REG - Serco Group PLC - Serco Group plc 2016 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 3
22/02/2017 07:07
- Part 3: For the preceding part double click ID:nRSV4908Xb
480.8 737.2
Operating profit 40.7 42.6
Net investment finance costs (0.6) (0.4)
Income tax expense (6.7) (5.2)
Profit after tax 33.4 37.0
Dividends received from joint ventures and associates 40.0 32.5
Exceptional items
Exceptional items are non-recurring items of financial performance that are outside normal operations and are material to
the results of the Group either by virtue of size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the performance of the Group. A number of small
items also arose in 2016 following changes in estimates to items historically treated as exceptional.
Exceptional items have arisen on both the continuing and discontinued operations of the Group. Exceptional items arising
on discontinued operations are disclosed on the face of the Condensed Consolidated Income Statement within the profit or
loss attributable to discontinued operations. Those arising on continuing operations are disclosed on the face of the
Condensed Consolidated Income Statement within exceptional operating items.
For the year ended 31 December 2016£m 2015£m
Exceptional items arising on continuing operations
Exceptional profit / (loss) on disposal of subsidiaries and operations 2.9 (2.6)
Other exceptional operating items on continuing operations
Impairment of goodwill (17.8) (87.5)
Restructuring costs (17.2) (19.7)
Aborted transaction costs (0.1) (1.7)
Costs associated with UK Government review (0.1) (1.2)
Release of UK frontline clinical health contract provisions 0.6 2.8
Settlement of defined benefit pension obligations (10.7) -
Impairment of interest in joint venture and related loan balances (13.9) -
Other exceptional operating items (59.2) (107.3)
Exceptional operating items arising on continuing operations (56.3) (109.9)
Exceptional items arising on discontinued operations
Exceptional (loss) / gain on disposal of subsidiaries and operations (2.8) 5.4
Other exceptional operating items on discontinued operations
Restructuring costs (1.1) (2.2)
Impairment of goodwill - (65.9)
Movements in indemnities provided on business disposals (13.7) -
Movement in the fair value of assets transferred to held for sale 3.4 (14.9)
Other exceptional operating items (11.4) (83.0)
Exceptional operating items arising on discontinued operations (14.2) (77.6)
Exceptional operating items arising on continuing and discontinued operations (70.5) (187.5)
Exceptional finance costs - continuing - (32.8)
Exceptional finance costs - discontinued (0.4) -
Total exceptional finance costs in continuing and discontinued operations (0.4) (32.8)
Tax credit of exceptional items - continuing 3.1 0.4
Tax credit on exceptional items - discontinued - 2.7
Total tax impact of exceptional items in continuing and discontinued operations 3.1 3.1
Total operating and financing exceptional items in continuing and discontinued operations (67.8) (217.2)
Exceptional loss on disposals of continuing operations
There were no material disposals of continuing operations in the year. The profit on disposal of £2.9m mainly relates to a
net credit of £2.5m on transactions completed in prior years, which includes cash of £4.5m as a result of deferred
consideration payments received which had previously been provided for.
Other exceptional operating items arising on continuing operations
In 2016, goodwill of £17.8m arose following the acquisition of Orchard & Shipman (Glasgow) Limited, the Group's
subcontractor on the COMPASS contract, providing accommodation to asylum seekers in Scotland and Northern Ireland on behalf
of the Home Office. This goodwill was then immediately impaired as the CGU is forecast to be loss making and therefore the
asset cannot be supported. The annual impairment testing of CGUs has identified no other impairment of goodwill. In 2015,
the Americas CGU was impaired by £87.5m, due primarily to a higher level of contract attrition than previously forecast and
the associated impact on future cash flows. Given the significant size of the impairment charge and that it is not part of
the normal trading performance of the business it was considered appropriate to treat as exceptional in the year.
In 2016, a charge of £17.2m (2015: £19.7m) arose in relation to the restructuring programme resulting from the Strategy
Review. This included redundancy payments, provisions, external advisory fees and other incremental costs. Due to the
nature and scale of the impact of the transformation stage of our Strategy Review, the incremental costs associated with
this programme were considered to be exceptional in the prior year and have been treated consistently in 2016.
Non-exceptional restructuring charges are incurred by the business as part of normal operational activity, which in the
year totalled £6.7m (2015: £13.8m).
The disposal of the Environmental and Leisure businesses was aborted in 2015 and during 2016 costs related to the aborted
transaction were finalised, resulting in a charge of £0.1m (2015: £1.7m).
