REG - Serco Group PLC - Serco Group plc 2016 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 5
22/02/2017 07:07
- Part 5: For the preceding part double click ID:nRSV4908Xd
60.2 (14.5) 58.8 27.4 27.0 (48.0) 110.9
Amortisation and impairment of intangibles arising on acquisition - (1.1) (1.2) - (2.5) - (4.8)
Operating profit / (loss) before exceptional items* 60.2 (15.6) 57.6 27.4 24.5 (48.0) 106.1
Exceptional profit / (loss) on disposal of subsidiaries and operations 0.5 0.3 (2.6) - - (0.8) (2.6)
Other exceptional operating items (0.2) (1.7) (1.3) (1.8) (87.5) (14.8) (107.3)
Operating profit / (loss)* 60.5 (17.0) 53.7 25.6 (63.0) (63.6) (3.8)
Investment revenue 6.1
Finance costs* (71.7)
Loss before tax (69.4)
Tax charge (17.9)
Tax on exceptional items 0.4
Loss for the year from continuing operations (86.9)
* Administrative expenses included within Trading Profit and operating profit has been restated following the change
in accounting policy regarding foreign exchange movements on investment and financing arrangements which has also resulted
in a restatement of finance costs. See note 1.
** Trading profit / (loss) is defined as operating (loss) / profit before exceptional items and amortisation and
impairment of intangible assets arising on acquisition.
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax 33.8 1.5 0.8 - 0.1 0.8 37.0
Depreciation of plant, property and equipment (1.9) (13.3) (5.4) (1.1) (3.0) (1.4) (26.1)
Impairment of plant, property and equipment (1.6) - - - (0.4) - (2.0)
Total depreciation and impairment of plant, property and equipment (3.5) (13.3) (5.4) (1.1) (3.4) (1.4) (28.1)
Amortisation of intangible assets arising on acquisition - (1.1) (1.2) - (2.5) - (4.8)
Amortisation of other intangible assets (0.4) (2.0) (1.5) (0.7) (1.1) (18.0) (23.7)
Impairment and write down of other intangible assets - (9.0) - - - - (9.0)
Total amortisation and impairment of intangible assets (0.4) (12.1) (2.7) (0.7) (3.6) (18.0) (37.5)
Segment assets
Interests in joint ventures and associates 4.4 6.5 2.3 0.4 0.2 - 13.8
Other segment assets 173.5 306.1 379.3 232.5 100.3 196.6 1,388.3
Total segment assets 177.9 312.6 381.6 232.9 100.5 196.6 1,402.1
Unallocated assets, including assets held for sale 437.4
Consolidated total assets 1,839.5
Segment liabilities
Segment liabilities (340.0) (188.9) (108.6) (194.1) (74.7) (154.0) (1,060.3)
Unallocated liabilities, including liabilities held for sale (497.1)
Consolidated total liabilities (1,557.4)
4. Joint ventures and associates
The Group has certain arrangements where control is shared equally with one or more parties and accounts for these
arrangements as joint ventures. AWE Management Limited (AWEML) was formerly a joint venture but in August 2016 there was a
change in the AWEML shareholding structure, with the Group's shareholding reducing from 33.3% to 24.5% by way of a return
of shares and Lockheed Martin taking a majority holding. The Group was compensated for the reduction in share ownership of
8.8% through receipt of a dividend of the same amount which existed at the date of reduction. Subsequent to the change in
share ownership AWEML has been accounted for as an associate as we continue to have significant influence, and therefore
continue to account for the investment through equity accounting. The remainder of the arrangements are each a separate
legal entity and legal ownership and control are equal with all other parties, there are no significant judgements
required.
AWEML, Merseyrail Services Holding Company Limited (MSHCL) and Northern Rail Holdings Limited (NRHL) were the only equity
accounted entities which were material to the Group during the year. Dividends of £19.6m (2015: £17.8m), £7.2m (2015:
£7.2m) and £10.0m (2015: £5.9m) respectively were received from these companies in the year. The Northern Rail franchise
ended on 31 March 2016.
