TIDMSRP
RNS Number : 6281H
Serco Group PLC
05 August 2021
2021 half year results
5 August 2021
Very strong trading and cash. GBP4bn of order intake. Order book
increases to GBP14bn. First interim dividend since 2014.
Change Change
at reported at constant
Six months ended 30 June 2021 2020 currency currency
====================================== ========= ========= ============ ============
Revenue (1) GBP2,168m GBP1,822m +19% +20%
-------------------------------------- --------- --------- ------------ ------------
Underlying Trading Profit (UTP) (2) GBP123m GBP78m +58% +62%
Reported Operating Profit (i.e. after
exceptional items) (2) GBP116m GBP89m +31%
-------------------------------------- --------- --------- ------------ ------------
Underlying Earnings Per Share (EPS),
diluted (3) 6.75p 3.86p +75%
Reported EPS (i.e. after exceptional
items), diluted 18.77p 5.66p +232%
-------------------------------------- --------- --------- ------------
Dividend Per Share 0.8p -
--------- ------------
Free Cash Flow (4) GBP130m GBP81m +61%
-------------------------------------- --------- --------- ------------
Adjusted Net Debt (5) GBP225m GBP143m +58%
Reported Net Debt (6) GBP651m GBP503m +29%
-------------------------------------- --------- --------- ------------
Highlights
-- Revenue (1) grew by 19% to GBP2.2bn, with organic growth of 15%, a 5% uplift
from acquisitions and a 1% FX drag.
-- Underlying Trading Profit (2) increased by 58% to GBP123m; 8%, or GBP6m,
contributed by acquisitions of Facilities First in Australia and WBB in
North America.
-- Group Margin strengthened from 4.3% to 5.7%.
-- Reported Operating Profit increased by 31%.
-- Diluted Underlying EPS increased by 75%, reflecting the growth in Underlying
Trading Profit, unchanged finance costs and a lower effective tax rate.
Reported EPS benefits from one-off credit of GBP155m on recognition of an
increased UK tax asset.
-- Free Cash Flow(4) up 61% to GBP130m, supported by strong cash collections
and some favourable timing effects.
-- Adjusted Net Debt(5) increased by GBP82m to GBP225m in the last 12 months,
despite spend of GBP249m on acquisitions and GBP40m on share buy-backs.
Covenant leverage 1.0x EBITDA (2020: 0.7x).
-- Interim dividend of 0.8p per share, the first interim dividend since 2014.
-- Order Intake was extremely strong at GBP4.1bn, 190% book-to-bill. Approximately
60% of the order intake related to new work and 40% contracts being rebid.
Pipeline of GBP5.8bn up 40% year-on-year, and largely rebuilt since the
start of the year despite exceptionally strong order intake.
-- Order Book increased from GBP13.5bn at the end of 2020 to GBP14.1bn.
Rupert Soames, Serco Group Chief Executive, said:
"These are very strong results, with revenue up 19%, Underlying
Trading Profit up 58%, and Free Cash Flow up 61%. We have had
extremely strong order intake, and the book-to-bill ratio was 190%,
which bodes well for the future. Our three largest divisions - Asia
Pacific, North America and UK & Europe - all delivered good
growth, and this reflects both the trust our government customers
have shown in us during the pandemic, and Serco's ability to
respond to their requirements with speed and at scale.
Serco has grown very rapidly in the past two years, made
possible by the investment we have made since 2014 in transforming
our culture, systems and processes, re-gaining the trust of our
customers, and building a strong and experienced management team.
Over 60% of our profits now come from outside the UK, which
reflects the success we have had in developing our businesses
around the world. We now employ 83,000 people, which is around
21,000, or a third, more than we did a year ago; notwithstanding
this rapid expansion, we have delivered an extremely strong
operational performance. In the last six months we have completed
two acquisitions, mobilised and trained thousands of people for new
contracts, de-mobilised others, and responded with agility to
constantly changing customer requirements. At the same time
colleagues have had to deal with challenges and sometimes tragedies
in their personal lives. For too many, home-life has provided
little respite from the pressures of work-life. My respect and
admiration for them all is unbounded.
About 17% of our first half revenues were directly associated
with the critical work of supporting governments in their response
to Covid-19. These revenues will fall away as the pandemic fades;
for all our sakes, the sooner the better. In the meantime, our job
is to deliver great service and value to governments on these
contracts while they are needed, and to wind them down in an
orderly manner when they are not. This work, whilst temporary in
nature, will leave an enduring legacy for Serco and make it an even
stronger company. It has shown our customers that they can trust us
to respond at speed and scale to extremely demanding requirements;
it has enabled us to invest in the development of systems,
processes and skills which will further strengthen what is already
a powerful proprietary platform for delivering complex government
services. We believe that as a result of Covid-19 related contracts
our skills and capabilities will be greater and our reputation with
governments will be enhanced. We take the GBP4bn of order intake we
have won in the first half as encouraging early evidence of this,
and it will certainly help to cushion the impact of the inevitable
wind-down of Covid-19 related work.
For the year as a whole, we expect to deliver Underlying Trading
Profit of around GBP200m, or nearly 30% growth in constant
currency. Profits in the year will be weighted to the first half,
and will include contributions from the WBB and FFA acquisitions,
which will enable us to partially offset the impact of the end of
the AWE contract in June, the mobilisation costs of the
recently-signed DWP contract, an expected reduction in Covid-19
related activities, and investments in our operating platform."
Our guidance for 2021 remains unchanged from that stated in our
Pre-Close Update on 30 June 2021, except for cash and net debt,
which has been updated following the very strong first half
performance.
Prior guidance Latest guidance
Revenue GBP4.3bn GBP4.3bn
Organic sales growth 6% 6%
Underlying Trading Profit GBP200m GBP200m
Net Finance Costs GBP28m GBP28m
Underlying effective
tax rate 25% 25%
Free Cash Flow GBP100m GBP120m
Adjusted Net Debt GBP275m GBP250m
Notes: The guidance uses an average GBP:USD exchange rate of
1.39 in 2021 and GBP:AUD of 1.82.
For further information please contact Serco:
Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718
195 074 or email: paul.checketts@serco.com
Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898
550 or email: marcus.deville@serco.com
Presentation:
A virtual presentation for institutional investors and analysts
will be held today starting at 10.00am. The presentation will be
webcast live on www.serco.com and subsequently available on demand.
A dial-in facility is also available on +44 (0) 207 192 8338 (USA:
+1 646 741 3167) with participant pin code 3376269.
Notes to summary table of financial results:
(1) Revenue is as defined under IFRS, which excludes Serco's
share of revenue of its joint ventures and associates. Organic
revenue growth is the change at constant currency after adjusting
to exclude the impact of relevant acquisitions or disposals. Change
at constant currency is calculated by translating non-sterling
values for the six months ended 30 June 2021 into sterling at the
average exchange rates for the six months ended 30 June 2020.
(2) Trading Profit is defined as IFRS operating profit excluding
amortisation of intangibles arising on acquisition as well as
exceptional items. Consistent with IFRS, it includes Serco's share
of profit after interest and tax of its joint ventures and
associates. Underlying Trading Profit additionally excludes
historic Contract & Balance Sheet Review adjustments and other
material one-time items. A reconciliation of Underlying Trading
Profit to Trading Profit and Reported Operating Profit is as
follows:
Six months ended 30 June 2020
GBPm 2021
==================================================== ===== =====
Underlying Trading Profit 122.7 77.6
Include: non-underlying items
Contract & Balance Sheet Review adjustments 2.9 2.9
---------------------------------------------------- ----- -----
Trading Profit 125.6 80.5
Amortisation of intangibles arising on acquisition (6.6) (5.0)
---------------------------------------------------- ----- -----
Operating Profit Before Exceptional Items 119.0 75.5
Operating Exceptional Items (2.7) 13.6
---------------------------------------------------- ----- -----
Reported Operating Profit (after exceptional items) 116.3 89.1
---------------------------------------------------- ----- -----
(3) Underlying EPS reflects the Underlying Trading Profit
measure after deducting net finance costs and related tax
effects.
(4) Free Cash Flow is the net cash flow from operating
activities before exceptional items as shown on the face of the
Group's Condensed Consolidated Cash Flow Statement, adding
dividends we receive from joint ventures and associates, and
deducting net interest paid, the capital element of lease payments,
net capital expenditure on tangible and intangible asset purchases
and share purchases used to satisfy share awards.
(5) Adjusted Net Debt is an additional non-IFRS Alternative
Performance Measure (APM) used by the Group. This measure more
closely aligns with the covenant measure for the Group's financing
facilities than Reported Net Debt because it excludes all lease
liabilities.
(6) Reported Net Debt includes all lease liabilities. A
reconciliation of Adjusted Net Debt to Reported Net Debt is as
follows:
As at 30 June 30 June 31 Dec
GBPm 2021 2020 2020
=============================== ======= ======= ======
Adjusted Net Debt 225.2 142.9 57.8
Include: all lease liabilities 425.7 359.9 402.6
Reported Net Debt 650.9 502.8 460.4
------------------------------- ------- ------- ------
(7) Represents percentage of Group Underlying Trading Profit
before corporate costs. Underlying Trading Profit before corporate
costs in the first half of 2021 was GBP145.4m.
Forward looking statements:
This announcement contains statements which are, or may be
deemed to be, "forward looking statements" which are prospective in
nature. All statements other than statements of historical fact are
forward looking statements. Generally, words such as "expect",
"anticipate", "may", "could", "should", "will", "aspire", "aim",
"plan", "target", "goal", "ambition", "intend" and similar
expressions identify forward looking-statements. By their nature,
these forward looking statements are subject to a number of known
and unknown risks, uncertainties and contingencies, and actual
results and events could differ materially from those currently
being anticipated as reflected in such statements. Factors which
may cause future outcomes to differ from those foreseen or implied
in forward looking statements include, but are not limited to:
general economic conditions and business conditions in Serco's
markets; contracts awarded to Serco; customers' acceptance of
Serco's products and services; operational problems; the actions of
competitors, trading partners, creditors, rating agencies and
others; the success or otherwise of partnering; changes in laws and
governmental regulations; regulatory or legal actions, including
the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or
regulatory approvals; exchange rate fluctuations; the development
and use of new technology; changes in public expectations and other
changes to business conditions; wars and acts of terrorism;
cyber-attacks; and pandemics, epidemics or natural disasters. Many
of these factors are beyond Serco's control or influence. These
forward looking statements speak only as of the date of this
announcement and have not been audited or otherwise independently
verified. Past performance should not be taken as an indication or
guarantee of future results and no representation or warranty,
express or implied, is made regarding future performance. Except as
required by any applicable law or regulation, Serco expressly
disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward looking statements contained in
this announcement to reflect any change in Serco's expectations or
any change in events, conditions or circumstances on which any such
statement is based after the date of this announcement, or to keep
current any other information contained in this announcement.
Accordingly, undue reliance should not be placed on the forward
looking statements.
LEI code: 549300PT2CIHYN5GWJ21
Chief Executive's Review
Summary of financial performance
Revenue, Underlying Trading Profit and Underlying Earnings Per
Share
Revenue increased by 19%, or GBP345m, to GBP2,168m (2020:
GBP1,822m). Of the growth, 15% (GBP282m) was organic, acquisitions
contributed 5% (GBP86m) and currency movements were a drag of 1%
(-GBP23m). The high level of organic growth was driven by very
strong performances from our UK and Australian businesses. About
GBP365m of our global revenues were from services supporting
governments' response to Covid-19, which compares to GBP130m in the
first half of 2020.
Underlying Trading Profit (UTP) increased by 58%, or GBP45m, to
GBP123m (2020: GBP78m). Excluding the adverse currency movement of
GBP3m, growth at constant currency was 62%. Acquisitions added 8%,
or GBP6m, of the growth, with the rest being organic. The organic
growth arose from continued strong demand for our Covid-19 work and
growth in a range of other contracts, notably in Justice &
Immigration and Citizens Services. Our core operating platform was
able to respond efficiently to the additional demand, illustrated
by the fact that Group administrative expenses increased
year-on-year by 8%, whilst revenues increased by 19%. As a
consequence, most of our regions improved their Underlying Trading
Profit margins as revenues increased, and this helped drive our UTP
margin from 4.3% to 5.7%.
Diluted Underlying Earnings Per Share increased by 75% to 6.75p
(2020: 3.86p). The percentage improvement was higher than the
increase in UTP due to a broadly unchanged finance cost and a lower
effective tax rate.
Cash flow and net debt
Free Cash Flow was very strong in the half at GBP130m (2020:
GBP81m). The improvement was a result of the GBP45m increase in
underlying profits and a working capital inflow of GBP44m, despite
revenue growth of GBP345m. The working capital inflow was helped by
the successful collection of some older receivables, efforts by
governments to support their supply chains by ensuring prompt
payments and favourable timing of receipts round the period end.
Average working capital days were broadly unchanged with debtor
days of 23 and creditor days of 24. We are proud to say that 89% of
UK supplier invoices were paid in under 30 days (2020: 87%) and 95%
were paid in under 60 days (2020: 96%). No working capital
financing facilities were utilised in this or the prior year.
The closing Adjusted Net Debt of GBP225m (2020: GBP143m)
compares to a daily average of GBP178m (2020: GBP283m) and a peak
of GBP346m (2020: GBP356m). The relatively large range for these
reflects the acquisition of WBB in May and the favourable timing of
receipts and payments at the end of the period. We have not used
any financing or efforts out of the ordinary to reduce period end
net debt.
Our measure of Adjusted Net Debt excludes all lease liabilities,
which now total GBP426m (31 December 2020: GBP403m) the majority
relating to the AASC contract and aligns more closely with the
measure used for covenants on our financing facilities. Adjusted
Net Debt at 30 June 2021 increased to GBP225m (31 December 2020:
GBP58m, 30 June 2020: GBP143m). The GBP167m increase since the year
end includes spend on acquisitions of GBP249m, GBP17m of dividend
payments and GBP40m of share purchases.
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.0x EBITDA (2020: 0.7x). This compares with
the covenant requirement for net debt to be less than 3.5x EBITDA
and our target range of 1-2x.
Dividends
The Board has decided to declare an interim dividend of 0.8p in
respect of the first half of 2021. To put this into context, the
Board decided, given the uncertainties last year, not to declare an
interim dividend in 2020. We did, however, pay a final dividend of
1.4p per share in respect of 2020, and if the normal approach of
paying about one-third of an expected annual dividend at the
interim stage and two-thirds at the Final stage had been followed,
it would have implied an interim in 2020 of about 0.7p. Indeed, an
amount roughly equivalent to this was included in the calculation
of the quantum of the share buyback programme announced in December
2020. In this context an interim dividend of 0.8p would represent
an increase of around 15% on the 0.7p that was notionally foregone
in 2020.
The Revenue and Trading Profit performances are described
further in the Divisional Reviews. More detailed analysis of
earnings, cash flow, financing and related matters is included in
the Finance Review.
Contract awards, order book, rebids and pipeline
Contract awards
Order intake has been extremely strong in the first half of 2021
with GBP4.1bn of work won, moving our book-to-bill to 190% for the
half, and approaching 130% for the rolling 12-months; since January
2017 and June 2021, we have had revenues of GBP15bn, and booked
orders of GBP19bn - a book-to-bill ratio of 126%. There were 33
contract awards worth more than GBP10m each and 4 with a total
contract value of more than GBP200m. Around 70% of order intake
came from the UK & Europe, 25% from the Americas and the
remaining 5% from customers of our AsPac and Middle East
operations.
Of the order intake, approximately 60% was represented by the
value of new business and 40% was rebids and extensions of existing
work. This is the opposite of the position in the same period last
year. The win rate by value for new work, which has averaged
slightly less than 30% over the last five years, was unusually high
at almost 70%. The win rate by value for securing existing work was
approximately 70%, which is lower than the 80-90% we typically see,
as a result of the loss of our Dubai Metro contract. Win rates by
number of tenders were approximately 65% for new bids and over 90%
for rebids and extensions.
VIVO Defence Services, our 50/50 joint venture with Engie, was
successful in securing several contracts from the UK Ministry of
Defence (MOD) Defence Infrastructure Organisation (DIO) as part of
the Future Defence Infrastructure Services (FDIS) programme, the
largest facilities management procurement currently running across
Europe. In Lot 3, which awarded contracts to provide asset and
facilities management services for the UK defence built estate,
VIVO won the largest two regions of the four that were competed.
These have an estimated total potential value to Serco of around
GBP1.7bn over the initial seven-year period. VIVO also secured the
largest two regions in Lot 2B, which provides repairs and
maintenance work for Service Family Accommodation, with an
estimated total potential value to Serco of around GBP200m. Also in
the UK, we were awarded contracts by the Department of Work and
Pensions as part of their Restart programme, which will help
unemployed people back into work. We estimate that the combined
value over the initial four and a half-year contract period will be
around GBP350m, with the amount dependent on the number of people
who find employment. The order intake also includes the GBP400m
contract renewal to provide support services at the Canadian Forces
Base in Goose Bay, Canada and our award to continue to provide
services at Covid-19 testing centre locations in the UK.
Order book
The order book increased from GBP13.5bn at the start of the year
to GBP14.1bn at the end of June. This is lower than might be
expected when order intake has been so high as, consistent with our
usual treatment of joint ventures, our order intake includes
Serco's GBP1.9bn share of our VIVO joint venture with Engie but our
order book does not. More widely, our order book definition gives
our assessment of the future revenue expected to be recognised from
the remaining performance obligations on existing contractual
arrangements. This excludes unsigned extension periods and the
order book would be GBP1.2bn higher if option periods in our US
business, which always tend to be exercised, were included.
Rebids
In our portfolio of existing work, we have around 70 contracts
with annual revenue of GBP5m or more where an extension or rebid
will be required before the end of 2023. Excluding our NHS Test
& Trace contracts, which are short-term in nature and we expect
the work to come to a natural finish, contracts which will either
end or need to be extended in 2021 have an annual contract value of
around GBP400m. A significant part of this is the Australian
Immigration services contract, where the customer has recently
informed us they propose extending for the maximum two years to
December 2023 and will enter into discussions to finalise the terms
of this . In each of 2022 and 2023 the annual value of contracts
ending or requiring extension is approximately GBP500m.
Pipeline
Our measure of pipeline is probably more narrowly defined than
is common in our industry. It includes only opportunities for new
business that have an estimated annual contract value (ACV) of at
least GBP10m and which we expect to bid and to be adjudicated
within a rolling 24-month timeframe. We cap the total contract
value (TCV) of individual opportunities at GBP1bn, to lessen the
impact of single large opportunities. The definition does not
include rebids and extension opportunities, and in the case of
framework, or call-off, contracts such as 'ID/IQ' (Indefinite
Delivery / Indefinite Quantity contracts), which are common in the
US, we only take the value of individual task orders into our
Pipeline as the customer confirms them. Our published Pipeline is
thus a relatively small proportion of the total universe of
opportunities, many of which have annual revenues less than GBP10m,
are likely to be decided beyond the next 24 months, or are rebids
and extensions.
Our Pipeline was GBP6.4bn at the end of 2020. We have seen
GBP4.1bn of orders secured in the half, and we are pleased that,
despite this, we have managed to largely replenish the Pipeline,
which stood at GBP5.8bn at 30 June. The Pipeline currently consists
of just over 25 bids that have an ACV averaging approximately
GBP30m and a contract length averaging seven years. The pipeline of
opportunities for new business that have an estimated ACV of less
than GBP10m has remained stable at GBP1.7bn.
As we have noted before, in the services industry in which Serco
operates, pipelines are often lumpy, as individual opportunities
can be very large, and when they come in and out of the pipeline
they can have a material effect on reported values.
Market outlook
Our approach to strategy planning is to conduct annual planning
exercises, updating the previous year's five-year forward plans,
using internal resources, so that at any time we have a reasonably
current five-year view. Every four to five years we conduct a more
detailed root-and-branch review, with external help, of our
markets. The last such review was in 2017, and in our 2018 Annual
Report, we set out our views on our markets. We had planned to
conduct our usual annual planning process in 2020, but as soon as
Covid-19 struck we told those people who would normally do this
work to focus on managing the business. However, in early 2021 we
restarted our normal strategy planning cycle, and we will update
markets on our latest views on the market in a Capital Markets Day
later in the year.
Pending that event, below are some of our reflections on our
market and in particular the impact of Covid-19. Some of this
repeats what we said in both our 2020 Interim and Final Reports,
but if something has stayed the same, we see no harm in saying it
again.
-- Covid-19 will probably amplify the underlying drivers of demand in our market
- which in 2014 we described as the "Four Forces". They are: relentlessly
increasing demand for public services; expectations of higher service quality;
structural fiscal deficits; electoral resistance to tax increases. These
forces will continue to encourage governments to seek innovative ways to
deliver more services, of higher quality, and at lower cost (what we call
'More and Better for Less'). We believe that Covid-19 has reconnected hundreds
of millions of people worldwide with government services and reminded them
of the value of well organised service delivery. This will make government
more confident in promoting services to citizens, and politicians more aware
that voters may make decisions on their future based on their personal experience
of the quality of public services. But the fact is that deficits and levels
of government debt have increased to levels not seen outside the aftermath
of the last two World Wars, and governments will be as focused on delivering
the "for Less" as on the "More" and the "Better". This is positive for our
market.
-- When faced by Covid-19, governments worldwide were, we believe, surprised
by two things. First, how little resilience there was in many critical self-provided
government services, and second by how well the private sector was able
to respond to an existential crisis. From developing vaccines in previously
undreamt-of timescales, to building vast new hospitals in weeks, to manufacturing
tens of thousands of ventilators, to standing up test and tracing services
on a scale never before seen, governments asked the private sector to respond,
and has, I suggest, been pleasantly surprised at how responsive and capable
the private sector has proved to be.
-- Procurement processes have become increasingly protracted over the last
18 months. During the first and second lockdowns, a certain amount of momentum
kept in-flight procurements going, but since December, and in particular
in the UK and North America, contracting authorities have struggled to keep
to timescales. In the US alone, we have over $2.5bn of tenders awaiting
adjudication, and the flow of new requests has slowed up; so the pattern
may be expressed as a backlog of awards and delays in new tenders, but as
a consequence many current contracts are being extended. This pattern tends
to favour incumbents. A peculiarly US phenomenon is the ritual of many contract
awards being challenged, and now with appeals taking longer to adjudicate,
incumbents have an even greater incentive to appeal awards where they have
lost. It will take some time for the normal tempo of bids to be restored.
-- We think that governments will reflect that they need to be more diligent
about how they plan for crises, and put in place supply-chains and procurement
processes that allow for the swift mobilisation of the private sector.
-- Our customers do not see clearly how the pandemic will play out over the
next few months. All they can do is to have on hand capacity they can flex
up and down as the needs of the moment dictate, and this is what most governments
have done. And if they don't know how it will play out, neither can we.
What we do know is that over the next year or so the volumes of our Covid-19
related work will reduce and in the meantime, our job is to deliver great
service and value to governments on these contracts while they are needed,
and to wind them down in an orderly manner when they are not. Whilst temporary
in nature, this work will leave an enduring legacy for Serco and make it
an even stronger company. It has shown our customers that they can trust
us to respond at speed and scale to extremely demanding requirements; it
has enabled us to invest in the development of systems, processes and skills
which will further strengthen what is already a powerful proprietary platform
for delivering complex government services. We believe that as a result
of Covid-19 related contracts our skills and capabilities will be greater
and our reputation with governments will be enhanced. We take the GBP4.1bn
of order intake we have won in the first half as encouraging early evidence
of this, and it will certainly help to cushion the impact of the inevitable
wind-down of Covid-19 related work.