In 2016 there were exceptional costs totalling £0.1m (2015: £1.2m) associated with the UK Government reviews and the
programme of Corporate Renewal, reflecting the related external costs. These costs were treated as exceptional when the
matter first arose and consistent treatment is applied in the current year.
In 2016 there were releases of provisions of £0.6m (2015: £2.8m) which were previously charged through exceptional items in
relation to the exit of the UK Frontline Clinical Health contracts.
Following the finalisation of the Revised Fair Deal, a number of employees are being transferred from the Serco Pension and
Life Assurance Scheme (SPLAS) back to the Principal Civil Service Pension Scheme. This transfer was finalised in December
2016 at which point all obligations of SPLAS to pay retirement benefits for these individuals were eliminated and as a
result a settlement charge of £10.7m arose. This has been treated as an exceptional item in the year as a result of the
transaction being material in size and nature and being outside of the normal course of business. The charge of £10.7m is
an accounting charge only, the cash impact of the settlement which will be paid in future periods, is estimated at £3.0m
and is offset by future savings in contributions resulting from the transfer.
A review of a joint venture's cash flow projections has led to the impairment of certain equity interests and associated
receivables balances, totalling £13.9m. The impairment is outside of the normal course of business and of a significant
value, and is therefore considered to be an exceptional item.
Exceptional profit or loss on disposal of discontinued operations
The loss on disposal of discontinued operations of £2.8m (2015: profit of £5.4m) relates to the sale of offshore and UK
onshore private sector BPO operations. The majority of the offshore BPO operations were sold in 2015 with the separate
disposal of operations in the Middle East completing in 2016. The UK onshore business has been sold or transferred to
various different purchasers with a final element remaining at the year end which is expected to be sold in 2017.
Other exceptional operating items arising on discontinued operations
In 2016 a charge of £1.1m (2015: £2.2m) has arisen in discontinued operations in relation to the restructuring programme
resulting from the Strategy Review. This includes redundancy payments, provisions and other charges relating to the exit
of the UK private sector BPO business, external advisory fees and other incremental costs.
During 2015, an impairment test of the Global Services business was conducted based on the fair value measurement, with
reference to offers received less costs of disposal. The impairment testing identified a non-cash exceptional impairment
of goodwill relating to discontinued operations of £65.9m.
A charge of £13.7m has arisen in 2016 in relation to the movement in the value of indemnities provided on business
disposals made in previous years. This relates to changes in exchange rates where indemnities were provided in foreign
currencies, and increases to provisions for interest and penalties on any indemnities. The original disposal of the
business was treated as exceptional and these revisions have been treated on a consistent basis.
The value of assets held for sale increased by £3.4m in 2016, reflecting the changing estimate of the likely proceeds and
movements of the assets held for sale since the prior balance sheet date. In 2015 the held for sale assets were impaired
by £14.9m through exceptional items.
Exceptional finance costs
A charge of £0.4m was incurred as a result of early payments to the US Private Placement (USPP) Noteholders following the
disposal of the offshore private sector BPO business. These charges are treated as exceptional finance costs as they are
directly linked to the restructuring resulting from the Strategy Review. Similar charges arose in 2015 which, together
with the costs related to the preservation of the Group's existing finance facilities, totalled £32.8m.
Tax impact of exceptional items
The tax impact of exceptional items in continuing and discontinued operations was a tax credit of £3.1m (2015: £3.1m).
Pre exceptional finance costs and investment revenue on continuing and discontinued operations
Investment revenue of £9.3m (2015: £8.2m) includes interest accruing on net retirement benefit assets of £4.7m (2015:
£4.9m), interest earned on deposits and other receivables of £3.6m (2015: £3.2m) and the movement in discounting of other
receivables of £1.0m (2015: £0.1m).
Finance costs of £21.9m (2015 restated: £40.1m) includes interest incurred on the USPP loans and the Revolving Credit
Facility of £15.6m (2015: £24.7m), facility fees and other charges of £3.5m (2015: £7.2m), interest payable on finance
leases of £1.6m (2015: £2.5m), the movement in discount on provisions of £2.4m (2015: £5.6m) and a credit for foreign
exchange on financing activities of £1.2m (2015: £0.1m). The last of these items was previously included in Reported
Operating Profit and therefore represents a restatement on the previously reported results.
