of 503.6m during the period (6 months to 30 June 2013: 490.1m, year ended 31 December 2013:
489.0m).
2. Dividend
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014 2013 2013
pence pence Change pence
Dividend per share 3.10 3.10 0.0% 10.55
The Board has declared an interim dividend of 3.10p per share, representing a consistent level with the 2013 interim
dividend. The interim dividend will be paid on 17 October 2014 to shareholders on the register as at 5 September 2014.
3. Cash flow
The Group generated a free cash inflow of £51.6m (six months ended 30 June 2013: £29.0m), the increase arising principally
as a result of the improvement in working capital in the period partly offset by the reduced profit.
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014£m 2013£m 2013£m
Adjusted operating profit excluding joint ventures 34.0 117.3 233.1
Non cash items 39.0 29.0 53.0
Adjusted EBITDA excluding joint ventures 73.0 146.3 286.1
Working capital movement 0.6 (93.2) (144.0)
Adjusted operating cash flow excluding joint ventures 73.6 53.1 142.1
Interest (17.3) (18.2) (38.2)
Tax received/(paid) 4.1 (8.8) (18.8)
Net expenditure on tangible and intangible assets* (23.5) (21.6) (51.8)
Dividends from joint ventures 14.7 24.5 51.5
Free cash flow 51.6 29.0 84.8
Acquisition of subsidiaries net of cash acquired (5.3) (18.6) (18.6)
Disposal of subsidiaries and operations net of cash acquired 6.8 (2.1) 40.6
Transaction related costs - (0.5) (2.8)
Other exceptional items (16.8) - (83.7)
Proceeds from share placement 155.8 - -
Purchase of own shares and issue proceeds of other share capital 2.3 (14.8) (14.9)
Financing** (58.8) 112.9 73.2
Management estimation of charges related to UK Government reviews (1.9) - (9.2)
Special pension contributions - (19.2) (19.7)
Dividends paid (36.4) (36.4) (51.5)
Net increase/(decrease) in cash and cash equivalents before exchange 97.3 50.3 (1.8)
Exchange (loss)/gain (1.6) 0.8 (15.9)
Net increase/(decrease) in cash and cash equivalents 95.7 51.1 (17.7)
Notes:
*Net expenditure on tangible and intangible assets excludes assets funded under finance lease arrangements.
**Financing is stated net of directly reimbursed capital expenditure.
3.1 Adjusted operating cash flow excluding joint ventures
Adjusted operating cash flow excluding joint ventures of £73.6m (six months ended 30 June 2013: £53.1m) reflects a
conversion of Adjusted EBITDA into cash of 100.8 % (six months ended 30 June 2013: 36.3%).
The strong working capital performance in the period includes the timing benefits from the unwind of some late customer
payments and milestone payments that had not been received at the end of 2013.
3.2 Interest
Net interest paid decreased by £0.9m to £17.3m, principally due to the timing of interest payments associated with the
Group's funding arrangements.
3.3 Tax
Tax received of £4.1m (six months ended 30 June 2013: payment of £8.8m), reflects a net repayment of tax, primarily driven
by UK losses resulting in tax refunds in respect of earlier years.
3.4 Net expenditure on tangible and intangible assets
Gross expenditure on tangible and intangible assets was £27.4m (six months ended 30 June 2013: £31.5m). This represents
1.4% of revenue (six months ended 30 June 2013: 1.5%). After disposal proceeds of £3.9m (six months ended 30 June 2013:
£9.9m), net capital expenditure was £23.5m (six months ended 30 June 2013: £21.6m).
3.5 Dividends from joint ventures
Dividends received from joint ventures totalled £14.7m (six months ended 30 June 2013: £24.5m), reflecting a conversion
rate of joint ventures' profit after tax into dividends of 107% (six months ended 30 June 2013: 107%).