Guidance for 2021
Revenue: We expect revenue of around GBP4.3bn in 2021, more than
10% higher than the GBP3.9bn reported in 2020, with organic growth
of approximately 6%. Whilst it is not possible to accurately
forecast Covid-19 related revenues, given the constantly evolving
situation, our expectation is that these revenues will reduce in
the remainder of the year, and will have as their prior-year
comparator a full six months of intense Covid effort, rather than
the three months of the first half of 2020. This and the cessation
of our Dubai Metro contract mean that we expect year-on-year
revenue growth to be markedly lower in the second half than in the
first, but still positive and around or above our 5% long-term
ambition.
Underlying Trading Profit: We expect UTP of around GBP200m for
the year, up around 23% on the prior year. Given the strong first
half, this implies a first half weighting of profits. The second
half will have a number of factors weighing on performance: the
ending of contracts such as AWE and Dubai Metro will together have
a GBP10m impact half-on-half; we booked GBP3m of profit on sale
from the divestment of our US parking business in the first half,
which will not recur; we will spend GBP8m-GBP10m mobilising the DWP
Restart contract that we won in the first half. In addition, we are
taking the opportunity of the strong performance to accelerate
investments in our systems and processes, which will cost about
GBP10m in the second half. They include: further development of our
HR system, bringing our European business onto our core SAP
platform, investment in cyber defences, and building our "UK SOX"
platform, which will put us in a good position to implement the
mooted changes to UK Audit & Corporate Governance. Although the
time and precise nature of these regulatory changes is not decided,
the direction of travel is set and we want to be ahead of this
particular curve. We also expect that during the second half,
demand for our Covid-19 related services will decline. All these
drags on performance will be partially offset by WBB and FFA, both
acquired in the first half, and improved performance in businesses
seriously impacted by Covid-19, such as our UK Leisure, Health and
Transport businesses. The aggregate effect will be to reduce
profits in in the second half of the year, relative to both H1 2021
and H2 2020.
Net finance costs and tax: Net finance costs are expected to be
around GBP28m. This is modestly higher than 2020 as we are carrying
a higher level of debt following the acquisitions of WBB and FFA,
and because this year will see us paying interest on both our US
private placement notes that were issued in October 2020 and the
notes that mature this year which last year's placement was
designed to refinance. The underlying effective tax rate is
expected to continue at around 25%. The tax rate is expected to be
higher in the second half than the first as a result of the
geographic mix of our profit and because the first half benefited
from a revision of our tax provision estimates.
Financial position: We expect adjusted net debt to be around
GBP250m at the end of December and leverage towards the bottom end
of our target range of 1-2x net debt : EBITDA. Full year net debt
is expected to be higher than at the half year as the exceptional
cash flow we saw in the first six months is likely to normalise.
The second half should see lower profitability than the first six
months, the reversal of favourable timing of receipts round the
half year period end, an extra "53(rd) week" payroll period in
North America, customers who had expedited payment terms to support
their supply chains through Covid-19 reverting to more normal
terms, and the repayment of deferred payroll taxes in North
America.
Concluding thoughts
We expect 2021 to be an exceptional year for Serco, not only in
terms of financial performance, where we expect to deliver revenue
growth of over 10%, profits growth of around 23%, and strong cash
conversion, but also outstanding operational delivery in the
context of a pandemic. This outcome has not happened by accident:
it is the product of seven years' work transforming Serco into a
company which is trusted and valued by governments, with an agile
and scalable operating platform. That, coupled with an experienced
and motivated management team and a "Loose-Tight" management
philosophy, which allows for rapid response without losing control
or prejudicing governance, is what has made this outcome
possible.
The shape of the year is unusual, with a second half markedly
weaker than the first as a result of the drags on profit described
in the outlook above. However, in 2022, some of these effects will
reverse, as we reap the rewards of the GBP4.1bn of order intake in
H1 21; in particular the DWP contract will move into profit, and
DIO contracts will start to contribute to profits. And while the
Covid contracts will inevitably wind down over the next 12 months,
their legacy will be to leave Serco an even more competitive,
well-financed, agile, and capable international supplier of
government services.
Rupert Soames
Group Chief Executive
Serco - and proud of it.
Divisional Reviews
Serco's operations are reported as four regional divisions: UK
& Europe (UK&E); the Americas; the Asia Pacific region
(AsPac); and the Middle East. Reflecting statutory reporting
requirements, Serco's share of revenue from its joint ventures and
associates is not included in revenue, while Serco's share of joint
ventures and associates' profit after interest and tax is included
in Underlying Trading Profit (UTP). As previously disclosed and for
consistency with guidance, Serco's UTP measure excludes contract
& balance sheet review adjustments (principally OCP releases or
charges), which are in any case immaterial in the period.
Six months ended 30 June 2021 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
------------------------------------ -------- -------- ------ ------ --------- --------
Revenue 1,038.5 528.6 457.9 142.5 - 2,167.5
Change +33% (2%) +38% (13%) +19%
Change at constant currency +33% +6% +29% (7%) +20%
Organic change at constant currency +33% 0% +12% (7%) +15%
UTP 56.1 57.1 25.0 7.2 (22.7) 122.7
Margin 5.4% 10.8% 5.5% 5.1% n/a 5.7%
Contract & Balance Sheet Review
adjustments 2.9 - - - - 2.9
Trading Profit/(Loss) 59.0 57.1 25.0 7.2 (22.7) 125.6
Amortisation of intangibles
arising on acquisition (0.4) (4.5) (1.7) - - (6.6)
Operating profit/(loss) before
exceptionals 58.6 52.6 23.3 7.2 (22.7) 119.0
------------------------------------ -------- -------- ------ ------ --------- --------
Six months ended 30 June 2020 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
-------------------------------- ------ -------- ------ ------ --------- --------
Revenue 783.6 542.1 332.0 164.5 - 1,822.2
UTP 26.5 53.4 13.3 7.0 (22.6) 77.6
Margin 3.4% 9.9% 4.0% 4.3% n/a 4.3%
Contract & Balance Sheet Review
adjustments 2.9 - - - - 2.9
Trading Profit/(Loss) 29.4 53.4 13.3 7.0 (22.6) 80.5
Amortisation of intangibles
arising on acquisition (1.5) (3.5) - - - (5.0)
Operating profit/(loss) before
exceptionals 27.9 49.9 13.3 7.0 (22.6) 75.5
-------------------------------- ------ -------- ------ ------ --------- --------
Year ended 31 December 2020 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
-------------------------------- -------- -------- ------ ------ --------- --------
Revenue 1,777.4 1,064.3 718.9 324.2 - 3,884.8
UTP 57.0 100.8 32.6 13.9 (41.2) 163.1
Margin 3.2% 9.5% 4.5% 4.3% 4.2%
Contract & Balance Sheet Review
adjustments 5.8 - - - - 5.8
Other one-time items 6.8 - - - - 6.8
Trading Profit/(Loss) 69.6 100.8 32.6 13.9 (41.2) 175.7
Amortisation of intangibles
arising on acquisition (2.0) (7.0) - - - (9.0)
Operating profit/(loss) before
exceptionals 67.6 93.8 32.6 13.9 (41.2) 166.7
-------------------------------- -------- -------- ------ ------ --------- --------
The trading performance and outlook for each division are
described on the following pages. Reconciliations and further
detail of financial performance are included in the Finance Review
on pages 13-30. This includes full definitions and explanations of
the purpose of each non-IFRS Alternative Performance Measure (APM)
used by the Group. The Condensed Consolidated Financial Statements
and accompanying notes are on pages 33-65.
UK & Europe (48% of revenue, 39% of Underlying Trading
Profit(7) )
Six months ended 30 June 2020 Growth
GBPm 2021
========================== ====== ===== ======
Revenue 1038.5 783.6 33%
Organic change 33% 19%
Acquisitions 0%
Currency 0%
-------------------------- ------ ----- ------
Underlying Trading Profit 56.1 26.5 112%
Organic change 112%
Acquisitions 0%
Currency 0%
Margin 5.4% 3.4%
-------------------------- ------ ----- ------
Revenue grew by 33% to GBP1,039m (2020: GBP784m), with the
increase all being organic. Amongst the sectors, Citizen Services,
Justice & Immigration, Transport and Health all grew revenues;
Defence fell slightly. Growth in Citizen Services was particularly
strong due to a full six months delivering Covid-19 related
services, as opposed to about three months in the prior year.
Covid-19 related work included providing support services for over
200 Covid-19 regional, local and mobile test centres as well as for
the UK Tracing programme. Across Testing and Tracing, we delivered
over 12 million hours of services in the first half, roughly
equivalent to 14,500 full-time people. Justice & Immigration
also increased revenues, in part because of a full six months of
the new Prisoner Escorting Contract, and also a result of increased
numbers of asylum seekers under our care.
Underlying Trading Profit increased to GBP56m (2020: GBP27m),
representing a margin of 5.4% (2020: 3.4%); this is the first time
in the last eight years that our UK & Europe business has
achieved margins around our long-term Group target. Increased
volumes and efficient scaling of platform costs enabled nearly all
business units to improve their margins, and those parts of our
business that were badly affected in 2020 by Covid-19 - notably
Leisure, Transport and Health - started to show modest signs of
improvement.
Trading Profit includes the profit contribution of joint
ventures and associates, from which interest and tax have already
been deducted. If the proportional share of revenue from joint
ventures and associates was included and the share of interest and
tax cost was excluded, the overall divisional margin would have
been 4.7% (2020: 2.9%). The joint venture and associate profit
contribution was lower at GBP6.4m (2020: GBP7.6m), as a result of
the negative impact on Merseyrail of Covid-19. We successfully
executed our exit from the AWE contract on 30 June to our
customer's satisfaction.
The UK & Europe division's order intake was extremely strong
at around GBP3.0bn, slightly more than 70% of the total for the
Group overall. Agreements signed included a number of contracts
from the Defence Infrastructure Organisation (DIO) awarded to our
VIVO JV with Engie, which we estimate will have a value in
aggregate to Serco of GBP1.9bn over their initial seven-year term.
The contracts include the maintenance of some 200 military sites,
19,000 buildings and around 20,000 homes. The order intake also
includes our DWP Restart contract, which has an estimated value of
GBP350m and our Covid-19 Testing Centres contract award, which we
value at GBP190m.
Despite such a strong period for order intake, the Pipeline
remains healthy, with both new opportunities and rebids
particularly across Defence, Maritime, Space and facilities
management, and in new prison operations in Justice &
Immigration.
Looking ahead to the second half, the UK&E business will
face a number of factors which will serve to reduce profits and
margins. Notably, we will have no income from AWE, which
contributed GBP7.9m to Underlying Trading Profit in the first half;
we expect to see a substantial reduction in revenues from NHS Test
& Trace in the second half, although the degree of reduction is
subject to considerable uncertainty as the contract is designed to
be flexible, allowing services to be flexed up and down at short
notice based on demand. We will have a charge of around GBP8m as we
mobilise the DWP restart contract, and we also plan to make
meaningful investments in the rollout of Workforce Management and
other IT infrastructure, as well as in organisational changes to
improve efficiency. The benefits of these investments will arise in
2022 and beyond.
Americas (24% of revenue, 39% of Underlying Trading Profit(7)
)
Six months ended 30 June 2020 Growth
GBPm 2021
========================== ===== ===== ======
Revenue 528.6 542.1 -2%
Organic change 0% 19%
Acquisitions 5%
Currency -8%
-------------------------- ----- ----- ------
Underlying Trading Profit 57.1 53.4 7%
Organic change 10%
Acquisitions 6%
Currency -9%
Margin 10.8% 9.9%
-------------------------- ----- ----- ------
Revenue in constant currency increased by 6% but an 8% adverse
translational effect of currency more than offset the growth; as a
consequence, reported revenues reduced by 2% to GBP529m (2020:
GBP542m). Most of the 6% constant currency growth was due to the
acquisition of WBB, which contributed GBP30m to revenues from
completion on 27 April. Outwith WBB, Defence and Citizen Services,
the two main segments for our Americas business, were both broadly
stable in the first half, against a tough comparator in 2020 and
continued delays in the award of new contracts. As at 30 June, the
North American business had over $2.5bn of tenders awaiting
award.
Margins increased from 9.9% to 10.8%, meaning that Underlying
Trading Profit increased by 7% to GBP57m (2020: GBP53m) despite the
lack of organic revenue growth. Excluding the adverse currency
movement of GBP5m, UTP growth at constant currency was 16%. The
increase was driven by the WBB business, acquired in April 2021,
which contributed around GBP3m of the growth, along with improved
profit contribution from contracts in the defence and transport
sectors and GBP3m of profit on sale from the divestment of our US
parking business.
Order intake was around GBP1.0bn, approximately 25% of the total
for the Group. We successfully rebid our contract to provide
support services at the 5 Wing Canadian Forces Base in Goose Bay,
Canada, with an estimated ceiling value of around C$700m or
GBP400m. We also successfully rebid our Anti-Terrorism / Force
Protection (ATFP) framework contract for US Naval Facilities, which
we estimate will be worth approximately GBP110m over eight years.
New business wins totalled in the region of GBP250m, across a range
of contracts, primarily in the defence sector.
The pipeline of major new bid opportunities due for decision
within the next 24 months in the Americas is now the largest of our
regions, due to the combination of new opportunities joining the
pipeline and award decisions being delayed due to Covid-19. Defence
makes up the bulk of our pipeline, with a broad spread of types of
work, and Citizen Services opportunities represent the
remainder.
We expect to see a step up in organic revenue growth in the
second half of the year, and we will see a full six months'
contribution from WBB, which will enable the division to deliver
strong year-on-year profit growth in the last six months of the
year.
Asia Pacific (21% of revenue, 17% of Underlying Trading
Profit(7) )
Six months ended 30 June 2020 Growth
GBPm 2021
========================== ===== ===== ======
Revenue 457.9 332.0 38%
Organic change 12% 25%
Acquisitions 17%
Currency 9%
-------------------------- ----- ----- ------
Underlying Trading Profit 25.0 13.3 88%
Organic change 52%
Acquisitions 23%
Currency 13%
Margin 5.5% 4.0%
-------------------------- ----- ----- ------
Revenue increased by 38% to GBP458m (2020: GBP332m). Organic
growth was 12% of the increase, with nearly all sectors showing
growth. There was particularly strong growth in Justice &
Immigration, with increased demand for our immigration services
partly as a result of Covid-19 response, and the increased revenues
from Clarence Correctional Centre, where operations commenced in
July 2020. The acquisition of Facilities First added 17% or GBP57m
to revenues, having completed at the beginning of January. Currency
movements added 9% to reported revenue growth.
Underlying Trading Profit increased by 88% to GBP25m (2020:
GBP13m), representing a margin of 5.5% (2020: 4.0%). Excluding the
favourable currency movement of GBP2m, growth at constant currency
was 74%. Facilities First generated margins in line with
expectations in the first six months of our ownership; our Justice
& Immigration business increased both volumes and margins, as
did Hong Kong.
Order intake was GBP0.1bn, just 3% of the Group total. Having
had significant success in recent years, it was a quiet period for
securing new work and no rebids were due in the period. We did
however extend our contracts to provide contact centre services to
the Australian Tax Office and to Services Australia to July 2022,
and we are delighted to say that our Immigration Services customer
has notified us that, subject to agreement on terms, they propose
extending our contract for another two years from December
2021.
Our pipeline for new business is strong, with opportunities to
provide facilities management services to Frankston Hospital in
Victoria, as part of a project to redevelop and extend the
hospital, and to participate in a concession to provide Vehicle
Registration and Licencing in the State of Victoria.
The high growth seen in the first half will not recur in the
second, in part because of a very strong performance in H2 of 2020,
particularly in our Immigration business, which we do not expect to
repeat, although we will see the inorganic benefit of the
Facilities First acquisition.
Middle East (7% of revenue, 5% of Underlying Trading Profit(7)
)
Six months ended 30 June 2020 Growth
GBPm 2021
========================== ===== ===== ======
Revenue 142.5 164.5 -13%
Organic change -7% -1%
Acquisitions 0%
Currency -6%
-------------------------- ----- ----- ------
Underlying Trading Profit 7.2 7.0 3%
Organic change 0%
Acquisitions 0%
Currency 3%
Margin 5.1% 4.3%
-------------------------- ----- ----- ------
Revenue fell by 13% to GBP143m (2020: GBP165m). Adverse currency
moves contributed 6% of the decline, with the remaining 7% being an
organic contraction. The organic decline was a result of a full six
months impact of the significant reduction in activity we
experienced last year due to Covid-19 in the transport, Citizen
Services and healthcare sectors. Unlike in the UK, we have had
limited Covid-19 response work to act as a counterbalance, although
we have recently started work for a government in the region
providing tracing services.
Despite the revenue contraction, Underlying Trading Profit
increased by 3% to GBP7.2m (2020: GBP7.0m), representing a margin
of 5.1% (2020: 4.3%). Excluding a small favourable currency
movement, growth at constant currency was 1%. This increase was
driven by a strong performance in defence and good cost control in
the areas where we experienced subdued demand.
Order intake was less than GBP0.1bn, or 1% of the total for the
Group. This was nearly all new business and included services at
Dubai Airport, where demand is increasing following its
reopening.
Our pipeline of major new bid opportunities in the Middle East
includes work in the Transport and Citizen Services sectors.
The Middle East business will see a sharp contraction in
revenues in the second half, reflecting the loss of the Dubai Metro
contract, which ends in September. However, a meaningful proportion
of the Metro revenues were low margin procurement of spares, so the
profit impact will be less dramatic. Nonetheless, profits in the
second half are likely to be lower than those in the first.
Corporate costs
Corporate costs relate to typical central function costs of
running the Group, including executive, governance and support
functions such as HR, finance and IT. Where appropriate, these
costs are stated after allocation of recharges to operating
divisions. The costs of Group-wide programmes and initiatives are
also incurred centrally.
Corporate costs only increased by GBP0.1m to GBP22.7m (2020:
GBP22.6m), despite the high organic growth and having made two
acquisitions in the period.
Dividend calendar
Ex-dividend date: 16 September 2021
Record date: 17 September 2021
Interim dividend payable: 12 October 2021
Finance Review
Amortisation
and
impairment
of
intangibles
Non arising Statutory
For the six underlying on pre Exceptional
months ended Underlying items Trading acquisition exceptional items Statutory
30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Revenue 2,167.5 - 2,167.5 - 2,167.5 - 2,167.5
Cost of sales (1,936.6) 2.9 (1,933.7) - (1,933.7) - (1,933.7)
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Gross profit 230.9 2.9 233.8 - 233.8 - 233.8
Administrative
expenses (114.6) - (114.6) - (114.6) - (114.6)
Other
exceptional
operating
items - - - - - (2.7) (2.7)
Other expenses - - - (6.6) (6.6) - (6.6)
Share of profits
in joint
ventures and
associates,
net of interest
and tax 6.4 - 6.4 - 6.4 - 6.4
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Profit before
interest
and tax 122.7 2.9 125.6 (6.6) 119.0 (2.7) 116.3
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Margin 5.7% 5.8% 5.5% 5.4%
Net finance
costs (12.6) - (12.6) - (12.6) - (12.6)
Profit before
tax 110.1 2.9 113.0 (6.6) 106.4 (2.7) 103.7
Tax
(charge)/credit (25.6) 155.1 129.5 1.2 130.7 0.7 131.4
Effective tax
rate 23.3% (114.6%) (122.8%) (126.7%)
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Profit for the
period 84.5 158.0 242.5 (5.4) 237.1 (2.0) 235.1
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Minority - - - -
interest
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Earnings per
share (EPS)
- basic (pence) 6.86 19.68 19.24 19.08
Earnings per
share (EPS)
- diluted
(pence) 6.75 19.36 18.93 18.77
----------------------- ---------------- ------------ ---------------- ------------- ---------------- ------------ ----------------
Amortisation
and
impairment
of
intangibles
Non arising Statutory
For the six underlying on pre Exceptional
months ended Underlying items Trading acquisition exceptional items Statutory
30 June 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Revenue 1,822.2 - 1,822.2 - 1,822.2 - 1,822.2
Cost of sales (1,645.9) 2.9 (1,643.0) - (1,643.0) - (1,643.0)
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Gross profit 176.3 2.9 179.2 - 179.2 - 179.2
Administrative
expenses (105.7) - (105.7) - (105.7) - (105.7)
Exceptional
profit on
disposal of
subsidiaries
and operations - - - - - 11.0 11.0
Other
exceptional
operating
items - - - - - 2.6 2.6
Other expenses - - - (5.0) (5.0) - (5.0)
Share of
profits in
joint
ventures and
associates,
net of
interest and
tax 7.0 - 7.0 - 7.0 - 7.0
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Profit before
interest
and tax 77.6 2.9 80.5 (5.0) 75.5 13.6 89.1
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Margin 4.3% 4.4% 4.1% 4.9%
Net finance
costs (12.7) - (12.7) - (12.7) - (12.7)
Profit before
tax 64.9 2.9 67.8 (5.0) 62.8 13.6 76.4
Tax charge (17.0) 10.4 (6.6) 0.9 (5.7) (0.4) (6.1)
Effective tax
rate 26.2% 9.7% 9.1% 8.0%
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Profit for the
period 47.9 13.3 61.2 (4.1) 57.1 13.2 70.3
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Minority
interest (0.1) (0.1) (0.1) (0.1)
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Earnings per
share (EPS)
- basic
(pence) 3.91 5.00 4.66 5.74
Earnings per
share (EPS)
- diluted
(pence) 3.86 4.92 4.60 5.66
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Amortisation
and
impairment
of
intangibles
For the year Non arising Statutory
ended underlying on pre Exceptional
31 December Underlying items Trading acquisition exceptional items Statutory
2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Revenue 3,884.8 - 3,884.8 - 3,884.8 - 3,884.8
Cost of sales (3,514.4) 12.6 (3,501.8) - (3,501.8) - (3,501.8)
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Gross profit 370.4 12.6 383.0 - 383.0 - 383.0
Administrative
expenses (220.0) - (220.0) - (220.0) - (220.0)
Exceptional
profit on
disposal of
subsidiaries
and operations - - - - - 11.0 11.0
Other
exceptional
operating
items - - - - - 1.5 1.5
Other expenses - - - (9.0) (9.0) - (9.0)
Share of
profits in
joint
ventures and
associates,
net of
interest and
tax 12.7 - 12.7 - 12.7 - 12.7
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Profit before
interest
and tax 163.1 12.6 175.7 (9.0) 166.7 12.5 179.2
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Margin 4.2% 4.5% 4.3% 4.6%
Net finance
costs (25.9) - (25.9) - (25.9) - (25.9)
Profit before
tax 137.2 12.6 149.8 (9.0) 140.8 12.5 153.3
Tax charge (31.2) 10.5 (20.7) 1.8 (18.9) (0.4) (19.3)
Effective tax
rate 22.7% 13.8% 13.4% 12.6%
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Profit for the
period 106.0 23.1 129.1 (7.2) 121.9 12.1 134.0
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Minority
interest 0.2 0.2 0.2 0.2
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Earnings per
share (EPS)
- basic
(pence) 8.61 10.49 9.90 10.89
Earnings per
share (EPS)
- diluted
(pence) 8.43 10.28 9.70 10.67
---------------------- ---------------- ----------- ---------------- ------------- ---------------- ------------ ----------------
Alternative Performance Measures (APMs) and other related
definitions
Overview
APMs used by the Group are reviewed below to provide a
definition and reconciliation from each non-IFRS APM to its IFRS
equivalent, and to explain the purpose and usefulness of each
APM.