Tax charge
In 2016, we recognised a total tax charge of £12.8m (2015: £33.5m), being £12.7m (2015: £17.5m) on continuing operations
profit of £29.6m (2015: loss of £69.4m) and £0.1m (2015: £16.0m) on discontinued operations losses of £17.9m (2015:
£50.2m). Of this amount, a £3.1m credit (2015: £0.4m credit) arises on exceptional items on continuing operations.
In respect of the results of our continuing operations, the profit on pre-exceptional items of £98.5m (2015: £106.1m) less
pre-exceptional finance costs of £12.6m (2015: £32.8m) is £85.9m (2015: £73.3m), which suffers a tax charged of £15.8m
(2015: £17.9m), giving a tax rate of 18.4% (2015: 24.4%).
The principal reasons why the tax rate on profit before exceptional items and tax from continuing operations at 18.4% is
lower than the UK standard corporation tax rate of 20% are due to higher rates of tax on profits arising on our
international operations, together with the absence of any deferred tax credit for losses incurred in the UK (which
includes the result of UK divisions and the majority of corporate costs) offset by the impact of our joint ventures whose
post-tax results are included in our pre-tax profit.
The tax charge on discontinued operations' losses and the tax credit on exceptional losses of £70.8m have only attracted
small amounts of tax because these costs and losses are largely generated in the UK, where deferred tax assets are not
being recognised due to insufficient UK taxable profits in the foreseeable future.
For the year ended 31 December Pre exceptional2016£m Pre exceptional2015£m
Underlying Trading Profit 82.1 95.9
Net finance costs from continuing operations (12.6) (32.8)
Net finance costs from discontinued operations - 0.9
Total net finance costs from continuing and discontinued operations (12.6) (31.9)
Underlying Trading Profit less net finance costs from continuing and discontinued operations 69.5 64.0
Tax charge on Underlying Trading Profit less net finance costs from continuing and discontinued operations (24.4) (30.5)
Underlying effective tax rate 35.2% 47.7%
The tax charge on an underlying basis, reflecting Underlying Trading Profit of £82.1m net of finance costs of £12.6m, was
£24.4m, representing an underlying effective tax rate of 35.2% (2015: 47.7%).
The effective tax rate in 2016 (35.2%) is lower than 2015 (47.7%) at an Underlying Trading Profit less finance costs level.
This is primarily due to reduced UK finance expenses during this period which have not given rise to a tax credit as no UK
deferred tax asset was recognised on them.
Our tax charge in future years will continue to be materially impacted by our accounting for UK deferred taxes. To the
extent that future UK tax losses are incurred and are not recognised, our effective tax rate will be higher than prevailing
standard corporation tax rates as we will not be able to recognise the associated tax benefits arising. When our UK
business returns to sustainable profitability our existing UK tax losses will be recognised or utilised, and the effective
rate will be reduced.
Contingent tax assets
At 31 December 2016, the Group has gross estimated unrecognised deferred tax assets of £1.04bn (£187m net), which are
potentially available to offset against future taxable profits. These principally relate to tax losses of £824m. Of these
tax losses, £697m have arisen in the UK business (net £118m).
A £10.0m UK tax asset has been recognised at 31 December 2016 (2015: £10.5m) on the basis of forecast utilisation against
future taxable profits.
Taxes paid
Net corporate income tax of £10.5m was paid during the year, relating primarily to our operations in AsPac (£5.8m), Europe
(£2.3m), Middle East (£1.5m) and Americas (£0.9m). The Group's UK operations have transferred tax losses to its profitable
joint ventures and associates in return for cash payments from the joint ventures and associates giving a cash tax inflow
in the UK of £4.8m. In addition there were small cash tax refunds where we have overpaid tax in previous periods. This
results in an overall tax paid figure in our cash flow statement of £5.6m.
The amount of tax paid (£5.6m) differs from the tax charge in the period (£12.8m) mainly due to the effect of future
expected cash tax outflows for which a charge has been taken in the current period and the impact of the time lag on
receipts of cash from joint ventures and associates for losses transferred to them.
Further detail is shown below of taxes that have been paid during the year.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax in the countries in which we operate means that we pay a variety
of taxes across the globe. In order to increase the transparency of our tax profile, we have shown below the cash taxes
that we have paid across our regional markets.
In total during 2016, Serco globally contributed £586.6m of tax to governments in the jurisdictions in which we operate.