Summarised financial information of AWEML, MSHCL, NRHL and an aggregation of the other equity accounted entities in which
the Group has an interest is as follows:
31 December 2016
Summarised financial information AWEML(100% of results) £m MSHCL(100% of results)£m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Revenue 968.1 150.3 132.7 437.5 43.3 480.8
Operating profit 72.9 18.9 13.2 37.4 3.3 40.7
Net investment revenue / (finance costs) 0.2 (1.3) 0.1 (0.5) (0.1) (0.6)
Income tax (charge) / credit (11.3) (3.7) (3.4) (6.8) 0.1 (6.7)
Profit from continuing operations 61.8 13.9 9.9 30.1 3.3 33.4
Other comprehensive income - 34.0 0.8 17.4 (1.6) 15.8
Total comprehensive income 61.8 47.9 10.7 47.5 1.7 49.2
Non-current assets 1,097.0 12.5 - 275.1 3.2 278.3
Current assets 149.3 32.8 14.2 60.1 16.0 76.1
Current liabilities (133.9) (31.9) (10.7) (54.2) (14.0) (68.2)
Non-current liabilities (1,095.2) (0.9) - (268.7) (3.1) (271.8)
Net assets 17.2 12.5 3.5 12.3 2.1 14.4
Proportion of group ownership 33% / 24.5% 50% 50% - - -
Carrying amount of investment 4.2 6.3 1.8 12.3 2.1 14.4
AWEML(100% of results) £m MSHCL(100% of results)£m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Cash and cash equivalents 72.4 10.5 14.5 35.4 4.7 40.1
Current financial liabilities excluding trade and other payables and provisions (7.0) (2.3) (0.5) (3.1) (0.9) (4.0)
Non current financial liabilities excluding trade and other payables and provisions - (0.6) - (0.3) (3.0) (3.3)
Depreciation and amortisation - (2.3) (1.7) (2.1) (1.0) (3.1)
Interest income 0.2 - 0.1 0.2 - 0.2
Interest expense - (1.3) - (0.6) (0.1) (0.7)
* Total results of the joint ventures and associates multiplied by the respective proportion of Group ownership.
The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52 week period
ended 7 January 2017. The 52 week period reflects the joint venture's internal reporting structure and is sufficiently
close so as to not require adjustment to match that of the Group. The results of NRHL reflect the period of trading to the
end of the franchise on 31 March 2016, together with the results from the ongoing post contract negotiations.
Excluded from the amounts disclosed in this note is an exceptional impairment of £13.9m of the equity interest and
associated receivables balances of a joint venture.
Certain employees of the groups headed by AWEML and MSHCL are members of sponsored defined benefit pension schemes. Given
the significance of the schemes to understanding the position of the entities the following key disclosures are made:
Main assumptions: 2016 AWEML £m MSHCL£m
Rate of salary increases (%) 2.3% 2.3%
Inflation assumption (CPI %) 2.3% 2.3%
Discount rate (%) 2.7% 2.7%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.8 N/A
Future male industrial pensioners at 65 (years) 24.9 N/A
Retirement benefit funding position (100% of results) £m £m
Present value of scheme liabilities (2,556.0) (275.7)
Fair value of scheme assets 1,460.9 171.1
Net amount recognised (1,095.1) (104.6)
Members' share of deficit - 62.8
Franchise adjustment* - 41.8
Related asset, right to reimbursement 1,095.1 -
Net retirement benefit obligation - -
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit pension scheme under current contractual arrangements. The
deficit reflected in the financial statements of MSHCL covers only that portion of the deficit that is expected to be
funded over the term of the franchise arrangement the entity operates under. In addition, the defined benefit position
reflects an adjustment in respect of funding required to be provided by employees.