3.6 Purchase of own shares and issue proceeds of share capital
The net £2.3m cash inflow in the period (six months ended 30 June 2013: outflow £14.8m) related to £2.3m (six months ended
30 June 2013: £1.2m) of proceeds from the issue of share capital associated with the exercise of share options. There was
no outflow in the period to purchase shares (six months ended 30 June 2013: £16.0m) for the Employee Share Ownership Trust
(ESOT) in order to satisfy options granted under the Group's share option schemes.
3.7 Proceeds from share placement
This related to a net receipt of £155.8m relating to the share placement which involved the issue of 49.9m new shares on 7
May 2014.
3.8 Financing
The outflow from financing of £58.8m (six months ended 30 June 2013: inflow of £112.9m) is primarily due to the repayment
of borrowings following the share placement receipt. Further detail on sources of funding is supplied in section 9 below.
3.9 Management estimation of charges related to UK Government reviews
There was cash spend of £1.9m (six months ended 30 June 2013: nil) in relation to costs estimated and allocated by
management in relation to the 2013 UK Government reviews on the business and related activities.
3.10 Other exceptional items
There was spend of £16.8m (six months ended 30 June 2013: nil) in relation to other exceptional items, this included £9.0m
of spend in relation to the direct costs associated with the UK reviews, £6.4m in relation to restructuring and £7.2m for
the cash spend associated with the UK Clinical Health onerous contract provisions. This is offset by £5.8m refund of VAT
related to the prior year settlement to the UK Central Government.
3.11 Special pension contributions
The comparative period special pension contributions of £19.7m related to a £16.8m payment to fund the deficit on the
Vertex pension fund prior to its transfer into the Group's largest defined benefit scheme, Serco Pension and Life Assurance
Scheme (SPLAS), and £2.9m in relation to deficit recovery funding of the Walsall defined benefit pension scheme.
3.12 Reconciliation of free cash flow
The table below reconciles the net cash from operating activities in the condensed consolidated cash flow statement to the
free cash flow at the beginning of Section 3 of the Finance Review.
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014£m 2013£m 2013£m
Operating activities:Net cash inflow from operating activities, before special pension contributions and other exceptional items 75.8 43.8 111.3
Investing activities: (6.2) (26.4) 14.2
Net cash (outflow)/inflow from investing activities
Less: Increase in security deposits - - 0.2
Less: (Proceeds)/costs on disposal of businesses (6.8) 2.1 (40.6)
Less: Acquisition of subsidiaries, net of cash acquired 5.3 18.6 18.6
Financing activities:Interest paid (18.4) (19.5) (40.8)
Management estimation of charges related to UK Government reviews 1.9 - 9.2
Transaction related costs - 0.5 2.8
Directly reimbursed capital expenditure - 9.9 9.9
Free cash flow 51.6 29.0 84.8
4. Balance sheet
A summary of Serco's balance sheet at 30 June 2014 is presented below together with a summary of the key movements.
Further information is provided in the Condensed Financial statements.
At 30 June 2014£m At 30 June 2013£m At 31 December 2013£m
Non-current assets 1,838.0 1,891.2 1,841.8
Current assets 1,107.5 1,137.2 967.1
Current liabilities (831.3) (858.2) (768.0)
Non-current liabilities (885.2) (1,038.8) (945.0)
Net assets 1,229.0 1,131.4 1,095.9
4.1 Non-current assets
Non-current assets at £1,838.0m are at a similar level to the 31 December 2013 year-end position. The most significant
item remains goodwill at £1,261m which is analysed in further detail, including disclosure of impairment testing, in note
11 of the Condensed Financial Statements.
4.2 Current assets
Current assets at £1,107.5m are £140.4m higher than the 31 December 2013 year-end position. The most significant item is
trade and other receivables at £816.5m and this has increased by £52.1m in the period. Cash and cash equivalents have
increased by £95.7m since year-end.
4.3 Current liabilities
Current liabilities at £831.3m are £63.3m higher than the 31 December 2013 year-end position, principally reflecting the
£69.8m increase in trade and other payables.
4.4 Non-current liabilities
Non-current liabilities at £885.2m are £59.8m lower than the 31 December 2013 year-end position. The most significant item
is the £709.0m of loans which have decreased by £47.1m and are analysed in further detail in note 12 of the Condensed
Financial Statements.