Taxes by categoryFor the year ended 31 December 2016 Taxes borne£m Taxes collected£m Total£m
Total of corporate income tax 10.5 0.1 10.6
Total of VAT and similar 8.1 161.7 169.8
Total of people taxes 109.6 294.6 404.2
Total other taxes 1.9 0.1 2.0
Total 130.1 456.5 586.6
Taxes by regionFor the year ended 31 December 2016 Taxes borne£m Taxes collected£m Total£m
UK & Europe 76.1 252.8 328.9
AsPac 24.2 122.2 146.4
North Americas 27.2 79.4 106.6
Middle East 2.6 2.1 4.7
Total 130.1 456.5 586.6
Corporation tax, which has historically been the only cost to be separately disclosed in our Financial Statements, is only
one element of our tax contribution. For every £1 of corporate tax paid directly by the group (tax borne), we bear £11.35
in other business taxes. The largest proportion of these is in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect a further £3.50 on behalf of national governments (taxes
collected). This amount is directly impacted by the people that we employ and the sales that we make.
Dividends
The Board is not recommending the payment of a dividend in respect of the 2016 financial year. The Board's appraisal of
the appropriateness of dividend payments takes into account the Group's underlying earnings, cash flows and financial
leverage, together with the requirement to maintain an appropriate level of dividend cover and the prevailing market
outlook. Although the Board is committed to resuming dividend payments as soon as it believes it prudent to do so, in
assessing whether we should resume dividend payments in respect of 2016, we have been mindful of the fact that our
forecasts for 2017 anticipate a reduction in earnings, a free cash outflow and an increase in net debt; furthermore, we are
only part-way through our recovery. In these circumstances, the Board believes that it would not be prudent to resume
dividend payments in respect of 2016.
Share count and earnings per share
The weighted average number of shares for EPS purposes was 1,088.3m at 31 December 2016 (2015: 986.5m). EPS before
exceptional items from both continuing and discontinued operations was 6.12p per share (2015: 6.55p), including the impact
of exceptional items EPS was a loss of 0.11p (2015: loss of 15.47p). Underlying EPS was 4.13p per share (2015: 3.44p).
Cash flows
The UTP of £82.1m (2015: £95.9m) converts into a trading cash outflow of £8.0m (2015: inflow of £0.6m). UTP reduced by
£13.8m and led to an £8.6m reduction in Trading Cash Flows. The low conversion was primarily due to the cash outflows
arising on the utilisation of contract provisions of £84.2m which is excluded from UTP but included in Trading Cash Flows.
The table below shows the operating profit and FCF reconciled to movements in Net Debt. FCF for the year was an outflow of
£33.0m compared to an outflow of £35.5m in 2015 (restated). Commentary on the FCF performance of the Group is provided in
the Chief Executive's Review and the Divisional Reviews sections.
The movement in Net Debt including assets and liabilities held for sale is an increase of £46.4m in 2016 compared to a
decrease of £608.6m for 2015, arising from three key areas:
· The proceeds from the Rights Issue of £530.3m in 2015.
· A reduction of the net cash inflows from acquisitions and disposals of subsidiaries of £165.7m to £19.2m due to a
significant portion of the private sector business disposal completing in 2015.
· An offsetting reduction in the cash outflows on exceptional items of £48.2m to £40.2m in 2016, due primarily to the
payment of exceptional finance costs of £31.8m in 2015. The majority of the exceptional cash payments in 2016 relate to
the break and exit costs of the residual UK private sector BPO operations and restructuring claims and costs arising on the
implementation of the outcome of the Strategy Review.