31 December 2015
Summarised financial information AWEML(100% of results) £m NRHL(100% of results)£m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Revenue 978.3 585.3 618.7 118.5 737.2
Operating profit 61.2 19.4 30.1 12.5 42.6
Net investment revenue / (finance costs) 0.4 0.4 0.3 (0.7) (0.4)
Income tax expense (5.9) (3.5) (3.7) (1.5) (5.2)
Profit from continuing operations 55.7 16.3 26.7 10.3 37.0
Other comprehensive income - 11.9 5.9 1.7 7.6
Total comprehensive income 55.7 28.2 32.6 12.0 44.6
Non current assets 464.2 10.3 159.9 17.3 177.2
Current assets 358.8 97.2 168.2 35.7 203.9
Current liabilities (342.6) (93.4) (160.9) (32.7) (193.6)
Non current liabilities (461.7) (3.8) (155.8) (17.9) (173.7)
Net assets 18.7 10.3 11.4 2.4 13.8
Proportion of group ownership 33% 50% - - -
Carrying amount of investment 6.2 5.2 11.4 2.4 13.8
Supplementary material AWEML(100% of results) £m NRHL(100% of results) £m Group portion of material joint ventures and associates* £m Group portion of other joint venture arrangements and associates* £m Total £m
Cash and cash equivalents 111.4 44.9 59.6 21.1 80.7
Current financial liabilities excluding trade and other payables and provisions (5.6) (4.3) (4.0) (2.2) (6.2)
Non current financial liabilities excluding trade and other payables and provisions (0.1) (1.3) (0.7) (3.3) (4.0)
Depreciation and amortisation - (4.6) (2.2) (2.3) (4.5)
Interest income 0.4 0.5 0.4 0.1 0.5
Interest expense - (0.1) (0.1) (0.8) (0.9)
* Total results of the joint ventures and associates multiplied by the respective proportion of Group ownership.
The financial statements of NRHL are for the 52 week period ended 9 January 2016.
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
Main assumptions: 2015 AWEML NRHL
Rate of salary increases (%) 2.2% 3.0%
Inflation assumption (CPI %) 2.2% 2.1%
Discount rate (%) 4.0% 3.9%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 22.7 N/a
Future male industrial pensioners at 65 (years) 25.4 N/a
Retirement benefit funding position (100% of results) AWEML£m NRHL£m
Present value of scheme liabilities (1,649.6) (918.3)
Fair value of scheme assets 1,188.0 682.6
Net amount recognised (461.6) (235.7)
Members' share of deficit - 94.3
Franchise adjustments* - 141.3
Related asset, right to reimbursement 461.6 -
Net retirement benefit obligation - (0.1)
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract
period.
The Northern Rail defined benefit pension scheme used a mortality rate multiplier of 98% based on the S1 normal males
(heavy) table, adjusted for the geographic location of members.
5. Acquisitions
On 1 December 2016 the Group acquired 100% of the issued share capital of Orchard & Shipman (Glasgow) Limited for £1,
obtaining full control. Orchard & Shipman (Glasgow) Limited was a financially distressed subcontractor on our COMPASS
contract and the business was acquired with the sole purpose of ensuring the continued delivery of this essential service
to asylum seekers in Scotland and Northern Ireland.
The amounts recognised in respect of the identifiable assets acquired and the liabilities assumed are as set out in the
table below:
Book value £m Fair value adjustments£m Provisional fair value £m
Property, plant and equipment 0.2 (0.2) -
Trade and other receivables 0.8 - 0.8
Cash and cash equivalents 0.1 - 0.1
Trade and other payables (4.2) - (4.2)
Onerous contract provisions (1.4) (12.6) (14.0)
Property provisions (0.5) - (0.5)
Total identifiable assets (5.0) (12.8) (17.8)
Goodwill 17.8
Acquisition date fair value of consideration transferred -
Goodwill represents the premium associated with preventing a disruption to our service users and the financial impact of
penalties associated with that disruption, taking into account the pre-existing onerous contract held by O&S for services
provided to Serco, which will now be performed by Serco up to the expected contract end date. All of the service users in
the region are housed in properties leased by Orchard & Shipman (Glasgow) Limited and the only way of guaranteeing control
of those leases was by means of the acquisition of the legal entity. As the contract is loss making no value is ascribed
to these lease arrangements and all goodwill arising on acquisition is immediately impaired. The onerous contract
provision (OCP) of £14.0m included in the fair value of the acquisition net assets represents the best estimate of Orchard
& Shipman (Glasgow) Limited's contractual obligations up to the expected contract end date. An element of this provision
was previously included in the Group's existing OCP and an amount of £3.6m is included in amounts released in the year.
