TIDMSRP
RNS Number : 2748Q
Serco Group PLC
25 February 2021
2020 full year results
25 February 2021
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Change Change
at reported at constant
Year ended 31 December 2020 2019 currency currency
============================================= =========== =========== ============ ============
Revenue (1) GBP3,884.8m GBP3,248.4m +20% +20%
--------------------------------------------- ----------- ----------- ------------ ------------
Underlying Trading Profit (UTP) (2) GBP163.1m GBP120.2m +36% +37%
Reported Operating Profit (i.e. after
exceptional items) (2) GBP179.2m GBP102.5m +75%
--------------------------------------------- ----------- ----------- ------------ ------------
Underlying Earnings Per Share (EPS),
diluted (3) 8.43p 6.16p +37%
Reported EPS (i.e. after exceptional
items), diluted 10.67p 4.21p +153%
------------
Dividend Per Share (recommended re-instated) 1.4p
--------------------------------------------- ----------- ----------- ------------
Free Cash Flow (4) GBP134.9m GBP62.0m +118%
--------------------------------------------- ----------- ----------- ------------
Adjusted Net Debt (5) GBP57.8m GBP214.5m -73%
Reported Net Debt (6) GBP460.4m GBP584.4m -21%
--------------------------------------------- ----------- ----------- ------------
Very strong year across global business in 2020; guidance
increased for 2021.
Highlights
-- Revenue : grew by 20% to GBP3.9bn, with organic growth of 16%,
a 5% uplift from our US acquisition in August 2019 of NSBU and
-1% from currency.
-- Underlying Trading Profit : increased by 36% to GBP163m, with
NSBU adding 8%; net impact of Covid-19 around GBP2m, or 1% of
UTP. Margin increased from 3.7% to 4.2%. Around three-quarters
of our profit(7) is now from outside the UK.
-- Reported Operating Profit: increased by 75%, or GBP77m, to GBP179m,
as a result of the 36% increase in underlying profit and an exceptional
gain on disposal.
-- Earnings per Share: increased by 37% on an underlying basis and
153% on a reported basis.
-- Free Cash Flow: more than doubled, to GBP135m.
-- Adjusted Net Debt: reduced by GBP157m to GBP58m. Covenant leverage
stands at 0.5x EBITDA.
-- Order Intake and Pipeline: some customer decisions slipped from
Q4 2020 to Q1 2021, leading to order intake of GBP3.1bn (80% book-to-bill)
and significant year-on-year increase in year-end qualified pipeline
of new business to GBP6.4bn (2019: GBP4.9bn).
-- Government support & employee recognition: the Group has repaid
all UK government employment and liquidity support, including GBP2m
of furlough payments, and has made ex-gratia payments totalling
GBP5m to around 50,000 front-line staff.
-- Dividends: the Board recommends restarting dividends, last paid
to Serco shareholders in 2014, with a payment of 1.4p in respect
of the 2020 financial year.
-- Acquisitions: in January 2021 we acquired Facilities First Australia
(FFA), a leading Australian facilities management company for A$78m.
In February 2021 we announced the acquisition, subject to regulatory
approval, of Whitney, Bradley & Brown Inc (WBB), a leading provider
of technical and engineering services to the US military for a
consideration of $295m.
-- Outlook for 2021(8) : having delivered compound annual growth
in profits of 33% over the last three years, we expect revenues
and trading profit to continue to grow in 2021, albeit at a slower
rate than seen in recent years. Reflecting a strong start to the
year, we have increased our profit guidance for 2021 by 6%, which
equates to year-on-year growth at constant currency of 10%. This
excludes the effect of the acquisition of WBB. Guidance will be
updated for this following completion.
Rupert Soames, Serco Group Chief Executive, said: "In the coming
months, every company's trading statement will pay glowing tributes
to employees, and thank them for their resilience and courage. I
have struggled to think of words that are not trite or clichés and
will not be repeated by a thousand other CEOs, so I will use
instead the words of a colleague, whose job is escorting prisoners,
who wrote to me in January:
"Working as a Custody Officer is both challenging and rewarding,
yes, the current situation with the virus has certainly changed the
way in which we work and has made day to day life more challenging
for everyone within Serco but also for the entire world. My husband
has cancer and also a disease which has caused him to have no
immune system. People have asked me why I would continue to work
knowing that every day when I go home to him, I am putting his
health at risk. The answer to this question is this: if everyone
took that attitude then businesses would suffer more than they are
already, people like myself and my colleagues are what keep the
contract running, and without my work to focus on I am sure I would
have gone crazy by now. Both my husband and I know that life throws
us curve balls now and again and we have to get on and make the
best of it and most importantly never give in! My husband and I
acknowledge how precious life is, we are as careful as we possibly
can be in protecting ourselves and others and acknowledge that life
has to go on. Serco has looked after its employees very well
throughout this terrible time. I am grateful to be able to work
every day in a job that I love doing."
Around 90% of our 55,000 colleagues cannot work from home,
because they work in places such as prisons, hospitals, ships, or
trains. They have turned up each day to enable us to deliver our
promise of supporting the delivery of public services; many have
suffered loss, either of colleagues, friends or family, and still
turned up for work. My respect and gratitude for them is unbound,
and I want to extend our condolences to the families of those
colleagues who have died from Covid-19 over the last year.
Turning to our financial performance in 2020, growing Revenues
by 20% (2019: +15%) and Underlying Trading Profit by 36% (2019:
+29%), is all the more impressive as it follows strong growth in
2019 and underlines the momentum behind Serco's return to robust
financial health. This performance is particularly gratifying given
the disruption caused to some parts of our business by Covid-19;
despite approaching GBP400m of Covid-19 related revenues, the net
impact of Covid-19 was around 1% of Underlying Trading Profit, and
the balance of the 35% increase in profits came from the normal
operations of the business.
Our free cash flow, now released from the drag of recent years
of Onerous Contract Provisions, was very strong at GBP135m, which,
combined with strong growth in EBITDA brings our covenant leverage
ratio down to 0.5x, which puts us in a very strong financial
position. This has enabled us to finance the recently announced
acquisition of WBB from our existing debt facilities and still be
around the middle of our target leverage range of 1-2 times Net
Debt : EBITDA.
It is pleasing finally to be able to re-start paying dividends,
last paid in 2014. The Board has thought carefully about this,
particularly in the light of the current circumstances; in April
2020, we justified withdrawing the proposed Final Dividend in
respect of 2019 saying: "At a time when the UK and other
governments are helping Serco with its liquidity, it seems
inappropriate to use that cash for anything other than its intended
purpose of protecting the financial strength and resilience of our
business". Subsequently, and for the same reason, we did not
propose a dividend at the half year in August 2020. Four things
have changed for us since the earlier decision-points in April and
August. First, any concerns we had about liquidity have proved
groundless; we have successfully re-entered the long term private
placement debt market (and at lower cost); we have been strongly
cash-positive in 2020; leverage is below our target range at year
end, and even after the WBB acquisition would sit comfortably
within our target range. Secondly, we have refunded all employment
and liquidity support paid to Serco by governments, with the
exception of GBP12m in the USA, for which there is no mechanism for
early repayment, so will be repaid as scheduled in 2021 and 2022.
Thirdly, whilst the profits arising from our work on Covid-19 are
ephemeral, they do not represent a material proportion of our
profits in the year (net, around 1% of Underlying Trading Profit).
Finally, we have sought to recognise the intense pressure and extra
work that Covid-19 has brought to our staff by making ex-gratia
payments totalling GBP5m to 50,000 of our front line colleagues. In
the light of these four considerations, the Board feels it
appropriate to recommend the payment of a final dividend in respect
of 2020 of 1.4p per share, representing a 25% payout ratio assuming
a notional 1/3(rd) / 2/3(rd) split between interim and full year
dividends.
Looking ahead to 2021, guidance set out below is improved from
that which we gave in December. It does not reflect the acquisition
of WBB, announced on 16 February, which is subject to regulatory
approval; guidance will be updated immediately after completion,
which is expected to be during the course of Q2. After the dramatic
growth of the last three years - with 33% compound annual growth in
Underlying Trading Profit - we see 2021 as being a year of more
normal rates of growth in revenues and profits; we will have some
"drags" on our profitability, notably only having six months of the
AWE contract, and we expect revenues related to Covid-19 services
to be much stronger in the first half than in the second. However,
we have had a strong start to the year, and we are therefore
increasing our profit guidance for 2021, with the revised guidance
equating to 10% constant currency growth in the year.
Guidance for 2021 excluding the effect of the WBB acquisition,
but including Facilities First Australia
2020 2021
Actual Initial guidance New guidance
Revenue GBP3.9bn GBP4.1bn GBP4.2bn
Organic sales growth 16% 2% 4%
Underlying Trading GBP163m GBP165m GBP175m
Profit
Net finance costs GBP26m GBP27m GBP27m
Underlying effective
tax rate 23% 25% 25%
Free Cash Flow GBP135m GBP75m GBP75m
Adjusted Net Debt GBP58m GBP100m GBP100m
Notes to guidance: The guidance uses an average GBP:USD exchange
rate of 1.37 in 2021 and GBP:AUD of 1.79. If the WBB acquisition
completes in Q2, we would expect our Net Debt : EBITDA to be around
1.6x at the half year and reduce thereafter.
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 5359253.
Notes to financial results summary table and highlights:
(1) Revenue is as defined under IFRS, which excludes Serco's
share of revenue of its joint ventures and associates. Organic
revenue growth is the change at constant currency after adjusting
to exclude the impact of relevant acquisitions or disposals. Change
at constant currency is calculated by translating non-sterling
values for the year ended 31 December 2020 into sterling at the
average exchange rates for the prior year.
(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
Contract & Balance Sheet Review adjustments (principally
Onerous Contract Provision (OCP) releases or charges) and other
material one-time items. A reconciliation of Underlying Trading
Profit to Trading Profit and Reported Operating Profit is as
follows:
Year ended 31 December
GBPm 2020 2019
==================================================== ===== ======
Underlying Trading Profit 163.1 120.2
Include: non-underlying items
OCP charges and releases 5.8 0.8
Other Contract & Balance Sheet Review adjustments
and one-time items 6.8 12.4
----------------------------------------------------
Trading Profit 175.7 133.4
Amortisation of intangibles arising on acquisition (9.0) (7.5)
---------------------------------------------------- ----- ------
Operating Profit before exceptional items 166.7 125.9
Operating exceptional items 12.5 (23.4)
---------------------------------------------------- ----- ------
Reported Operating Profit 179.2 102.5
---------------------------------------------------- ----- ------
(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 Consolidated Cash Flow Statement, adding dividends we
receive from joint ventures and associates, and deducting net
interest and net capital expenditure on tangible and intangible
asset purchases.
(5) Adjusted Net Debt has been introduced by Serco as 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 including those newly
recognised under IFRS16.
(6) Reported Net Debt includes all lease liabilities, including
those newly recognised under IFRS16. A reconciliation of Adjusted
Net Debt to Reported Net Debt is as follows:
As at 31 December 2020
GBPm 2019
=========================================================== ===== =====
Adjusted Net Debt 57.8 214.5
Include: all lease liabilities accounted for in accordance
with IFRS16 402.6 369.9
Reported Net Debt 460.4 584.4
----------------------------------------------------------- ----- -----
(7) Refers to non-UK Underlying Trading Profit as a proportion
of group Underlying Trading Profit before corporate costs. Our
Underlying Trading Profit before corporate costs in 2020 was
GBP204.3m.