4.5 Net assets
At £1,229.0m net assets have increased by £133.1m, principally reflecting the net proceeds of £156m from the share
placement in May 2014 involving the issue of 49.9m new shares. The placement net proceeds have been used to reduce the net
debt of the group.
5. Acquisitions
On 2 January 2014, 70% of the share capital of MENA Business Services LLC was acquired. MENA is a regional provider of
contact centre, training services and business consultancy outsourcing services, based in the Middle East. The initial
cash consideration was £3.1m. Up to a further £2.1m is payable from 2015 to 2016, contingent on the financial performance
of the acquired business. The provisional fair value of this deferred contingent consideration is £2.1m. Provisional
goodwill of £4.4m arose on the transaction. Net cash payments arising on the acquisition were £2.3m, representing cash
consideration of £3.1m net of £0.8m of cash balances acquired.
Deferred consideration payments of £3.0m were made in the period in relation to prior year acquisitions, representing the
final payment in respect of Intelenet.
6. Disposals
The table below shows the net cash proceeds from the disposal of businesses and operations reflecting the cash proceeds
less any cash and cash equivalents disposed and disposal costs paid in the period.
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014 2013 2013
£m £m £m
Braintree Community Hospital (disposal cash costs) (0.1) - -
Collectica 5.3 - -
UK transport maintenance and technology business 2.0 - 40.2
UK occupational health business - - 2.2
Ascot College - - 0.7
UK data hosting operations (disposal cash costs) (0.4) (2.1) (2.5)
Net cash proceeds 6.8 (2.1) 40.6
7. Net debt
At 30 June 2014£m At 30 June 2013£m At 31 December 2013£m
Cash and cash equivalents 220.8 193.9 125.1
Loans (716.8) (858.5) (782.2)
Obligations under finance leases (63.3) (66.9) (68.0)
Recourse net debt (559.3) (731.5) (725.1)
Non-recourse debt (21.5) (22.6) (20.3)
Net debt (580.8) (754.1) (745.4)
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014£m 2013£m 2013£m
Movement in net debt 164.6 (122.1) (113.4)
Opening net debt (745.4) (632.0) (632.0)
Closing net debt (580.8) (754.1) (745.4)
Adjusted net debt, including the proportional share of joint venture net cash of £52.8m, is £528.0m (30 June 2013: £681.4m,
31 December 2013: £701.2m).
7.1 Recourse net debt
In the period, recourse net debt decreased by £165.8m to £559.3m. Sources of funding are described in section 7.3 below.
Cash and cash equivalents include encumbered cash of £13.2m (30 June 2013: £9.4m, 31 December 2013: £10.2m). This is cash
relating to customer advance payments.
7.2 Non-recourse debt
The Group's debt is non-recourse if no Group company, other than the relevant borrower, has an obligation to repay the debt
under a guarantee or other arrangement. The debt is excluded from all of our credit agreements and other covenant
calculations, and therefore has no impact on the Group's ability to borrow.
In the period, non-recourse debt increased by £1.2m to £21.5m. The increase is due to additional financing within the
National Physical Laboratory contract.
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014£m 2013£m 2013£m
Repayment of non-recourse loans 1.4 4.9 10.2
Non-recourse loan advances (2.6) (2.2) (5.3)
Foreign exchange - (0.2) (0.1)
Movement in non-recourse net debt (1.2) 2.5 4.8
Opening non-recourse debt (20.3) (25.1) (25.1)
Closing non-recourse debt (21.5) (22.6) (20.3)
7.3 Reconciliation of free cash flow to recourse net debt
The tables below reconcile free cash flow at the beginning of Section 3 of the Finance Review to the movement in Group
recourse net debt and net debt.