In general, APMs are presented externally to meet investors'
requirements for further clarity and transparency of the Group's
financial performance. The APMs are also used internally in the
management of our business performance, budgeting and forecasting,
and for determining Executive Directors' remuneration and that of
other Management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being
included in an APM, this reflects revenues presented elsewhere
within the reported financial information, except where amounts are
recalculated to reflect constant currency. Where items of profits
or costs are being excluded in an APM, these are included elsewhere
in our reported financial information as they represent actual
profits or costs of the Group, except where amounts are
recalculated to reflect constant currency. As a result, APMs allow
investors and other readers to review different kinds of revenue,
profits and costs and should not be used in isolation. Other
commentary within this announcement, including the other sections
of this Finance Review, as well as the Condensed Consolidated
Financial Statements and their accompanying notes, should be
referred to in order to fully appreciate all the factors that
affect our business. We strongly encourage readers not to rely on
any single financial measure, but to carefully review our reporting
in its
entirety.
The methodology applied to calculating the APMs has not changed
since 31 December 2020.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 33, reflects revenue translated at the
average exchange rates for the period. In order to provide a
comparable movement on the previous period's results, reported
revenue is recalculated by translating non-Sterling values for the
six months ended 30 June 2021 into Sterling at the average exchange
rates for the six months ended 30 June 2020.
2021
For the six months ended 30 June GBPm
--------------------------------------------- --------------
Reported revenue at constant currency 2,190.1
Foreign exchange differences (22.6)
--------------------------------------------- --------------
Reported revenue at reported currency 2,167.5
--------------------------------------------- --------------
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses
acquired during a particular period from the date of acquisition
and/or generated by businesses sold during a particular period up
to the date of disposal. In order to provide a comparable movement
which ignores the effect of both acquisitions and disposals,
Organic Revenue at constant currency is recalculated by excluding
the impact of any relevant acquisitions or disposals.
There are two acquisitions excluded for the calculation of
Organic Revenue in the period to 30 June 2021, which are the
acquisitions of Facilities First Australia Holdings Pty Ltd and
Whitney, Bradley & Brown, Inc which completed on 4 January 2021
and 27 April 2021 respectively. The acquisition of Mercurius
Finance S.A. on 30 June 2021 had no impact for organic
purposes.
The Group also disposed of its interest in its Viapath joint
venture on 31 May 2020, however no adjustment is required to
Organic Revenue since the joint venture results were accounted for
on an equity accounting basis and therefore had no impact on Group
revenue.
Organic Revenue growth is calculated by comparing the current
year Organic Revenue at constant currency exchange rates with the
prior period Organic Revenue at reported currency exchange
rates.
2021
For the six months ended 30 June GBPm
---------------------------------------------------- --------------
Organic Revenue at constant currency 2,103.7
Foreign exchange differences (24.0)
---------------------------------------------------- --------------
Organic Revenue at reported currency 2,079.7
Impact of relevant acquisitions or disposals 87.8
---------------------------------------------------- --------------
Reported revenue at reported currency 2,167.5
---------------------------------------------------- --------------
2020
For the six months ended 30 June GBPm
------------------------------------------------------- --------------
Comparable Organic Revenue at reported currency 1,822.2
Impact of relevant acquisitions or disposals -
------------------------------------------------------- --------------
Reported revenue at reported currency 1,822.2
------------------------------------------------------- --------------
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group's Condensed Consolidated
Income Statement on page 33, excludes the Group's share of revenue
from joint ventures and associates, with Serco's share of profits
in joint ventures and associates (net of interest and tax)
consolidated within reported operating profit as a single line
further down the Condensed Consolidated Income Statement. The
alternative measure includes the share of joint ventures and
associates for the benefit of reflecting the overall change in
scale of the Group's ongoing operations, which is particularly
relevant for evaluating Serco's presence in market sectors such as
Defence and Transport. The alternative measure allows the
performance of the joint venture and associate operations
themselves, and their impact on the Group as a whole, to be
evaluated on measures other than just the post-tax result.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
-------------------------------------------- -------------- -------------- --------------
Revenue plus share of joint ventures
and associates 2,360.2 2,010.1 4,249.9
Exclude share of revenue from joint
ventures and associates (192.7) (187.9) (365.1)
-------------------------------------------- -------------- -------------- --------------
Reported revenue 2,167.5 1,822.2 3,884.8
-------------------------------------------- -------------- -------------- --------------
Alternative profit measures
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
-------------------------------------------------- ------------ ------------ -------------
Underlying Trading Profit 122.7 77.6 163.1
Non-underlying items:
OCP charges and releases 0.4 2.9 5.8
Other Contract & Balance Sheet Review
adjustments and one-time items 2.5 - 6.8
-------------------------------------------------- ------------ ------------ -------------
Total non-underlying items 2.9 2.9 12.6
-------------------------------------------------- ------------ ------------ -------------
Trading Profit 125.6 80.5 175.7
Operating exceptional items (2.7) 13.6 12.5
Amortisation and impairment of intangibles
arising on acquisition (6.6) (5.0) (9.0)
Operating profit 116.3 89.1 179.2
-------------------------------------------------- ------------ ------------ -------------
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur and to
remove the impact of historical issues. UTP therefore provides a
measure of the underlying performance of the business in the
current period.
Charges and releases on all Onerous Contract Provisions (OCPs)
that arose during the 2014 Contract and Balance Sheet Review are
excluded from UTP in the current and prior periods. Charges
associated with the creation of new OCPs identified are included
within UTP to the extent that they are not considered sufficiently
material to require separate disclosure on an individual basis.
During the period, charges on existing OCPs of GBP1.2m (six months
to 30 June 2020: GBP2.3m) were taken within UTP. OCPs reflect the
future multiple year cost of delivering onerous contracts and do
not reflect only the current cost of operating the contract in the
latest individual period. It should be noted that, as for operating
profit, UTP benefits from OCP utilisation of GBP0.7m in 2021 (six
months to 30 June 2020: GBP1.8m). The utilisation, which
neutralises the in-period losses on previously identified onerous
contracts, is lower than the same period in the prior year as the
number of onerous contracts within the Group continued to reduce as
they have ended or ceased to be onerous.
Revisions to accounting estimates and judgements which arose
during the 2014 Contract & Balance Sheet Review and other
one-time items are separately reported where the impact of an
individual item is material. Items recorded in this category relate
to releases of provisions held against possible contractual
requirements that could have required settlement by the Group, but
which have now exceeded the period during which such a claim
against the Group can be made.
Both OCP adjustments and other Contract & Balance Sheet
Review and one-time items are identified and separated from the APM
in order to give clarity of the underlying performance of the Group
and to separately disclose the progress made on these items.
Underlying Trading Margin is calculated as UTP divided by
statutory revenue.
The non-underlying column in the summary income statement on
page 13 includes the tax impact of the above items and tax items
that, in themselves, are considered to be non-underlying. Further
detail of such items is provided in the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to
operating profit, as shown on the Group's Condensed Consolidated
Income Statement on page 33, by making two adjustments.
First, Trading Profit excludes exceptional items, being those
considered material and outside of the normal operating practice of
the Group to be suitable of separate presentation and detailed
explanation.
Second, amortisation and impairment of intangibles arising on
acquisitions are excluded, because these charges are based on
judgements about the value and economic life of assets that, in the
case of items such as customer relationships, would not be
capitalised in normal operating practice.
UTP at constant currency
UTP disclosed above has been translated at the average foreign
exchange rates for the period. In order to provide a comparable
movement on the previous period's results, UTP is recalculated by
translating non-Sterling values for the six months to 30 June 2021
into Sterling at the average exchange rates for the six months
ended 30 June 2020.
2021
For the six months ended 30 June GBPm
--------------------------------------------- ------------
Underlying Trading Profit at constant
currency 125.7
Foreign exchange differences (3.0)
--------------------------------------------- ------------
Underlying Trading Profit at reported
currency 122.7
--------------------------------------------- ------------
Alternative Earnings per share (EPS) measures
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
pence pence pence
--------------------------------------------------- ------------- ----------- -------------
Underlying EPS, basic 6.86 3.91 8.61
Net impact of non-underlying operating
items, non-underlying tax and amortisation
and impairment of intangibles arising
on acquisition 12.38 0.75 1.29
--------------------------------------------------- ------------- ----------- -------------
EPS before exceptional items, basic 19.24 4.66 9.90
Impact of exceptional items (0.16) 1.08 0.99
--------------------------------------------------- ------------- ----------- -------------
Reported EPS, basic 19.08 5.74 10.89
--------------------------------------------------- ------------- ----------- -------------
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
pence pence pence
--------------------------------------------------- ------------- ----------- -------------
Underlying EPS, diluted 6.75 3.86 8.43
Net impact of non-underlying operating
items, non-underlying tax and amortisation
and impairment of intangibles arising
on acquisition 12.18 0.74 1.27
--------------------------------------------------- ------------- ----------- -------------
EPS before exceptional items, diluted 18.93 4.60 9.70
Impact of exceptional items (0.16) 1.06 0.97
Reported EPS, diluted 18.77 5.66 10.67
--------------------------------------------------- ------------- ----------- -------------
EPS before exceptional items
EPS, as shown on the Group's Condensed Consolidated Income
Statement on page 33, includes exceptional items charged or
credited to the income statement. EPS before exceptional items aids
consistency with historical operating performance.
Underlying EPS
Reflecting the same adjustments made to operating profit to
calculate UTP as described above and including the related tax
effects of each adjustment and any other non-underlying tax
adjustments as described in the tax charge section below, an
alternative measure of EPS is presented. This aids consistency with
historical results and enables performance to be evaluated before
the unusual or one-time effects described above. The full
reconciliation between statutory EPS and Underlying EPS is provided
in the summary income statements on page 13.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect net
cash inflow from operating activities before exceptional items,
which is the measure shown on the Condensed Consolidated Cash Flow
Statement on page 38. This IFRS measure is adjusted to include
dividends we receive from joint ventures and associates, net
interest paid, the capital element of lease payments, cash flows on
the purchase of own shares to satisfy share awards and net capital
expenditure on tangible and intangible asset purchases.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
--------------------------------------------------- ------------ ------------- -------------
Free Cash Flow 129.9 80.9 134.9
Exclude dividends from joint ventures
and associates (9.6) (12.4) (19.8)
Exclude net interest paid 12.8 12.6 24.6
Exclude capitalised finance costs paid 0.6 - 0.9
Exclude capital element of lease repayments 60.0 52.8 100.8
Exclude proceeds received from exercise
of share options (0.1) (0.1) (0.1)
Exclude purchase of own shares to satisfy 20.3 - -
share awards
Exclude purchase of intangible and tangible
assets net of proceeds from disposal 8.7 20.6 29.2
--------------------------------------------------- ------------ ------------- -------------
Cash flow from operating activities before
exceptional items 222.6 154.4 270.5
Exceptional operating cash flows (3.7) (4.2) (2.0)
--------------------------------------------------- ------------ ------------- -------------
Cash flow from operating activities 218.9 150.2 268.5
--------------------------------------------------- ------------ ------------- -------------
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In
order to calculate an appropriate cash conversion metric equivalent
to UTP, Trading Cash Flow is derived from FCF by excluding tax and
interest items. UTP cash conversion therefore provides a measure of
the efficiency of the business in terms of converting profit into
cash before taking account of the impact of interest, tax and
exceptional items.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
------------------------------------------------- ------------ ------------ -------------
Free Cash Flow 129.9 80.9 134.9
Add back:
Tax paid 24.5 12.0 35.9
Non-cash R&D expenditure - - 0.1
Net interest paid 12.8 12.6 24.6
Capitalised finance costs paid 0.6 - 0.9
------------------------------------------------- ------------ ------------ -------------
Trading Cash Flow 167.8 105.5 196.4
------------------------------------------------- ------------ ------------ -------------
Underlying Trading Profit 122.7 77.6 163.1
------------------------------------------------- ------------ ------------ -------------
Underlying Trading Profit cash conversion 137% 136% 120%
------------------------------------------------- ------------ ------------ -------------
Net Debt and Adjusted Net Debt
We present an alternative measure to bring together the various
funding sources that are included on the Group's Condensed
Consolidated Balance Sheet on page 37 and the accompanying notes.
Net Debt is a measure to reflect the net indebtedness of the Group
and includes all cash and cash equivalents and any debt or
debt-like items, including any derivatives entered into in order to
manage risk exposures on these items. Net Debt includes all lease
liabilities, whilst Adjusted Net Debt is derived from Net Debt by
excluding liabilities associated with leases.
The Adjusted Net Debt measure was introduced because it more
closely aligns to the Consolidated Total Net Borrowings measure
used for the Group's debt covenants, which is prepared under
accounting standards applicable prior to the adoption of IFRS16
Leases. Principally as a result of the Asylum Accommodation and
Support Services Contract (AASC), the Group has entered into a
significant number of leases which contain a termination option.
The
use of Adjusted Net Debt removes the volatility that would
result from estimations of lease periods and the recognition of
liabilities associated with such leases where the Group has the
right to cancel the lease and hence the corresponding obligation.
Though the intention is not to exercise the options to cancel the
leases, it is available unlike other debt obligations.
As at As at As at
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
---------------------------------------- -------------- -------------- --------------
Cash and cash equivalents 193.3 244.9 335.7
Loans payable (411.8) (390.4) (388.8)
Lease liabilities (425.7) (359.9) (402.6)
Derivatives relating to Net Debt (6.7) 2.6 (4.7)
---------------------------------------- -------------- -------------- --------------
Net Debt (650.9) (502.8) (460.4)
Add back: Lease liabilities 425.7 359.9 402.6
---------------------------------------- -------------- -------------- --------------
Adjusted Net Debt (225.2) (142.9) (57.8)
---------------------------------------- -------------- -------------- --------------
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used
by the Group and is a metric used to determine the performance and
remuneration of the Executive Directors. ROIC is calculated based
on UTP and Trading Profit using the income statement for the period
and a two-point average of the opening and closing balance sheets.
The composition of Invested Capital and calculation of ROIC are
summarised in the table below.
Invested Capital excludes right of use assets recognised under
IFRS16 Leases. This is because the Invested Capital of the company
are those items within which resources are, or have been,
committed, which is not the case for many leases which would have
been classed as operating leases under IAS17 Leases where
termination options exist and commitments for expenditure are in
future years.
30 June 30 June 31 December
2021 2020 2020
For the 12 months ended GBPm GBPm GBPm
---------------------------------------------------- -------------- -------------- --------------
ROIC excluding right of use assets
Non current assets
Goodwill 826.7 710.3 669.6
Other intangible assets - owned 159.6 91.3 80.6
Property, plant and equipment - owned 54.7 58.6 54.2
Interest in joint ventures and associates 18.5 19.6 19.2
Contract assets, trade and other receivables 25.4 25.1 25.3
Current assets
Inventory 20.5 20.3 21.4
Contract assets, trade and other receivables 624.2 677.8 609.6
Total invested capital assets 1,729.6 1,603.0 1,479.9
---------------------------------------------------- -------------- -------------- --------------
Current liabilities
Contract liabilities, trade and other
payables (630.8) (635.0) (576.2)
Non current liabilities
Contract liabilities, trade and other
payables (60.8) (66.3) (56.9)
---------------------------------------------------- -------------- -------------- --------------
Total invested capital liabilities (691.6) (701.3) (633.1)
---------------------------------------------------- -------------- -------------- --------------
Invested Capital 1,038.0 901.7 846.8
---------------------------------------------------- -------------- -------------- --------------
Two point average of opening and closing
Invested Capital 969.9 813.6 855.5
---------------------------------------------------- -------------- -------------- --------------
Trading Profit, 12 months ended 220.8 163.3 175.7
---------------------------------------------------- -------------- -------------- --------------
ROIC% 22.8% 20.1% 20.5%
---------------------------------------------------- -------------- -------------- --------------
Underlying Trading Profit, 12 months
ended 208.2 147.2 163.1
---------------------------------------------------- -------------- -------------- --------------
Underlying ROIC% 21.5% 18.1% 19.1%
---------------------------------------------------- -------------- -------------- --------------
Overview of financial performance
Revenue
Reported revenue increased by 18.9% to GBP2,167.5m when compared
with the same six-month period in the prior year (2020:
GBP1,822.2m), a 20.2% increase in constant currency. This is in
line with the updated guidance issued on 30 June 2021 where revenue
was expected to be GBP2.2bn for the six months then ended.
Commentary on the revenue performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews
sections.
Trading Profit
Trading Profit in the six months was GBP125.6m (2020:
GBP80.5m).
Commentary on the trading performance of the Group is provided
in the Chief Executive's Review and the Divisional Reviews
sections.
Underlying Trading Profit (UTP)
UTP was GBP122.7m ( 2020: GBP77.6m), up 58.1%. At constant
currency, UTP was GBP125.7m, up 62.0%.
Commentary on the underlying performance of the Group is
provided in the Chief Executive's Review and the Divisional Reviews
sections.
In the six months to 30 June 2021, excluded from UTP were net
releases from OCPs of GBP0.4m (2020: net releases of GBP2.9m)
following the detailed reassessment undertaken during the period.
Also excluded from UTP were net releases and additional profits of
GBP2.5m (2020: GBPnil) relating to items identified during the 2014
Contract & Balance Sheet Review and other one-time items.
The tax impact of items in UTP and other non-underlying tax
items is discussed in the tax section below.
Reported operating profit
Reported operating profit of GBP116.3m (2020: GBP89.1m) was
GBP9.3m lower than Trading Profit due to GBP6.6m (2020: GBP5.0m) of
amortisation of intangibles arising on acquisition and GBP2.7m
(2020: credit of GBP13.6m) of exceptional items which are mostly
related to exceptional costs associated with the acquisitions of
Facilities First Australia Holdings Pty Limited and Whitney,
Bradley & Brown, Inc.
Joint ventures and associates - share of results
In 2021, the most significant joint ventures and associates in
terms of scale of operations have been AWE Management Limited
(AWEML) and Merseyrail Services Holding Company Limited
(Merseyrail), with dividends received of GBP9.6m (2020: GBP9.1m)
and GBPnil (2020: GBP1.5m) respectively. Total revenues generated
by these businesses were GBP629.9m (2020: GBP539.0m) and GBP75.0m
(2020: GBP75.7m) respectively.
As announced on 2 November 2020, the Ministry of Defence
notified the Group that it would be exercising its ability to
terminate services provided by the Group through AWEML on 30 June
2021. The exit from the contract was in advance of the final
milestones anticipated in the contract, and as a result, the
operating performance includes judgements over the completion
status of certain items which may subsequently be adjusted. The
transaction included the sale of AWE plc from AWEML, however the
Group continues to own 24.5% of AWEML which holds receivables and
payables with AWE plc and these are expected to be settled as the
negotiations regarding the termination and disposal conclude.
While the revenues and individual line items are not
consolidated in the Group Condensed Consolidated Income Statement,
summary financial performance measures for the Group's proportion
of the aggregate of all joint ventures and associates are set out
below for information purposes.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
---------------------------------------------- ------------ ------------ --------------
Revenue 192.7 187.9 365.1
---------------------------------------------- ------------ ------------ --------------
Operating profit 8.5 8.6 15.4
Net investment revenue - 0.1 -
Income tax charge (2.1) (1.7) (2.7)
---------------------------------------------- ------------ ------------ --------------
Profit after tax 6.4 7.0 12.7
---------------------------------------------- ------------ ------------ --------------
Dividends received from joint ventures
and associates 9.6 12.4 19.8
---------------------------------------------- ------------ ------------ --------------
The change in revenue and profits on the prior period is due to
changes in the underlying operating performance of the Group's
material joint ventures, with additional revenues at AWEML offset
to an extent by the absence of revenue from Viapath following the
latter's disposal on 31 May 2020. Whilst operating profit at AWEML
has increased in line with operating volumes and revenue, and
losses made by Viapath during its period of ownership in 2020 are
no longer present, an increase in losses at Merseyrail has meant a
reduction in the Group's share of operating profits from joint
ventures since the prior period. The reduction at Merseyrail is due
to the impact of reduced passenger volumes during the pandemic in
the prior period only having an impact from early March 2020. The
reduction in dividends is due to the absence of Viapath in the
current period compared to a dividend receipt of GBP2.8m in the
prior period and no dividend received from Merseyrail in 2021 for
the reasons mentioned above. Future dividends received from the
joint ventures are likely to take into consideration operating
performance as a result of the pandemic and a requirement to
maintain an appropriate level of cash resources within the entities
given the impact of Covid-19, though most notably in respect of the
Merseyrail joint venture.
Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the performance of the
Group.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
------------------------------------------------------ ------------ ------------ --------------
Exceptional items arising
Exceptional profit on disposal of subsidiaries
and operations - 11.0 11.0
Other exceptional operating items
Restructuring costs 0.1 0.1 0.1
Costs associated with UK Government review (0.3) (1.2) (1.3)
Movement in other provisions and other
items - 2.6 2.6
Reversal of impairment of interest in
joint venture and related loan balances - 2.5 2.5
Costs associated with the acquisition
of Naval Systems Business Unit - (1.4) (1.5)
Costs associated with the acquisition
of Facilities First Australia (0.5) - (0.9)
Costs associated with the acquisition (2.0) - -
of Whitney, Bradley & Brown, Inc.
Other exceptional operating items (2.7) 2.6 1.5
------------------------------------------------------ ------------ ------------ --------------
Exceptional operating items (2.7) 13.6 12.5
------------------------------------------------------ ------------ ------------ --------------
Exceptional tax 0.7 (0.4) (0.4)
------------------------------------------------------ ------------ ------------ --------------
Total exceptional items net of tax (2.0) 13.2 12.1
------------------------------------------------------ ------------ ------------ --------------
Other exceptional operating items
The Group completed the acquisition of Facilities First
Australia Holdings Pty Limited (FFA) in 2021. The transaction and
implementation costs incurred during the six months ended 30 June
2021 of GBP0.5m have been treated as exceptional costs in line with
the Group's accounting policy and the treatment of similar costs
during the year ended 31 December 2020.
The Group also completed the acquisition of Whitney, Bradley
& Brown, Inc (WBB) in 2021. The transaction and implementation
costs incurred during the six months ended 30 June 2021 of GBP2.0m
have been treated as exceptional costs in line with the Group's
accounting policy.
There were exceptional costs totalling GBP0.3m (2020: GBP1.2m)
associated with the UK Government review and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2021. No
significant further costs are expected to be incurred.
Exceptional Tax
Exceptional tax for the period was a tax credit of GBP0.7m
(2020: charge of GBP0.4m) which arises on exceptional items within
operating profit.
The exceptional items in the period were such that they either
lead to a tax deduction in the period or are expected to lead to a
tax deduction in a future period.
Finance costs and investment revenue
Net finance costs were GBP12.6m (2020: GBP12.7m) and net
interest paid was GBP12.8m (2020: GBP12.6m).
Investment revenue of GBP1.3m (2020: GBP0.7m) consists primarily
of interest accruing on net retirement benefit assets of GBP0.6m
(2020: GBP0.6m), dividends received of GBP0.4m (2020: nil) and
interest receivable of GBP0.3m (2020: GBP0.1m).
The finance costs of GBP13.9m (2020: GBP13.4m) include interest
incurred on the US private placement loan notes and the revolving
credit facility of GBP7.9m (2020: GBP7.4m) and lease interest
payable of GBP4.1m (2020: GBP4.8m) as well as other financing
related costs including the impact of foreign exchange on financing
activities.
Tax
Tax charge
Underlying Tax
An underlying tax charge of GBP25.6m is recognised on Underlying
Trading Profits after net finance costs. The effective tax rate
(23.3%) is slightly lower than in 2020 (26.2%) but higher than the
rate for the year ended 31 December 2020 (22.7%). The rate is
higher than December 2020 primarily due to the recognition of the
UK deferred tax assets discussed below which means that utilisation
of losses brought forward to offset current year profits does not
impact the tax rate in 2021 as it did in the prior year. This is
offset by the impact of changes in the geographical location of
where profits are made together with the impact of movements in
provisions as part of our regular reassessment of tax exposures
across the Group.