(8) Our outlook for 2021 is based upon currency rates as at 31
January 2021. The rates used, along with their estimated impact on
revenue and UTP are as follows:
Year ended 31 December 2021 outlook 2020 actual 2019 actual
======================= ============ =========== ===========
Average FX rates:
US Dollar 1.37 1.29 1.28
Australian Dollar 1.79 1.88 1.83
Euro 1.13 1.13 1.14
Year-on-year impact:
Revenue (GBP40m) (GBP24m) +GBP42m
UTP (GBP4m) (GBP1m) +GBP4m
----------------------- ------------ ----------- -----------
Reconciliations and further detail of financial performance are
included in the Finance Review on pages 22-38. This includes full
definitions and explanations of the purpose and usefulness of each
non-IFRS Alternative Performance Measure (APM) used by the Group.
The Condensed Consolidated Financial Statements and accompanying
notes are on pages 39-76.
Chief Executive's Review
Summary of financial performance
Revenue and Trading Profit
Reported Revenue increased 20% to GBP3,885m (2019: GBP3,248m);
in accordance with IFRS this measure excludes Serco's share of
revenue from joint ventures and associates of GBP364m (2019:
GBP395m). Net currency movements reduced revenue by GBP22m or 1%,
whilst the full-year effect of the acquisition of Naval Systems
Business Unit (NSBU), which completed at the start of August 2019,
added GBP151m or 5% to growth. At constant currency, the organic
revenue growth was GBP508m or 16%, accelerating from 15% in the
first half of the year to 17% in the second half. The very strong
revenue growth rate was a consequence of Covid-19 related services,
higher demand for our immigration services, a full year
contribution from the AASC asylum accommodation and support
contract in the UK and the AHSC defence garrison healthcare
services contract in Australia, as well as the start of new work
including Clarence Correctional Centre, Gatwick Immigration &
Removal Centres and Prisoner Escorting. This resulted in
particularly strong organic growth in our UK&E and AsPac
Divisions.
Underlying Trading Profit (UTP) increased by GBP43m or 36% to
GBP163m (2019: GBP120m); excluding the GBP1m adverse impact of
currency, the increase in UTP was GBP44m or 37%. Profits increased
in all our divisions, with our UK&E and Americas businesses
seeing very strong improvement. The Group's Underlying Trading
Profit margin was 4.2%, an increase of 50 basis points.
In every year, Serco's results are the aggregation of pluses and
minuses, as some contracts grow their profits and others reduce
them. This year, some of the pluses and the minuses were extreme.
Contracts that went backwards included our business in the UK
supporting Local Authority Leisure Centres, which were largely
closed down during the various lockdowns; our Health business bore
very significant additional costs as it worked to maintain service
in the face of Covid-19; our Merseyrail joint venture saw passenger
volumes at a fraction of normal levels; together, these three parts
of our UK operations saw their contribution reduce year-on-year by
around GBP35m; our contract to build an ice-breaker for the
Australian Government suffered losses as we had to tow the ship
from its shipyard in Romania, where there was a serious Covid-19
outbreak, to Holland in order to complete construction; many of our
contracts bore additional costs as they worked to deliver services
in the face of Covid-19. And we also made the decision to recognise
the extraordinary efforts of colleagues by making ex-gratia
payments totalling GBP5m to 50,000
front-line staff.
A large positive was we had a number of new and re-bid contracts
contributing to profits. Our Asylum Seeker (AASC) contract in the
UK, which over the last five years lost around GBP15m-GBP20m on
average per year, swung into profit under the new 10-year contract
in 2020; there was strong demand for immigration services in
Australia, which included mobilising quarantine hotels in Western
Australia; our defence garrison healthcare services contract in
Australia, won in 2019, made a full-year contribution in 2020; in
the US, our contract with the Federal Emergency Management Agency
(FEMA) saw strong growth. And we benefitted from an entirely new
source of business - NHS Test & Trace where we have provided
more than 25% of the testing sites and half the Tier 3 tracing
capacity; although these contracts are at lower margins than we
would normally accept for this type of work, they generated nearly
GBP350m of revenue, so made a material contribution and helped to
reduce the impact of losses in Transport, Health and Leisure.
Together, contributions from these new and growing contracts
combined to outweigh the losses and reduced profits of other parts
of the business that were negatively impacted by Covid-19.
Importantly, of the GBP43m increase in UTP, the net impact on
profits directly attributable to Covid-19, was GBP2m; the balance
of GBP41m came from underlying growth in the business and the
acquisition of NSBU.
Trading Profit was GBP176m (2019: GBP133m), GBP13m higher than
UTP, which reflects a net GBP6m credit in Contract & Balance
Sheet Review and one-time items (2019: net credit of GBP4m), and
GBP7m of other one off items (2019: GBP12m) relating to the release
of provisions that are no longer required. The utilisation of
Onerous Contract Provisions (OCPs) fell from GBP41m in 2019
(excluding IFRS16-related accelerated utilisation) to just GBP2m in
2020. We have now very nearly completed our task of managing the
GBP447m of loss-making onerous contracts identified in 2014; the
closing balance of OCPs now stands at GBP15m, compared to GBP17m at
the start of the year and the initial charge of GBP447m.
Reported operating profit and exceptional costs
Reported Operating Profit grew by GBP77m, or 75%, to GBP179m
(2019: GBP103m) and was higher than Trading Profit as GBP9m (2019:
GBP8m) of amortisation of intangibles arising on acquisition was
more than offset by exceptional operating income of GBP13m (2019:
costs of GBP23m), the largest portion of which related to our exit
from the Viapath pathology services joint venture. There were no
exceptional restructuring costs (2019: GBP13m).
Finance costs
Net finance costs were GBP26m (2019: GBP22m), with the increase
driven by having a full year of property leases related to the AASC
contract. The interest component of leases reported under Finance
costs, as required under IFRS16, was GBP10m (2019: GBP7m). Cash net
interest paid was GBP25m (2019: GBP22m).
Pensions
Serco's pension schemes are in a strong funding position,
resulting in a balance sheet accounting surplus, before tax, of
GBP80m (31 December 2019: GBP54m) on scheme gross assets of
GBP1.6bn and gross liabilities of GBP1.5bn. The opening net asset
position led to a net credit within net finance costs of GBP1m
(2019: GBP2m). For the Group's main scheme, the Serco Pension and
Life Assurance Scheme (SPLAS), the purchase of a bulk annuity from
an insurer has the effect of fully removing longevity, investment
and accounting risks for around half of all scheme 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.
Tax
The underlying effective tax cost was GBP31m (2019: GBP24m),
representing an underlying effective rate of 23% (2019: 25%) based
upon Underlying Trading Profit less net finance costs, totalling
GBP137m (2019: GBP98m). The rate is higher than the UK statutory
rate of corporation tax as the tax rates in our international
divisions tend to be higher than the UK's rate. This is partially
offset by consolidating our share of joint venture and associate
earnings as, although included in profit before tax, the income has
already been taxed. The rate is lower than in 2019 due to an
increase in the proportion of the Group's profits arising in the UK
and a reduction in the proportion of our profits made by our joint
ventures and associates. We expect the rate to increase to closer
to 25% in 2021, although this is sensitive to the geographic mix of
our profits.
Tax on non-underlying items was a net credit of GBP12m (2019:
charge of GBP3m). The GBP12m credit, related to the tax impact of
amortisation of intangibles arising on acquisition of GBP2m and
GBP10m related to non-underlying items. Tax on exceptional items
was GBP0.4m (2019: GBP3m). The total tax charge was GBP19m (2019:
GBP30m) and net cash tax paid was GBP36m (2019: GBP31m), which is
higher than the current tax charge due to the effect of future
expected cash tax deductions for which a current accounting credit
is taken and due to timing differences on some tax receipts and
payments, notably the cash from joint ventures and associates for
losses transferred to them.
Reported result for the year
The reported result for 2020, as presented at the bottom of the
Group's Consolidated Income Statement on page 39, is a profit of
GBP134m (2019: GBP51m). This comprises reported operating profit of
GBP179m (2019: GBP103m), reported profit before tax of GBP153m
(2019: GBP81m) and tax of GBP19m (2019: GBP30m).
Earnings per share (EPS)
Diluted underlying EPS, which reflects the Underlying Trading
Profit measure after deducting pre-exceptional net finance costs
and related tax effects, increased by 37% to 8.43p (2019: 6.16p).
The improvement reflects the 36% increase in Underlying Trading
Profit and the lower tax rate, partially offset by the increase in
net finance costs and an increase in the weighted average number of
shares in issue. The weighted average number of shares increased by
58m, or 5%, to 1,229m (2019: 1,171m), with the vast majority of
this, 45m, the full-year effect of the May 2019 share placing.
Diluted reported EPS, which includes the impact of the other
non-underlying items and exceptional costs, increased by 153% to
10.67p (2019: 4.21p).
Cash flow and Net Debt
Free Cash Flow showed sharp improvement, increasing by GBP73m to
GBP135m (2019: GBP62m), representing cash conversion of 120%. The
improvement was a result both of the GBP43m increase in underlying
profits as well as improved debtors collection, with an almost
complete catch up on delays in processing billings on our FEMA
contract in the US and successful collection of some older
receivables in our Middle East business. We also benefited from
GBP12m of Covid-19 tax deferrals in the USA, for which there is no
mechanism to repay ahead of schedule. Despite organic revenue
growth of just over half a billion pounds, our working capital
outflow was just GBP5m as governments, most notably the UK
Government, made significant efforts to ensure that their suppliers
were paid promptly, and for our part we ensured our suppliers were
equally supported. Average working capital days for the year were
broadly unchanged, with creditor days reducing from 29 in 2019 to
23 in 2020; we are proud to say that 89% of UK supplier invoices
were paid in under 30 days (2019: 86%) and 97% were paid in under
60 days (2019: 96%).
The cash outflows related to loss-making contracts subject to
OCPs reduced, reflected in the lower rate of provision utilisation
of GBP2m (2019: GBP41m). The Group did not utilise any working
capital financing facilities in 2020 or the prior year, and has no
such facilities in place. Of other movements within Free Cash Flow
to note, cash tax paid increased due to some timing effects and
capital expenditure was higher, primarily a temporary consequence
of the purchase of vehicles for our new prisoner escorting
contract.
Adjusted Net Debt at the end of the year fell by GBP157m to
GBP58m (2019: GBP215m). Our key measure of Adjusted Net Debt
excludes all lease liabilities, which now total GBP403m (2019:
GBP370m), including those leases now recognised under IFRS16. The
adjusted measure of Net Debt aligns closely with the covenant on
our financing facilities; our Net Debt for covenant purposes was
GBP102m (2019: GBP235m). The GBP157m reduction in 2020 includes the
free cash inflow of GBP137m, proceeds from the sale of our stake in
Viapath and GBP12m of favourable currency moves. The closing
Adjusted Net Debt of GBP58m compares to a daily average of GBP209m
(2019: GBP231m) and a peak of GBP356m (2019: GBP357m). The
unusually large difference between peak, average daily and period
end Adjusted Net Debt was the result of two factors that occurred
in the first half: first, in response to Covid-19 and government
requests, we mobilised and paid for a large amount of additional
resources from March onwards, and it took until June for the
contractual paperwork and the payments to catch up, so we carried
an unusually high amount of working capital for much of the first
six months; second, there were delays in processing billings on our
FEMA contract in the US in Q1, which saw improvement in Q2 and
complete catch up in the second half. Working capital normalised in
the second half, with peak and average Adjusted Net Debt being
GBP208m and GBP137m respectively, much closer to period end than in
the first half.
Reported Net Debt fell GBP124m to GBP460m (2019: GBP584m),
notwithstanding a GBP33m increase in leases to GBP403m (2019:
GBP370m), reflecting the continued expansion of our AASC
contract.