For the year ended 31 December 2016£m 2015(restated*)£m
Operating profit / (loss) on continuing operations* 42.2 (3.8)
Operating loss on discontinued operations (17.5) (51.1)
Remove exceptional items 70.5 187.5
Operating profit before exceptional items on continuing and discontinued operations* 95.2 132.6
Less: profit from joint ventures and associates (33.4) (37.0)
Movement in provisions (118.4) (116.0)
Other non-cash movements* 63.9 83.6
Operating cash inflow before movements in working capital, exceptional items and tax* 7.3 63.2
Working capital movements (23.7) (22.6)
Tax paid (5.6) (2.7)
Non-cash R&D expenditure (0.4) (0.7)
Cash flow from operating activities before exceptional items* (22.4) 37.2
Dividends from joint ventures and associates 40.0 32.5
Interest received 1.4 3.4
Interest paid (20.1) (34.7)
Capitalised finance costs paid (0.3) (1.4)
Purchase of intangible and tangible assets net of proceeds from disposals (31.6) (72.5)
Free Cash Flow* (33.0) (35.5)
Net cash inflow on acquisition and disposal of subsidiaries 19.2 184.9
Proceeds from Rights Issue - 530.3
Purchase of own shares net of share option proceeds - 4.4
Other movements on investment balances 0.7 (1.3)
Capitalisation and amortisation of loan costs (0.7) (0.6)
Unwind of discounting and capitalisation of interest on loans receivable 2.9 -
Non-recourse loan disposals, repayments and advances - 24.0
New, acquired and disposed finance leases (0.5) 0.5
Exceptional items (40.2) (88.4)
Cash movements on hedging instruments* 47.0 19.3
Foreign exchange loss on Net Debt* (41.8) (29.0)
Movement in Net Debt including assets and liabilities held for sale* (46.4) 608.6
Assets held for sale movement in Net Debt 4.7 (44.2)
Net Debt at 1 January* (67.6) (632.0)
Net Debt at 31 December* (109.3) (67.6)
Net Debt at 1 January including assets and liabilities held for sale* (62.9) (671.5)
Net Debt at 31 December including assets and liabilities held for sale* (109.3) (62.9)
* Operating profit, other non-cash movements, cash movements on hedging instruments, foreign exchange loss on Net Debt
and Net Debt have been restated following the change in accounting policy regarding foreign exchange movements on
investment and financing arrangements and the change in definition of Net Debt to include derivative financial instruments
that relate to other components of Net Debt. The sub totals including Free Cash Flow have changed as a result.
Net Debt
As at 31 December Including assets and liabilities held for sale2016£m Including assets and liabilities held for sale(restated*)2015£m
Cash and cash equivalents 177.8 328.8
Loans receivable 22.9 19.9
Other loans (299.9) (381.9)
Obligations under finance leases (28.2) (44.3)
Derivatives relating to Net Debt components* 18.1 14.6
Net Debt (109.3) (62.9)
* As explained above, Net Debt has been restated to include derivative financial instruments that relate to other
components of Net Debt.
Average Net Debt as calculated on a daily basis for the year ended 31 December 2016 was £119.4m (2015 restated: £444.1m,
pre Rights Issue impact), compared with the opening and closing positions of £62.9m and £109.3m respectively. Peak Net
Debt was £182.9m (2015 restated: £858.6m, pre rights issue impact).
Treasury operations and risk management
The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign
currency exchange rates, interest rates and credit risk. The Group has a centralised treasury function whose principal role
is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise and that the
financial risk arising from the Group's underlying operations is effectively identified and managed.
Treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed
annually. Financial instruments are only executed for hedging purposes - speculation is not permitted. A monthly report is
provided to senior management outlining performance against the treasury policy and the treasury function is subject to
periodic internal audit review.
Liquidity and funding
As at 31 December 2016, the Group had committed funding of £770m, comprising £290m of private placement notes and a £480m
revolving credit facility with a syndicate of banks which was undrawn. In addition, the Group had a receivables financing
facility of £30.0m of which £7.7m was utilised at the year end (2015: £30.0m).
Following the disposal of the majority of the private sector BPO business, the Group was required to offer the net disposal
proceeds to the debt holders in prepayment. As a result of this process, £117m ($167m) of private placement notes were
repaid at par on 16 February 2016.
Interest rate risk
Given the nature of the Group's business, we have a preference for fixed rate debt to reduce the volatility of net finance
costs. Our treasury policies require us to maintain a minimum proportion of fixed rate debt as a proportion of overall Net
Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 31 December 2016, more
than 100% of the Group's Net Debt was at fixed rates. Interest on the revolving credit facility is at floating rate,
however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of its net investments in overseas subsidiaries.
The Group manages this risk where appropriate by borrowing in the same currency as those investments. Group borrowings are
predominantly denominated in Sterling and US Dollar. The Group manages its currency flows to minimise foreign exchange
risk arising on transactions denominated in foreign currencies and uses forward contracts where appropriate to hedge net
currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk on the amounts due from counterparties. The
Group manages this risk by adhering to counterparty exposure limits based on external credit ratings of the relevant
counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private placement loan notes, receivables financing
facility and the Group's £480m revolving credit facility, with a maximum Consolidated Total Net Borrowings (CTNB) to
covenant EBITDA of 3.5 times and minimum covenant EBITDA to net finance costs of 3.0 times, tested semi-annually. A
reconciliation of the basis of calculation is set out in the table below.