Pre-exceptional tax
A tax credit of GBP130.7m (2020: GBP5.7m charge) on
pre-exceptional profits has been recognised which includes an
underlying tax charge of GBP25.6m, the tax impact of amortisation
of intangibles arising on acquisition of GBP1.2m and a GBP155.1m
credit on non-underlying items.
Of the GBP155.1m credit on non-underlying items, GBP144.8m of
the credit arises from the recognition of deferred tax assets in
relation to the Group's UK operations which have not previously
been recognised as assets. It is now considered that the UK
business has returned to sustainable profitability, and there is
sufficient certainty of future taxable profits against which these
deductions can be utilised to enable the recognition of an
increased deferred tax asset. GBP10.8m of the credit relates to the
revaluation of the deferred tax asset at 1 January 2021, following
the announcement in the UK Budget earlier this year that the tax
rate in the UK is to increase in 2023 to 25%. The remaining GBP0.5m
non-underlying tax charge relates to tax on non-underlying income
that is taxable.
The rate change movement on the revaluation of the deferred tax
liability held in connection with the Group's defined benefit
pension schemes and foreign exchange hedges flows through the
Statement of Comprehensive Income (SOCI). The rate change movement
on the revaluation of all other elements of deferred tax such as
other timing differences and recoverable losses is shown through
the income statement.
The tax rate on profits before exceptional items at (122.8)% is
lower than the UK standard corporation tax rate of 19.0%. This is
mainly due to the impact of non-underlying credits discussed above.
Other items which reduce the tax charge below the UK standard
corporation tax rate are our joint ventures, whose post-tax results
are included in our pre-tax profit, and the credit associated with
a reduction in provisions for uncertain tax positions, made as part
of our regular reassessment of tax exposures across the Group,
which has led us to conclude that certain provisions are no longer
likely to lead to an outflow of tax. The impact of this is
partially offset by higher rates of tax on profits arising on our
international operations.
Exceptional tax
An analysis of exceptional tax is provided within the
exceptional items section above.
Deferred tax assets
At 30 June 2021 there is a net deferred tax asset of GBP177.9m
(31 December 2020: GBP56.3m). This consists of a deferred tax asset
of GBP225.8m (31 December 2020: GBP83.2m) and a deferred tax
liability of GBP47.9m (31 December 2020: GBP26.9m).
A GBP167.0m UK tax asset is recognised on the Group's balance
sheet at 30 June 2021 (31 December 2020: GBP30.6m) on the basis
that improved performance in the underlying UK business indicates a
sustained return to profitability which would enable accumulated
tax losses within the UK to be utilised. The return to
profitability is as a result of onerous contracts ending and new
profitable long term contracts being entered into, as well as a
significant reduction in exceptional restructuring spend following
the strategy review in 2015, which also reduced the level of
overhead spend within the UK business. GBP19.2m of the UK deferred
tax asset of GBP186.2m recognised during the period has been used
to offset profits arising in the six month period to 30 June
2021.
Taxes paid
Net corporate income tax of GBP24.5m was paid during the period,
relating primarily to our operations in AsPac (GBP13.4m), North
America (GBP10.3m), Middle East (GBP0.8m), UK (GBP0.1m) and Europe
(GBP0.1m net refund).
The amount of tax paid (GBP24.5m) differs from the tax credit in
the period (GBP131.4m) mainly due to the impact of the additional
deferred tax assets recognised during the period. In addition,
taxes paid/received from Tax Authorities can arise in later periods
to the associated tax charge/credit, and there is a time lag on
receipts of cash from joint ventures and associates for losses
transferred to them resulting in a net tax inflow.
Dividends
During the six months to 30 June 2021, the Group has paid
dividends of GBP16.8m (2020: GBPnil) in respect of the final
dividend for the year ended 31 December 2020. As noted in the Chief
Executive's Review, the Board has decided to declare an interim
dividend of 0.8p per share in respect of the six months ended 30
June 2021 (2020: no interim dividend declared).
Share count and Earnings per share (EPS)
The weighted average number of shares for EPS purposes was
1,232.2m for the six months ended 30 June 2021 (2020: 1,226.5m) and
diluted weighted average number of shares was 1,252.6m (2020:
1,244.7m). The increase in the weighted average number of shares is
due to the full year impact of the 10,000,000 new shares issued to
the Serco Group plc 1998 Employee Share Ownership Trust (ESOT) in
March 2020, used to satisfy awards granted under the Group's share
award schemes.
The number of Ordinary Shares in issue has reduced during the
six months to 30 June 2021 as a result of the Serco Share
repurchase programme (the Programme). At the end of 2020, the Group
announced its intention to repurchase Ordinary Shares with a value
of up to GBP40m, subject to a maximum of 122,338,063 Ordinary
Shares being purchased, during the period 4 January 2021 to 11 June
2021. Through the Programme, the Group repurchased 30,721,849
Ordinary Shares for total consideration of GBP40.7m including
fees.
On 28 June 2021, the Group announced that, of the Ordinary
Shares repurchased and held in Treasury, 15,350,000 were
transferred to the ESOT to be used to satisfy awards granted under
the Group's share award schemes. The 15,371,849 Ordinary Shares
remaining in Treasury were cancelled on 28 June 2021.
Basic EPS before exceptional items was 19.24p per share (2020:
4.66p); including the impact of exceptional items, Basic EPS was
19.08p (2020: 5.74p). Basic Underlying EPS was 6.86p (2020: 3.91p)
which increased due to the movement in Underlying Trading Profit
offset by the increase in the tax charge.
Diluted EPS before exceptional items was 18.93p (2020: 4.60p);
including the impact of exceptional items, Diluted EPS was 18.77p
(2020: 5.66p). Diluted Underlying EPS was 6.75p (2020: 3.86p).
Cash flows
The UTP of GBP122.7m (2020: GBP77.6m) converts into a trading
cash inflow of GBP167.8m (2020: GBP105.5m). The improvement in 2021
trading cash inflows reflects the increase in profitability from
revenue and profit growth. The Group has also benefitted from the
lease arrangement entered into in respect of the PECS fleet for
which payments to fund construction took place in 2020 and cash
in-flows in respect of the arrangement were in the period 1 July
2020 to 30 June 2021, as well as working capital inflows across the
Group of GBP43.6m (2020: GBP19.2m). These were offset by GBP20.3m
spent on the repurchase of the Group's own shares to satisfy share
awards. In some instances, working capital has benefitted from
favourable payment terms being put in place by the Group's
customers in order to ensure its key suppliers do not experience
liquidity challenges as a result of the pandemic. It is expected
that these will return to standard terms in future periods.
The table below shows the operating profit and Free Cash Flow
(FCF) reconciled to movements in Net Debt. FCF for the period was
an inflow of GBP129.9m compared to GBP80.9m in 2020. The
improvement in FCF is largely as a result of improved trading cash
inflows as discussed above offset by the higher tax payments
including some as a result of Covid-19 related tax deferral schemes
that were in operation in some jurisdictions in 2020. All tax
payments deferred were repaid by December 2020 with the exception
of the US tax deferrals for which there was no early repayment
mechanism.
Adjusted Net Debt increased by GBP167.4m in the six months to 30
June 2021, a reconciliation of which is provided at the bottom of
the following table.
The net cash outflow on acquisition and disposal of subsidiaries
of GBP235.1m (2020: inflow of GBP7.4m) includes the purchase
consideration for the acquisitions of Facilities First Australia
Holdings Pty Limited, Whitney, Bradley & Brown, Inc and
Mercurius Finance S.A.. The amount is net of the cash held by
entities acquired in those transactions.
Exceptional cash outflows of GBP3.7m as shown below differ to
the exceptional credit to the income statement of GBP2.7m due to
the cash associated with certain acquisition related costs being
paid during the current period despite the expense having been
recognised in the prior year.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
-------------------------------------------------- -------------- -------------- --------------
Operating profit 116.3 89.1 179.2
Remove exceptional items 2.7 (13.6) (12.5)
-------------------------------------------------- -------------- -------------- --------------
Operating profit before exceptional
items 119.0 75.5 166.7
Less: share of profits in joint ventures
and associates (6.4) (7.0) (12.7)
Movement in provisions 1.2 5.6 16.2
Depreciation, amortisation and impairment
of owned property, plant and equipment
and intangible assets 22.0 20.3 39.2
Depreciation, amortisation and impairment
of leased property, plant and equipment
and intangible assets 58.8 46.4 93.9
Other non-cash movements 8.9 6.4 8.5
-------------------------------------------------- -------------- -------------- --------------
Operating cash inflow before movements
in working capital, exceptional items
and tax 203.5 147.2 311.8
Working capital movements 43.6 19.2 (5.3)
Tax paid (24.5) (12.0) (35.9)
Non-cash R&D expenditure - - (0.1)
-------------------------------------------------- -------------- -------------- --------------
Cash flow from operating activities
before exceptional items 222.6 154.4 270.5
Dividends received from joint ventures
and associates 9.6 12.4 19.8
Interest received 0.3 0.1 0.3
Interest paid (13.1) (12.7) (24.9)
Capital element of lease repayments (60.0) (52.8) (100.8)
Capitalised finance costs paid (0.6) - (0.9)
Purchase of intangible and tangible
assets net of proceeds from disposals (8.7) (20.6) (29.2)
Purchase of own shares to satisfy share (20.3) - -
awards
Proceeds received from exercise of share
options 0.1 0.1 0.1
-------------------------------------------------- -------------- -------------- --------------
Free Cash Flow 129.9 80.9 134.9
Net cash (outflow)/inflow on acquisition
and disposal of subsidiaries, joint
ventures and associates (235.1) 7.4 6.1
Net increase in debt items on acquisition (14.3) - -
and disposal of subsidiaries, joint
ventures and associates
Dividends paid to shareholders (16.8) - -
Purchase of own shares (20.4) - -
Movements on other investment balances 0.3 - 0.5
Capitalisation and amortisation of loan - (0.6) -
costs
Exceptional items (3.7) (4.2) (2.0)
Exceptional proceeds from loans receivable - 1.2 1.2
Exceptional distribution from joint
venture - - 1.9
Cash movements on hedging instruments (5.9) (0.9) 2.4
Foreign exchange (loss)/gain on Adjusted
Net Debt (1.4) (12.2) 11.7
-------------------------------------------------- -------------- -------------- --------------
Movement in Adjusted Net Debt (167.4) 71.6 156.7
Opening Adjusted Net Debt (57.8) (214.5) (214.5)
-------------------------------------------------- -------------- -------------- --------------
Closing Adjusted Net Debt (225.2) (142.9) (57.8)
Lease Liabilities (425.7) (359.9) (402.6)
-------------------------------------------------- -------------- -------------- --------------
Closing Net Debt (650.9) (502.8) (460.4)
-------------------------------------------------- -------------- -------------- --------------
Net Debt
As at As at As at
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
---------------------------------------- -------------- -------------- --------------
Cash and cash equivalents 193.3 244.9 335.7
Loans payable (411.8) (390.4) (388.8)
Lease liabilities (425.7) (359.9) (402.6)
Derivatives relating to Net Debt (6.7) 2.6 (4.7)
---------------------------------------- -------------- -------------- --------------
Net Debt (650.9) (502.8) (460.4)
Exclude Lease liabilities 425.7 359.9 402.6
---------------------------------------- -------------- -------------- --------------
Adjusted Net Debt (225.2) (142.9) (57.8)
---------------------------------------- -------------- -------------- --------------
Average Adjusted Net Debt as calculated on a daily basis for the
six months ended 30 June 2021 was GBP178m (2020: GBP283m). Peak
Adjusted Net Debt was GBP346m (2020: GBP356m).
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 and
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 30 June 2021, the Group had committed funding of GBP665m
(at 31 December 2020: GBP642m), comprising GBP295m of US private
placement loan notes, a total of GBP120m of term loan facilities
which were fully drawn and a GBP250m revolving credit facility
(RCF) which was undrawn. Of the GBP120m of term loan facilities,
GBP75m were entered into during the six months to 30 June 2021.
The Group's RCF provides GBP250m of committed funding for five
years from the arrangement date in December 2018. The US private
placement loan notes are repayable in bullet payments between 2021
and 2032.
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 Policy requires us to maintain a minimum proportion of
fixed rate debt as a proportion of overall Adjusted Net Debt and
for this proportion to increase as the ratio of EBITDA to interest
expense falls. As at 30 June 2021, GBP294.6m of debt was held at
fixed rates and Adjusted Net Debt was GBP225.2m.
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 and 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.
Following the refinancing in December 2018, the debt covenants
have been amended to include the impact of IFRS15 Revenue from
Contracts with Customers. The covenants continue to exclude the
impact of IFRS16 Leases on the Group's results.
12 months 12 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
----------------------------------------------------- ------------- ------------- -------------
Operating profit before exceptional
items 210.2 153.1 166.7
Remove: Amortisation and impairment
of intangibles arising on acquisition 10.6 10.2 9.0
Trading Profit 220.8 163.3 175.7
Exclude: Share of joint venture post-tax
profits (12.1) (21.0) (12.7)
Include: Dividends from joint ventures 17.0 24.4 19.8
Add back: Net non-exceptional charges
to OCPs 6.5 6.6 4.9
Add back: Net covenant OCP utilisation (0.9) - (0.7)
Add back: Depreciation, amortisation
and impairment of owned property, plant
and equipment and non-acquisition intangible
assets 30.3 34.8 30.2
Add back: Depreciation, amortisation
and impairment of property, plant and
equipment and non-acquisition intangible
assets held under finance leases -
in accordance with IAS17 Leases 3.7 5.7 4.3
Add back: Foreign exchange credit on
investing and financing arrangements (1.1) (0.1) (0.7)
Add back: Share based payment expense 13.4 11.9 11.2
Other covenant adjustments to EBITDA (4.7) (2.9) (7.2)
----------------------------------------------------- ------------- ------------- -------------
Covenant EBITDA 272.9 222.7 224.8
----------------------------------------------------- ------------- ------------- -------------
Net finance costs 25.8 24.0 25.9
Exclude: Net interest receivable on
retirement benefit obligations 1.2 1.6 1.2
Exclude: Movement in discount on other
debtors 0.1 - 0.1
Exclude: Other dividends received 0.8 - 0.4
Exclude: Foreign exchange on investing
and financing arrangements (1.1) (0.1) (0.7)
Add back: Movement in discount on provisions (0.2) (0.1) (0.2)
Other covenant adjustments to net finance
costs resulting from IFRS16 Leases (8.2) (9.1) (9.1)
----------------------------------------------------- ------------- ------------- -------------
Covenant net finance costs 18.4 16.3 17.6
Adjusted Net Debt 225.2 142.9 57.8
Obligations under finance leases -
in accordance with IAS17 Leases 28.3 6.8 24.1
Recourse Net Debt 253.5 149.7 81.9
Exclude: Disposal vendor loan note,
encumbered cash and other adjustments (3.8) 5.3 (1.7)
Covenant adjustment for average FX
rates 9.8 (6.4) 21.3
----------------------------------------------------- ------------- ------------- -------------
CTNB 259.5 148.6 101.5
----------------------------------------------------- ------------- ------------- -------------
CTNB / covenant EBITDA (not to exceed
3.5x) 0.95x 0.67x 0.45x
----------------------------------------------------- ------------- ------------- -------------
Covenant EBITDA / covenant net finance
costs (at least 3.0x) 14.8x 13.7x 12.8x
----------------------------------------------------- ------------- ------------- -------------
Net assets summary
As at As at As at
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
-------------------------------------------- ---------------- ---------------- ----------------
Non current assets
Goodwill 826.7 710.3 669.6
Other intangible assets 159.6 91.3 80.6
Property, plant and equipment 467.2 399.3 441.7
Contract assets, trade receivables
and other current assets 43.9 44.8 44.5
Deferred tax assets 225.8 68.5 83.2
Retirement benefit assets 157.2 125.1 114.6
-------------------------------------------- ---------------- ---------------- ----------------
Total non current assets 1,880.4 1,439.3 1,434.2
-------------------------------------------- ---------------- ---------------- ----------------
Current assets
Inventories 20.5 20.3 21.4
Contract assets, trade receivables
and other current assets 625.8 682.1 614.1
Current tax assets 7.4 5.5 4.9
Cash and cash equivalents 193.3 244.9 335.7
-------------------------------------------- ---------------- ---------------- ----------------
Total current assets 847.0 952.8 976.1
-------------------------------------------- ---------------- ---------------- ----------------
Total assets 2,727.4 2,392.1 2,410.3
-------------------------------------------- ---------------- ---------------- ----------------
Current liabilities
Contract liabilities, trade payables
and other current liabilities (639.3) (636.5) (585.5)
Current tax liabilities (16.7) (20.5) (21.6)
Provisions (69.5) (56.9) (62.1)
Lease obligations (130.2) (86.8) (109.3)
Loans (61.9) (176.7) (89.7)
-------------------------------------------- ---------------- ---------------- ----------------
Total current liabilities (917.6) (977.4) (868.2)
-------------------------------------------- ---------------- ---------------- ----------------
Non current liabilities
Contract liabilities, trade payables
and other non current liabilities (60.8) (66.3) (57.0)
Deferred tax liabilities (47.9) (31.1) (26.9)
Provisions (107.8) (112.6) (115.9)
Lease obligations (295.5) (273.1) (293.3)
Loans (349.9) (213.7) (299.1)
Retirement benefit obligations (30.1) (34.7) (34.9)
-------------------------------------------- ---------------- ---------------- ----------------
Total non current liabilities (892.0) (731.5) (827.1)
-------------------------------------------- ---------------- ---------------- ----------------
Total liabilities (1,809.6) (1,708.9) (1,695.3)
-------------------------------------------- ---------------- ---------------- ----------------
Net assets 917.8 683.2 715.0
-------------------------------------------- ---------------- ---------------- ----------------
At 30 June 2021, the balance sheet had net assets of GBP917.8m,
a movement of GBP202.8m from the closing net asset position of
GBP715.0m as at 31 December 2020. The movement in net assets is
mainly due to the following movements:
-- An increase in goodwill of GBP157.1m due to additional
goodwill on the acquisitions of Facilities First Australia Holdings
Pty Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB),
partially offset by an adverse foreign exchange movement.
-- An increase in other intangible assets of GBP79.0m due to the
combined intangibles recognised on the FAA and WBB acquisitions,
offset by amortisation charged in the period.
-- Deferred tax assets have increased by GBP142.6m owing to the
Group's recognition of assets relating to historic losses in full.
Previously, only losses likely to be utilised over a five-year
period were recognised, whereas the Group's change in judgement, as
discussed above, has increased the asset recognised.
-- An increase in the net retirement benefit asset of GBP47.4m
due to the return on assets held by the various pension schemes in
which the Group is involved exceeding the increase in the
associated defined benefit liabilities arising from changes in
actuarial assumptions and other liability-impacting factors.
-- Cash and cash equivalents have decreased by GBP142.4m. Since
the year end, the Group has generated cash inflows of GBP222.6m
from its operations before exceptional items, including GBP43.6m
from movements in working capital. Net spend on tangible and
intangible assets has been GBP8.7m and the capital element of lease
repayments during the six months was GBP60.0m. Including associated
costs, the spend on shares repurchased in the period totals
GBP40.7m and dividends totalling GBP16.8m have been paid. The other
significant cash outflow is the spend on acquisitions which,
inclusive of costs but net of cash received, totalled
GBP235.1m.
-- Contract liabilities, trade payables and other liabilities
have increased by GBP57.6m, primarily due to GBP34.7m brought on
with the acquisitions of FFA and WBB. The remainder of the increase
is in trade and other payables caused by the increase in operating
levels and other increases related to deferred revenue balances
which have increased as new contracts have been won and phase-in
revenues are deferred.
-- Net loan balances have increased by GBP23.0m as the repayment
of GBP46.5m of the Group's US private placement loan notes have
been more than offset by GBP75.0m of additional loans taken to fund
the acquisition of WBB. The remaining difference is driven by the
impact of moving exchange rates on the Group's debt. In addition to
these movements, the Group acquired GBP14.3m of loans with the
acquisition of FFA all of which were fully repaid during the period
as well as drawing down and repaying GBP35.0m on the revolving
credit facility.
Acquisitions
On 4 January 2021, the Group acquired 100% of the issued share
capital of Facilities First Australia Holdings Pty Limited (FFA),
for consideration of AU Dollars $52.2m (GBP29.6m) in cash, on a
cash free, debt free basis, subject to standard working capital and
completion adjustments. At the same time, the Group transferred AU
Dollars $25.2m (GBP14.3m) to allow FFA to settle existing debt and
debt-like balances. FFA is a specialist provider of cleaning,
facility maintenance and management services in Australia.
On 27 April 2021, the Group acquired 100% of the issued share
capital of Whitney, Bradley & Brown, Inc for $295.0m
(GBP211.7m) which will increase the scale, breadth and capability
of Serco's North American Defence business and will give Serco a
strong platform from which to address all major segments of the US
Defence services market.
On 30 June 2021, the Group acquired 100% of the issued share
capital of Mercurius Finance S.A., the holding company of Clemaco
Trading N.V., Clemaco Contracting N.V. and Targets N.V. (together
Clemaco), for EUR1.0m (GBP0.8m). Clemaco specialises in the support
and maintenance of ships for the Belgian Navy, enabling Serco to
provide additional value to existing Serco and Clemaco customers
and expanding Serco's existing activities with the Belgian
Navy.
Pensions
Serco's pension schemes are in a strong funding position, and
show an accounting surplus, before tax, of GBP127.1m (31 December
2020: GBP79.7m) on scheme gross assets of GBP1.6bn and gross
liabilities of GBP1.4bn. The opening net asset position led to a
net credit within net finance costs of GBP0.6m (2020: GBP0.6m). For
the Group's main scheme, the Serco Pension and Life Assurance
Scheme (SPLAS), the purchase of a bulk annuity from an insurer,
which covers around half of all scheme members, has the effect of
fully removing longevity, investment and accounting risks for those
members; the gross liability remains recognised on our balance
sheet, but there is an equal and opposite insurance asset
reflecting the perfect hedge established by the annuity.
Covid-19
Coronavirus (Covid-19) was originally identified as a disease in
China late in 2019. Following global transmission of the disease
early in 2020, Europe and other continents began identifying cases
which continued to rise in number such that on 12 March 2020 the
World Health organisation characterised the outbreak of Covid-19 as
a global pandemic.
Most of the Group's contracts deliver critical services to
governments and the delivery requirements of the vast majority of
these have not been impacted by Covid-19. However, a small number
of contracts within the Group have been impacted by; lower volumes
or suspensions of its air traffic control contracts in the Middle
East, lower volumes within its UK Transport business; higher levels
of absenteeism and increased service performance in its UK Health
contracts; closure of operations including leisure centres in the
UK and the Driver Examination Services contract in Canada; and
delays in project work such as the delivery of the Antarctic Supply
Research Vessel in Australia. The negative impact from these
contracts has been offset by additional services being delivered to
assist governments with their management and recovery from the
Covid-19 pandemic, additional volumes within its immigration
contracts in the UK and Australia, and financial support from its
customers. We estimate that about GBP365m of our global revenues
were from services supporting governments' response to Covid-19,
which compares to GBP130m in the first half of 2020. This estimate
carries significant judgement as it becomes increasingly difficult
to estimate what the baseline revenue would have been should the
pandemic not have taken place. In addition, it is not possible to
estimate the impact on new business or rebids, as it is possible
that procurement of services by the Group's major customers has
been delayed as a result of the pandemic due to Governments
prioritising their management of Covid-19.