Six months ended Six months ended Year ended
30 June 30 June 31 December
2014£m 2013£m 2013£m
Free cash flow 51.6 29.0 84.8
Acquisition of subsidiaries net of cash acquired (5.3) (18.6) (18.6)
Disposal of subsidiaries and operations net of cash disposed 6.8 (2.1) 40.6
Transaction related costs - (0.5) (2.8)
Proceeds from share placement 155.8 - -
Purchase of own shares and issue proceeds of other share capital 2.3 (14.8) (14.9)
Repayment of non-recourse loans (1.4) (4.9) (10.2)
New and acquired finance leases (4.5) (23.1) (33.0)
Management estimation of charges related to UK Government reviews (1.9) - (9.2)
Other exceptional items (16.8) - (83.7)
Special pension contribution - (19.2) (19.7)
Dividends paid (36.4) (36.4) (51.5)
Dividend to non-controlling interest - - (0.6)
Foreign exchange 15.6 (34.0) 0.6
Movement in recourse net debt 165.8 (124.6) (118.2)
Opening recourse net debt (725.1) (606.9) (606.9)
Closing recourse net debt (559.3) (731.5) (725.1)
8. Pensions
The Group is a sponsor of a number of defined benefit schemes and defined contribution schemes. At 30 June 2014, the net
retirement benefit asset included in the balance sheet arising from our defined benefit pension scheme obligations was
£60.5m (30 June 2013: net asset of £12.2m, 31 December 2013: net asset of £42.7m). The pension scheme asset base is
£1.4bn.
Defined benefit pension schemes
At 30 June 2014£m At 30 June 2013£m At 31 December 2013£m
Group schemes - non contract specific 78.9 26.7 58.4
Contract specific schemes (3.5) (12.1) (5.5)
Net retirement benefit asset 75.4 14.6 52.9
Intangible assets arising from rights to operate franchises and contracts 0.3 2.0 1.0
Deferred tax liabilities (15.2) (4.4) (11.2)
60.5 12.2 42.7
Serco has two main types of scheme which are accounted for as defined benefit pension schemes. Each type has its own
accounting treatment under IFRS. These are:
Non contract specific - schemes which do not relate to specific contracts or franchises. For these schemes we charge the
actuarial gain or loss for the period to the consolidated statement of comprehensive income (the SOCI).
Contract specific - schemes relating to specific contracts or franchises, where the deficit will pass back to the customer
or on to the next contractor at the end of the contract. For these schemes, we charge the actuarial gain or loss on our
share of the deficit for the period to the SOCI, recognise a recoverable intangible asset on the balance sheet at the start
of the contract or franchise and amortise the intangible asset to the income statement over the contract or franchise
life.
During the period we provided £7.5m in relation to an estimated settlement on a dispute in respect of funding of the
Docklands Light Railway (DLR) pension scheme. As part of the contract we are obliged to make contributions towards a
reduction in the overall deficit during the contract period. This has been reflected in our annual profits over the life of
the contract in line with franchise accounting. The Scheme Trustees have however recently completed a valuation and we have
a dispute over the extent of liability that Serco has to fund the deficit. At 30 June 2014 the Group has recognised a £7.5m
provision in relation to this matter for the estimated settlement, together with associated costs.
Excepting this matter, Serco has limited ongoing commercial risk in relation to the contract specific schemes, due either
to the right of cost reimbursement or because the deficit will, in general, pass back to the customer or on to the next
contractor at the end of the contract. Amongst our non contract specific schemes, the largest is the Serco Pension and
Life Assurance Scheme (SPLAS). At 30 June 2014, SPLAS had a surplus of £84.8m (31 December 2013: £64.2m). This is
calculated under IAS 19 (Revised) using market-derived rates at 30 June 2014. It therefore reflects the effect of the
market conditions on investment returns in the period.
The estimated actuarial deficit of SPLAS, calculated using prudent Trustee assumptions, as at 30 June 2014 was
approximately £2m (31 December 2013: £13m). The value calculated in the latest triennial review was a deficit of £24m at 5
April 2012. We continue to review the level of benefits and contributions under the scheme in the light of our business
needs and changes to pension legislation.