For the year ended 31 December 2016£m 2015(restated*)£m
Operating profit before exceptional items on continuing and discontinued operations* 95.2 132.6
Remove:
Joint venture and associate post-tax profits (33.4) (37.0)
Foreign exchange credit on investing and financing arrangements* 1.2 0.1
Add:
Dividends from joint ventures and associates 40.0 32.5
Amortisation and impairment of other intangible assets 26.9 40.5
Depreciation of property, plant and equipment 24.8 28.9
Impairment of property, plant and equipment 0.7 2.1
Share based payment expense 9.7 9.8
Covenant EBITDA 165.1 209.5
Net finance costs on continuing and discontinued operations* 12.6 31.9
Add: Foreign exchange credit on investing and financing arrangements* 1.2 0.1
Other adjustments 3.3 (0.6)
Covenant net finance costs 17.1 31.4
Recourse Net Debt (including assets and liabilities held for sale)* 109.3 62.9
Loans receivable, foreign exchange adjustments and other items 5.5 28.8
CTNB 114.8 91.7
CTNB / covenant EBITDA (not to exceed 3.5x) 0.7x 0.4x
Covenant EBITDA / Covenant net finance costs (at least 3.0x) 9.7x 6.7x
* As explained above, operating profit and net finance costs have been restated following the change in accounting
policy regarding foreign exchange movements on investment and financing arrangements. These adjustments have been reversed
in order to maintain the definition of EBITDA and net finance costs per the covenant. CTNB is consistent with the new
definition of Net Debt and is unaffected by the change in accounting policy.
Net assets summary
2016£m 2015£m
As at 31 December As reported* Including assets held for sale Adjustment for assets held for sale As reported
Non-current assets
Goodwill 577.9 517.7 (7.8) 509.9
Other intangible assets 83.6 90.2 (0.4) 89.8
Property, plant and equipment 69.3 74.1 (0.9) 73.2
Other non-current assets 73.0 72.0 (0.2) 71.8
Deferred tax assets 50.8 42.2 - 42.2
Retirement benefit assets 150.4 127.1 - 127.1
1,005.0 923.3 (9.3) 914.0
Current assets
Inventories 22.4 26.4 - 26.4
Trade and other current assets 548.4 549.7 (20.6) 529.1
Current tax 11.0 11.3 (4.7) 6.6
Cash and cash equivalents 177.8 328.8 (5.2) 323.6
759.6 916.2 (30.5) 885.7
Assets classified as held for sale - - 39.8 39.8
Total current assets 759.6 916.2 9.3 925.5
Total assets 1,764.6 1,839.5 - 1,839.5
Current liabilities
Trade and other current liabilities (525.1) (558.6) 7.4 (551.2)
Current tax liabilities (25.9) (14.3) 0.1 (14.2)
Provisions (172.3) (191.2) 22.6 (168.6)
Obligations under finance leases (12.3) (16.3) 0.5 (15.8)
Loans (9.7) (132.2) - (132.2)
(745.3) (912.6) 30.6 (882.0)
Amounts classified as held for sale - - (32.5) (32.5)
Total current liabilities (745.3) (912.6) (1.9) (914.5)
Non-current liabilities
Other non-current liabilities (16.8) (18.3) - (18.3)
Deferred tax liabilities (30.5) (22.3) - (22.3)
Provisions (249.4) (315.0) 1.9 (313.1)
Obligations under finance leases (15.9) (28.0) - (28.0)
Loans (290.2) (249.7) - (249.7)
Retirement benefit obligations (17.7) (11.5) - (11.5)
(620.5) (644.8) 1.9 (642.9)
Total liabilities (1,365.8) (1,557.4) - (1,557.4)
Net assets 398.8 282.1 - 282.1
* No amounts were included in held for sale as at 31 December 2016.
The breakdown of the Group's net assets is summarised above, showing the impact of the assets and liabilities held for sale
for each line item in the prior year.
At 31 December 2016 the balance sheet had net assets of £398.8m, a movement of £116.7m from the closing net asset position
of £282.1m as at 31 December 2015. The increase in net assets is mainly due to the following movements:
· An increase in goodwill by £68.0m caused by movements in foreign exchange rates. Total goodwill of £401.2m relates
to non-UK cash generating units.