The Group's liquidity position continues to be strong with
GBP665m of committed credit facilities and committed headroom of
GBP439m. This is as a result of the stronger underlying operating
performance and cash management, with customers meeting their
obligations and paying for services in accordance with the terms of
the arrangements.
Claim for losses in respect of the 2013 share price
reduction
Following the announcement during 2020 that the Group has
received a claim seeking damages for alleged losses as a result of
the reduction in Serco's share price in 2013, the Group has
continued to assess the merit, likely outcome and potential impact
on the Group of any such litigation that either has been or might
potentially be brought against the Group. Any outcome is subject to
a number of significant uncertainties and, therefore, it is not
possible to assess the quantum of any such litigation as at the
date of this disclosure.
Information on other contingent liabilities can be found in note
14 to the Condensed Consolidated Financial Statements.
Nigel Crossley
Group Chief Financial Officer
4 August 2021
Statement of Directors' Responsibilities
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted
for use in the UK;
-- the interim management report includes a fair review of the information required by:
o DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
o DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
By order of the Board:
Rupert Soames Nigel Crossley
Group Chief Executive Group Chief Financial Officer
INDEPENT REVIEW REPORT TO SERCO GROUP PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2021 which comprises the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement
of Comprehensive Income, the Condensed Consolidated Statement of
Changes in Equity, the Condensed Consolidated Balance Sheet, the
Condensed Cash Flow Statement and the related explanatory
notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2021 is not prepared, in all material respects, in accordance
with IAS 34 Interim Financial Reporting as adopted for use in the
UK and the Disclosure Guidance and Transparency Rules ("the DTR")
of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the latest annual financial statements
of the Group were prepared in accordance with International
Financial Reporting adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union and in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and the next annual
financial statements will be prepared in accordance with UK-adopted
international accounting standards. The directors are responsible
for preparing the condensed set of financial statements included in
the half-yearly financial report in accordance with IAS 34 as
adopted for use in the UK.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
John Luke
for and on behalf of KPMG LLP
15 Canada Square
London
E14 5GL
4 August 2021
Financial Statements
Condensed Consolidated Income Statement
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------------------------------- ------------ ------------ ------------
Revenue 2,167.5 1,822.2 3,884.8
Cost of sales (1,933.7) (1,643.0) (3,501.8)
--------------------------------------------------- ------------ ------------ ------------
Gross profit 233.8 179.2 383.0
Administrative expenses (114.6) (105.7) (220.0)
Exceptional profit on disposal of subsidiaries
and operations - 11.0 11.0
Other exceptional operating items (2.7) 2.6 1.5
Other expenses - amortisation and impairment
of intangibles arising on acquisition (6.6) (5.0) (9.0)
Share of profits in joint ventures and associates,
net of interest and tax 6.4 7.0 12.7
--------------------------------------------------- ------------ ------------ ------------
Operating profit 116.3 89.1 179.2
--------------------------------------------------- ------------ ------------ ------------
Operating profit before exceptional items 119.0 75.5 166.7
--------------------------------------------------- ------------ ------------ ------------
Investment revenue 1.3 0.7 1.9
Finance costs (13.9) (13.4) (27.8)
Total net finance costs (12.6) (12.7) (25.9)
--------------------------------------------------- ------------ ------------ ------------
Profit before tax 103.7 76.4 153.3
--------------------------------------------------- ------------ ------------ ------------
Profit before tax and exceptional items 106.4 62.8 140.8
--------------------------------------------------- ------------
Tax on profit before exceptional items 130.7 (5.7) (18.9)
Exceptional tax 0.7 (0.4) (0.4)
--------------------------------------------------- ------------ ------------ ------------
Tax credit/(charge) 131.4 (6.1) (19.3)
--------------------------------------------------- ------------ ------------ ------------
Profit for the period 235.1 70.3 134.0
--------------------------------------------------- ------------ ------------ ------------
Attributable to:
Equity owners of the Company 235.1 70.4 133.8
Non controlling interest - (0.1) 0.2
--------------------------------------------------- ------------ ------------ ------------
Earnings per share (EPS)
Basic EPS 19.08p 5.74p 10.89p
Diluted EPS 18.77p 5.66p 10.67p
--------------------------------------------------- ------------ ------------ ------------
The notes on pages 39 to 65 form part of these condensed
consolidated financial statements.
Condensed Consolidated Statement of Comprehensive Income
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
------------------------------------------------------- ------------ ------------ ------------
Profit for the period 235.1 70.3 134.0
Other comprehensive income for the period:
Items that will not be reclassified subsequently
to profit or loss:
Share of other comprehensive income in joint
ventures and associates 2.5 1.4 2.7
Remeasurements of post-employment benefit obligations* 47.1 29.4 18.2
Actuarial (loss)/gain on reimbursable rights* (2.1) 3.0 3.9
Income tax relating to these items* (16.3) (8.0) (5.9)
Items that may be reclassified subsequently
to profit or loss:
Net exchange (loss)/gain on translation of
foreign operations** (18.6) 37.9 7.9
Fair value gain/(loss) on cash flow hedges
during the period** - 0.3 (0.2)
Income statement items reclassified 0.1 - -
Tax relating to items that may be reclassified** 4.0 - -
Total other comprehensive income for the period 16.7 64.0 26.6
Total comprehensive income for the period 251.8 134.3 160.6
------------------------------------------------------- ------------ ------------ ------------
Attributable to:
Equity owners of the Company 251.8 134.3 160.4
Non controlling interest - - 0.2
------------------------------------------------------- ------------ ------------ ------------
* Recorded in retirement benefit obligations reserve in the
Condensed Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Condensed
Consolidated Statement of Changes in Equity.
The notes on pages 39 to 65 form part of these condensed
consolidated financial statements.
Condensed Consolidated Statement of Changes in Equity
Retirement Share Hedging
Share Capital benefit based Own and Total Non
Share premium redemption Retained obligations payment shares Treasury translation shareholders' controlling
capital account reserve earnings reserve reserve reserve shares reserve equity interest
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ---------- -------- ----------- ------- ------- --------- ----------- ------------- -----------
At 1 January
2020
(audited) 24.5 462.9 0.1 165.9 (151.8) 72.2 (4.4) - (28.0) 541.4 1.5
Total
comprehensive
income for
the
period - - - 71.7 24.4 - - - 38.2 134.3 -
Issue of share
capital 0.2 - - - - - (0.2) - - - -
Shares
transferred
to award
holders
on exercise
of share
awards - - - - - (2.1) 2.2 - - 0.1 -
Expense in
relation
to share
based
payments - - - - - 5.9 - - - 5.9 -
At 30 June
2020
(unaudited) 24.7 462.9 0.1 237.6 (127.4) 76.0 (2.4) - 10.2 681.7 1.5
Total
comprehensive
income for
the
period - - - 64.8 (8.2) - - - (30.5) 26.1 0.2
Issue of share
capital - 0.2 - - - - - - - 0.2 -
Shares
transferred
to award
holders
on exercise
of share
awards - - - - - (0.3) 0.3 - - - -
Expense in
relation
to share
based
payments - - - - - 5.3 - - - 5.3 -
At 31 December
2020
(audited) 24.7 463.1 0.1 302.4 (135.6) 81.0 (2.1) - (20.3) 713.3 1.7
-------------- ------- ------- ---------- -------- ----------- ------- ------- --------- ----------- ------------- -----------
The notes on pages 39 to 65 form part of these condensed
consolidated financial statements.
Condensed Consolidated Statement of Changes in Equity
(continued)
Retirement Share Hedging
Share Capital benefit based Own and Total Non
Share premium redemption Retained obligations payment shares Treasury translation shareholders' controlling
capital account reserve earnings reserve reserve reserve shares reserve equity interest
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2020
(audited) 24.7 463.1 0.1 302.4 (135.6) 81.0 (2.1) - (20.3) 713.3 1.7
Total
comprehensive
income for
the
period - - - 237.7 28.7 - - - (14.6) 251.8 -
Income
statement
items
reclassified - - - - - - - - 0.1 0.1 -
Dividends paid - - - (16.8) - - - - - (16.8) -
Shares
purchased
and held in
Treasury - - - - - - - (40.7) - (40.7) -
Cancellation
of shares
held
in Treasury (0.3) - 0.3 (20.4) - - - 20.4 - - -
Shares
transferred
from Treasury
to Own shares
reserve - - - (20.0) - - (0.3) 20.3 - - -
Shares
transferred
to award
holders
on exercise
of share
awards - - - - - (0.6) 0.6 - - - -
Expense in
relation
to share
based
payments - - - - - 8.1 - - - 8.1 -
Tax credit on
items taken
directly to
equity - - - - - 0.3 - - - 0.3 -
At 30 June
2021
(unaudited) 24.4 463.1 0.4 482.9 (106.9) 88.8 (1.8) - (34.8) 916.1 1.7
-------------- ------- ------- ---------- -------- ----------- ------- ------- --------- ----------- ------------- -----------
The notes on pages 39 to 65 form part of these condensed
consolidated financial statements.
Condensed Consolidated Balance Sheet
As at As at As at
30 June 30 June 31 December
2021 2020 2020
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------------------------- ------------ ------------ -------------
Non current assets
Goodwill 826.7 710.3 669.6
Other intangible assets 159.6 91.3 80.6
Property, plant and equipment 467.2 399.3 441.7
Interests in joint ventures and associates 18.5 19.6 19.2
Contract assets 3.4 - -
Trade and other receivables 22.0 25.1 25.3
Derivative financial instruments - 0.1 -
Deferred tax assets 225.8 68.5 83.2
Retirement benefit assets 157.2 125.1 114.6
--------------------------------------------- ------------ ------------ -------------
1,880.4 1,439.3 1,434.2
--------------------------------------------- ------------ ------------ -------------
Current assets
Inventories 20.5 20.3 21.4
Contract assets 285.9 325.2 296.1
Trade and other receivables 338.3 352.6 313.5
Current tax assets 7.4 5.5 4.9
Cash and cash equivalents 193.3 244.9 335.7
Derivative financial instruments 1.6 4.3 4.5
--------------------------------------------- ------------ ------------ -------------
847.0 952.8 976.1
Total assets 2,727.4 2,392.1 2,410.3
--------------------------------------------- ------------ ------------ -------------
Current liabilities
Contract liabilities (50.1) (62.3) (42.3)
Trade and other payables (580.7) (572.7) (533.9)
Derivative financial instruments (8.5) (1.5) (9.3)
Current tax liabilities (16.7) (20.5) (21.6)
Provisions (69.5) (56.9) (62.1)
Lease obligations (130.2) (86.8) (109.3)
Loans (61.9) (176.7) (89.7)
--------------------------------------------- ------------ ------------ -------------
(917.6) (977.4) (868.2)
--------------------------------------------- ------------ ------------ -------------
Non current liabilities
Contract liabilities (55.0) (51.4) (47.5)
Trade and other payables (5.8) (14.9) (9.4)
Derivative financial instruments - - (0.1)
Deferred tax liabilities (47.9) (31.1) (26.9)
Provisions (107.8) (112.6) (115.9)
Lease obligations (295.5) (273.1) (293.3)
Loans (349.9) (213.7) (299.1)
Retirement benefit obligations (30.1) (34.7) (34.9)
--------------------------------------------- ------------ ------------ -------------
(892.0) (731.5) (827.1)
--------------------------------------------- ------------ ------------ -------------
Total liabilities (1,809.6) (1,708.9) (1,695.3)
--------------------------------------------- ------------ ------------ -------------
Net assets 917.8 683.2 715.0
--------------------------------------------- ------------ ------------ -------------
Equity
Share capital 24.4 24.7 24.7
Share premium account 463.1 462.9 463.1
Capital redemption reserve 0.4 0.1 0.1
Retained earnings 482.9 237.6 302.4
Retirement benefit obligations reserve (106.9) (127.4) (135.6)
Share based payment reserve 88.8 76.0 81.0
Own shares reserve (1.8) (2.4) (2.1)
Hedging and translation reserve (34.8) 10.2 (20.3)
--------------------------------------------- ------------ ------------ -------------
Equity attributable to owners of the Company 916.1 681.7 713.3
Non controlling interest 1.7 1.5 1.7
--------------------------------------------- ------------ ------------ -------------
Total equity 917.8 683.2 715.0
--------------------------------------------- ------------ ------------ -------------
The notes on pages 39 to 65 form part of these condensed
consolidated financial statements.
Condensed Consolidated Cash Flow Statement
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
----------------------------------------------------- ------------ ------------ ------------
Net cash inflow from operating activities before
exceptional items 222.6 154.4 270.5
Exceptional items (3.7) (4.2) (2.0)
----------------------------------------------------- ------------ ------------ ------------
Net cash inflow from operating activities 218.9 150.2 268.5
----------------------------------------------------- ------------ ------------ ------------
Investing activities
Interest received 0.3 0.1 0.3
(Increase)/decrease in other investments (0.1) - 0.1
Dividends received from joint ventures and
associates 9.6 12.4 19.8
Exceptional distribution from joint ventures - - 1.9
Other dividends received 0.4 - 0.4
Proceeds from disposal of property, plant and
equipment 6.5 0.1 20.9
Net cash inflow on disposal of subsidiaries
and operations - 11.0 11.0
Acquisition of subsidiaries, net of cash acquired (235.1) (3.6) (4.9)
Proceeds from loans receivable - 1.2 1.2
Purchase of other intangible assets (3.8) (3.7) (8.3)
Purchase of property, plant and equipment (11.4) (17.0) (41.8)
----------------------------------------------------- ------------ ------------ ------------
Net cash (outflow)/inflow from investing activities (233.6) 0.5 0.6
----------------------------------------------------- ------------ ------------ ------------
Financing activities
Interest paid (13.1) (12.7) (24.9)
Capitalised finance costs paid (0.6) - (0.9)
Advances of loans 110.0 292.0 447.9
Repayments of loans (95.5) (223.5) (348.5)
Capital element of lease repayments (60.0) (52.8) (100.8)
Cash movements on hedging instruments (5.9) (0.9) 2.4
Dividends paid to shareholders (16.8) - -
Own shares repurchased (40.7) - -
Proceeds received from exercise of share options 0.1 0.1 0.1
Net cash (outflow)/inflow from financing activities (122.5) 2.2 (24.7)
----------------------------------------------------- ------------ ------------ ------------
Net (decrease)/increase in cash and cash equivalents (137.2) 152.9 244.4
Cash and cash equivalents at beginning of period 335.7 89.5 89.5
Net exchange (loss)/gain (5.2) 2.5 1.8
----------------------------------------------------- ------------ ------------ ------------
Cash and cash equivalents at end of period 193.3 244.9 335.7
----------------------------------------------------- ------------ ------------ ------------
The notes on pages 39 to 65 form part of these condensed
consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
1. General information, accounting policies and going
concern
The financial information herein for the year ended 31 December
2020 does not constitute the Company's statutory accounts as
defined in section 434 of the Companies Act 2006 , but is derived
from those accounts. The auditor's report on the 2020 accounts
contained no emphasis of matter and did not contain statements
under S498 (2) or (3) of the Companies Act 2006 or equivalent
preceding legislation.
The annual financial statements of Serco Group plc are prepared
in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union (EU). The condensed set of
financial statements included in this half yearly financial report
has been prepared in accordance with International Accounting
Standard (IAS) 34 Interim Financial Reporting, as adopted for use
in the UK. The financial statements have been prepared on the
historical cost basis, except for the revaluation of financial
instruments. Historical cost is generally based on the fair value
of the consideration given in exchange for goods and services.
In the six months ended 30 June 2021, the same accounting
policies, presentation and methods of computation are followed in
the condensed set of financial statements as applied in the Group's
latest annual audited financial statements with one exception. The
Group, following a review of its accounting policies, has updated
its accounting policy for modifications to contracts with customers
which do not result in the provision of distinct goods or services.
Previously, it was stated that if the pricing in the new contract
was not commensurate with the stand-alone selling prices for the
goods or services and the new goods and services were not distinct
from those in the original contract, that any historic adjustments
would be recognised through opening retained earnings. This is not
the case, and the Group would recognise any adjustments as an
adjustment to revenue in the period of the modification. No such
modifications have occurred either during the year ended 31
December 2020 or in the six month period to 30 June 2021.
Going concern
In assessing the basis of preparation of the condensed set of
financial statements for the six months ended 30 June 2021, the
Directors have considered the principles of the Financial Reporting
Council's 'Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting, 2014'; particularly in
assessing the applicability of the going concern basis, the review
period and disclosures. The period of assessment is considered to
be at least 12 months from the date of approval of these financial
statements.
At 30 June 2021, the Group's principal debt facilities comprised
a GBP250m revolving credit facility, acquisition term loan
facilities totalling GBP120m and GBP295m of US private placement
loan notes, giving GBP665m of committed credit facilities and
committed headroom of GBP439m. As at June 2021, the Group's
leverage ratio is below both its covenant of 3.5x and the Group's
target range of 1x-2x at 0.95x.
The Directors have undertaken a rigorous assessment of going
concern and liquidity, taking into account financial forecasts, key
uncertainties and sensitivities, including the ongoing and
potential future impacts of Covid-19 on the Group's future
performance. In making this assessment the Directors have
considered the Group's existing debt levels, the committed funding
and liquidity positions under its debt covenants, its ability to
generate cash from trading activities and its working capital
requirements. The Directors have also identified a series of
mitigating actions that could be used to preserve cash in the
business should the need arise.
The basis of the assessment continues to be the Board-approved
budget, updated to take account of known changes since, including
the impact of the Group's results for the six months to 30 June
2021. The budget is prepared annually for the next two-year period
and is based on a bottom-up approach to all of the Group's existing
contracts, potential new contracts and administrative functions.
When the budget was set covering 2021 and 2022, consideration was
given to the known impacts of Covid-19, though most of the Group's
contracts deliver critical services to Governments and the delivery
requirements of these have not been materially impacted. Where
situations have evolved, these have been reflected in the Group's
most recent forecasts and thus are included within the assessment
process outlined below.
The Directors have considered the ongoing impact of Covid-19 on
the Group's operations. The key impacts which the Group has felt
are lower passenger volumes on the Group's train operating
contracts, lower volumes within its air traffic control business
within the Middle East, higher costs within the Health portfolio
and lower usage of the Group's UK leisure centres. In a severe
downside scenario, the Directors have modelled the negative
financial impact of Covid-19 as experienced during the year to 31
December 2020 through another three-month lockdown during the
assessment period. In this downside scenario, the Group continues
to have sufficient covenant and liquidity headroom.
Due to the limited adverse impacts of Covid-19 on the Group's
profitability, the Directors believe that appropriate sensitivities
in assessing the Group's ability to continue as a going concern are
to model reductions in the Group's win rates for new business and
rebids, and reductions in profit margins. Due to the diversity in
the Group's operations, the Directors believe that a reverse stress
test of these sensitivities to assess the headroom available under
the Group's debt covenants and available liquidity provides
meaningful analysis of the Group's ability to continue as a going
concern. Based on the headroom available, the Directors are then
able to assess whether the reductions required to breach the
Group's financial covenants, or exhaust available liquidity, are
plausible.
This reverse stress test shows that, even after assuming that
the US private placement loan notes of $88m due to mature before 31
December 2022 and the GBP45m acquisition term loan facility used to
fund the acquisition of NSBU are repaid, and that no additional
refinancing occurs, the Group can afford to be unsuccessful on 50%
of its target new business and rebid wins, combined with a profit
margin 50 basis points below the Group's forecast, and still retain
sufficient liquidity to meet all liabilities as they fall due and
remain compliant with the Group's financial covenants without a
requirement for any mitigating actions.
In respect of win rates, rebids have a more significant impact
on the Group's revenue than new business wins during the assessment
period, as contracts accounting for c.45% of total revenues are
expected to be rebid in the next three years. The Group's rebid win
rate excluding COMPASS SNI and Viapath, neither of which
contributed to the Group's profitability, has been in excess of 85%
over the last two years, therefore a reduction of 50% to the
budgeted win rates and rebid rates is not considered plausible.
These rebids have been excluded because the Group does not
generally bid for contracts at margins below its target range and
where there is a significant increase in price, there is more
likelihood of the Group not being successful.
In respect to margin reduction, due to the diversified nature of
the Group's portfolio of long term contracts and the fact that the
Group has met or exceeded its full year guidance for the last five
years, a reduction in margin of 50bps (c.GBP20m) versus the Group's
budget is not considered plausible within the assessment period
combined with a 50% reduction in win rates for new business and
rebids.
Consequently, the Directors are confident that the Group will
have sufficient funds to continue to meet its liabilities as they
fall due for at least 12 months from the date of approval of the
condensed set of financial statements and therefore have prepared
the financial statements on a going concern basis.
2. Critical accounting judgements and key sources of estimation
uncertainty
In the process of applying the Group's accounting policies,
which are described in the Group's Annual Report and Accounts for
the year ended 31 December 2020, and modified as noted in note 1
above, Management has made the following judgements that have the
most significant effect on the amounts recognised in the Condensed
Consolidated Financial Statements. As described below, many of
these areas of judgement also involve a high level of estimation
uncertainty.
Key sources of estimation uncertainty
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions
requires assumptions and complex judgements to be made about the
future performance of the Group's contracts. The level of
uncertainty in the estimates made, either in determining whether a
provision is required, or in the calculation of a provision booked,
is linked to the complexity of the underlying contract and the form
of service delivery. Due to the level of uncertainty and
combination of variables associated with those estimates there is a
significant risk that there could be material adjustment to the
carrying amounts of onerous contract provisions within the next
financial reporting period. This includes the potential recognition
of onerous contract provisions for contracts which the Directors
have assessed do not require a provision as at 30 June 2021.
Major sources of uncertainty which could result in a material
adjustment within the next financial reporting period are:
-- The ability of the Company to maintain or improve operational performance
to ensure costs or performance related penalties are in line with
expected levels;
-- Volume driven revenue and costs being within the expected ranges;
-- The outcome of open claims made by or against a customer regarding
contractual performance or contractual negotiations taking place
where there is expected to be a positive outcome from the Group's
perspective;
-- The ability of suppliers to deliver their contractual obligations
on time and on budget; and
-- The potential impact of any longer term impacts of Covid-19 on contract
performance such as the performance and usage of leisure centres
or passenger volumes in the UK and the risk that this may be impacted
by any future wave of the virus which requires a subsequent lock
down period, or as-yet unknown shifts in customer behaviours, in
the absence of any customer support.
In the current period, an amount of GBP1.2m was charged to
historic provisions, and releases of GBP0.4m have been made. All of
these revisions have resulted from triggering events in the current
period, either through changes in contractual positions or changes
in circumstances which could not have been reasonably foreseen at
the previous balance sheet date. To mitigate the level of
uncertainty in making these estimates, Management regularly
compares actual performance of the contracts against previous
forecasts and considers whether there have been any changes to
significant judgements.
The future range of possible outcomes in respect of those
assumptions and significant judgements made to determine the
carrying value of onerous contracts could result in either a
material increase or decrease in the value of onerous contract
provisions in the next financial year. The extent to which actual
results differ from estimates made at the reporting date depends on
the combined outcome and timing of a large number of variables
associated with performance across multiple contracts.
The individual provisions are discounted where the impact is
assessed to be significant. When used, discount rates 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.
The Group undertakes a robust assessment at each reporting date
to determine whether any individual customer contracts, which the
Group has entered into, are onerous and require a provision to be
recognised in accordance with IAS37 Provisions, Contingent
Liabilities & Contingent Assets. The Group operates a large
number of long-term contracts at different phases of their contract
life cycle. Within the Group's portfolio, there are a small number
of contracts where the balance of risks and opportunities indicates
that they might be onerous if transformation initiatives or
contract changes are not successful. The Group has concluded that
these contracts do not require an onerous contract provision on an
individual basis. Following the individual contract reviews, the
Group has also undertaken a top down assessment which assumes that,
whilst the contracts may not be onerous on an individual basis, as
a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to
avoid a contract loss, will not be fully successful, and it is more
likely than not that one or more of
these contracts will be onerous. Therefore, in considering the
Group's overall onerous contract provision, the Group has made a
best estimate of the provision required to take into consideration
this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a
critical estimate for the Group. As at 30 June 2021, the provision
recognised in respect of this portfolio of contracts is GBP8.5m (31
December 2020: GBP8.5m).