9. Treasury
The Group has a committed £730.0m (31 December 2013: £730.0m) five-year multi-currency revolving credit facility which
matures in March 2017. As at 30 June 2014, £145.0m (31 December 2013: £175.0m) had been drawn down. In addition to the
bank facility, Serco has US private placements totalling £557.8m (31 December 2013: £574.7m) with scheduled repayments
between 2014 and 2024, with £23.2m maturing in August 2014.
The above facilities are unsecured and have financial and non-financial covenants and obligations typical of these
arrangements. The principal financial covenants (as defined) require leverage not to exceed 3.5 times EBITDA and EBITDA to
cover interest at least 3.0 times. As at 30 June 2014 these ratios were 2.4 times and 6.5 times respectively (At 31
December 2013 these ratios were 2.3 times and 8.8 times respectively).
10. Going concern
In order to satisfy ourselves that we have adequate resources for the future, the Directors have reviewed the Group's
committed funding and liquidity positions, and our ability to generate cash from trading activities. The Directors have
also reviewed our business plans and the principal risks we face.
Although trading was poor in the first half of the year, profits were in line with our revised expectations and cash flow
and net debt were better than expected. However, the reduction in profitability led to pressure on our loan covenants and
we moved to strengthen the balance sheet in May 2014 via an equity placing of 49.9m shares, raising net proceeds of £156m.
Despite the challenges and uncertainties which remain in our business, including a comparatively low level order book
visibility (of 71% for the next year) relative to the past, we are making good progress with our Strategy Review, and in
rebuilding trust and confidence with the UK Government. The Group's principal funding is through a revolving credit
facility and US private placements. As at 30 June 2014, the Group had £1,287.8m of committed credit facilities and headroom
of £585.0m. The Group fully expects to meet scheduled repayments through operational cash flows.
Whilst the current economic environment continues to contain uncertainties, our revenues are largely derived from long-term
contracts and our contract portfolio is of sufficient diversity that a downturn in any particular market, sector or
geography has a diluted effect on the Group as a whole.
Based on the current business plan and anticipated forecast trading, and taking account of the information set out above,
the Directors have a reasonable expectation that the Company and the Group will be able to operate within the level of
available facilities and cash for the foreseeable future and accordingly believe that it is appropriate to prepare the
financial statements on a going concern basis.
11. Principal risks and uncertainties
The principal risks and uncertainties that could materially affect Serco's results and operations are setout on pages 12 to
15 of the 2013 Annual Report and Accounts and the key headline risks for the remainder of 2014 are restated below. This
summary is not intended, and should not be used, as a substitute for reading the appropriate pages of the Annual Report and
Accounts which include further commentary on the risks and the Group's management of them. Whilst the Group's view of its
principal risks and uncertainties for the remaining six months of the financial year remains substantially unchanged, there
may be additional risks unknown to Serco and other risks, currently believed to be immaterial, which could turn out to be
material. These risks, whether they materialise individually or simultaneously, could significantly affect the Group's
business and financial results.
(i) Market risks
· Change in political environment, including changes to government policies, expenditure levels and budgetary
constraints
· Failure to win a strategic or significant bid or rebid
· Failure to effectively manage brand and reputation
(ii) Operational risks
· Major information security breach
(iii) Governance risks
· Significant incident of bribery or corrupt practice
(iv) People risks
· Failure to retain and attract key leadership talent
(v) Finance risks
· The impairment of goodwill could adversely impact reported results
Responsibility statement
We confirm to the best of our knowledge:
a) the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;
b) the interim management report includes a fair review of the information required by the DTR 4.2.7R (indication of the
important events during the first six months and description of principal risks and uncertainties for the remaining six
months of the year); and
c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related
parties' transactions and changes therein).
By order of the Board,
Rupert Soames Andrew Jenner
Group Chief Executive Group Chief Financial Officer
11 August 2014
Independent Review Report to Serco Group plc
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report
for the six months ended 30 June 2014 which comprises the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated statement of changes in equity, the consolidated balance sheet, the consolidated
cash flow statement and related notes 1 to 19. We have read the other information contained in the half-yearly financial
report and considered whether it contains any apparent misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with the International Standard on Review Engagements (UK and
Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the
Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required
to state to them in an independent review 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 formed.