At the closing balance sheet date, our leverage for debt
covenant purposes was 0.5x EBITDA (2019: 1.2x), being Covenant Net
Debt of GBP102m divided by EBITDA of GBP225m. This compares with
the covenant requirement to be less than 3.5x Net Debt : EBITDA.
Our target range is 1x-2x Covenant Net Debt to EBITDA.
At our pre-close update on 17 December we announced that we
intended to buy GBP40m of shares over the coming months, and these
shares would be either cancelled, held in Treasury and/or used to
satisfy the requirements of employee share schemes. As at 24
February 2021, 14.4m shares have been purchased at an average price
of GBP1.23. As stated below, it is now our intention to cancel
around GBP20m of the purchased shares, and apply the balance to
employee share schemes. The effect of this share buyback, along
with dividends and the anticipated purchase of WBB Inc, would
result in our leverage for debt covenant purposes rising to around
1.6x EBITDA.
The Revenue and Trading Profit performances are discussed in
more detail in the Divisional Reviews. More detailed analysis of
earnings, cash flow, financing and related matters are described
further in the Finance Review.
Dividend recommendation
In the 2019 Annual Report, the Board recommended the payment of
a final dividend with respect to 2019, the first time it had been
able to make such a recommendation since 2014. It was a milestone
in the recovery of the company. Covid-19 then intervened and in
April 2020, we withdrew the proposed Final Dividend in respect of
2019 saying: "At a time when the UK and other governments are
helping Serco with its liquidity, it seems inappropriate to use
that cash for anything other than its intended purpose of
protecting the financial strength and resilience of our
business".
The Board has considered carefully the timing of the
re-instatement of dividends, which, in the current circumstances is
more than a simple financial calculation, given the importance of
acting responsibly from a reputational perspective at this
challenging time. We have also been mindful of the views of some of
the institutions and agencies whose opinion shareholders may value,
as well as taking into account more broadly, to the extent that we
can discern them, views of other stakeholders. It would, perhaps,
be the easiest thing to defer payments of dividends again, given
that the pandemic is still very much with us. On the other hand,
Serco as a company has been saved by its shareholders and supported
on its return to growth, with GBP850m of additional equity injected
into the company since May 2014; the Board feels very strongly that
shareholders should see cash returns on their investment at the
earliest moment it is appropriate and prudent for them to do
so.
Four things have changed for us since the earlier
decision-points of our initial Covid-19 trading update in April and
our half year results in August. First, any concerns we had about
liquidity have proved groundless; we have successfully re-financed
our long-term debt (and at lower cost); we have been strongly
cash-positive in 2020; leverage, even after the WBB acquisition,
will be in the middle of our target range. Secondly, we have
refunded all employment and liquidity support paid to Serco by
governments, with the exception of GBP12m in the USA, for which
there is no mechanism for early repayment. Thirdly, whilst the
profits arising from our work on Covid-19 are ephemeral, they do
not represent a disproportionate proportion of our profits in the
year (net, around 1% of Underlying Trading Profit). Finally, we
have sought to recognise the intense pressure and extra work that
Covid-19 has brought to our staff by making an ex-gratia payment of
GBP5m to 50,000 of our front-line colleagues.
In the light of these four considerations, the Board feels it
both appropriate and prudent to recommend the payment of a final
dividend in respect of 2020 of 1.4p per share, which based on a
policy of paying 1/3(rd) / 2/3(rd) split between interim and full
year dividend, would represent 4x dividend cover, or a 25% payout
ratio. The dividend, if approved by shareholders at the AGM on 21
April 2021, would be paid on 4 June. We also intend to cancel
GBP20m of the GBP40m of shares whose purchase we announced at our
pre-close Trading Update in December; the GBP20m would be roughly
equivalent to the cash value of the 2019 final and 2020 interim
dividends foregone.
As we said in last year's report, the Board regards the 25%
payout ratio as a prudent starting point for dividends, and will
keep dividend policy under regular consideration as we continue to
implement the growth stage of our strategy. Future dividend
decisions will take into account the Group's underlying earnings,
cash flows and financial leverage, together with the prevailing
market outlook. The Board is mindful of the requirement to maintain
an appropriate level of dividend cover, the potential alternative
uses of capital to generate incremental value for shareholders, and
the desire to maintain financial flexibility and a strong balance
sheet that is considered appropriate for Serco's ability to deliver
sustainable value for all of the Group's stakeholders.
Contract awards, order book, rebids and pipeline
Contract awards
We won GBP3.1bn of work in 2020, which represented a
book-to-bill ratio (the relationship between orders received and
revenue recognised) of around 80% (2019: 170%). We noted in last
year's full year results that 2019's GBP5.4bn of order intake was
an exceptional performance, and that we expected order intake in
2020 to be significantly lower; since 2017, our book-to-bill ratio
has been approximately 115%. The natural lumpy flow of contract
awards that led us to make this prediction was exaggerated in 2020
by the disruption caused by Covid-19 and, as a result, several
large contract award decisions scheduled for Q4 were delayed to
2021; a consequence of this is that our reported year-end pipeline
at GBP6.4bn was significantly larger than last year's GBP4.9bn.
Furthermore, whilst the average duration of a new contract in Serco
is about five years - so a new or rebid contract win "books" at a
multiple of this year's "billing" - more than half of the GBP636m
increase in revenues in 2020 arose from Covid-19 related work where
contracts are by their nature "booked" into the order book as they
are "billed". In the light of these factors, we are encouraged that
our book-to-bill remained as high as 80%.
Of the order intake, approximately 60% was represented by the
value of rebids and extensions of existing work and 40% comprised
new business. Our win rate by value for new work was around 35%,
above the average over the last five years of approximately 25%.
Conversely, the win rate by value for securing existing work was
around 70%, which is considerably lower than the 80-90% we
typically see. The lower rate was a result of the Viapath joint
venture, in which we had a 33% interest, not being selected as the
preferred bidder for pathology services in London. We subsequently
sold down our interest in the joint venture for a consideration of
GBP11m. In our wholly-owned operations, the win rate by value for
existing work was over 90%. The win rates by number of tenders were
nearly 60% for new bids and over 90% for rebids and extensions.
Regionally, just under 50% of order intake came from the
UK&E, slightly less than 30% from Asia Pacific, 20% from the
Americas and the remaining proportion from customers of our Middle
East business.
The largest award was our GBP450m contract to continue to
operate the Northern Isles Ferry Services. First announced in
September 2019, the contract was not included in our order intake
until a procurement challenge from the unsuccessful bidder was
resolved early in 2020. In Australia, we signed a six-year A$730m
(GBP370m) extension to our contract to deliver support services at
Fiona Stanley Hospital in Perth. Also in Australia, we successfully
rebid our contract to run Acacia Prison in Western Australia. The
new contract has an estimated value of A$445m (GBP250m) over the
initial five-year period and $A1.4bn (GBP790m) if two five-year
extensions are exercised. The UK business won an eight-year
contract valued at just over GBP200m to manage the Gatwick
Immigration Removal Centres. We agreed and mobilised a range of
work related to helping governments tackle Covid-19. This included
contracts in the UK to support the NHS Test & Trace programme,
testing facilities in the UK, temporary hospitals in the UK and the
Middle East, and quarantine hotels in Western Australia. In total,
the contracted value of the Covid-19 work was approaching GBP400m.
Other notable contract awards included a nine-year GBP116m
environmental services contract with three councils in Norfolk, a
new GBP52m, five-year agreement for deployment of secure services
for the US Department of Defense, a new win worth GBP43m to provide
deep space surveillance support in the USA and a 14-month extension
to our contract to provide contact centre services for the
Australian Tax Office, valued at GBP44m. We were also awarded a new
contract to deliver front line customer services at Dubai Airport.
However, as a result of the airport closing and subsequent lower
passenger volumes due to Covid-19, the contract is yet to start, so
we have not included it in our order intake in the period.
Bids for new work that were unsuccessful in the period included
Wellingborough Prison in the UK, Air Traffic Controller training
for the Federal Aviation Administration in North America and
support services for Kowloon West Cluster Hospital Authority in
Hong Kong.
Order book
As a result of the lower order intake, the Group's order book
reduced from GBP14.1bn at the start of 2020 to GBP13.5bn at the
year end. The order book reflects any required changes in
assumptions for existing contracts, including currency movements.
This order book definition is therefore aligned with the IFRS15
disclosures of the future revenue expected to be recognised from
the remaining performance obligations on existing contractual
arrangements. It is worth noting that, as it excludes unsigned
extension periods, the GBP13.5bn would be GBP14.4bn if option
periods on contracts in our US business were included. As option
periods have always tended to be exercised in our US business, we
do include these in our assessment of order intake, but in
accordance with IFRS15 we do not include them in the order book
until they are exercised. The order book definition also excludes
our share of expected revenue from contractual arrangements of our
joint ventures and associates. This would add a further GBP0.8bn if
included within our order book, relating to the remaining period of
the AWE operations and the Merseyrail franchise.
There is GBP2.9bn of revenue already secured in the order book
for 2021, equivalent to around 70% visibility of our GBP4.2bn
revenue guidance. The 'gap' in visibility is typically closed by
our US business receiving the exercise of contract option periods
and through short-term task order work on framework contracts,
together with the necessary securing of contract extensions and
rebids across the rest of the Group.
Rebids
As we look ahead the customary three years through to the end of
2023, across the Group there are around 75 contracts in our order
book with annual revenue of over GBP5m where an extension or rebid
will be required. Collectively these represent current annual
revenue of around GBP1.9bn or 50% of the Group's 2021 revenue
guidance. At the start of 2018 the three-year forward rebid value
was GBP1.4bn, at the start of 2019 it was GBP1.2bn and at the start
of 2020 it was GBP1.5bn. The proportion of revenue that requires
securing at some point over the next three years is slightly higher
than usual as the contracts related to the Covid-19 response are
shorter-term in nature. Contracts that could potentially end at
some point before the end of 2021 have aggregate annual revenue of
around GBP1.1bn, which is higher than normal as it includes the
Covid-19 work and our operations for the Dubai Metro, a rebid we
consider to have been unsuccessful, and accounts for 3% of Group
revenue and a minor profit impact . In 2022, the aggregate annual
revenue due for extension or recompete is around GBP400m. This
includes the Australian immigration services contract due to end in
December 2021 unless the option for a further extension is
exercised or a rebid is won, and which currently accounts for over
5% of Group revenue.
Pipeline
Serco's measure of pipeline is probably more narrowly defined
than is common in our industry; it was designed as an indicator of
future growth and focuses on bids for new business only. As a
consequence, on average over the last five years, less than half of
our achieved order intake has come from the pipeline. It measures
only opportunities for new business that have an estimated Annual
Contract Value (ACV) greater than GBP10m, and which we expect to
bid and to be awarded within a rolling 24-month timeframe; we cap
the Total Contract Value (TCV) of individual opportunities at
GBP1bn, to attenuate 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 Indefinite
Delivery / Indefinite Quantity (ID/IQ) contracts, which are common
in the US, we only take the individual task orders into account. It
is therefore a relatively small proportion of the total universe of
opportunities as many of these have annual revenues less than
GBP10m, are likely to be decided beyond the next 24 months, will be
work from framework contracts, or are rebids and extensions.