Onerous contract provisions totalling GBP6.1m are estimated for
individual contracts, based on the specific characteristics of the
contract including possible contract variations, estimates of
transaction price such as variable revenues and forecast costs to
fulfil those contracts. As noted above, the Group also holds a
balance of GBP8.5m in respect of the portfolio risk associated with
operating a large number of long-term contracts, giving a total
onerous contract provision of GBP14.6m (see note 13). Management
has considered the nature of the estimate for onerous contract
provisions and concluded that it is reasonably possible that
outcomes within the next financial year may be different from
management's assumptions and could, in aggregate, require a
material adjustment to the onerous contract provision. However, due
to the estimation uncertainty across numerous contracts each with
different characteristics, it is not practical to provide a
quantitative analysis of the aggregated judgements that are
applied, and management do not believe that disclosing a potential
range of outcomes on a consolidated basis would provide meaningful
information to a reader of these condensed consolidated financial
statements.
Impairment of assets
Identifying whether there are indicators of impairment for
assets involves a high level of judgement and a good understanding
of the drivers of value behind the asset. At each reporting period
an assessment is performed in order to determine whether there are
any such indicators, which involves considering the performance of
our business and any significant changes to the markets in which we
operate.
We seek to mitigate the risk associated with this judgement by
putting in place processes and guidance for the finance community
and internal review procedures.
Determining whether assets with impairment indicators require an
actual impairment involves an estimation of the expected value in
use of the asset (or cash generating unit (CGU) to which the asset
relates). The value in use calculation involves an estimation of
future cash flows and also the selection of appropriate discount
rates, both of which involve considerable judgement. The future
cash flows are derived from latest approved forecasts, with the key
assumptions being revenue growth, margins and cash conversion
rates. As was the case at the end of 2020, the budgeting process is
required to estimate the ongoing impact of Covid-19, and whilst
this remains a source of uncertainty, the Group's understanding of
the potential impacts continues to improve. As a result of known
and anticipated impacts of Covid-19 being included in Management's
forecasts, no additional specific adjustments have been made to the
cash flows used in assessing the value in use of assets.
Discount rates are calculated with reference to the specific
risks associated with the assets and are based on advice provided
by external experts. Our calculation of discount rates is performed
based on a risk free rate of interest appropriate to the geographic
location of the cash flows related to the asset being tested, which
is subsequently adjusted to factor in local market risks and risks
specific to Serco and the asset itself. Discount rates used for
internal purposes are post tax rates, however for the purpose of
impairment testing in accordance with IAS36 Impairment of Assets we
calculate a pre tax rate based on post tax targets.
A key area of focus in recent years has been in the impairment
testing of goodwill as a result of the pressure on the results of
the Group. No impairment indicators relating to goodwill were noted
in the six months to 30 June 2021 and there continues to be
significant headroom across all CGUs.
Current tax
Liabilities for tax contingencies require Management judgement
and estimates to be made in respect of tax audits and tax exposures
in each of the jurisdictions in which we operate. Management is
also required to make an estimate of the current tax liability
together with an assessment of the temporary differences that arise
as a consequence of different accounting and tax treatments. Key
judgement areas include the correct allocation of profits and
losses between the countries in which we operate and the pricing of
intercompany services. Where Management conclude that a tax
position is uncertain, a current tax liability is held for
anticipated taxes that are considered probable based on the current
information available including the specific circumstances of each
case and external advice where appropriate . Given the number of
geographies in which we operate and the associated number of
inherent uncertainties, there is a broad range of potential
outcomes. Management therefore do not consider that disclosing a
potential range of outcomes would provide meaningful additional
information to a reader of the accounts.
These liabilities can be built up over a long period of time but
the ultimate resolution of tax exposures usually occurs at a point
in time, and given the inherent uncertainties in assessing the
outcomes of these exposures, these estimates are prone to change in
future periods. It is not currently possible to estimate the timing
of potential cash outflows, but on resolution, to the extent this
differs from the liability held, this will be reflected through the
tax charge or credit for that period. Each potential liability and
contingency is revisited on at least an annual basis and adjusted
to reflect any changes in positions taken by the Group, local tax
audits, the expiry of the statute of limitations following the
passage of time and any change in the broader tax environment.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit
obligation as a result of contractual arrangements entered into
requires a level of judgement, largely driven by the legal position
held between the Group, the customer and the relevant pension
scheme. The Group's retirement benefit obligations are covered in
note 16.
The calculation of retirement benefit obligations is dependent
on material key assumptions including discount rates, mortality
rates, inflation rates and future contribution rates.
In accounting for the defined benefit schemes, the Group has
applied the following principles:
-- The asset recognised for the Serco Pension and Life Assurance Scheme is
equal to the full surplus that will ultimately be available to the Group
as a future refund.
-- No foreign exchange item is shown in the disclosures as the non UK liabilities
are not material.
No pension assets are invested in the Group's own financial
instruments or property.
Pension annuity assets are remeasured to fair value at each
reporting date based on the share of the defined benefit obligation
covered by the insurance contract.
Critical accounting judgements
Covid-19 related impacts
Coronavirus (Covid-19) was originally identified as a disease in
China late in 2019. Following global transmission of the disease
early in 2020, Europe and other continents began identifying cases
which continued to rise in number such that on 12 March 2020 the
World Health organisation characterised the outbreak of Covid-19 as
a global pandemic.
Most of the Group's contracts deliver critical services to
governments and the delivery requirements of the vast majority of
these have not been impacted by Covid-19. However, a small number
of contracts within the Group have been impacted by; lower volumes
or suspensions of its air traffic control contracts in the Middle
East, lower volumes within its UK Transport business; higher levels
of absenteeism and increased service performance in its UK Health
contracts; closure of operations including leisure centres in the
UK and the Driver Examination Services contract in Canada; and
delays in project work such as the delivery of the Antarctic Supply
Research Vessel in Australia. The negative impact from these
contracts has been offset by additional services being delivered to
assist governments with their management and recovery from the
Covid-19 pandemic, additional volumes within its immigration
contracts in the UK and Australia, and financial support from its
customers. We estimate that about GBP365m of our global revenues
were from services supporting governments' response to Covid-19,
which compares to GBP130m in the first half of 2020. This estimate
carries significant judgement as it becomes increasingly difficult
to estimate what the baseline revenue would have been should the
pandemic not have taken place. In addition, it is not possible to
estimate the impact on new business or rebids, as it is possible
that procurement of services by the Group's major customers has
been delayed as a result of the pandemic due to Governments
prioritising their management of Covid-19.
The Group's liquidity position continues to be strong with
GBP665m of committed credit facilities and committed headroom of
GBP439m. This is as a result of the stronger underlying operating
performance and cash management, with customers meeting their
obligations and paying for services in accordance with the terms of
the arrangements.
Leases
The Group makes use of leases both in assisting with the
operational delivery of contracts and within support functions.
Operational leases include, but are not limited to, accommodation
for asylum seekers, vehicles used in the transport of service users
and properties used to deliver services or administrative
functions. Within the Group's support functions, the most prevalent
leases are those associated with properties and the company car
fleet.
The majority of the Group's operational leases are entered into
either for the duration of the contract to which they relate, or
with a termination option included, allowing the Group the option
to exit the lease if it so desires. As a result, the most
significant judgement that is made in relation to leases, is the
derivation of the lease term at the outset of the lease. Extension
and cancellation options included in leases, where the Group has
the unilateral option to exercise, are included when assessing the
lease term only to the extent that it is more likely than not they
will be exercised. This assessment is revisited whenever the
circumstances of a contract change, or more frequently if
Management become aware of a change in the probability of
exercising such options.
Use of Alternative Performance Measures: Operating profit before
exceptional items
IAS1 Presentation of Financial Statements requires material
items to be disclosed separately in a way that enables users to
assess the quality of a company's profitability. In practice, these
are commonly referred to as 'exceptional' items, but this is not a
concept defined by IFRS and therefore there is a level of judgement
involved in arriving at an Alternative Performance Measure which
excludes such exceptional items. We consider items which are
material and outside of the normal operating practice of the
Company to be suitable for separate presentation. There is a level
of judgement required in determining which items are exceptional on
a consistent basis and require separate disclosure. Further details
can be seen in note 6.
The segmental analysis in note 3 includes the additional
performance measure of Trading Profit on operations which is
reconciled to reported operating profit in that note. The Group
uses Trading Profit as an alternative measure to reported operating
profit by making several adjustments. Firstly, Trading Profit
excludes exceptional items, being those we consider material and
outside of the normal operating practice of the Company to be
suitable of separate presentation and detailed explanation.
Secondly, amortisation and impairment of intangibles arising on
acquisitions are excluded, because these charges are based on
judgments about the value and economic life of assets that, in the
case of items such as customer relationships, would not be
capitalised in normal operating practice. The Group's Chief
Operating Decision Maker (CODM) reviews the segmental analysis for
operations.
Claim for losses in respect of the 2013 share price
reduction
Following the announcement during 2020 that the Group has
received a claim seeking damages for alleged losses as a result of
the reduction in Serco's share price in 2013, the Group has
continued to assess the merit, likely outcome and potential impact
on the Group of any such litigation that either has been or might
potentially be brought against the Group. Any outcome is subject to
a number of significant uncertainties and therefore, it is not
possible to assess the quantum of any such litigation as at the
date of this disclosure.
Deferred tax
Deferred tax assets are recognised on tax deductible temporary
differences to the extent that it is probable that taxable profit
will be available against which they can be utilised. Significant
Management judgement is required to determine the amount of
deferred tax assets that should be recognised, based upon the
likely timing, geography and the level of future taxable profits.
Since a significant portion of the deductible temporary differences
relate to historic tax losses, there has been historic evidence
that future taxable profits may not be available.
A GBP167.0m UK tax asset is recognised on the Group's balance
sheet at 30 June 2021 (31 December 2020: GBP30.6m) on the basis
that structural changes in the underlying UK business indicate a
sustained return to profitability which would enable future tax
deductions within the UK to be utilised. The return to
profitability is as a result of onerous contracts ending and new
profitable long term contracts being entered into as well as a
significant reduction in exceptional restructuring spend following
the strategy review in 2015, which also reduced the level of
overhead spend within the UK business. GBP19.2m of the UK deferred
tax asset of GBP186.2m recognised during the period has been used
to offset profits arising in the six month period to 30 June
2021.
Further details on taxes are disclosed in note 9.
3. Segmental information
The Group's operating segments reflecting the information
reported to the Board in the six months ended 30 June 2021 under
IFRS8 Operating Segments are as set out below.
Reportable segments Operating segments
------------------- ------------------------------------------------------------------
UK & Europe Services for sectors including Citizen Services, Defence, Health,
Justice & Immigration and Transport delivered to UK Government,
UK devolved authorities and other public sector customers in
the UK and Europe
------------------- ------------------------------------------------------------------
Americas Services for sectors including Citizen Services, Defence and
Transport delivered to US federal and civilian agencies, selected
state and municipal governments and the Canadian Government
------------------- ------------------------------------------------------------------
AsPac Services for sectors including Citizen Services, Defence, Health,
Justice & Immigration and Transport in the Asia Pacific region
including Australia, New Zealand and Hong Kong
------------------- ------------------------------------------------------------------
Middle East Services for sectors including Citizen Services, Defence, Health
and Transport in the Middle East region
------------------- ------------------------------------------------------------------
Corporate Central and head office costs
------------------- ------------------------------------------------------------------
Each operating segment is focused on a narrow group of customers
in a specific geographic region and is run by a local Management
team which report directly to the Group's Chief Operating Decision
Maker (CODM) on a regular basis. As a result of this focus, the
sectors in each region have similar economic characteristics and
are aggregated at the operating segment level in these condensed
financial statements.
Revenue disaggregation
An analysis of the Group's revenue from its key market sectors
is as follows:
Middle
UK&E Americas AsPac East Total
Six months ended 30 June 2021 GBPm GBPm GBPm GBPm GBPm
------------------------------ ------- -------- ----- ------ -------
Key sectors
Defence 99.4 357.3 74.0 14.9 545.6
Justice & Immigration 201.3 - 185.0 - 386.3
Transport 70.6 40.5 3.5 87.0 201.6
Health 132.1 - 117.3 3.1 252.5
Citizen Services 535.1 130.8 78.1 37.5 781.5
------------------------------- ------- -------- ----- ------ -------
1,038.5 528.6 457.9 142.5 2,167.5
------------------------------ ------- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Six months ended 30 June 2020 GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- -------- ----- ------ -------
Key sectors
Defence 100.8 363.8 64.2 13.4 542.2
Justice & Immigration 179.3 - 140.9 - 320.2
Transport 71.9 42.2 3.8 100.4 218.3
Health 121.5 - 50.0 5.5 177.0
Citizen Services 310.1 136.1 73.1 45.2 564.5
------------------------------- ----- -------- ----- ------ -------
783.6 542.1 332.0 164.5 1,822.2
------------------------------ ----- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Year ended 31 December 2020 GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- -------- ----- ------ -------
Key sectors
Defence 196.6 725.2 133.3 27.0 1,082.1
Justice & Immigration 393.7 - 328.1 - 721.8
Transport 143.6 84.7 7.7 194.2 430.2
Health 245.9 - 101.4 10.0 357.3
Citizen Services 797.6 254.4 148.4 93.0 1,293.4
----------------------------- ------- -------- ----- ------ -------
1,777.4 1,064.3 718.9 324.2 3,884.8
---------------------------- ------- -------- ----- ------ -------
Information about major customers
The Group has four major governmental customers which each
represent more than 5% of Group revenues. The customers' revenues
were GBP913.2m (2020: GBP654.1m) for the UK Government within the
UK & Europe segment, GBP434.2m (2020: GBP470.5m) for the US
Government within the Americas segment, GBP423.0m (2020: GBP326.3m)
for the Australian Government within the AsPac segment and
GBP109.1m (2020: GBP118.6m) for the Government of the United Arab
Emirates within the Middle East segment.
The following is an analysis of the Group's revenue, results,
assets and liabilities by reportable segment:
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,038.5 528.6 457.9 142.5 - 2,167.5
------------------------------------------- ------- -------- ----- ------ --------- -------
Result
------------------------------------------- ------- -------- ----- ------ --------- -------
Trading Profit/(Loss) from operations* 59.0 57.1 25.0 7.2 (22.7) 125.6
Amortisation and impairment of intangibles
arising on acquisition (0.4) (4.5) (1.7) - - (6.6)
------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 58.6 52.6 23.3 7.2 (22.7) 119.0
Other exceptional operating items** 0.1 (2.0) (0.5) - (0.3) (2.7)
Operating profit/(loss) 58.7 50.6 22.8 7.2 (23.0) 116.3
Investment revenue 1.3
Finance costs (13.9)
Profit before tax 103.7
Tax credit 130.7
Tax on exceptional items 0.7
------------------------------------------- ------- -------- ----- ------ --------- -------
Profit for the period 235.1
------------------------------------------- ------- -------- ----- ------ --------- -------
* Trading Profit/(Loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business. Included within exceptional
operating items are total acquisition related costs of GBP2.5m.
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 6.8 - - - (0.4) 6.4
------------------------------------------- ------- -------- ------- ------ --------- -----------
Depreciation of plant, property and
equipment (42.8) (10.8) (6.4) (3.3) (4.6) (67.9)
Impairment of plant, property and - - - - - -
equipment
------------------------------------------- ------- -------- ------- ------ --------- -----------
Total depreciation and impairment
of plant, property and equipment (42.8) (10.8) (6.4) (3.3) (4.6) (67.9)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Amortisation of intangible assets
arising on acquisition (0.4) (4.5) (1.7) - - (6.6)
Amortisation of other intangible
assets (0.5) (0.5) (1.7) (0.1) (3.5) (6.3)
Total amortisation and impairment
of intangible assets (0.9) (5.0) (3.4) (0.1) (3.5) (12.9)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Segment assets
Interests in joint ventures and associates 18.0 - 0.1 0.4 - 18.5
Other segment assets*** 757.5 887.2 331.0 95.0 210.1 2,280.8
------------------------------------------- ------- -------- ------- ------ --------- -----------
Total segment assets 775.5 887.2 331.1 95.4 210.1 2,299.3
Unallocated assets 428.1
------------------------------------------- ------- -------- ------- ------ --------- -----------
Consolidated total assets 2,727.4
------------------------------------------- ------- -------- ------- ------ --------- -----------
Segment liabilities
Segment liabilities*** (663.8) (202.7) (223.4) (66.8) (168.0) (1,324.7)
Unallocated liabilities (484.9)
------------------------------------------- ------- -------- ------- ------ --------- -----------
Consolidated total liabilities (1,809.6)
------------------------------------------- ------- -------- ------- ------ --------- -----------
*** The Corporate segment assets and liabilities include balance
sheet items which provide benefit to, or are incurred on behalf of,
the wider Group, including defined benefit pension schemes and
corporate intangible assets.
The depreciation charge in the UK&E segment has increased to
GBP42.8m (2020: GBP30.0m) due to additional property leases
together with the timing of renewals on existing leases on the
Asylum Accommodation and Support Services Contract (AASC).
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----- -------- ----- ------ --------- -------
Revenue 783.6 542.1 332.0 164.5 - 1,822.2
------------------------------------------- ----- -------- ----- ------ --------- -------
Result
------------------------------------------- ----- -------- ----- ------ --------- -------
Trading Profit/(Loss) from operations* 29.4 53.4 13.3 7.0 (22.6) 80.5
Amortisation and impairment of intangibles
arising on acquisition (1.5) (3.5) - - - (5.0)
------------------------------------------- ----- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 27.9 49.9 13.3 7.0 (22.6) 75.5
Exceptional profit on disposal of
subsidiaries and operations 11.0 - - - - 11.0
Other exceptional operating items** 1.0 1.6 - - - 2.6
-------------------------------------------
Operating profit/(loss) 39.9 51.5 13.3 7.0 (22.6) 89.1
Investment revenue 0.7
Finance costs (13.4)
------------------------------------------- ----- -------- ----- ------ ---------
Profit before tax 76.4
Tax charge (5.7)
Tax on exceptional items (0.4)
-------
Profit for the period 70.3
------------------------------------------- ----- -------- ----- ------ --------- -------
* Trading Profit/(Loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business. Included within exceptional
operating items are total acquisition related costs of GBP1.4m.
Middle
UK&E Americas AsPac East Corporate Total
Six months ended 30 June 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 7.0 - - - - 7.0
------------------------------------------- ------- -------- ------- ------ --------- ---------
Depreciation of plant, property and
equipment (30.0) (11.5) (4.4) (4.0) (4.1) (54.0)
Impairment of plant, property and
equipment (0.2) - - - - (0.2)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total depreciation and impairment
of plant, property and equipment (30.2) (11.5) (4.4) (4.0) (4.1) (54.2)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Amortisation of intangible assets
arising on acquisition (1.5) (3.5) - - - (5.0)
Amortisation of other intangible
assets (0.2) (0.3) (1.4) (0.2) (5.4) (7.5)
Total amortisation and impairment
of intangible assets (1.7) (3.8) (1.4) (0.2) (5.4) (12.5)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment assets
Interests in joint ventures and associates 19.1 - 0.1 0.4 - 19.6
Other segment assets*** 680.5 796.4 267.7 131.3 173.3 2,049.2
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total segment assets 699.6 796.4 267.8 131.7 173.3 2,068.8
Unallocated assets 323.3
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total assets 2,392.1
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment liabilities
Segment liabilities*** (558.6) (224.1) (189.2) (95.7) (197.8) (1,265.4)
Unallocated liabilities (443.5)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total liabilities (1,708.9)
------------------------------------------- ------- -------- ------- ------ --------- ---------
*** The Corporate segment assets and liabilities include balance
sheet items which provide benefit to, or are incurred on behalf of,
the wider Group, including defined benefit pension schemes and
corporate intangible assets.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,777.4 1,064.3 718.9 324.2 - 3,884.8
------------------------------------------- ------- -------- ----- ------ --------- -------
Result
------------------------------------------- ------- -------- ----- ------ --------- -------
Trading Profit/(Loss) from operations* 69.6 100.8 32.6 13.9 (41.2) 175.7
Amortisation and impairment of intangibles
arising on acquisition (2.0) (7.0) - - - (9.0)
------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 67.6 93.8 32.6 13.9 (41.2) 166.7
Exceptional profit on disposal of
subsidiaries and operations 11.0 - - - - 11.0
Other exceptional operating items** 1.0 1.4 (0.8) - (0.1) 1.5
Operating profit/(loss) 79.6 95.2 31.8 13.9 (41.3) 179.2
Investment revenue 1.9
Finance costs (27.8)
Profit before tax 153.3
Tax charge (18.9)
Tax on exceptional items (0.4)
------------------------------------------- ------- -------- ----- ------ --------- -------
Profit for the year 134.0
------------------------------------------- ------- -------- ----- ------ --------- -------
* Trading Profit/(Loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business. Included within exceptional
operating items are total acquisition related costs of GBP2.4m.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------ --------- ---------
Supplementary information
Share of profits in joint ventures
and associates, net of interest and
tax 12.7 - - - - 12.7
------------------------------------------- ------- -------- ------- ------ --------- ---------
Depreciation of plant, property and
equipment (61.6) (22.5) (9.6) (7.6) (8.1) (109.4)
Impairment of plant, property and
equipment (0.7) - - - - (0.7)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total depreciation and impairment
of plant, property and equipment (62.3) (22.5) (9.6) (7.6) (8.1) (110.1)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Amortisation of intangible assets
arising on acquisition (2.0) (7.0) - - - (9.0)
Amortisation of other intangible
assets (0.7) (0.6) (3.0) (0.4) (9.3) (14.0)
Total amortisation and impairment
of intangible assets (2.7) (7.6) (3.0) (0.4) (9.3) (23.0)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment assets
Interests in joint ventures and associates 18.7 - 0.1 0.4 - 19.2
Other segment assets*** 750.9 675.3 274.4 87.9 174.3 1,962.8
------------------------------------------- ------- -------- ------- ------ --------- ---------
Total segment assets 769.6 675.3 274.5 88.3 174.3 1,982.0
Unallocated assets 428.3
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total assets 2,410.3
------------------------------------------- ------- -------- ------- ------ --------- ---------
Segment liabilities
Segment liabilities*** (626.6) (185.0) (200.0) (66.7) (170.3) (1,248.6)
Unallocated liabilities (446.7)
------------------------------------------- ------- -------- ------- ------ --------- ---------
Consolidated total liabilities (1,695.3)
------------------------------------------- ------- -------- ------- ------ --------- ---------
*** The Corporate segment assets and liabilities include balance
sheet items which provide benefit to, or are incurred on behalf of,
the wider Group, including defined benefit pension schemes and
corporate intangible assets.
4. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding
Company Limited (MSHCL) were the only equity accounted entities
which were material to the Group during the six months ended 30
June 2021 or comparative periods. Dividends of GBP9.6m (2020:
GBP9.1m) and GBPnil (2020: GBP1.5m) respectively were received from
these companies in the period. The only significant movement in
dividends received relates to the absence of a dividend from MSHCL
where passenger volumes in particular were negatively impacted by
Covid-19.