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 Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by
the European Union. The condensed set of financial statements included in this half-yearly financial report has been
prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European
Union.
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.
Scope of Review
We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 'Review
of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of
persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
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.
Conclusion
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 2014 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Services Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
11August 2014
ck Exchange Announcement
Condensed consolidated income statement
For the six months ended 30 June 2014
Six months ended30 June 2014(unaudited) Six months ended30 June 2013(unaudited) Year ended31 December 2013(audited)
Before exceptional items ExceptionalItems Total Total Beforeexceptionalitems ExceptionalItems Total
Note £m £m £m £m £m £m £m
Adjusted revenue 2,433.2 - 2,433.2 2,548.5 5,143.9 - 5,143.9
Less: Share of revenue of joint ventures (415.5) - (415.5) (435.2) (855.8) - (855.8)
Revenue 2 2,017.7 - 2,017.7 2,113.3 4,288.1 - 4,288.1
Cost of sales (1,826.9) - (1,826.9) (1,829.4) (3,788.9) - (3,788.9)
Gross profit 190.8 - 190.8 283.9 499.2 - 499.2
Administrative expenses (159.5) - (159.5) (166.6) (287.1) - (287.1)
Other expenses - amortisation of intangibles arising on acquisition (5.8) - (5.8) (12.5) (21.4) - (21.4)
Other expenses - transaction related costs - - - (2.7) (3.5) - (3.5)
Share of profits in joint ventures, net of interest and tax 5 13.8 - 13.8 23.0 47.1 - 47.1
Net profit on disposal of subsidiaries and operations 6 - 2.2 2.2 - - 19.2 19.2
Other exceptional operating items 6 - (31.6) (31.6) - - (109.7) (109.7)
Operating profit 39.3 (29.4) 9.9 125.1 234.3 (90.5) 143.8
Investment revenue 7 2.8 - 2.8 2.6 5.2 - 5.2
Finance costs 7 (20.0) - (20.0) (21.6) (42.4) - (42.4)
Profit/(loss) before tax 22.1 (29.4) (7.3) 106.1 197.1 (90.5) 106.6
Tax 8 (3.3) 4.2 0.9 (21.9) (40.0) 28.8 (11.2)
Profit/(loss) for the period 18.8 (25.2) (6.4) 84.2 157.1 (61.7) 95.4
Attributable to:
Equity holders of the parent 18.8 (25.2) (6.4) 84.2 157.1 (61.7) 95.4
Non-controlling interest - - - - - - -
Earnings per share (EPS)
Basic EPS 10 3.73p (5.00p) (1.27p) 17.18p 32.13p (12.62p) 19.51p
Diluted EPS 10 (1.27p) 16.72p 31.38p (12.32p) 19.06p
Condensed consolidated statement of comprehensive income
For the six months ended 30 June 2014
Note Six months ended30 June 2014(unaudited)£m Six months ended30 June 2013(unaudited)£m Year ended 31 December 2013(audited)£m
(Loss)/profit for the period (6.4) 84.2 95.4
Other comprehensive income for the period:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial gain/(loss) on defined benefit pension schemes1 15 10.3 (34.0) 30.3
Actuarial gain/(loss) on reimbursable rights1 15 8.4 (7.9) (37.1)
Tax relating to items not reclassified (3.3) 10.1 3.0
Share of other comprehensive (expense)/income in joint ventures (0.1) 1.8 3.9
Items that may be reclassified subsequently to profit or loss:
Net exchange loss on translation of foreign operations2 (6.3) (5.7) (53.1)
Fair value gain/(loss) on cash flow hedges during the period2 8.8 4.7 (4.8)
Tax relating to items that may be reclassified (2.8) (1.4) 1.2
Share of other comprehensive expense in joint ventures - (0.6) (1.8)
Total comprehensive income for the period 8.6 51.2 37.0
Attributable to:
Equity holders of the parent 8.6 51.1 37.0
Non-controlling interest - 0.1 -
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