On this definition our pipeline stood at GBP6.4bn at the close
of 2020, significantly higher than the GBP4.9bn we reported at the
start of the year and GBP4.2bn at the half year. As well as the
usual flow of wins and losses, 2020 was particularly unusual with
Covid-19 leading to changing timings on work in the pipeline plus
new work helping governments respond to the pandemic. The increase
in the pipeline value reflects a combination of new opportunities
and award decisions that were expected in 2020, being delayed to
2021, as our government customers' timelines were disrupted by
Covid-19. The upwards shift in our pipeline can be seen as a
natural consequence of our order intake being lower due to delayed
award decisions. The pipeline at the end of 2020 consisted of
around 30 bids that have an ACV averaging approximately GBP35m and
a contract length averaging around seven years. The UK & Europe
division represents slightly more than half of the Group's
pipeline, the Americas division around one-third, AsPac
approximately 10% and the Middle East Division the balance.
Although excluded from our primary pipeline definition above,
opportunities for new business that have an estimated ACV smaller
than GBP10m are a significant component of the pipeline and
potential growth. This is increasingly likely to be the case given
the use of task orders under framework contracts. The pipeline of
new business opportunities with an estimated ACV of less than
GBP10m has increased from GBP1.6bn at the beginning of the year to
GBP1.7bn. The pipeline including both large and smaller
opportunities has increased from GBP6.5bn to GBP8.1bn.
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. While the
second half of 2020 did produce an increase in the pipeline, and
market conditions may over time become more favourable, it is not
necessarily strongly predictive of future revenues.
Operational progress, transformation, innovation and people
We have an ambition to be the best-managed business in our
sector. Achieving this will require investment in people, processes
and systems. We regularly update on progress, and each are
described below, but Covid-19 has been hugely disruptive and has
tested our systems, processes and people in unforeseen ways.
Our first trading statement on Covid-19, issued on 2 April, set
out our operational priorities:
" Our priority in this crisis is to support the delivery of
essential public services and, within that context, do all we
can
to protect our employees from harm and our shareholders from
loss. .... Our mettle is being tested as never before, and we are
determined to rise to the level of events. "
It turns out that many of the investments that we have made over
the past five years have proven their worth during the crisis. In
particular, I would point to three themes which have served us
well.
The first is a management structure based on our "loose-tight"
model. This means that we delegate authority and responsibility for
day-to-day operational management to be as close to the customer as
possible, but we maintain a tight control over risk management,
bidding and cost control, and we have a well-established reporting
regime, where transparency and reporting bad news as soon as it
happens are the orders of the day. During the crisis, we maintained
the regimen of monthly reporting, and the Investment Committee,
which is a standing committee of the most senior Group executives
including the CEO, CFO, COO and Group General Counsel and which
oversees bids and investments, met no fewer than 85 times between
the 1(st) April and 31(st) December 2020. Divisional Performance
Reviews, and Business Unit Performance Reviews, continued their
monthly rhythm. Our cash performance was reported daily.
The second was cultural: over the past five years we have laid
much emphasis on our values of Trust, Care, Innovation and Pride.
These played a significant part in sustaining the ability of the
business to deliver under extreme and unprecedent pressure. The
levels of Trust built up across the management team allowed us to
work seamlessly together across boundaries; the value of Care made
it easy to connect company and personal interest with the
astonishing efforts that people had to make to look after
prisoners, patients, travellers, and hundreds of thousands of often
frightened and confused citizens. Innovation and loose-tight
management allowed us to invent new services and business models
almost overnight and to adapt our IT platforms to new ways of
working. Pride meant that people understood that the work we do
delivering public services is incredibly important and that it is a
privilege to be able to make a difference every day to people's
lives. Pride and Trust also helped us maintain momentum and morale
in the face of public criticism and comment about our work in the
early days of NHS Test & Trace in the UK. Needless to say, much
of the criticism was wildly unfair and bore little relationship to
the facts, but it was still unsettling to our colleagues to see
their hard work being called into question.
What evidence do we have of the impact of our culture and
organisational philosophy? On the operational side, clearly we have
the evidence of what has been delivered: quarantine hotels in
Australia mobilised in a matter of days; 10,500 call handlers
mobilised in four weeks for the UK Tracing programme, then reduced
three months later to 5,000, then expanded two months later to
approaching 10,000. A network of test centres set up and operated
which between May and December tested more than 5 million people.
Critical ship repairs performed under lock-down; train and metro
services maintained transport services to move critical workers;
multiple crews on rotating isolation to help support Navy
movements; prisons adapted to 23-hour-day lockdowns and no
visitors; hospital staff delivering cleaning, catering and
portering with sickness absence rates of up to 25% in some
contracts. Operationally, Serco has performed really well during
the crisis.
But we also have the evidence of our trusty Viewpoint survey, to
which 29,782 responded this year, slightly more than last year.
These surveys have been running since 2011, and the "Engagement
Score" they produce has pretty accurately reflected the fortunes of
the company and the state of morale in Serco. Given the huge
disruption experienced by so many of our colleagues; the immense
changes they faced and adaptations they had to make in both their
personal and working lives, I was braced for a sharp drop in
response rates and scores. To my immense surprise and pleasure, I
was wrong and engagement scores increased over prior years', and
continue their upward march. There can be no greater tribute to the
leadership shown by managers at all levels in the company that this
has happened, and of all our operational and financial achievements
in 2020, it is of this that I am the most proud. Of particular note
is the clear correlation between the scores of People Managers (+2
at 75) and the wider workforce (+2 at 73); clearly, the experience
of the workforce as a whole, and their managers, is aligned to a
rare degree.
2011 2012 2013 2014 2015 2016 2017 2018* 2019 2020
Leaders 65 56 51 38 55 72 71 69 77 83
Managers 54 51 49 n/a 59 62 65 70 73 75
All employees 45 45 42 42 53 54 56 67 71 73
* in 2018, the methodology for calculating employee engagement
changed, aligned to the new specialist third party provider of the
survey. As reported at the time, it is not possible to adjust
historic data to restate to the new methodology, but analysis
performed by the new provider in 2018 indicated that the engagement
level for that year was broadly stable on the previous year's
score.
One other fact worth mentioning: in 2019 we opened up the
questionnaire to allow free-text answers to questions, with
specific opportunities to make comments to the Board. To our
surprise, the 27,000 respondents made some 50,000 individual
comments. In 2020, we did the same, and this year there were 64,500
comments, of which we have picked a genuinely random sample - the
good the bad and the ugly - of 1,000 and published them for public
view on our website. If anyone has any doubt as to the fact that
Serco colleagues are a feisty, fearless and passionate lot who care
deeply about their work delivering public services and about Serco,
we need look no further than those comments.
One thing that has suffered badly is our management training.
Several years ago we designed and developed specific week long
management training programmes with our partners at the Saïd
Business School, Oxford; travel restrictions meant that we had to
abandon these programmes because we believed the week long
residential element was critical in being able to build networks
across the company. We will reinstate these courses as soon as we
can and catch up. On the other hand, we have been able to hold our
commitment to recruiting graduates, and doubled our intake in
2020.
The third element that has stood us in good stead has been our
investment in IT systems; over the past few years we have been
migrating our key management and financial systems to the Cloud,
and upgrading them at the same time. By the end of the first
quarter of 2020 we had migrated the majority of our worldwide users
on to Cloud-based implementations of Office 365, with the effect
that, when the pandemic hit, we had an IT and support
infrastructure which was able to adapt readily to remote and home
working in a secure manner for most of our users. Just in time, as
it turns out. Despite all the distractions of the crisis, we have
not slackened off our rate of investment in new systems; we are in
the process of a major upgrade of our back office systems in North
America, which is almost complete at the time of writing, and we
are also developing a custom-built system for the one process which
we in Serco do on a truly industrial scale: recruit, manage, pay,
train and organise people. This will use our existing SAP back-end,
but put a much more efficient and intuitive front-end onto it. To
give some idea of the scale at which Serco operates on the HR
front: in 2020, including contingent labour, we recruited about
21,500 people, and created around 10,000 net new jobs.
We said at the beginning of the crisis that it would test our
mettle; it has, and I am proud beyond words as to how well
colleagues and the organisation as a whole have performed. For a
very large business, we have shown surprising agility. For a
business which sometimes looks like a collection of small
businesses, we have demonstrated our ability to act with common
purpose, and to maintain rigorous standards of reporting and
control in confusing and difficult circumstances. For a business of
any size we have shown great resilience. Perhaps the most
remarkable thing is that whilst the management of some other
companies, for example in travel, or hospitality, have had to
manage disaster and seen their businesses going bust, and others
for instance in on-line retailing may have seen the triumph of
their model and their businesses boom, Serco has had to manage
businesses booming and busting under the same roof.
Perhaps the biggest lesson we have learnt over the last year is
encapsulated in the words of Rudyard Kipling:-
"If you can meet with Triumph and Disaster, and treat those two
impostors just the same"
Easy to say, hard to do.
The Serco Institute
From March to June 2020, during the first few months of
Covid-19, and acknowledging the world was rightly rather distracted
with different priorities and focus areas, the Institute
purposefully paused its work and instead lent its team to help
fight the virus on the frontline of London hospitals, as well as to
assist the Serco Foundation's Coronavirus Community Support Fund
scheme that gave over GBP600k to local charities fighting the
pandemic. However, since restarting in the summer, the Institute
has been publishing once again and making a thoughtful contribution
and impact on public service thinking and our markets:
-- It has produced several volumes in its new "Policy People" series
- interviews with key figures from across the international public
sector landscape, who share their insight and reflections on
their policy experiences.
-- Ahead of the Integrated Review in UK Defence, the Institute published
a substantial report produced in conjunction with Kings College
London's Centre for Defence Studies on the merits of the 'Whole
Force' approach, including greater use of the private sector,
which was launched at a roundtable hosted by the Institute with
the Chief of Defence Personnel and the recent UK Minister for
the Armed Forces speaking, amongst others.
-- At the time of writing, as the outputs of the Institute gain
traction and attention, we are about to see the launch of the
Serco Institute Middle East with two reports to be published
based on polling residents of the UAE and KSA respectively for
their views, hopes, and fears on the future of public services
in their countries.
-- Last but not least, the Institute has also published numerous
short-form articles reacting to day-to-day or more immediate
events, such as the realities of NHS Test and Trace operations,
Social Value models in the UK, vaccine policy, the likely impact
of the Biden administration, and more.
In terms of work soon to be published, the report the Institute
commissioned from the independent economic consultancy Capital
Economics on the value of outsourcing is complete and simply
awaiting publication. This has provided new and persuasive evidence
and data in an area where there has been no new research in nearly
ten years. Some of the key conclusions are as follows:
-- "The evidence from areas that have been subject to competition
suggests that it is possible to deliver services more cost efficiently
without damaging service quality..."
-- "Our analysis on prison management, soft facilities management
in healthcare and air traffic control suggests that potential
average savings to the government of between five and fifteen
per cent from introducing competitive markets is a relatively
conservative estimate..."
-- And perhaps most importantly, that: "...the private sector typically
delivers services to the same standard or better than the public
sector."
Also, soon to be published is a piece of substantial research on
'Contestability' policy and the use of the private sector in
delivering public services in Australia.
At a time when the role of the private sector in delivering
public services has been questioned in some countries -
particularly on the back of political controversies as to how well
or not governments have dealt with the pandemic - and at a time
when citizens' expectations of public services continue to increase
and evolve, we feel the Serco Institute can continue to make an
important contribution to understanding what works, and why, in
policy delivery, and disseminating knowledge of innovations in
public services .
Acquisitions
We regard acquisitions as an important part of our toolkit,
which if deployed correctly, can add value and speed strategic
progress; but they should be in addition to, and designed to
deliver, new opportunities for organic growth. They require
discipline and process, and for M&A we follow our head office
mantra of having a few good people rather than a lot of mediocre
ones. Much of our work we do in-house although we also use advisers
where appropriate. We look at an awful lot of opportunities, and
reject most of them. Generally speaking, we regard acquisitions as
higher risk than organic growth, so any candidates have to meet our
stringent criteria of being both financially and strategically
compelling. We also recognise that acquisition opportunities come
in different shapes, sizes and sectors, and a small one can be
strategically important to a region, but not necessarily
significant at Group level. But large or small, all acquisitions
are centrally managed by Group and follow the same rigorous
process.