As announced on 2 November 2020, the Ministry of Defence
notified the Group that it would be exercising its ability to
terminate services provided by the Group through AWEML on 30 June
2021. The exit from the contract was in advance of the final
milestones anticipated in the contract, and as a result, the
operating performance includes judgements over the completion
status of certain items which may subsequently be adjusted. The
transaction included the sale of AWE plc from AWEML, however the
Group continues to own 24.5% of AWEML which holds receivables and
payables with AWE plc and these are expected to be settled as the
negotiations regarding the termination and disposal conclude.
Summarised financial information of AWEML and MSHCL and an
aggregation of the other equity accounted entities in which the
Group has an interest is as follows:
30 June 2021
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ---------------- ---------------- ------
Revenue 629.9 75.0 191.8 0.9 192.7
--------------------------------- ------------ --------- ---------------- ---------------- ------
Operating profit/(loss) 43.3 (4.3) 8.5 - 8.5
Net investment finance
costs - (0.1) - - -
Income tax (charge)/credit (10.2) 0.9 (2.1) - (2.1)
--------------------------------- ------------ --------- ---------------- ---------------- ------
Profit/(loss) from operations 33.1 (3.5) 6.4 - 6.4
Other comprehensive income - 4.9 2.5 - 2.5
--------------------------------- ------------ --------- ---------------- ---------------- ------
Total comprehensive income 33.1 1.4 8.9 - 8.9
--------------------------------- ------------ --------- ---------------- ---------------- ------
Non current assets - 16.5 8.2 0.2 8.4
Current assets 167.8 41.0 61.7 2.0 63.7
Current liabilities (149.6) (25.6) (49.4) (1.1) (50.5)
Non current liabilities - (6.1) (3.1) - (3.1)
--------------------------------- ------------ --------- ---------------- ---------------- ------
Net assets 18.2 25.8 17.4 1.1 18.5
Proportion of Group ownership 24.5% 50.0% - - -
--------------------------------- ------------ --------- ---------------- ---------------- ------
Carrying amount of investment 4.5 12.9 17.4 1.1 18.5
--------------------------------- ------------ --------- ---------------- ---------------- ------
* Total results of the entity multiplied by the respective
proportion of Group ownership.
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ --------- ---------------- ---------------- -----
Cash and cash equivalents 114.9 25.4 40.9 0.7 41.6
Current financial liabilities
excluding trade and other
payables and provisions (0.6) (5.3) (2.8) - (2.8)
Non current financial liabilities
excluding trade and other
payables and provisions - (5.9) (3.0) - (3.0)
Depreciation and amortisation - (2.9) (1.4) - (1.4)
Interest income - - - - -
Interest expense - (0.1) - - -
---------------------------------- ------------ --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective
proportion of Group ownership.
The Group's share of liabilities within joint ventures and
associates is GBP53.6m (31 December 2020: GBP224.5m). Of this,
GBPnil (31 December 2020: GBP163.1m) relates to a defined benefit
pension obligation against which Serco is fully indemnified. As a
result of the Ministry of Defence's termination of the Management
& Operations contract at AWE, the Pensions Contract was also
terminated, and hence AWEML had no obligations under the Pensions
Contract from 30 June 2021. The remaining liabilities include
GBP5.1m of lease obligations (31 December 2020: GBP6.2m) and the
balance is trade and other payables which arise as part of the day
to day operations carried out by those entities. Other than
liabilities associated with leases, the Group has no material
exposure to third party debt or other financing arrangements within
any of its joint ventures and associates. Of the amount included
within AWEML's current assets and liabilities is a cash amount of
GBP98m, which as at 30 June 2021 belonged to AWE plc but was in the
bank account of AWEML. The amount was repaid in full on 1 July
2021.
30 June 2020
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------------ --------- ---------------- ---------------- -------
Revenue 539.0 75.7 169.9 18.0 187.9
------------------------------------- ------------ --------- ---------------- ---------------- -------
Operating profit/(loss) 37.4 (0.8) 8.8 (0.2) 8.6
Net investment revenue 0.3 - 0.1 - 0.1
Income tax (charge)/credit (7.1) 0.3 (1.6) (0.1) (1.7)
------------------------------------- ------------ --------- ---------------- ---------------- -------
Profit/(loss) from operations 30.6 (0.5) 7.3 (0.3) 7.0
Other comprehensive income - 2.9 1.4 - 1.4
------------------------------------- ------------ --------- ---------------- ---------------- -------
Total comprehensive income/(expense) 30.6 2.4 8.7 (0.3) 8.4
------------------------------------- ------------ --------- ---------------- ---------------- -------
Non current assets 489.5 21.9 130.9 0.2 131.1
Current assets 188.8 51.8 72.1 3.6 75.7
Current liabilities (171.2) (37.1) (60.5) (1.4) (61.9)
Non current liabilities (488.7) (11.2) (125.3) - (125.3)
------------------------------------- ------------ --------- ---------------- ---------------- -------
Net assets 18.4 25.4 17.2 2.4 19.6
Proportion of Group ownership 24.5% 50.0% - - -
------------------------------------- ------------ --------- ---------------- ---------------- -------
Carrying amount of investment 4.5 12.7 17.2 2.4 19.6
------------------------------------- ------------ --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective
proportion of Group ownership.
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ --------- ---------------- ---------------- -----
Cash and cash equivalents 77.3 36.7 37.3 1.9 39.2
Current financial liabilities
excluding trade and other
payables and provisions (0.7) (5.4) (2.9) (0.5) (3.4)
Non current financial liabilities
excluding trade and other
payables and provisions - (10.3) (5.2) - (5.2)
Depreciation and amortisation - (3.0) (1.5) (0.4) (1.9)
Interest income 0.3 0.1 0.1 - 0.1
Interest expense - (0.1) (0.1) - (0.1)
---------------------------------- ------------ --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective
proportion of Group ownership.
31 December 2020
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
Summarised financial information GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------------ --------- ---------------- ---------------- -------
Revenue 1,106.8 150.7 346.5 18.6 365.1
------------------------------------- ------------ --------- ---------------- ---------------- -------
Operating profit/(loss) 75.0 (5.7) 15.5 (0.1) 15.4
Net investment revenue/(finance
cost) 0.3 (0.1) - - -
Income tax (charge)/credit (14.0) 1.5 (2.7) - (2.7)
------------------------------------- ------------ --------- ---------------- ---------------- -------
Profit/(loss) from operations 61.3 (4.3) 12.8 (0.1) 12.7
Other comprehensive income/(expense) - 5.3 2.7 - 2.7
------------------------------------- ------------ --------- ---------------- ---------------- -------
Total comprehensive income/(expense) 61.3 1.0 15.5 (0.1) 15.4
------------------------------------- ------------ --------- ---------------- ---------------- -------
Non current assets 668.1 19.1 173.3 0.1 173.4
Current assets 191.4 43.2 68.5 1.8 70.3
Current liabilities (169.2) (29.6) (56.3) (0.8) (57.1)
Non current liabilities (665.9) (8.5) (167.4) - (167.4)
------------------------------------- ------------ --------- ---------------- ---------------- -------
Net assets 24.4 24.2 18.1 1.1 19.2
Proportion of Group ownership 24.5% 50.0% - - -
------------------------------------- ------------ --------- ---------------- ---------------- -------
Carrying amount of investment 6.0 12.1 18.1 1.1 19.2
------------------------------------- ------------ --------- ---------------- ---------------- -------
* Total results of the entity multiplied by the respective
proportion of Group ownership.
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% (100% of joint ventures arrangements
of results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ --------- ---------------- ---------------- -----
Cash and cash equivalents 119.8 22.5 40.6 0.8 41.4
Current financial liabilities
excluding trade and other
payables and provisions (0.6) (5.5) (2.9) 0.1 (2.8)
Non current financial liabilities
excluding trade and other
payables and provisions - (7.7) (3.8) - (3.8)
Depreciation and amortisation - (6.1) (3.1) (0.4) (3.5)
Interest income 0.3 0.1 0.1 - 0.1
Interest expense - (0.2) (0.1) - (0.1)
---------------------------------- ------------ --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective
proportion of Group ownership.
5. Acquisitions
On 4 January 2021, the Group acquired 100% of the issued share
capital of Facilities First Australia Holdings Pty Limited (FFA),
for consideration of AU Dollars $52.2m (GBP29.6m) in cash, on a
cash free, debt free basis, subject to standard working capital and
completion adjustments. At the same time, the Group transferred AU
Dollars $25.2m (GBP14.3m) to allow FFA to settle existing debt and
debt-like balances. FFA is a specialist provider of cleaning,
facility maintenance and management services in Australia. The
operating results, assets and liabilities have been recognised
effective 4 January 2021.
The total annual revenue of FFA in 2021 is expected to be around
AU Dollars $250m (GBP138m) and the estimated operating profit
before exceptional items, including an appropriate allocation of
charges for shared support services and fully allocated overheads,
to be around AU Dollars $11m (GBP6m).
On 27 April 2021, the Group acquired 100% of the issued share
capital of Whitney, Bradley & Brown, Inc (WBB) for $295.0m
(GBP211.7m) which will increase the scale, breadth and capability
of Serco's North American Defence business and will give Serco a
strong platform from which to address all major segments of the US
Defence services market. The operating results, assets and
liabilities have been recognised effective 27 April 2021.
The total annual revenue of WBB in 2021 is expected to be around
$230m (GBP165m) and the estimated operating profit before
exceptional items, including an appropriate allocation of charges
for shared support services and fully allocated overheads, to be
around $28m (GBP20m).
On 30 June 2021, the Group acquired 100% of the issued share
capital of Mercurius Finance S.A., the holding company of Clemaco
Trading N.V., Clemaco Contracting N.V. and Targets N.V. (together
Clemaco), for EUR1.0m (GBP0.8m). Clemaco specialises in the support
and maintenance of ships for the Belgian Navy, enabling Serco to
provide additional value to existing Serco and Clemaco customers
and expanding Serco's existing activities with the Belgian Navy.
The operating results, assets and liabilities have been recognised
effective 30 June 2021.
The amounts shown below in respect of the assets and liabilities
acquired in material transactions remain provisional and are
therefore subject to change, until the Group has finalised the
associated acquisition accounting.
Provisional fair values
FFA WBB Total
GBPm GBPm GBPm
--------------------------------------------- -------- -------- -------
Goodwill 29.0 137.9 166.9
Acquisition related intangible assets 19.8 70.0 89.8
Property, plant and equipment 4.0 3.2 7.2
Retirement benefit assets 1.3 - 1.3
Inventories 0.1 - 0.1
Trade and other receivables 14.9 23.1 38.0
Cash and cash equivalents 2.0 5.0 7.0
Deferred tax assets - 7.1 7.1
Trade and other payables (19.2) (15.5) (34.7)
Provisions (1.7) - (1.7)
Retirement benefit obligations (2.5) - (2.5)
Loans (14.3) - (14.3)
Corporation tax liabilities (0.6) - (0.6)
Deferred tax liabilities (0.9) (19.0) (19.9)
Lease liabilities (2.3) (0.1) (2.4)
--------------------------------------------- -------- -------- -------
Acquisition date fair value of consideration
transferred 29.6 211.7 241.3
--------------------------------------------- -------- -------- -------
Satisfied by:
Cash 29.6 211.7 241.3
Total consideration 29.6 211.7 241.3
--------------------------------------------- -------- -------- -------
The net cash outflow as a result of acquisitions made during the
year was GBP238.2m made up of GBP29.6m consideration paid on the
acquisition of FFA, GBP211.7m consideration paid on the acquisition
of WBB, GBP0.8m consideration paid on the acquisition of Clemaco,
combined acquisition related costs of GBP3.1m and GBP7.0m of cash
acquired.
Goodwill on the acquisitions of FFA and WBB represents the
premium associated with expanding the Group's capabilities in the
relevant sectors and geographical locations in which the acquired
companies operate. For FFA, this represents scale within facilities
management in Australia, whilst for WBB it relates to the increased
presence in the US defence market as well as considerable expertise
in complementary areas. No tax deductions related to the goodwill
arising on either transaction are available. The acquisition
related intangibles represent customer relationships which have
been valued using our best estimate of forecast cashflows
discounted to present value and, in the case of WBB, certain
software related assets and the brand names associated with
them.
Based on estimates made of the full year impact of the
acquisition of WBB, had the acquisition taken place on 1 January
2021, Group revenue and operating profit before exceptional items
for the period would have increased by approximately GBP54m and
GBP8m respectively, taking total Group revenue to GBP2,222m and
total Group operating profit before exceptional items to GBP127m.
Due to the date of acquisition of FFA, the annualised impact is not
considered to be materially different to the results already
included in the financial statements for the six months to 30 June
2021.
The total impact of acquisitions to the Group's cash flow
position in the period was as follows:
GBPm
----------------------------------------------------- -----
Net cash outflow on acquisition of FFA 27.6
Net cash outflow on acquisition of WBB 206.7
Net cash outflow on acquisition of Clemaco 0.8
----------------------------------------------------- -----
Net cash outflow arising in the year on acquisitions 235.1
Exceptional acquisition related costs - FFA 1.1
Exceptional acquisition related costs - WBB 2.0
Net cash impact in the year on acquisitions 238.2
----------------------------------------------------- -----
Costs associated with the acquisitions of both FFA and WBB are
shown as exceptional costs in the Condensed Consolidated Income
Statement for the period. The total acquisition related costs
recognised in exceptional items for the six months ended 30 June
2021 was GBP2.5m. There were no material costs associated with the
acquisition of Clemaco during the period.
6. Exceptional items
Exceptional items are items of financial performance that are
outside normal operations and are material to the results of the
Group either by virtue of size or nature. As such, the items set
out below require separate disclosure on the face of the income
statement to assist in the understanding of the performance of the
Group.
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
------------------------------------------------ ------------ ------------ -------------
Exceptional items arising
Exceptional profit on disposal of subsidiaries
and operations - 11.0 11.0
Other exceptional operating items
Restructuring costs 0.1 0.1 0.1
Costs associated with UK Government review (0.3) (1.2) (1.3)
Movement in other provisions and other
items - 2.6 2.6
Reversal of impairment of interest in
joint venture and related loan balances - 2.5 2.5
Costs associated with the acquisition
of Naval Systems Business Unit - (1.4) (1.5)
Costs associated with the acquisition
of Facilities First Australia (0.5) - (0.9)
Costs associated with the acquisition (2.0) - -
of Whitney, Bradley & Brown, Inc.
Other exceptional operating items (2.7) 2.6 1.5
------------------------------------------------ ------------ ------------ -------------
Exceptional operating items (2.7) 13.6 12.5
------------------------------------------------ ------------ ------------ -------------
Exceptional tax 0.7 (0.4) (0.4)
------------------------------------------------ ------------ ------------ -------------
Total exceptional items net of tax (2.0) 13.2 12.1
------------------------------------------------ ------------ ------------ -------------
The Group completed the acquisition of Facilities First
Australia Holdings Pty Limited (FFA) in 2021. The transaction and
implementation costs incurred during the six months ended 30 June
2021 of GBP0.5m have been treated as exceptional costs in line with
the Group's accounting policy and the treatment of similar costs
during the year ended 31 December 2020.
The Group also completed the acquisition of Whitney, Bradley
& Brown, Inc (WBB) in 2021. The transaction and implementation
costs incurred during the six months ended 30 June 2021 of GBP2.0m
have been treated as exceptional costs in line with the Group's
accounting policy.
There were exceptional costs totalling GBP0.3m (2020: GBP1.2m)
associated with the UK Government review and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2021. No
significant further costs are expected to be incurred.
Exceptional tax for the period was a tax credit of GBP0.7m
(2020: GBP0.4m charge) which arises on exceptional items within
operating profit.
7. Investment revenue
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
------------------------------------------------ ---------- ---------- ------------
Interest receivable on other loans and deposits 0.3 0.1 0.2
Net interest receivable on retirement benefit
obligations (note 16) 0.6 0.6 1.2
Other dividends received 0.4 - 0.4
Movement in discount on other debtors - - 0.1
------------------------------------------------ ---------- ---------- ------------
1.3 0.7 1.9
------------------------------------------------ ---------- ---------- ------------
8. Finance costs
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
----------------------------------------- ---------- ---------- ------------
Interest payable on lease liabilities 4.1 4.8 9.5
Interest payable on other loans 7.9 7.4 15.3
Facility fees and other charges 1.3 1.0 2.1
Movement in discount on provisions - - 0.2
----------------------------------------- ---------- ---------- ------------
13.3 13.2 27.1
Foreign exchange on financing activities 0.6 0.2 0.7
----------------------------------------- ---------- ---------- ------------
13.9 13.4 27.8
----------------------------------------- ---------- ---------- ------------
9. Tax
The tax charge for the six months ended 30 June 2021 is
calculated using the full year forecasted effective tax rate by
territory in which the Group has derived its profits and then
applying this to the actual profit for the period in each
territory. The tax impacts of items specific to the period are then
included to provide the half year actual tax charge.
A tax credit of GBP130.7m (2020: GBP5.7m charge) on
pre-exceptional profits has been recognised which includes an
underlying tax charge of GBP25.6m, the tax impact of amortisation
of intangibles arising on acquisition of GBP1.2m and a GBP155.1m
credit on non-underlying items.
In relation to the GBP155.1m credit on non-underlying items,
GBP144.8m of the credit relates to recognition of deferred tax
assets in relation to the Group's UK operations which have not
previously been recognised as assets. It is now considered that the
UK business has returned to sustainable profitability, and there is
sufficient certainty of future taxable profits against which these
deductions can be utilised to enable the recognition of an
increased deferred tax asset. GBP10.8m of the credit relates to the
revaluation of the deferred tax asset at 1 January 2021, following
the announcement in the UK Budget earlier this year that the tax
rate in the UK is to increase in 2023 to 25%. The remaining GBP0.5m
non-underlying tax charge relates to tax on non-underlying income
that is taxable.
The rate change movement on the revaluation of the deferred tax
liability held in connection with the Group's defined benefit
pension schemes and foreign exchange hedges flows through the
Statement of Comprehensive Income (SOCI). The rate change movement
on the revaluation of all other elements of deferred tax such as
other timing differences and recoverable losses is shown through
the income statement.
The tax rate on profits before exceptional items at (122.8)% is
lower than the UK standard corporation tax rate of 19.0%. This is
mainly due to the impact of non-underlying credits discussed above.
Other items which reduce the tax charge below the UK standard
corporation tax rate are our joint ventures, whose post-tax results
are included in our pre-tax profit, and the credit associated with
a reduction in provisions for uncertain tax positions, made as part
of our regular reassessment of tax exposures across the Group,
which has led us to conclude that certain provisions are no longer
likely to lead to an outflow of tax. The impact of this is
partially offset by higher rates of tax on profits arising on our
international operations.
A GBP167.0m UK tax asset is recognised on the Group's balance
sheet at 30 June 2021 (31 December 2020: GBP30.6m) on the basis
that structural changes in the underlying UK business indicate a
sustained return to profitability which would enable future tax
deductions within the UK to be utilised. The return to
profitability is as a result of onerous contracts ending and new
profitable long term contracts being entered into, as well as a
significant reduction in exceptional restructuring spend following
the strategy review in 2015, which also reduced the level of
overhead spend within the UK business.
10. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been
calculated in accordance with IAS33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the
following data:
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Number of shares millions millions millions
---------------------------------------------- ---------- ---------- ------------
Weighted average number of ordinary shares
for the purpose of basic EPS 1,232.2 1,226.5 1,229.1
Effect of dilutive potential ordinary shares:
Shares under award 20.4 18.2 25.2
---------------------------------------------- ---------- ---------- ------------
Weighted average number of ordinary shares
for the purpose of diluted EPS 1,252.6 1,244.7 1,254.3
---------------------------------------------- ---------- ---------- ------------
Per share Per share Per share
Earnings amount Earnings amount Earnings amount
30 June 30 June 30 June 30 June 31 December 31 December
2021 2021 2020 2020 2020 2020
Basic EPS GBPm pence GBPm pence GBPm pence
-------------------------------- -------- --------- -------- --------- ------------ ------------
Earnings for the purpose of
basic EPS 235.1 19.08 70.4 5.74 133.8 10.89
Effect of dilutive potential
ordinary shares (0.31) (0.08) (0.22)
-------------------------------- -------- --------- -------- --------- ------------ ------------
Diluted EPS 235.1 18.77 70.4 5.66 133.8 10.67
-------------------------------- -------- --------- -------- --------- ------------ ------------
Basic EPS excluding exceptional
items
-------------------------------- -------- --------- -------- --------- ------------ ------------
Earnings for the purpose of
basic EPS 235.1 19.08 70.4 5.74 133.8 10.89
Add back exceptional items 2.7 0.22 (13.6) (1.11) (12.5) (1.02)
Add back tax on exceptional
items (0.7) (0.06) 0.4 0.03 0.4 0.03
-------------------------------- -------- --------- -------- --------- ------------ ------------
Earnings excluding exceptional
items for the basis of basic
EPS 237.1 19.24 57.2 4.66 121.7 9.90
Effect of dilutive potential
ordinary shares (0.31) (0.06) (0.20)
-------------------------------- -------- --------- -------- --------- ------------ ------------
Excluding exceptional items,
diluted 237.1 18.93 57.2 4.60 121.7 9.70
-------------------------------- -------- --------- -------- --------- ------------ ------------
The weighted average number of shares for EPS purposes was
1,232.2m for the six months ended 30 June 2021 (2020: 1,226.5m) and
diluted weighted average number of shares was 1,252.6m (2020:
1,244.7m). The increase in the weighted average number of shares is
due to the full year impact of the 10,000,000 new shares issued to
the Serco Group plc 1998 Employee Share Ownership Trust (ESOT) in
March 2020, used to satisfy awards granted under the Group's share
award schemes.
The number of Ordinary Shares in issue has reduced during the
six months to 30 June 2021 as a result of the Serco Share
repurchase programme (the Programme). At the end of 2020, the Group
announced its intention to repurchase Ordinary Shares with a value
of up to GBP40m, subject to a maximum of 122,338,063 Ordinary
Shares being purchased, during the period 4 January 2021 to 11 June
2021. Through the Programme, the Group repurchased 30,721,849
Ordinary Shares for total consideration of GBP40.7m including
fees.
On 28 June 2021, the Group announced that, of the Ordinary
Shares repurchased and held in Treasury, 15,350,000 were
transferred to the ESOT to be used to satisfy awards granted under
the Group's share award schemes. The 15,371,849 Ordinary Shares
remaining in Treasury were cancelled on 28 June 2021.
11. Goodwill
Goodwill is stated at cost less any provision for impairment and
is compared against the associated recoverable amount at least
annually. The value of each cash generating unit (CGU) is based on
value in use calculations derived from forecast cash flows based on
past experience, adjusted to reflect market trends, economic
conditions and key risks. These forecasts include an estimate of
new business wins and an assumption that the final year forecast
continues on into perpetuity at a CGU specific growth rate.
Goodwill is required to be tested for impairment at least once
every financial year, irrespective of whether there is any
indication of impairment. The annual impairment review typically
takes place in the final quarter of the year. However, if there are
indicators of impairment, an earlier review is also required.
There have been no indicators of impairment since the full
impairment test undertaken for the 2020 year-end. Consistent with
the approach adopted at 30 June 2020, specific consideration has
been given to whether there are any indicators of impairment across
the Group's cash generating units (CGUs) relating to the ongoing
impact of the Covid-19 pandemic. The pandemic itself is not an
impairment indicator, however economic shocks resulting from the
pandemic could be considered to be indicators which otherwise would
not have existed. In assessing for potential indicators of
impairment, the Group has gathered information at both macro and
micro levels, globally and on the basis of the individual
geographies in which the Group operates.