· A decrease in provisions of £60.0m. Further details on the provision balance is provided below.
· An increase in trade and other current assets and liabilities of £45.4m due in part to the unwinding of the
forfeiting facility of £22.3m and other working capital movements, including foreign exchange movements in non-UK
businesses.
· An increase in Net Debt of £46.4m due to the working capital movements noted above offset by cash generated from
operations.
· An increase in the assets reflecting the Group's retirement benefit obligations of £17.1m, due to the performance of
liability driven investments.
Provisions
The total of current and non-current provisions, excluding provisions related to businesses held for sale, has decreased by
£60.0m since 31 December 2015. The movement is due to a decrease in contract provisions of £81.9m offset by an increase in
non-contract provisions of £21.9m. The increase in non-contract provisions is primarily due to the provision for the
exceptional defined benefit scheme settlement cost of £10.7m and an £8.7m increase in employee provisions due to the
ongoing Strategic Review restructuring programme.
Movements in contract provisions, including those related to businesses held for sale since the 31 December 2015 balance
sheet date, are as follows:
Onerous Contract Provisions£m Other Contract Provisions£m Total contract provisions including assets held for sale£m Held for sale adjustment£m Total contract provisions as reported£m
At 1 January 2016 (299.9) (13.2) (313.1) 11.0 (302.1)
Arising on acquisition (14.0) - (14.0) - (14.0)
Charged to income statement - trading (56.1) (0.5) (56.6) - (56.6)
Charged to income statement - exceptional (0.6) - (0.6) 0.6 -
Released to income statement - trading 65.7 7.6 73.3 (8.4) 64.9
Released to income statement - exceptional 0.6 - 0.6 - 0.6
Utilised during the year 84.2 0.9 85.1 (3.1) 82.0
Unwinding of discount (2.4) - (2.4) - (2.4)
FX (11.6) 0.3 (11.3) (0.1) (11.4)
Transfer to trade payables 11.5 - 11.5 - 11.5
Reclassifications 2.4 4.9 7.3 - 7.3
At 31 December 2016 (220.2) - (220.2) - (220.2)
The balance of OCPs at 31 December 2016 was £220.2m (2015: £299.9m). Our OCP balances are subject to ongoing review and a
full bottom-up assessment of the forecasts that form the basis of the OCPs is conducted as part of the annual budgeting
process. The overall net release of OCPs was £9.6m in 2016 and utilisation was £84.2m.
In 2016, additional charges have been made in respect of future losses on a number of onerous contracts totalling £56.7m.
This increase related to revisions to existing OCPs of £53.2m and new provisions raised on two contracts totalling £3.5m,
with the new provisions relating to contracts which have been operating for a number of years. Of the total charge, £0.6m
relates to contracts included in the held for sale businesses and are included within exceptional items, consistent with
previous treatment. No further exceptional OCP charges or releases are expected in the future.
Included within additional charges made to existing OCPs was £29.5m relating to our Ontario Driver Examination Services
contract. This contract is to provide multiple services, including administering driver examinations and the
implementation and roll out of an IT system across multiple locations. The contract was initially identified as onerous
during the 2014 Contract and Balance Sheet Review. In 2016 delays and cost overruns relating to the IT system
implementation have resulted in higher forecast implementation costs. Furthermore, the future performance of the system
has also been reassessed and this has resulted in a reduction to the expected future operational efficiencies and savings
forecast to be achieved following the system implementation. These factors combined have increased the expected total
future losses of the contact, resulting in both the increase to the OCP of £29.5m and an additional in year charge of £8.8m
arising from the cost overruns and programme delays experienced during the year.
An additional £7.1m in respect of the Prisoner Escort and Custody Services (PECS) contract has been charged. It was
previously anticipated that the contract, which has up to three extension years, would not be extended in its current form
but our expectation now is that it will be extended for one of the potential three extension years.
There was also an additional £6.8m charge in the year in respect of updating the assumptions regarding the operational and
maintenance costs of running the Caledonian Sleepers contract.
In 2016, releases to the income statement from OCPs totalling £66.3m were made, including £0.6m in respect of provisions
previously charged to exceptional items.