Since 2014 we have undertaken five acquisitions:
-- In 2017, we acquired BTP systems, a US defence engineering company,
for $20m (GBP13m).
-- In 2018 we acquired parts of the Carillion Healthcare business,
for GBP18m.
-- In 2019 we undertook a major acquisition in North America in
the form of the Naval Systems Business Unit of Alion, a leading
provider of naval design, systems engineering and acquisition
& programme management, for a consideration of $225m (GBP186m).
-- In January 2021, we acquired FFA, a specialist provider of cleaning,
facilities maintenance and management services to governments
in Australia for A$78m (GBP44m) including working capital adjustments.
-- On 16 February 2021 we announced the acquisition, subject to
regulatory approvals, of WBB, a leading provider of advisory,
engineering, and technical services to the US military, for $295m
(GBP215m).
The FFA acquisition was attractive because our Australian
business wanted to extend its reach and capability in the
government facilities maintenance and management market, for which
there are numerous opportunities in the years ahead. FFA was a rare
asset because of its focus on, and strong track record with,
government, indeed it had originally been the management buyout of
the New South Wales in-house FM operation. The purchase price was
6.3x trailing EBITDA, which we believed was a fair price for a
business with relatively low margins.
The WBB acquisition, which is subject to regulatory approval,
would be our largest to date. It is highly complementary to our
existing Serco business in North America: like Serco, WBB is a
leading provider to the US Department of Defense of Systems
Engineering and Technical Assistance (SETA) services focusing in
the fields of Acquisition and Programme Management, Systems Design
and Engineering, Through-Lifecycle Asset Management and
Mission.
It would add very significantly to the scale, breadth and
capability of our North American defence business. In terms of
scale, it adds around 20% to Serco's existing $0.9bn of North
American defence revenues, and about 1,000 skilled people,
reinforcing our position as a significant supplier in the US
defence services market, with credible positions in all arms of the
Department of Defense. In terms of breadth the acquisition of WBB
adds new market segments and reach within US defence. It will
approximately double Serco's revenues across both the US Army and
Air Force/Space Force, giving us $100m businesses in each. It will
give us immediate access to markets that are difficult to enter
organically including Air Force programme offices, the Missile
Defense Agency, Space and Missile Defense Command, the Office of
the Secretary of Defense, security agencies and others. In terms of
capability, WBB brings significant new areas of capability to
Serco's global defence business, including Advanced Data Analytics,
Organisation Design, Cyber, AI & Machine Learning, Natural
Language Processing, Wargaming, Modelling, and technologies related
to geo-location. Among its 1,000 employees, 80% of whom have
security clearances, it has around 200 "Subject Matter Experts"
many of whom are former senior US military officers who are
recognised experts in their fields.
We will continue to keep our eyes and ears open for new
opportunities, and focus in the meantime on delivering value from
those acquisitions we have already done.
Market outlook
Our approach to strategy planning is to conduct annual planning
exercises, updating five-year forward plans, using internal
resources. Every 4-5 years we conduct a root-and-branch review,
with external help, of our markets. The last such review was in
2018, and in our 2018 results announcement, we set out our views on
our markets. We had planned to conduct an annual update 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. We did,
however, set all our Divisions to thinking how life might be
different in a post-Covid-19 world.
It is our intention to give investors a Capital Markets Day in
the second half of 2021, at which point the fog on what a
post-Covid-19 world might look like will have thinned, and we will
be able to give a more considered analysis. In the Our Market
section of the Annual Report we set out a lot of our thinking, but
below are some of our reflections on how Covid-19 may impact our
market:-
-- 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. But the fact is that deficits and levels of government
debt have increased to levels not seen outside World War, and
governments will be sharply focused on delivering "More and Better
for Less". This is positive for our market.
-- When faced by Covid-19, governments worldwide were 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 broad and capable the private sector has proved
to be.
-- We think that thoughtful governments will reflect that they need
to be more diligent about how they plan for crises, and putting
in place supply-chains and procurement processes that allow for
the swift mobilisation of the private sector.
-- In the UK in particular, many companies have avoided doing business
with government as they have seen the carnage that has been wrought,
some by government, some by self-harm, on the sector over the
past 10 years. During the crisis, companies have seen that, particularly
in crisis, government can be a good customer to have; they pay
on time, and in times of trouble, demand increases. This may
attract more entrants into the market, which would be a good
thing. One of the greatest dangers for companies like Serco,
whose very existence depends upon government being confident
it can test value through competition, is if there is no competition.
-- Governments across the world were broadly able to maintain momentum
on tender evaluation during the first six months of 2020, but
in the second half many of the larger tender adjudications became
delayed, and we suspect that it will take some time for backlogs
to be cleared. This trend is exacerbated in the US where it is
the habit of losers, particularly incumbent losers, to launch
protests against procurement decisions, and Covid-19 is slowing
up the process of dealing with these protests.
-- With hundreds of millions of people being made unemployed, we
believe that governments will invest in services to get people
back into work as soon as possible. This is an area in which
we have deep experience.
-- We see demand for testing and contact tracing reducing during
the course of 2021 and eventually being taken over by Local Authorities,
with a reserve force from the private sector at the ready to
deploy in case of significant outbreaks.
-- We believe the arrival of the Biden administration and its response
to higher debt due to Covid-19 is likely to slow the rate of
growth in US defence spending. However, the need to respond to
external military threats is supported across both parties and
we therefore think the change of government is unlikely to have
a dramatic impact on our US defence business.
Long term, we believe that the Covid-19 crisis will have an
impact on the mix of demand for services provided by the private
sector to governments, but we see no reason to change our view that
in the years ahead Serco should be able to grow its revenues by, on
average, around 5% a year, and deliver trading margins of 5%.
Guidance for 2021
At our Closed Period trading update on 17 December 2020, we
provided our initial outlook for 2020 and remarked that we
anticipated a year of stable revenue, UTP and earnings for the
existing business, with a small uplift to reflect the acquisition
of FFA. We also noted that, in common with many other businesses,
we face a lot of uncertainty in 2021, and the outlook has a
wider-than-usual margin for error. Since that date, and having had
a very strong start to the year, we have revised upwards our view
of Underlying Trading Profit. We have also revised guidance to take
account of currency rates and to take into account the impact of
the resumption of dividend payments announced with our 2020
results. With lower volumes expected from Covid-19-related work in
the second half, along with the exit from our activities at the
Atomic Weapons Establishment at the end of June 2021, we expect
trading to be stronger in the first half than in the second. This
guidance does not include the effect of the acquisition of WBB Inc,
which is still subject to regulatory approval; guidance will be
updated following completion, which we expect to achieve in Q2. In
our statement announcing the transaction, we stated that we
expected WBB to generate revenue in calendar 2021 of around $230m
(GBP168m), EBITDA of $29m (GBP21m) and UTP of $28m (GBP20m), before
exceptional transaction and integration costs; naturally, the
proportion of this that would accrue to Serco in 2021 would depend
on the timing of completion.
Revenue: Revenue in 2021 is expected to be around GBP4.2bn,
approximately 7% higher than the GBP3.9bn outturn for 2020. This
assumes 4% from the acquisition of FFA, organic growth of 4% and a
1% adverse impact from currency. We will have an ongoing positive
contribution from several of the contracts that have supported
growth in the second half of 2020, including Prisoner Escorting and
Custody Services, Gatwick IRC and Clarence Correctional Centre.
Predicting the outcome for our Covid-19 related work is difficult
due to the speed of change with the pandemic and the potential for
rapid changes in demand from our government customers. Our current
expectation is that the level of work will be lower in 2021 but the
range of potential outcomes is wide.
Underlying Trading Profit: UTP is expected to be around GBP175m,
including approximately GBP6m from FFA and a currency headwind of
GBP4m, based on recent exchange rates. The year will benefit from
the annualisation of our new contracts from 2020 and we anticipate
some improvement in the parts of our business negatively impacted
by Covid-19 in 2020. These should offset the cessation of our
involvement in the Atomic Weapons Establishment at the end of June
2021, higher insurance costs and a lower level of profit on our
Center for Medicare & Medicaid Services (CMS) contract as the
high volumes we saw in 2020 fall away; we also expect to see a
reduced contribution from our Anti-Terrorism / Force Protection
(ATFP) framework contract for US Naval Facilities due to the
typical phasing of work over the contract life.
Net finance costs and tax: Net finance costs are expected to be
around GBP27m. This is similar to 2020 as the lower level of debt
is temporarily offset by us paying interest on both our new US
private placement notes and the existing notes that will mature in
May and October 2021 as well as the acquisition of FFA. The
underlying effective tax rate is expected to continue at around
25%, although this is sensitive to the geographic mix of our profit
and any changes to current corporate tax rates.
Financial position: We expect Adjusted Net Debt to be to
approximately GBP100m. Strong cash generation will be balanced by
us repaying about half the of the GBP12m in US employment tax
deferrals in 2020, the acquisition of FFA and the GBP40m of our own
shares being purchased. Free Cash Flow is expected to reduce in
2021 due to the repayment of US tax deferrals, the purchase of
shares for employee share schemes and because 2020 benefitted from
catch up on delays in processing billings on our FEMA contract in
the US.
Our outlook for 2021 is based upon recent currency rates. The
rates used, along with their estimated impact on revenue and UTP,
are shown in the table on page 4.
Board
There have been numerous changes to the Board during the year,
which will be described in the Chairman's letter in our annual
report. There are two in particular I would like to comment on. The
first is the departure of Serco's Chairman, Sir Roy Gardner who had
the courage to join Serco in 2015, at a time when few others would.
He has been immensely supportive of the executive and has been a
font of wise advice, for which I and my colleagues are enormously
grateful. I greatly look forward to working with new incoming
Chairman, John Rishton, who has been on the Serco Board since 2016.
The second is the departure of my longstanding colleague Angus
Cockburn, who is to step down from the Board at the AGM. Angus was
instrumental in persuading me to join Aggreko in 2003, and we have
worked together, with only a six-month break, since then. He is a
prince amongst men, and a giant amongst CFOs. Fortunately, in 2014
he took the trouble to recruit and groom a brilliant successor,
Nigel Crossley, who will seamlessly take on Angus's work.
Summary and concluding thoughts
In this section of my report last year, the preoccupation was
how we should adapt to being a "normal" company after four
turbulent years and how we should respond to the increased focus of
stakeholders on Environmental, Social and Governance (ESG)
issues.
On ESG, we have tried hard to respond in a thoughtful way to the
need for continuous improvement. We think that our reporting has
much improved, and although it will have negative consequences for
our profits, the loss of our contracts at AWE will allay the
concerns of those stakeholders who felt uncomfortable with us being
centrally involved with the production of nuclear weapons. However,
there will always be certain parts of our business which will cause
concern to some. Most notably the fact that we do on governments'
behalf some of the hard things that citizens expect their
governments to do, like deport some people and hold others in
prison; all on behalf of democratically elected governments, but
unpalatable to some.
In terms of business operations, 2020 was a salutary example
that, in the words of Robert Burns, "the best laid schemes o' mice
an' men gang aft a-gley." Covid-19 upended the best-laid plans of
CEOs, let alone of mice. I am beyond proud of the way colleagues
managed their way through this crisis, and beyond pleased with the
way our "loose-tight" management structure, our reporting, our
processes and our IT systems were able to react with agility, pace
and precision to an existential, and completely unexpected, crisis
and deliver an outstanding financial outcome.