The Group has not been impacted in a manner which would indicate
the existence of impairment indicators and will prepare a full
goodwill assessment at the end of the year. When considering the
potential existence of both internal and external impairment
indicators, the Group assessed certain key measures and other
sources of available information which included, but were not
limited to, in particular the absence of:
-- Any obsolescence indicators within the Group's physical assets;
-- Any plans to dispose of CGUs;
-- Indicators of worse than expected performance to an extent that would have
caused an impairment had they been known at the time of the latest full
impairment review;
-- Net operating cash outflows or operating losses;
-- A significant decline in market value; or
-- Carrying amounts of net assets in excess of market capitalisation.
The potential indicator with the largest possible impact was the
increase in market interest rates globally which impact on the
Group's discount rates and reduce the present value of future cash
flows. Following rises throughout most of 2020, the discount rates
observed by the Group have decreased across all CGU operating
locations since 31 December 2020.
Following all of the above analysis undertaken, no indicators of
impairment have been identified.
12. Analysis of Net Debt
30 June 2021
As at As at
1 January Cash Exchange Non-cash 30 June
2021 flow Acquisitions* differences movements** 2021
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ---------- ------- ------------- ------------ ------------- --------
Loans payable (388.8) (14.5) (14.3) 5.8 - (411.8)
Lease obligations (402.6) 60.0 (2.4) 1.8 (82.5) (425.7)
--------------------------- ---------- ------- ------------- ------------ ------------- --------
Liabilities arising
from financing activities (791.4) 45.5 (16.7) 7.6 (82.5) (837.5)
Cash and cash equivalents 335.7 (144.2) 7.0 (5.2) - 193.3
Derivatives relating
to Net Debt (4.7) - - (2.0) - (6.7)
--------------------------- ---------- ------- ------------- ------------ ------------- --------
Net Debt (460.4) (98.7) (9.7) 0.4 (82.5) (650.9)
--------------------------- ---------- ------- ------------- ------------ ------------- --------
* Acquisitions represent the net cash/(debt) acquired on acquisition
** Non-cash movements relate to the net impact of entering into
new leases and exiting certain leases before the end of the lease
term without payment of a cash termination cost.
30 June 2020
As at As at
1 January Cash Exchange Non-cash 30 June
2020 flow differences movements* 2020
GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------- ------ ------------ ------------ --------
Loans payable (305.0) (68.5) (16.3) (0.6) (390.4)
Lease obligations (369.9) 52.8 (6.9) (35.9) (359.9)
-------------------------- ---------- ------ ------------ ------------ --------
Liabilities arising from
financing activities (674.9) (15.7) (23.2) (36.5) (750.3)
Cash and cash equivalents 89.5 152.9 2.5 - 244.9
Derivatives relating
to Net Debt 1.0 - 1.6 - 2.6
-------------------------- ---------- ------ ------------ ------------ --------
Net Debt (584.4) 137.2 (19.1) (36.5) (502.8)
-------------------------- ---------- ------ ------------ ------------ --------
* Non-cash movements relate to the net impact of entering into
new leases and exiting certain leases before the end of the lease
term without payment of a cash termination cost.
31 December 2020
As at As at
1 January Cash Exchange Non-cash 31 December
2020 flow differences movements* 2020
GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------- ------ ------------ ------------ ------------
Loans payable (305.0) (99.4) 15.6 - (388.8)
Lease obligations (369.9) 100.8 0.9 (134.4) (402.6)
-------------------------- ---------- ------ ------------ ------------ ------------
Liabilities arising from
financing activities (674.9) 1.4 16.5 (134.4) (791.4)
Cash and cash equivalents 89.5 244.4 1.8 - 335.7
Derivatives relating
to Net Debt 1.0 - (5.7) - (4.7)
-------------------------- ---------- ------ ------------ ------------ ------------
Net Debt (584.4) 245.8 12.6 (134.4) (460.4)
-------------------------- ---------- ------ ------------ ------------ ------------
* Non-cash movements relate to the net impact of entering into
new leases and exiting certain leases before the end of the lease
term without payment of a cash termination cost.
13. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- -------- --------- --------- ------ ------
As at 1 January 2021 83.2 15.7 14.5 64.6 178.0
Arising on acquisition 1.7 - - - 1.7
Charged to income statement
- other 7.6 1.2 1.2 4.9 14.9
Released to income statement
- exceptional (0.1) - - - (0.1)
Released to income statement
- other (3.6) (1.2) (0.4) (5.2) (10.4)
Transfer from accruals 1.5 - - 1.2 2.7
Utilised during the period (4.5) (0.3) (0.7) (0.9) (6.4)
Exchange differences (2.9) (0.1) - (0.1) (3.1)
----------------------------- -------- --------- --------- ------ ------
As at 30 June 2021 82.9 15.3 14.6 64.5 177.3
----------------------------- -------- --------- --------- ------ ------
Analysed as:
Current 28.8 4.5 14.6 21.6 69.5
Non-current 54.1 10.8 - 42.9 107.8
----------------------------- -------- --------- --------- ------ ------
82.9 15.3 14.6 64.5 177.3
----------------------------- -------- --------- --------- ------ ------
Employee related provisions are for end of contract liabilities
and amounts in relation to restructuring, together with long-term
service awards and terminal gratuity liabilities which have been
accrued and are based on contractual entitlement, together with an
estimate of the probabilities that employees will stay until
rewards fall due and receive all relevant amounts. The provisions
will be utilised over various periods driven by local legal or
regulatory requirements, the timing of which is not certain.
The majority of property provisions relate to leased properties
and are associated with the requirement to return properties to
either their original condition, or to enact specific improvement
activities in advance of exiting leases. Dilapidations associated
with leased properties are held as a provision until such time as
they fall due, with the longest running lease ending in April
2039.
The present value of the estimated future cash outflow required
to settle the contract obligations as they fall due over the
respective contracts has been used in determining the provision.
Individual provisions are only discounted where the impact is
assessed to be significant. Currently, no contract provisions are
discounted. When used, discount rates 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.
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. The timing of utilisation is dependent on future
events which could occur within the next 12 months or over a longer
period with the majority expected to be settled by 30 June
2023.
14. Contingent liabilities
The Company has guaranteed overdrafts, leases and bonding
facilities of its joint ventures and associates up to a maximum
value of GBP3.8m (31 December 2020: GBP3.8m). The actual commitment
outstanding at 30 June 2021 was GBP3.8m (31 December 2020:
GBP3.8m).
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 30 June 2021 was
GBP244.9m (31 December 2020: GBP247.9m).
Following the announcement during 2020 that the Group has
received a claim seeking damages for alleged losses as a result of
the reduction in Serco's share price in 2013, the Group has
continued to assess the merit, likely outcome and potential impact
on the Group of any such litigation that either has been or might
potentially be brought against the Group. Any outcome is subject to
a number of significant uncertainties and therefore, it is not
possible to assess the quantum of any such litigation as at the
date of this disclosure.
The Group is in discussion with HMRC regarding the application
of certain employer duties from April 2017. The Group has received
strong legal opinion that a court is likely to find in the Group's
favour and therefore no provision has been recorded on the balance
sheet in respect of the matter. Due to the range of subjective
outcomes it is not possible to disclose any meaningful quantitative
amount associated with any liability where a cost to the Group of
GBPnil continues to be the most likely outcome.
The Group is also aware of other claims and potential claims
which involve or may involve legal proceedings against the Group
although the timing of settlement of these claims remains
uncertain. The Directors are of the opinion, having regard to legal
advice received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material
effect on the Group's financial position.
15. Financial risk management
The vast majority of financial instruments are held at amortised
cost. The classification of the fair value measurement falls into
three levels, based on the degree to which the fair value is
observable. The levels are as follows:
Level 1: Inputs derived from unadjusted quoted prices in active
markets for identical assets or liabilities.
Level 2: Inputs are inputs, other than quoted prices included
within Level 1, that are observable for the asset or liability,
either directly or indirectly.
Level 3: Inputs are unobservable inputs for the asset or
liability.
Based on the above, the derivative financial instruments held by
the Group at 30 June 2021 and the comparison fair values for loans
and leases, are all considered to fall into Level 2. There are no
Level 3 items. As at 30 June 2021, the Group held Level 2
derivative instruments in designated hedge relationships or
designated as fair value through the P&L made up of financial
assets of GBP1.6m (31 December 2020: GBP4.5m) and financial
liabilities of GBP8.5m (31 December 2020: GBP9.4m).
There have been no transfers between levels in the six months to
30 June 2021.
16. Defined benefit schemes
Characteristics
Among our non-contract specific schemes, the largest is the
Serco Pension and Life Assurance Scheme (SPLAS). The most recent
full actuarial valuation of SPLAS was undertaken as at 5 April 2018
and completed in June 2019. The exercise to value the scheme as at
5 April 2021 is underway with completion anticipated during the
first half of 2022. The actuarially assessed deficit for funding
purposes at 5 April 2018 was GBP26.0m. A summary valuation was also
undertaken as at 30 June 2021 when the estimated actuarial deficit
of SPLAS was GBP20.0m (2020: GBP36.0m) on the funding basis,
whereas the accounting valuation at 30 June 2021 resulted in an
asset of GBP157.2m. The primary reason a difference arises is that
pension scheme accounting requires the valuation to be performed on
the basis of a best estimate whereas the funding valuation used by
the trustees makes more prudent assumptions.
A revised schedule of contributions for SPLAS was agreed during
2019, with 30.8% of pensionable salaries due to be paid from 1
November 2019, changing to 30.3% from 1 November 2020. The schedule
of contributions also determined that additional shortfall
contributions were required - a total of GBP13.2m of these have
already been made with further amounts of GBP1.7m per annum due for
the years 2022 to 2028.
Values recognised in total comprehensive income
The total amounts recognised in the financial statements in
respect of all schemes are analysed as follows:
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- ---------- ---------- ------------
Current service cost - employer 2.6 2.4 4.7
Administrative expenses and taxes 0.5 0.6 1.6
----------------------------------------------- ---------- ---------- ------------
Recognised in arriving at operating profit
before exceptional items 3.1 3.0 6.3
----------------------------------------------- ---------- ---------- ------------
Interest income on scheme assets - employer (11.0) (14.6) (29.3)
Interest on franchise adjustment (0.1) (0.1) (0.1)
Interest cost on scheme liabilities - employer 10.5 14.1 28.2
----------------------------------------------- ---------- ---------- ------------
Finance income (0.6) (0.6) (1.2)
----------------------------------------------- ---------- ---------- ------------
Six months Six months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Included within the SOCI GBPm GBPm GBPm
--------------------------------------------- ---------- ---------- ------------
Actual return on scheme assets (24.2) 152.9 216.8
Less: interest income on scheme assets (11.0) (14.7) (29.4)
--------------------------------------------- ---------- ---------- ------------
(35.2) 138.2 187.4
Effect of changes in demographic assumptions - - 0.4
Effect of changes in financial assumptions 62.7 (114.0) (173.6)
Effect of experience adjustments 19.6 5.2 4.0
--------------------------------------------- ---------- ---------- ------------
Remeasurements 47.1 29.4 18.2
--------------------------------------------- ---------- ---------- ------------
Change in franchise adjustment (1.1) 1.9 2.5
Change in members' share (1.0) 1.1 1.4
--------------------------------------------- ---------- ---------- ------------
Actuarial (loss)/gain on reimbursable rights (2.1) 3.0 3.9
--------------------------------------------- ---------- ---------- ------------
Total pension gain recognised in the SOCI 45.0 32.4 22.1
--------------------------------------------- ---------- ---------- ------------
Balance sheet values
The total assets and liabilities of all schemes are:
As at As at As at
30 June 30 June 31 December
2021 2020 2020
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- --------- ------------
Equities 57.7 52.1 55.6
Bonds except LDIs 360.9 349.0 367.3
Pooled investment funds 77.4 61.8 62.8
LDIs 363.1 425.8 408.3
Property 1.7 1.8 1.6
Cash and other 8.7 8.8 14.7
Annuity policies 680.9 663.6 690.2
----------------------------------------- --------- --------- ------------
Fair value of scheme assets 1,550.4 1,562.9 1,600.5
Present value of scheme liabilities (1,435.6) (1,485.3) (1,534.8)
----------------------------------------- --------- --------- ------------
Net amount recognised 114.8 77.6 65.7
Franchise adjustment* 7.4 7.7 8.4
Members' share of deficit 4.9 5.1 5.6
----------------------------------------- --------- --------- ------------
Net retirement benefit asset 127.1 90.4 79.7
----------------------------------------- --------- --------- ------------
Net pension liability (30.1) (34.7) (34.9)
Net pension asset 157.2 125.1 114.6
----------------------------------------- --------- --------- ------------
Net retirement benefit asset 127.1 90.4 79.7
Deferred tax liabilities (31.6) (17.0) (15.2)
----------------------------------------- --------- --------- ------------
Net retirement benefit asset (after tax) 95.5 73.4 64.5
----------------------------------------- --------- --------- ------------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
The SPLAS Trust Deed gives the Group an unconditional right to a
refund of surplus assets, assuming the full settlement of plan
liabilities in the event of a plan wind-up. Pension assets are
deemed to be recoverable and there are no adjustments in respect of
minimum funding requirements as economic benefits are available to
the Group either in the form of future refunds or, for plans still
open to benefit accrual, in the form of possible reductions in
future contributions.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which represents
90% of total liabilities and 94% of total assets of the defined
benefit pension schemes in which the Group participates. The
significant actuarial assumptions with regards to the determination
of the defined benefit obligation are set out below.
The Group continued to set RPI inflation in line with the market
break-even expectations less an inflation risk premium. The
inflation risk premium has remained at 0.3% at 30 June 2021,
reflecting a decrease in potential market distortions caused by RPI
reform proposals. For CPI, the Group retained the assumed
difference between the RPI and CPI by of an average of 0.6% per
annum.
30 June 30 June 31 December
2021 2020 2020
Main assumptions % % %
------------------------- -------------- -------------- --------------
Rate of salary increases 2.80 2.40 2.50
Rate of increase in 2.70 (CPI) and 2.35 (CPI) and 2.40 (CPI) and
pensions in payment 3.00 (RPI) 2.70 (RPI) 2.75 (RPI)
Rate of increase in 2.30 (CPI) and 1.90 (CPI) and 2.20 (CPI) and
deferred pensions 3.20 (RPI) 2.80 (RPI) 2.80 (RPI)
Inflation assumption 2.30 (CPI) and 1.90 (CPI) and 2.00 (CPI) and
- pre-retirement 3.20 (RPI) 2.80 (RPI) 2.90 (RPI)
Inflation assumption 2.80 (CPI) and 2.40 (CPI) and 2.40 (CPI) and
- post-retirement 3.20 (RPI) 2.80 (RPI) 2.75 (RPI)
Discount rate 1.90 1.60 1.40
------------------------- -------------- -------------- --------------
30 June 30 June 31 December
2021 2020 2020
Post retirement mortality years years years
-------------------------- ------- ------- -----------
Current pensioners
at 65 - male 21.7 21.6 21.6
Current pensioners
at 65 - female 24.3 24.2 24.2
Future pensioners at
65 - male 23.9 23.8 23.9
Future pensioners at
65 - female 26.4 26.2 26.3
-------------------------- ------- ------- -----------
Sensitivity analysis
Sensitivity analysis is provided below, based on reasonably
possible changes of the assumptions occurring at the end of the
reporting period, assuming all other assumptions are held constant.
The sensitivities have been derived in the same manner as the
defined benefit obligation as at 30 June 2021 where the Group's
defined benefit obligation is estimated using the Projected Unit
Credit method. Under this method each participant's benefits are
attributed to years of service, taking into consideration future
salary increases and the scheme's benefit allocation formula. Thus,
the estimated total pension to which each participant is expected
to become entitled at retirement is broken down into units, each
associated with a year of past or future credited service. The
Group's defined benefit obligation as at 30 June 2021 is calculated
on the actuarial assumptions agreed as at that date. The
sensitivities are calculated by changing each assumption in turn
following the methodology above with all other things held
constant. The change in the defined benefit obligation from
updating the single assumption represents the impact of that
assumption on the calculation of the Group's defined benefit
obligation.
Increase/(decrease) 30 June 30 June 31 December
in defined benefit 2021 2020 2020
obligation GBPm GBPm GBPm
-------------------------- ------- ------- -----------
Discount rate - 0.5%
increase (114.3) (119.9) (125.3)
Discount rate - 0.5%
decrease 129.5 136.1 142.4
Inflation - 0.5% increase 94.9 103.3 103.7
Inflation - 0.5% decrease (87.9) (91.6) (96.6)
Rate of salary increase
- 0.5% increase 3.6 3.6 3.7
Rate of salary increase
- 0.5% decrease (3.4) (3.4) (3.5)
Mortality - one-year
age rating 55.2 55.6 59.8
-------------------------- ------- ------- -----------
17. Related party transactions
Transactions between the Company and its wholly owned
subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. The Group also
enters into transactions with the Directors, however disclosure of
such transactions is only made annually. Transactions between the
Group and its joint venture undertakings and associates are
disclosed below.
Transactions
During the period, Group companies entered into the following
transactions with joint ventures and associates:
Transactions
for the
six months Current Non current
ended 30 Outstanding Outstanding
June at 30 June at 30 June
2021 2021 2021
GBPm GBPm GBPm
------------------------------------------- ------------ ------------ ------------
Sale of goods and services
Associates 0.8 - -
Other
Dividends received - associates 9.6 - -
Receivable from consortium for tax - joint
ventures - 2.0 0.1
------------------------------------------- ------------ ------------ ------------
Total 10.4 2.0 0.1
------------------------------------------- ------------ ------------ ------------
Joint venture receivable amounts outstanding have arisen from
transactions undertaken during the general course of trading, are
unsecured, and will be settled in cash. No guarantees have been
given or received.
Transactions
for the
six months Current Non current
ended 30 Outstanding Outstanding
June at 30 June at 30 June
2020 2020 2020
GBPm GBPm GBPm
------------------------------------------- ------------ ------------ ------------
Sale of goods and services
Joint ventures 0.1 - -
Associates 1.2 0.1 -
Other
Dividends received - joint ventures 2.3 - -
Profit share received - joint ventures 2.9 - -
Dividends received - associates 9.1 - -
Receivable from consortium for tax - joint
ventures - - 2.2
Total 15.6 0.1 2.2
Transactions
for the Current Non current
year ended Outstanding Outstanding
31 December at 31 December at 31 December
2020 2020 2020
GBPm GBPm GBPm
------------------------------------------- ------------ --------------- ---------------
Sale of goods and services
Joint ventures 0.1 - -
Associates 2.3 0.2 -
Other
Dividends received - joint ventures 4.3 - -
Dividends received - associates 15.5 - -
Receivable from consortium for tax - joint
ventures (0.1) 2.0 0.1
Total 22.1 2.2 0.1
As announced on 2 November 2020, the Ministry of Defence
notified the Group that it would be exercising its ability to
terminate services provided by the Group through AWE Management
Limited (AWEML) on 30 June 2021. The exit from the contract was in
advance of the final milestones anticipated in the contract, and as
a result, the operating performance includes judgements over the
completion status of certain items which may subsequently be
adjusted. The transaction included the sale of AWE plc from AWEML,
however the Group continues to own 24.5% of AWEML which holds
receivables and payables with AWE plc and these are expected to be
settled as the negotiations regarding the termination and disposal
conclude.
On 31 May 2020, the Group disposed of its 33% interest in
Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP
(together Viapath). As part of the transaction, the Group received
an amount of GBP11.0m for its share in the net assets of the joint
venture. At the same time as disposing of the Group's interest in
Viapath, the Group recovered a loan into the joint venture of
GBP1.2m and GBP2.9m of profit share which was previously considered
to be irrecoverable.
18. Notes to the Condensed Consolidated Cash Flow Statement
2021 2020
Before Before
exceptional 2021 Exceptional 2021 exceptional 2020 Exceptional 2020
items items Total items items Total
Six months ended 30 June GBPm GBPm GBPm GBPm GBPm GBPm
Operating profit for the period 119.0 (2.7) 116.3 75.5 13.6 89.1
Adjustments for:
Share of profits in joint ventures
and associates (6.4) - (6.4) (7.0) - (7.0)
Share based payment expense 8.1 - 8.1 5.9 - 5.9
Impairment of property, plant - - - - - -
and equipment - owned
Impairment of property, plant
and equipment - leased - - - 0.2 - 0.2
Depreciation of property, plant
and equipment -owned 9.1 - 9.1 7.8 - 7.8
Depreciation of property, plant
and equipment -leased 58.8 - 58.8 46.2 - 46.2
Amortisation of intangible assets
- owned 12.9 - 12.9 12.5 - 12.5
Exceptional profit on disposal
of subsidiaries and operations - - - - (11.0) (11.0)
Reversal of impairment on loans
to JVs - - - - (1.2) (1.2)
(Profit)/loss on early termination
of leases (0.7) - (0.7) 0.1 - 0.1
Loss on disposal of property, - - - - - -
plant and equipment
Loss on disposal of intangible
assets 1.5 - 1.5 0.3 - 0.3
Exceptional transaction costs - - - - - -
Increase/(decrease) in provisions 1.2 (0.6) 0.6 5.6 (3.4) 2.2
Other non cash movements - - - 0.1 - 0.1
Total non cash items 84.5 (0.6) 83.9 71.7 (15.6) 56.1
Operating cash inflow/(outflow)
before movements in working
capital 203.5 (3.3) 200.2 147.2 (2.0) 145.2
Decrease /(increase) in inventories 0.7 - 0.7 (1.2) - (1.2)
Decrease in receivables 34.1 - 34.1 7.5 - 7.5
Increase/(decrease) in payables 8.8 (0.4) 8.4 12.9 (2.2) 10.7
Movements in working capital 43.6 (0.4) 43.2 19.2 (2.2) 17.0
Cash generated by operations 247.1 (3.7) 243.4 166.4 (4.2) 162.2
Tax paid (24.5) - (24.5) (12.0) - (12.0)
Net cash inflow/(outflow) from
operating activities 222.6 (3.7) 218.9 154.4 (4.2) 150.2
2020 2020
Before exceptional Exceptional 2020
items items Total
Year ended 31 December GBPm GBPm GBPm
------------
Operating profit for the year 166.7 12.5 179.2
Adjustments for:
Share of profits in joint ventures and
associates (12.7) - (12.7)
Exceptional distribution from joint venture - (1.9) (1.9)
Share based payment expense 11.2 - 11.2
Impairment of property, plant and equipment
- owned 0.3 - 0.3
Impairment of property, plant and equipment
- leased 0.4 - 0.4
Depreciation of property, plant and equipment
- owned 15.9 - 15.9
Depreciation of property, plant and equipment
- leased 93.5 - 93.5
Amortisation of intangible assets - owned 23.0 - 23.0
Exceptional profit on disposal of subsidiaries
and operations - (11.0) (11.0)
Reversal of impairment on loans to JVs - (1.2) (1.2)
Profit on early termination of leases (2.9) - (2.9)
Profit on disposal of property, plant
and equipment (0.4) - (0.4)
Loss on disposal of intangible assets 0.6 - 0.6
Increase/(decrease) in provisions 16.2 (4.0) 12.2
Total non cash items 145.1 (18.1) 127.0
Operating cash inflow/(outflow) before
movements in working capital 311.8 (5.6) 306.2
Increase in inventories (2.9) - (2.9)
Increase in receivables (0.1) - (0.1)
(Decrease)/increase in payables (2.3) 3.6 1.3
------------ ------
Movements in working capital (5.3) 3.6 (1.7)
------------ ------
Cash generated by operations 306.5 (2.0) 304.5
Tax paid (35.9) - (35.9)
Non cash R&D expenditure (0.1) - (0.1)
------------ ------
Net cash inflow/(outflow) from operating
activities 270.5 (2.0) 268.5
------------ ------
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END
IR USUARAWUWRUR
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