Included within the releases in the year was £33.9m in respect of the COMPASS contract that reflected the updated forecast
assumptions around service user volumes and accommodation costs, and the impact from the terms agreed with the customer as
part of the contract extension. We had previously included assumptions for the impact of the extension in the COMPASS OCP
and the updated view of reduced losses on this contract reflect the improved terms under which we will operate under the
extension. On 1 December 2016 Serco acquired Orchard & Shipman (Glasgow) Limited, a subcontractor on the COMPASS contract
that provided services to the Scotland and Northern Ireland regions. On acquisition an OCP of £14.0m was recognised as
part of the opening balance sheet of Orchard & Shipman, which following the acquisition is included in the provision for
future losses to be incurred by the Group.
In the year, a £11.9m release was recorded in respect of the contract to operate and maintain the fleet of Armidale Class
Patrol Boats (ACPB) for the Royal Australian Navy. This release arose following both better than forecast trading under
the contract as re-negotiated in November 2015, and the latest assessment of any post contract costs after the operations
are transferred to the new contractor on 30 June 2017.
There were also a number of other smaller releases, notably in respect of HMP Ashfield and the Future Provision of Marine
Services contract.
During the year a settlement was reached with the customer in respect of HMAS Bundaberg, the vessel operating under the
ACPB contract which was destroyed by fire in 2014. The provision relating to this claim was transferred to creditor and
debtor balances within working capital, given that the amounts owed to the customer and the associated insurance receivable
are more certain and therefore did not meet the criteria to be included within the provisions balance.
Contract and Balance Sheet Review items
There were adjustments arising in 2016 on items identified during the Contract and Balance Sheet Review in 2014. These
adjustments relate to a number of items including:
· The releases of other provisions and accruals of £13.4m where liabilities have either been settled for less than the
amount provided or accrued, or have lapsed due to the passage of time.
· A charge of £8.8m reflecting a reduction in the accrued revenue for the Ontario Driver Examination Services contract
resulting from the impact of long term contract accounting.
The overall net improvement to Trading Profit from OCPs and Contract and Balance Sheet Review adjustments was £14.2m in
2016. The cumulative net improvement to Trading Profit from OCPs and other Contract and Balance Sheet Review items from
2015 and 2016 is £35.1m which represents 5% of the original total taken through Trading Profit.
Angus Cockburn
Chief Financial Officer
22 February 2017
Financial StatementsCondensed consolidated income statementFor the year ended 31 December 2016
Continuing operations 2016 £m 2015 (restated*) £m
Revenue 3,011.0 3,177.0
Cost of sales (2,767.6) (2,849.1)
Gross profit 243.4 327.9
Administrative expenses
General and administrative expenses* (173.2) (254.0)
Exceptional profit / (loss) on disposal of subsidiaries and operations 2.9 (2.6)
Other exceptional operating items (59.2) (107.3)
Other expenses - amortisation and impairment of intangibles arising on acquisition (5.1) (4.8)
Total administrative expenses (234.6) (368.7)
Share of profits in joint ventures and associates, net of interest and tax 33.4 37.0
Operating profit / (loss)* 42.2 (3.8)
Operating profit before exceptional items* 98.5 106.1
Investment revenue 9.3 6.1
Finance costs* (21.9) (38.9)
Exceptional finance costs - (32.8)
Total net finance costs* (12.6) (65.6)
Profit / (loss) before tax 29.6 (69.4)
Tax on profit / (loss) before exceptional items (15.8) (17.9)
Tax credit on exceptional items 3.1 0.4
Tax charge (12.7) (17.5)
Profit / (loss) for the year from continuing operations 16.9 (86.9)
Loss for the year from discontinued operations (18.0) (66.2)
Loss for the year (1.1) (153.1)
Attributable to:
Equity owners of the Company (1.2) (152.6)
Non controlling interests 0.1 (0.5)
Earnings per share (EPS)
Basic EPS from continuing operations 1.55p (8.78p)
Diluted EPS from continuing operations 1.50p (8.78p)
Basic EPS from discontinued operations (1.66p) (6.69p)
Diluted EPS from discontinued operations (1.66p) (6.69p)
Basic EPS from continuing and discontinued operations (0.11p) (15.47p)
Diluted EPS from continuing and discontinued operations (0.11p) (15.47p)
* General and administrative expenses and net finance costs have been restated following the change in accounting
policy regarding foreign exchange movements on investment and financing arrangements. See note 1.
Condensed consolidated statement of comprehensive incomeFor the year ended 31 December 2016
2016 £m 2015 £m
Loss for the year (1.1) (153.1)
Other comprehensive income for the year:
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