So, what does this say of the future? Naturally we will want to
point to the wisdom of our investment in management, systems,
processes, and the creation of an operating platform that is able
to work across different geographies and segments of the government
services marketplace. But we have been lucky, too. Lucky to have
had our balance sheet crisis before most of our peers, and been
able to learn the salutary lessons and disciplines that brought
with it; lucky that when Covid-19 struck, our balance sheet was
repaired and our operating platform was well invested; lucky that
when governments needed us, we had earned our right to be "in the
room". And that combination of skill and luck has enabled us to
deliver 33% compound growth in profits over the last three years,
even in the teeth of a crisis as grave as Covid-19.
Maybe now, in 2021, we can think once again of the ambition we
set ourselves a year ago of being a more "normal" company. That we
can grow our margins to 5% and our revenues at 5%, quietly and
diligently serving governments, avoiding risk and losses, and
repeating to ourselves the mantra that "no deal is better than a
bad deal". All the while paddling furiously below the surface
trying to do better than that; investing in our people and systems
as well as searching for value-enhancing acquisition such as NSBU,
FFA and WBB. And holding fast to our ambition to be thought of as
the best-managed business in our sector.
And we intend to stick with the strategy we developed in
2014:
What we do: we are an international business providing
people-enabled services, supported by best-in-class systems and
processes, to governments.
How we do it: we use a management framework, as set out
below.
Our Values: Trust, Care, Innovation, Pride
Our Purpose: to be a trusted partner of governments, delivering
superb public services, that transform outcomes and make a positive
difference for our fellow citizens.
Our Organising Principles: loose-tight, disciplined
entrepreneurialism
Our Method: being the best-managed business in the sector.
Our Deliverables: high and rising employee engagement, margins
of 5%, growing revenues at 5%.
We intend to continue working hard to deliver this strategy.
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 Underlying Trading Profit
measure excludes Contract & Balance Sheet Review adjustments
(principally OCP releases or charges).
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
Change +31% +16% +16% (7%) +19.6%
Change at constant currency +31% +17% +18% (7%) +20.3%
Organic change at constant currency +31% +1% +18% (7%) +16.2%
UTP 57.0 100.8 32.6 13.9 (41.2) 163.1
Margin 3.2% 9.5% 4.5% 4.3% (1.1%) 4.2%
Change 39bps 51bps -50bps 31bps 34bps 50bps
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
------------------------------------ ------------ ----------- ---------- ---------- ----------- -----------
Year ended 31 December 2019 UK&E Middle Corporate Total
GBPm Americas AsPac East costs
-------------------------------- -------- -------- ------ ------ --------- --------
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
UTP 38.4 82.1 31.3 13.9 (45.5) 120.2
Margin 2.8% 9.0% 5.0% 4.0% (1.4%) 3.7%
Contract & Balance Sheet Review
adjustments 0.3 9.5 - - (6.2) 3.6
Other one-time items 9.6 - - - - 9.6
Trading Profit/(Loss) 48.3 91.6 31.3 13.9 (51.7) 133.4
Amortisation of intangibles
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Operating profit/(loss) before
exceptionals 47.1 85.4 31.2 13.9 (51.7) 125.9
-------------------------------- -------- -------- ------ ------ --------- --------
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 22-38. 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 39-76. Included in note 2 to
the Group's Consolidated Financial Statements are the Group's
policies on recognising revenue across the various revenue streams
associated with the diverse range of goods and services discussed
within the Divisional Reviews. The various revenue recognition
policies are applied to each individual circumstance as relevant,
taking into account the nature of the Group's obligations under the
contract with the customer and the method of delivering value to
the customer in line with the terms of the contract.
UK & Europe
Serco's UK & Europe Division supports public service
delivery across all five of the Group's chosen sectors: our Justice
& Immigration business provides a wide range of services to
support the safeguarding of society, the reduction of reoffending,
and the effective management of the UK's immigration system, and
includes prison management as well as the provision of housing and
welfare services for asylum seekers; in Defence, we are trusted to
deliver critical support services and operate highly sensitive
facilities of national strategic importance; we operate complex
public Transport systems and services; our Health business provides
primarily non-clinical support services to hospitals; and our
Citizen Services business provides environmental and leisure
services, as well as a wide range of other front, middle and
back-office services to support public sector customers in the UK
and international organisations across Europe, including the
European Patent Organisation and the European Space Agency. On a
Reported Revenue basis, Serco's operations in the UK represent
approximately 43% of the Group's reported revenue, and those across
the rest of Europe approximately 3%.
The division had a very strong year, and the UK had the most to
cope with in terms of Covid-19, with some businesses going
backwards and others growing strongly. Revenue for 2020 was
GBP1,777m (2019: GBP1,362m), an increase of 31%. Reported revenue
excludes that from our joint venture and associate holdings which
largely comprise the operations of AWE and Merseyrail. At constant
currency, the growth in revenue was also 31%, or GBP415m. The high
organic growth resulted from a combination of additional work
related to Covid-19, our Asylum Accommodation and Support Services
Contracts (AASC) contracts, the start of our agreement to manage
the Gatwick Immigration Removal Centres and mobilisation of our new
Prisoner Escorting contract. Work supporting our customers'
response to Covid-19 included the NHS Testing and Contact Tracing
programmes, and increased customer service work, including NHS 111.
At the same time, Covid-19 caused an abrupt reduction in demand in
our Leisure business and on our contract to operate the Northern
Isles Ferries. The Caledonian Sleepers contract saw a sharp
reduction in passenger volumes and services as a result of
Government limitations on travel, but alongside these service
changes, Emergency Measures Arrangements were agreed with the
customer. The current EMA comes to an end in March 2021 and we have
commenced discussions with the customer about the future trading
arrangement, including the possibility of an extension or new
EMA.
Underlying Trading Profit (UTP) was GBP57m (2019: GBP38m),
representing a margin of 3.2% (2019: 2.8%) and growth of 48% at
constant currency. The increase in our profit was driven, in large
part, by our AASC contracts moving from losing money in 2019, as
mobilisation costs were incurred, to profitability, and by our
additional Covid-19 work. There was a GBP2m non-recurring benefit
to UTP as we exited the Viapath pathology services joint venture.
Trading Profit includes the profit contribution (from which
interest and tax have already been deducted) of joint ventures and
associates. If the GBP365m (2019: GBP395m) proportional share of
revenue from joint ventures and associates was included and the
GBP3m (2019: GBP6m) share of interest and tax cost was excluded,
the overall Divisional margin would have been 2.8% (2019: 2.7%).
The joint venture and associate profit contribution was lower at
GBP13m (2019: GBP27m), due to the impact of Covid-19 on Merseyrail
passenger numbers and lower pricing on AWE.
Within UTP there was a reduced rate of OCP utilisation of GBP1m
(2019: GBP33m excluding IFRS16-related accelerated utilisation), as
we draw towards the end of our efforts over the last six years to
reduce these large loss-making contracts. Trading Profit of GBP70m
(2019: GBP48m) was above UTP due to a GBP6.8m credit, relating to a
settlement in favour of the Group included within other one time
items (2019: GBP9.6m net credit) and a GBP5.8m credit in Contract
& Balance Sheet Review adjustments (2019: GBP0.3m net
credit).
The UK & Europe Division's order intake was GBP1.5bn, or 48%
of that for the whole Group. The largest award was our GBP450m
contract to continue to operate the Northern Isles Ferry Services.
First announced in September 2019, the contract was not included in
our order intake until a procurement challenge from the
unsuccessful bidder was resolved earlier this year. The second
largest contract award in the period was a new agreement to manage
the Gatwick Immigration Centres, valued at approximately GBP200m.
We also agreed various shorter-term contracts with the government
to provide services in response to Covid-19.
Of existing work where an extension or rebid will be required at
some point before the end of 2023, there are less than 30 contracts
with annual revenue of GBP5m or more within the division. In
aggregate, these represent around 40% of the current level of
annual revenue for the division. The largest is the NHS Test &
Trace contract, which, due to its nature, we don't expect to
continue, at least at its current level. The larger contracts to
rebid include, in 2021, our contract with the Department for Work
and Pensions and, in 2022, our Royal Navy fleet support contract
known as Future Provision of Marine Services (FPMS) and our UK MOD
Skynet satellite support operations.
The UK & Europe pipeline has increased materially in 2020 as
a result of new opportunities and awards that were expected in 2020
being delayed to 2021. Opportunities in the new bid pipeline
include several defence support opportunities, justice tenders
including the new build prison manage and operate contracts, and
environmental services work in Citizen Services. A significant
proportion of the UK pipeline relates to work for the Defence
Infrastructure Organisation (DIO). We are bidding this in a
joint venture and, if successful, we would recognise only Serco's
share of profit after interest and tax, not revenue.
The announcement in early November that the Ministry of Defence
intended to take back in-house the management of the Atomic Weapons
Establishment as from the end of June 2021, was clearly a major
disappointment as we have been involved with the management of AWE
for over 20 years. The contract contributed GBP15m to UTP in 2020,
and the financial consequences of losing the contract will be split
between 2021 and 2022.
Americas
Our Americas Division accounts for 27% of Serco's reported
revenue, and provides professional, technology and management
services focused on Defence, Transport, and Citizen Services. The
US Federal Government, including the military, civilian agencies
and the national intelligence community, are our largest customers.
We also provide services to the Canadian Government and to some US
state and municipal governments.
Revenue for 2020 was GBP1,064m (2019: GBP916m), an increase of
16% in reported currency. In US dollars, the main currency for
operations of the Division, revenue for the year was equivalent to
approximately US$1,369m (2019: US$1,172m). The Naval Systems
Business Unit (NSBU) acquisition, completed at the start of August
2019, drove growth from acquisitions of 17%, while the
strengthening of the pound against the dollar decreased revenue by
GBP8m or 1%. Organically, revenue was stable as growth in the US
Federal Emergency Management Agency (FEMA) contract framework and
the US Pension Benefit Guaranty Corporation (PBGC) contract was
offset by the loss in 2019 of our contract to provide traffic
management services to the US state of Georgia Department of
Transportation (GDOT) and lower volumes on our Consolidated Afloat
Networks Enterprise Services (CANES) contract, which was coming off
strong demand and task order processing in 2019. CANES had seen
particularly strong demand and new task order wins in 2019; it is a
contract to assemble off-the-shelf components for the US Navy and
attracts with relatively low margins and by its nature has volumes
which vary by significant amounts from quarter to quarter.
Underlying Trading Profit grew strongly to GBP101m (2019:
GBP82m), representing a margin of 9.5% (2019: 9.0%) and growth of
GBP19m or 23%. Constant currency growth, after an adverse currency
movement of less than GBP1m, was 24%. Around half of the growth
came from the NSBU acquisition and half was organic. Despite
revenue being flat organically, profit improved as the additional
FEMA and PBGC work more than offset the reduced contribution from
CANES and GDOT, and due to a step up in profit on our
Anti-Terrorism / Force Protection (ATFP) framework contract for US
Naval Facilities. The ATFP contract has been successfully rebid in
2021 but the typical phasing of this work over the contract life
means we anticipate a lower level of revenue and profit at the
beginning of the new agreement. Following a strong 2019, profit was
broadly flat on our health insurance eligibility support contract
for the Center for Medicare & Medicaid Services (CMS). The
temporary uplift in volume related work experienced in 2019
continued into the first half of 2020 before stepping down in the
second half, as expected, once the circumstances that led to the
extra activity were resolved.