No acquisition related costs were incurred.
Orchard & Shipman (Glasgow) Limited contributed no external income to the Group's revenue for the year between the date of
acquisition and the balance sheet date as the prime contract with the customer exists in another Group company, and
therefore Group revenue would have been no higher if the acquisition had been completed on the first day of the financial
year. As the business relates entirely to a loss making contract, the existence of the onerous contract provision results
in no profit or loss in the period since acquisition and no profit or loss would have arisen had the acquisition taken
place on 1 January 2016.
6. 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 underlying performance of the Group.
In the year 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 income statement within the loss attributable to
discontinued operations, those arising on continuing operations are disclosed on the face of the income statement within
exceptional operating items. Further information regarding the exceptional items arising on discontinued operations can be
seen in note 2.
Exceptional gain / (loss) on disposal of subsidiaries and operations
There were no material disposals of continuing operations in the year. Disposals relating to discontinued operations are
included in note 2.
During the year the Group surrendered 8.8% of the share capital of AWEML, resulting in a reduction in interests in joint
ventures and associates of £1.6m in return for equal consideration.
The profit on disposal of £2.9m arose from a profit of £0.4m on the disposal of a 10% investment sold as it was no longer
required to be held under the terms of the relevant contract, and a profit of £2.5m relating to transactions completing in
prior years, including cash of £4.5m as a result of deferred consideration payments received which had previously been
impaired.
Other exceptional operating items arising on continuing operations
For the year ended 31 December 2016 £m 2015 £m
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 ventures and associates, and related loan balances (13.9) -
Other exceptional operating items (59.2) (107.3)
Goodwill is tested for impairment annually or more frequently if there are indications that there is a risk that it could
be impaired. The recoverable amount 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, the Group's strategy
and key risks. These forecasts include an estimated level of new business wins and contract attrition and an assumption
that the final year forecast continues into perpetuity at a CGU specific terminal growth rate. The terminal growth rates
are provided by external sources and are based on the long-term inflation rates of the geographic market in which the CGUs
operate and therefore do not exceed the average long-term growth rates forecast for the individual markets.
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 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 phase of the 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 totalled £6.7m in the
year (2015: £13.8m).
The disposal of the Environmental and Leisure businesses was aborted in December 2015 and during the current period 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 review and the
programme of Corporate Renewal, reflecting the related external costs. This reflected external costs related to this review
and the Corporate Renewal Programme, which were treated as exceptional when the matter first arose and consistent treatment
has been 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 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 as £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 £13.9m of the equity interest and
associated receivables balances. The impairment is outside of the normal course of business and of a significant value,
and is therefore considered to be an exceptional item.
The exceptional finance costs charged in 2015 of £32.8m arose as a result of costs being incurred in 2015 to preserve the
existing finance facilities, after an agreement was reached in December 2014 for the Group to defer its December 2014
covenant test until May 2015. In addition, payments were made to the US Private Placement (USPP) Noteholders as a result of
early settlement following the Group refinancing. Total charges of £32.8m had been treated as exceptional items as they
were outside of the normal financing arrangement of the Group and were significant in size.
The tax impact of these exceptional items was a tax credit of £3.1m (2015: £0.4m).