Within Underlying Trading Profit there was no OCP utilisation
(2019: GBP4m), as the Ontario Driver Examination Services (DES)
contract is no longer an onerous contract. There were no Contract
& Balance Sheet Review adjustments (2019: GBP9.5m net credit),
so Trading Profit was GBP101m (2019: GBP92m).
Americas represented around GBP0.6bn ($0.8bn) or 19% of the
Group's order intake. The largest award for new work was from the
U.S. Space Force to manage, operate and maintain the Ground-Based
Electro-Optical Deep Space Surveillance (GEODSS) system. The
contract has an eight-month base period and six one-year option
years with a total value of $57m. We also secured additional field
office support services work for the Pension Benefit Guaranty
Corporation, following our initial contract win in 2019.
Our rebid and extended win rate was in excess of 90% in the
year. This included the rebid of our contract to support the US
Army's civilian readiness training and talent management efforts.
We also resecured places on the ID/IQ frameworks for both ship and
shore-based C4ISR systems modernisation services over the next ten
years that replace the previous GIC frameworks.
Of existing work where an extension or rebid will be required at
some point before the end of 2023, there are around 25 contracts
with annual revenue of over GBP5m within the Americas division; in
aggregate, these represent around 60% of the current level of
annual revenue for the division. Those coming up for rebid or
extension in 2021 include our SEA 21 contract for managing
lifecycle maintenance of US Navy surface ships and our support
services at the 5 Wing Canadian Forces Base in Goose Bay; and in
2022, the Federal Aviation Administration's (FAA) Contract Tower
(FCT) Program and resecuring a position on the successor framework
for CANES. In 2023, our CMS contract is scheduled to be
retendered.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes a broad spread of defence
support functions, including those added with the NSBU acquisition.
Our Citizen Services business unit also had a number of wins during
the year, and building further the pipeline in this area remains a
target.
AsPac
Serco operates in Australia, New Zealand and Hong Kong in the
Asia Pacific region, providing services in each of the Justice,
Immigration, Defence, Health, Transport and Citizen Services
sectors. The AsPac Division accounts for 19% of the reported
revenue for the Group.
Revenue for 2020 was GBP719m (2019: GBP621m), an increase of 16%
in reported currency. In Australian dollars, the main currency for
operations of the Division, revenue for the year was equivalent to
approximately A$1,343m (2019: A$1,137m). The weakening of local
currencies against sterling reduced revenue by GBP14m or 2%; the
organic change at constant currency was therefore growth of 18%, or
GBP112m. The largest contributor to this growth was the AHSC
defence garrison healthcare services contract in Australia, which
started operations on 1 July 2019. Other notable drivers of growth
were Clarence Correctional Centre, where operations commenced in
July, increased activity for our immigration business and
additional work with Services Australia (formerly the Department of
Human Services), where increased business resulted indirectly from
the impact of Covid-19.
Underlying Trading Profit was GBP33m (2019: GBP31m),
representing a margin of 4.5% (2019: 5.0%) and an increase of 4%.
Excluding the adverse currency movement of GBP0.4m, the increase at
constant currency was 6%. We saw good profit growth from the AHSC
contract, this being its first full year of operation, as well as
the additional work with Services Australia. The margin reduced by
around 50 basis points due to a drag from Clarence Correctional
Centre, which was break even, construction delays on Australia's
new Antarctic research icebreaker vessel, as a result of Covid-19,
and additional overheads of around GBP3m, including GBP1m of
front-line worker bonuses.
There was OCP utilisation of GBP0.8m (2019: GBP3m) within
Underlying Trading Profit. There were no Contract & Balance
Sheet Review adjustments (2019: GBPnil), so trading profit was
therefore GBP33m (2019: GBP31m), the same as Underlying Trading
Profit.
AsPac represented around GBP0.9bn or 29% of the Group's order
intake. Having had significant success in winning in recent years,
it was a relatively quiet year for new work. We did however have a
very strong year on rebids and extensions, with our win rate by
value approaching 100%. Our contract to deliver prison services at
Acacia Prison for the Government of Western Australia was
successfully rebid. Serco has managed operations at the prison,
which is Western Australia's largest prison and the second largest
in Australia, since 2006. The initial 5-year period has an
estimated value of A$445m or approximately GBP250m. The contract
has provision for two further 5-year extensions with potential
value to Serco over the full 15 years, including indexation, of
approximately A$1.4bn (GBP790m). We signed a variation and
extension contract with the government of Western Australia for the
Fiona Stanley Hospital in Perth. The new contract will see
continued delivery of support services at the hospital, albeit with
a reduced number of service lines. The contract has an estimated
value of approximately $730m (GBP370m) over its six-year term,
including indexation. We also extended our contract to provide
contact centre services to the Australian Tax Office to April
2021 and to Services Australia to June 2021. Related to
Covid-19, we agreed work with the government for services,
including to provide accommodation in mid-2020 for more than 1,300
quarantined travellers in Western Australia and additional contact
centre work.
Of existing work where an extension or rebid will be required at
some point before the end of 2023, there are 10 contracts with
annual revenue of over GBP5m within the AsPac division. In
aggregate, these represent just over half of the current level of
annual revenue for the division. This high proportion reflects that
the Australia onshore immigration services contract requires
further extension or rebid again at the end of 2021, with this
accounting for around 25% of divisional revenue. Others that will
require extending or rebidding include, in 2021, the Services
Australia framework contract, the Australian Tax Office framework
contract and the Fleet Marine Service Contract.
Our pipeline of new bid opportunities is currently weighted
towards the health segment. The largest is to provide health
services as part of the redevelopment and expansion project of the
existing Frankston Hospital in Victoria. Rebuilding the pipeline
across the Justice & Immigration, Defence, Citizen Services,
Transport and Health sectors remains a target, and we are expecting
further opportunities in the coming years.
The AsPac pipeline is in a rebuilding phase, with the growth
team looking to scope future opportunities over the short to medium
term. Our pipeline of new bid opportunities is currently weighted
towards health facilities management. We are expecting further
opportunities to join the pipeline in the Justice and Defence
segments. AsPac will be working with its newly acquired subsidiary,
FFA, to develop and execute a strong pipeline in the facilities
management and cleaning sectors.
Middle East
Operations in the Middle East Division include Transport,
Defence, Health and Citizen Services, with the region accounting
for approximately 8% of the Group's reported revenue.
Revenue for 2020 was GBP324m (2019: GBP350m), a decrease of 7%
in reported currency. The weakening of local currency against
sterling decreased revenue by GBP3m or less than 1%; the organic
change at constant currency was also a decline of 7%. The Middle
East segment has faced the largest negative impact from Covid-19 as
there has been a sudden reduction in activity in parts of the
transport portfolio and, unlike in the UK, limited Covid-19
response work to act as a counterbalance. There was growth in
revenue from expanded services to Mashroat in Saudi Arabia and the
Dubai Metro. These were outweighed by Covid-19 leading to reduced
revenue on various contracts including Baghdad Air Traffic Control,
health FM in Saudi Arabia and Dubai Airport facilities management.
There was also a drag from the Cleveland Clinic contract, which was
lost in 2019.
Underlying Trading Profit of GBP14m (2019: GBP14m) was stable
year-on-year, representing a margin of 4.3% (2019: 4.0%). Excluding
the adverse currency movement of GBP0.6m, the increase at constant
currency was 1%. Although the reduction in revenue on our air
traffic control work and health FM contracts in Saudi Arabia
negatively impacted profit, this was offset by improved
profitability on some of our work in Saudi Arabia. There are no OCP
contracts in the Division and therefore no OCP utilisation within
Underlying Trading Profit. There were no Contract & Balance
Sheet Review adjustments in the latest or prior year. Trading
Profit was therefore GBP14m (2019: GBP14m).
The Middle East represented GBP0.2bn, or 6%, of the Group's
order intake, not helped by disruption from Covid-19. We were
awarded a new contract to deliver front line hospitality customer
services at Dubai Airport. However, as a result of the airport
closing and subsequent lower passenger volumes due to Covid-19, the
contract start was delayed. It began in January 2021 at a lower
level than originally anticipated. As a result, we have included it
in our order intake at a reduced amount. We did, however, secure a
five-year contract to continue running the monorail for Nakheel on
the Palm Jumeirah and successfully rebid our contract for the
delivery of air navigation services at Sharjah Airport.
Of existing work where an extension or rebid will be required at
some point before the end of 2023, there are around 10 contracts
with annual revenue of over GBP5m within the Middle East division.
In aggregate, these represent around 65% of the current level of
annual revenue for the division. The high proportion reflects that
the Dubai Metro contract is due for rebid in 2021, with this
accounting for around 30% of current divisional revenue. We
consider this rebid to have been unsuccessful. Further extensions
or rebids include the Dubai and Baghdad ANS contracts, the Middle
East Logistics and Base Support Services (MELABS) contract and
Saudi rail operations.
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 at the Underlying Trading Profit level reduced
by GBP4m to GBP41.2m (2019: GBP45.5m).
Corporate costs at a UTP level have reduced due to lower travel,
lower LTIP costs as the issue of awards was delayed in the year,
and favourable estimates in provisions for disputes held centrally
which do not relate to specific contracts or operation.
Dividend calendar, if approved at the AGM
Ex-dividend date 13 May 2021
Record date 14 May 2021
Final dividend payable 4 June 2021
Finance Review
Amortisation
and
impairment
of
intangibles
Non arising Statutory
underlying on pre Exceptional
For the year ended Underlying items Trading acquisition exceptional items Statutory
31 December 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 -
basic (pence) 8.61 10.49 9.90 10.89
Earnings per share -
diluted (pence) 8.43 10.28 9.70 10.67
----------------------- ----------- ------------ ---------- ------------- ------------- ------------ ----------
Amortisation
and
impairment
of
intangibles
Non arising Statutory
underlying on pre Exceptional
For the year ended Underlying items Trading acquisition exceptional items Statutory
31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Revenue 3,248.4 - 3,248.4 - 3,248.4 - 3,248.4
Cost of sales (2,941.5) 13.2 (2,928.3) - (2,928.3) - (2,928.3)
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Gross profit 306.9 13.2 320.1 - 320.1 - 320.1
Administrative
expenses (214.2) - (214.2) - (214.2) - (214.2)
Other exceptional
operating
items - - - - - (23.4) (23.4)
Other expenses - - - (7.5) (7.5) - (7.5)
Share of profits in
joint
ventures and
associates,
net of interest and
tax 27.5 - 27.5 - 27.5 - 27.5
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Profit before
interest
and tax 120.2 13.2 133.4 (7.5) 125.9 (23.4) 102.5
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Margin 3.7% 4.1% 3.9% 3.2%
Net finance costs (21.8) - (21.8) - (21.8) - (21.8)
Profit before tax 98.4 13.2 111.6 (7.5) 104.1 (23.4) 80.7
Tax charge (24.4) (4.5) (28.9) 1.5 (27.4) (2.7) (30.1)
Effective tax rate 24.8% 25.9% 26.3% 37.3%
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Profit for the period 74.0 8.7 82.7 (6.0) 76.7 (26.1) 50.6
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Minority interest 0.2 0.2 0.2 0.2
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
Earnings per share -
basic (pence) 6.31 7.05 6.54 4.31
Earnings per share -
diluted (pence) 6.16 6.89 6.39 4.21
---------------------- ----------- ------------ ---------- ------------- ------------- ------------- ----------
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 the Strategic Report within the Annual Report and
Accounts, including the other sections of the Finance Review, as
well as the 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
during the year.