7. Investment revenue
Year ended 31 December 2016 £m 2015 £m
Interest receivable on other loans and deposits 3.6 1.1
Net interest receivable on retirement benefit obligations 4.7 4.9
Movement in discount on other debtors 1.0 0.1
9.3 6.1
8. Finance costs
Year ended 31 December 2016 £m 2015(restated*) £m
Interest payable on obligations under finance leases 1.6 2.5
Interest payable on other loans 15.6 24.7
Facility fees and other charges 3.5 6.2
Movement in discount on provisions 2.4 5.6
23.1 39.0
Foreign exchange on financing activities* (1.2) (0.1)
21.9 38.9
* Finance costs have been restated as a result of the change in treatment of foreign exchange items on investing and
financing items as explained in note 1.
9. Tax
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.
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.
10. Earnings per share
Basic and diluted 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 2016 millions 2015millions
Weighted average number of ordinary shares for the purpose of basic EPS 1,088.3 986.5
Effect of dilutive potential ordinary shares: Share options 37.3 -
Weighted average number of ordinary shares for the purpose of diluted EPS 1,125.6 986.5
At 31 December 2016 options over 246,818 (2015: 560,060) shares were excluded from the weighted average number of shares
used for calculating diluted earnings per share because their exercise price was above the average share price for the year
and they were, therefore, anti-dilutive.
The dilutive shares of 37.3m (2015: 26.5m) are applied in the continuing only EPS calculation. Due to the loss making
position of continuing and discontinued combined, and discontinued only, the dilutive impact has not been calculated in
2016 and 2015, nor for 2015 continuing.
Earnings per share continuing and discontinued
Basic EPS Earnings Per share amount Earnings Per share amount
2016£m 2016 2015 2015pence
pence £m
Earnings for the purpose of basic EPS (1.2) (0.11) (152.6) (15.47)
Effect of dilutive potential ordinary shares - - - -
Diluted EPS (1.2) (0.11) (152.6) (15.47)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS (1.2) (0.11) (152.6) (15.47)
Add back exceptional items 70.9 6.51 220.3 22.33
Add back tax on exceptional items (3.1) (0.28) (3.1) (0.31)
Earnings excluding exceptional operating items for the purpose of basic EPS 66.6 6.12 64.6 6.55
Earnings per share continuing
Basic EPS Earnings 2016 £m Per share amount 2016 pence Earnings 2015 £m Per share amount 2015 pence
Earnings for the purpose of basic EPS 16.9 1.55 (86.6) (8.78)
Effect of dilutive potential ordinary shares - (0.05) - -
Diluted EPS 16.9 1.50 (86.6) (8.78)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS 16.9 1.55 (86.6) (8.78)
Add back exceptional items 56.3 5.17 142.7 14.47
Add back tax on exceptional items (3.1) (0.28) (0.4) (0.04)
Earnings excluding exceptional operating items for the purpose of basic EPS 70.1 6.44 55.7 5.65
Earnings per share discontinued
Basic EPS Earnings 2016 £m Per share amount 2016 pence Earnings 2015 £m Per share amount 2015 pence
Earnings for the purpose of basic EPS (18.1) (1.66) (66.0) (6.69)
Effect of dilutive potential ordinary shares - - - -
Diluted EPS (18.1) (1.66) (66.0) (6.69)
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS (18.1) (1.66) (66.0) (6.69)
Add back exceptional items 14.6 1.34 77.6 7.87
Add back tax on exceptional items - - (2.7) (0.28)
Earnings excluding exceptional operating items for the purpose of basic EPS (3.5) (0.32) 8.9 0.90
11. Goodwill
The value of each 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 a review is also required.
Sensitivity analysis has been performed for each key assumption, a 1% movement in discount rates and a 1% movement in
terminal growth rates are considered to be reasonably possible. The only CGU impacted by a reasonably possible change in a
key assumption is Health. The breakeven point of Health goodwill impairment is a 0.2% increase in discount rate or a 0.3%
decrease in terminal growth rate.
Serco operates a contract supporting the US Affordable Care Act (ACA) with eligibility processing services to those seeking
health insurance. These operations accounted for nearly 30% of the Americas divisional revenue in 2016, and we currently
forecast them to be broadly flat in 2017. The contract requires the final option year to be exercised in H1 of 2017 in
order to extend through to 30 June 2018 at which point we would be required to rebid the contract. Particular uncertainty
exists with regard to the future of the ACA. At the time of reporting, apart from knowing that under the new US
President's Administration changes will be made to the ACA, there is no consensus in neither Congress nor the
Administration as to what form these changes will take, and what provision will be made for the more than 24 million people
who have received their health insurance coverage through the ACA. Whilst margins on this contract are lower than the
average for the Americas division, the contract recovers a material amount of overhead costs and large reductions in
chargeable direct labour could create challenges to reduce overheads in line with revenues. The timing and nature of
arrangements made for the replacement of the Affordable Care Act in the US could therefore have a material impact on the
business both in the immediate and longer term. However, at present, the impact on future revenues and profitability
cannot be reliably estimated.
12. Analysis of Net Debt
At 1 January 2016 £m Cash Reclassified as held for sale £m Acquisitions** £m Disposals £m Exchange differences £m Non cash movements £m At 31 December 2016 £m
flow £m
Cash and cash equivalents 323.6 (153.7) - 0.1 - 7.8 - 177.8
Loan receivables 19.9 - - - - 0.1 2.9 22.9
Loans payable (381.9) 135.8 - - - (52.8) (1.0) (299.9)
Obligations under finance leases (43.8) 16.7 (0.2) - - (0.4) (0.5) (28.2)
Derivatives relating to Net Debt 14.6 - - - - 3.5 - 18.1
(67.6) (1.2) (0.2) 0.1 - (41.8) 1.4 (109.3)
At 1 January 2015(restated*) £m Cash Reclassified as held for sale £m Acquisitions** £m Disposals £m Exchange differences £m Non cash movements £m At 31 December 2015(restated*) £m
flow £m
Cash and cash equivalents 180.1 128.8 17.2 - (0.4) (2.1) - 323.6
Loan receivables 1.0 (0.6) - - - - 19.5 19.9
Loans payable (797.3) 449.0 (0.8) - - (30.8) (2.0) (381.9)
Obligations under finance leases (26.5) 9.3 (26.7) - - - 0.1 (43.8)
Derivatives relating to Net Debt* 10.7 - - - - 3.9 - 14.6
(632.0) 586.5 (10.3) - (0.4) (29.0) 17.6 (67.6)
* Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt.
See note 1.
** Acquisitions represent the net cash / (debt) acquired on acquisition.
Total net debt held amounts to £109.3m (2015: £62.9m) of which £109.3m (2015: £67.6m) is shown above and £nil (2015: £4.7m
(asset)) is included within amounts held for sale on the balance sheet.
13. Provisions
Employee related £m Property £m Contract £m Other £m Total £m
At 1 January 2016 36.4 18.3 302.1 124.9 481.7
Acquisitions - 0.6 14.0 - 14.6
Reclassified to trade and other payables - - (11.5) (8.3) (19.8)
Charged to income statement - exceptional 0.4 - - 22.7 23.1
Charged to income statement - other 25.6 4.4 56.6 23.7 110.3
Released to income statement - exceptional (0.2) - (0.6) - (0.8)
Released to income statement - other (5.3) (0.3) (64.9) (17.2) (87.7)
Utilised during the year (17.5) (6.2) (82.0) (17.7) (123.4)
Reclassification - (2.9) (7.3) 4.9 (5.3)
Transfer from assets held for sale - - - 3.3 3.3
Eliminated on disposal of subsidiary - - - (1.7) (1.7)
Unwinding of discount - 0.1 2.4 - 2.5
Exchange differences 5.7 1.2 11.4 6.6 24.9
At 31 December 2016 45.1 15.2 220.2 141.2 421.7
Analysed as:
Current 13.7 4.3 79.2 75.1 172.3
Non current 31.4 10.9 141.0 66.1 249.4
Total provisions held by the Group at 31 December 2016 amount to £421.7m (2015: £506.2m) and include £421.7m (2015:
£481.7m) shown above and £nil (2015: £24.5m) included within amounts held for sale on the balance sheet.
Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract, up to a
maximum of 8 ¼ years from the balance sheet date. The present value of the estimated future cash outflows required to
settle the contract obligations as they fall due over the respective contracts has been used in determining the provision.
The individual provisions are discounted where the impact is assessed to be material. Discount rates used are calculated
based on the estimated risk free rate of interest for the region in which the provision is located and matched against the
ageing profile of the provision. Rates applied are in the range of 1.16% and 3.30%. A full analysis is performed at least
annually of the future profitability of all contracts with marginal performances and of the balance sheet items directly
linked to these contracts.
Due to the significant size of the balance and the inherent level of uncertainty over the amount and timing of the related
cash flows upon which onerous contract provisions are based, if the expected operational performance varies from the best
estimates made at the year end, a material change in estimate may be required. The key drivers behind operational
performance is the level of activity required to be serviced, which is often directed by the actions of the UK Government,
and the efficiency of Group employees and resources.
Employee related provisions are for long-term service awards and terminal gratuities liabilities which have been accrued
and are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until
retirement 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 not
certain.
Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs
associated with the lease exceed the economic benefits expected to be generated in the future. The provision has been
calculated based on the discounted cash outflows required to settle the lease obligations as they fall due, with the
longest running lease ending in April 2039.
Other provisions are held for indemnities given on disposed businesses, legal and other costs that the Group expects to
incur over an extended period, in respect of past events. These costs are based on past experience of similar items and
other known factors and represent management's best estimate of the likely outcome and will be utilised with reference to
the specific facts and circumstances, with the majority expecting to be settled by 31 December 2021.
14. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a
maximum value of £20.4m (2015: £21.1m). The actual commitment outstanding at 31 December 2016 was £17.9m (2015: £20.8m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31
December 2016 was £252.1m (2015: £211.8m).
As we have disclosed before, we are under investigation by the Serious Fraud Office. In November 2013, the UK's Serious
Fraud Office announced that it had opened an investigation, which remains ongoing, into the Group's Electronic Monitoring
Contract.
We are cooperating fully with the Serious Fraud Office's investigation but it is not possible to predict the outcome.
However, disclosed in the Principal Risks and Uncertainties in this Report is a description of the range of possible
outcomes in the event that the Serious Fraud Office decides to prosecute the individuals and /or the Serco entities
involved.
The Group is aware of other claims and potential claims which involve or may involve legal proceedings against the Group.
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.
15. Defined benefit schemes
The costs related to defined benefit pension schemes included within operating profit in the year amount to £11.7m (2015:
£11.6m). Included in investment income and finance costs is a credit of £4.7m (2015: £4.9m) relating to the net interest
income on our consolidated pension schemes. Among our non contract specific schemes, the largest is the Serco Pension and
Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of this scheme was undertaken as at 5 April 2015
and resulted in an actuarially assessed deficit of £4.0m.
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value Contract Non contract specific Total
specific 2016£m 2016£m
2016£m
Equities 3.3 43.3 46.6
Bonds except LDI 0.7 20.2 20.9
Liability driven investments (LDI) - 1,390.6 1,390.6
Gilts - 72.4 72.4
Property 0.6 - 0.6
Cash and other 1.2 4.2 5.4
Annuity policies - 20.0 20.0
Fair value of scheme assets 5.8 1,550.7 1,556.5
Present value of scheme liabilities (12.0) (1,418.0) (1,430.0)
Net amount recognised (6.2) 132.7 126.5
Franchise adjustment* 3.7 - 3.7
Members' share of deficit 2.5 - 2.5
Net retirement benefit asset - 132.7 132.7
Net pension liability - (17.7) (17.7)
Net pension asset - 150.4 150.4
Deferred tax liabilities - (17.6) (17.6)
Net retirement benefit asset (after tax) - 115.1 115.1
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside
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