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group's Consolidated Income
Statement on page 39, reflects revenue translated at the average
exchange rates for the period. In order to provide a comparable
movement on the previous year's results, reported revenue is
recalculated by translating non-Sterling values for the year to 31
December 2020 into Sterling at the average exchange rate for the
year ended 31 December 2019.
2020
For the year ended 31 December GBPm
--------------------------------------- --------
Reported revenue at constant currency 3,908.8
Foreign exchange differences (24.0)
--------------------------------------- --------
Reported revenue at reported currency 3,884.8
--------------------------------------- --------
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses
acquired during a particular year from the date of acquisition
and/or generated by businesses sold during a particular year up to
the date of disposal. In order to provide a comparable movement
which ignores the effect of both acquisitions and disposals on the
previous year's results, Organic Revenue at constant currency is
recalculated by excluding the impact of any relevant acquisitions
or disposals.
There is one acquisition excluded for the calculation of Organic
Revenue in the year to 31 December 2020, which is the acquisition
of the Naval Systems Business Unit ("NSBU") from Alion Science and
Technology Corporation on 1 August 2019.
The Group also disposed of its interest in its Viapath joint
venture on 31 May 2020, however no adjustment is required to
Organic Revenue growth since the joint venture results were
accounted for on an equity basis and therefore had no impact Group
revenue.
Organic Revenue growth is calculated by comparing the current
year Organic Revenue at constant currency exchange rates with the
prior year Organic Revenue at reported currency exchange rates.
2020
For the year ended 31 December GBPm
-------------------------------------------------- --------
Organic Revenue at constant currency 3,646.1
Foreign exchange differences (21.8)
-------------------------------------------------- --------
Organic Revenue at reported currency 3,624.3
Impact of any relevant acquisitions or disposals 260.5
-------------------------------------------------- --------
Reported revenue at reported currency 3,884.8
-------------------------------------------------- --------
2019
For the year ended 31 December GBPm
-------------------------------------------------- --------
Organic Revenue at reported currency 3,138.4
Impact of any relevant acquisitions or disposals 110.0
-------------------------------------------------- --------
Reported revenue at reported currency 3,248.4
-------------------------------------------------- --------
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group's Consolidated Income
Statement on page 39, 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 in
the 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.
2020 2019
For the year ended 31 December GBPm GBPm
---------------------------------------------- -------- --------
Revenue plus share of joint ventures and
associates 4,249.9 3,643.0
Exclude share of revenue from joint ventures
and associates (365.1) (394.6)
---------------------------------------------- -------- --------
Reported revenue 3,884.8 3,248.4
---------------------------------------------- -------- --------
Alternative profit measures
2020 2019
For the year ended 31 December GBPm GBPm
---------------------------------------------------- ------ -------
Underlying Trading Profit 163.1 120.2
Non-underlying items:
OCP charges and releases 5.8 0.8
Other Contract & Balance Sheet Review adjustments
and one-time items 6.8 12.4
---------------------------------------------------- ------ -------
Total non-underlying items 12.6 13.2
---------------------------------------------------- ------ -------
Trading Profit 175.7 133.4
Operating exceptional items 12.5 (23.4)
Amortisation and impairment of intangibles
arising on acquisition (9.0) (7.5)
Operating profit 179.2 102.5
---------------------------------------------------- ------ -------
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 year.
Charges and releases on all Onerous Contract Provisions (OCPs)
that arose during the 2014 Contract & Balance Sheet Review are
excluded from UTP in the current and prior years. 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.
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 year. It should be noted that, as
for operating profit, UTP benefits from OCP utilisation of GBP1.8m
in 2020 (2019: GBP53.6m). The utilisation, which neutralises the
in-year losses on previously identified onerous contracts, is
significantly lower than the prior year as the number of onerous
contracts within the Group have significantly reduced, as many have
come to an end or have ceased to be onerous.
Revisions to accounting estimates and judgements which arose
during the 2014 Contract & Balance Sheet Review are reported
alongside other one-time items where the impact of an individual
item is material. Items recorded within this category during 2020
include the settlement of contractual disputes arising on one of
the Group's ongoing contracts which represents final settlement of
the issues under discussion.
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 22 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 Consolidated Income
Statement on page 39, by making two adjustments.
Firstly, Trading Profit excludes exceptional items, being those
considered material and outside of the normal operating practices
of the Group to be suitable for separate presentation and detailed
explanation.
Secondly, 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 year. In order to provide a comparable
movement on the previous year's results, UTP is recalculated by
translating non-Sterling values for the year to 31 December 2020
into Sterling at the average exchange rate for the year ended 31
December 2019.
2020
For the year ended 31 December GBPm
------------------------------------------------ ------
Underlying Trading Profit at constant currency 164.5
Foreign exchange differences (1.4)
------------------------------------------------ ------
Underlying Trading Profit at reported currency 163.1
------------------------------------------------ ------
Alternative Earnings Per Share (EPS) measures
For the year ended 31 December 2020 2019
pence pence
------------------------------------------------------- ------- -------
Underlying EPS, basic 8.61 6.31
Net impact of non-underlying items and amortisation
and impairment of intangibles arising on acquisition 1.29 0.23
------------------------------------------------------- ------- -------
EPS before exceptional items, basic 9.90 6.54
Impact of exceptional items 0.99 (2.23)
------------------------------------------------------- ------- -------
Reported EPS, basic 10.89 4.31
------------------------------------------------------- ------- -------
2020 2019
For the year ended 31 December pence pence
------------------------------------------------------- ------- -------
Underlying EPS, diluted 8.43 6.16
Net impact of non-underlying items and amortisation
and impairment of intangibles arising on acquisition 1.27 0.23
------------------------------------------------------- ------- -------
EPS before exceptional items, diluted 9.70 6.39
Impact of exceptional items 0.97 (2.18)
Reported EPS, diluted 10.67 4.21
------------------------------------------------------- ------- -------
EPS before exceptional items
EPS, as shown on the Group's Consolidated Income Statement on
page 39, includes exceptional items charged or credited to the
income statement in the year. 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 statement on page 22.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect cash
flow from operating activities before exceptional items, which is
the measure shown on the Consolidated Cash Flow Statement on page
43. This IFRS measure is adjusted to include dividends we receive
from joint ventures and associates and exclude net interest paid,
the capital element of lease payments and net capital expenditure
on tangible and intangible asset purchases.
2020 2019
For the year ended 31 December GBPm GBPm
--------------------------------------------- ------- -------
Free Cash Flow 134.9 62.0
Exclude dividends from joint ventures and
associates (19.8) (25.4)
Exclude net interest paid 24.6 21.0
Exclude capitalised finance costs paid 0.9 1.2
Exclude capital element of lease repayments 100.8 70.2
Exclude proceeds received from exercise of
share options (0.1) (0.2)
Exclude purchase of intangible and tangible
assets net of proceeds from disposal 29.2 23.3
--------------------------------------------- ------- -------
Cash flow from operating activities before
exceptional items 270.5 152.1
Exceptional operating cash flows (2.0) (49.2)
--------------------------------------------- ------- -------
Cash flow from operating activities 268.5 102.9
--------------------------------------------- ------- -------
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.
2020 2019
For the year ended 31 December GBPm GBPm
------------------------------------------- ------ ------
Free Cash Flow 134.9 62.0
Add back:
Tax paid 35.9 31.2
Non-cash R&D expenditure 0.1 0.1
Net interest paid 24.6 21.0
Capitalised finance costs paid 0.9 1.2
------------------------------------------- ------ ------
Trading Cash Flow 196.4 115.5
------------------------------------------- ------ ------
Underlying Trading Profit 163.1 120.2
------------------------------------------- ------ ------
Underlying Trading Profit cash conversion 120% 96%
------------------------------------------- ------ ------
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 Consolidated
Balance Sheet on page 42 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.
2020 2019
For the year ended 31 December GBPm GBPm
---------------------------------- -------- --------
Cash and cash equivalents 335.7 89.5
Loans payable (388.8) (305.0)
Lease liabilities (402.6) (369.9)
Derivatives relating to Net Debt (4.7) 1.0
---------------------------------- -------- --------
Net Debt (460.4) (584.4)
---------------------------------- -------- --------
Add back: Lease liabilities 402.6 369.9
---------------------------------- -------- --------
Adjusted Net Debt (57.8) (214.5)
---------------------------------- -------- --------
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used
by the Group and is one of the metrics used to determine the
performance and remuneration of the Executive Directors. ROIC is
calculated based on UTP and Trading Profit using the Group's
Consolidated Income Statement for the year 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 Group
are those items within which resources are, or have been,
committed, which is not the case for many leases which would
previously have been classified as operating leases under IAS17
Leases where termination options exist and commitments for
expenditure are in future years.
2020 2019*
For the year ended 31 December GBPm GBPm
------------------------------------------------ -------- --------
ROIC excluding right of use assets
Non current assets
Goodwill 669.6 674.2
Other intangible assets - owned 80.6 96.5
Property, plant and equipment - owned 54.2 47.3
Interest in joint ventures and associates 19.2 23.6
Trade and other receivables 25.3 26.5
Current assets
Inventory 21.4 18.3
Contract assets, trade and other receivables 609.6 607.4
Total invested capital assets 1,479.9 1,493.8
------------------------------------------------ -------- --------
Current liabilities
Contract liabilities, trade and other payables (576.2) (557.0)
Non current liabilities
Contract liabilities, trade and other payables (56.9) (72.7)
------------------------------------------------ -------- --------
Total invested capital liabilities (633.1) (629.7)
------------------------------------------------ -------- --------
Invested Capital 846.8 864.1
------------------------------------------------ -------- --------
Two-point average of opening and closing
Invested Capital 855.5 782.7
------------------------------------------------ -------- --------
Trading Profit 175.7 133.4
------------------------------------------------ -------- --------
ROIC% 20.5% 17.0%
------------------------------------------------ -------- --------
Underlying Trading Profit 163.1 120.2
------------------------------------------------ -------- --------
Underlying ROIC% 19.1% 15.4%
------------------------------------------------ -------- --------
* During the year ended 31 December 2020, the Group finalised
fair value measurements for a number of contracts which had
previously been provisionally valued associated with the
acquisition of Naval Systems Business Unit which was completed 1
August 2019. As a result, in accordance with IFRS3 Business
Combinations, goodwill has been revised and the fair value of
acquired assets and liabilities have been adjusted, resulting in an
amendment to their carrying value as presented as at 31 December
2019. Further information on the fair value can be found in Note 5
to the Condensed Consolidated Financial Statements.
Overview of financial performance
Revenue
Reported revenue increased by 19.6% in the year to GBP3,884.8m
(2019: GBP3,248.4m), a 20.3% increase in constant currency. Organic
revenue growth at constant currency was 16.2%. This is in line with
the trading update issued on 17 December 2020 where revenue was
expected to be GBP3.9bn for the year ended 31 December 2020.
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 for the year was GBP175.7m (2019: GBP133.4m).
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 was GBP163.1m (2019: GBP120.2m), up 35.7%. At constant
currency, UTP was GBP164.5m, up 36.9%. This is in line with the
trading update issued on 17 December 2020 where UTP was expected to
be between GBP160m and GBP165m for the year ended 31 December
2020.
Commentary on the underlying performance of the Group is
provided in the Chief Executive's Review and the Divisional Reviews
sections.
Excluded from UTP were net releases from OCPs of GBP5.8m (2019:
net releases of GBP0.8m) following the detailed reassessment
undertaken as part of the budgeting process. Also excluded from UTP
were net releases and additional profits of GBP6.8m (2019: net
releases and additional profits of GBP12.4m) 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 of this Finance Review.
Joint ventures and associates - share of results
In 2020, the most significant joint ventures and associates in
terms of scale of operations were AWE Management Limited ("AWE")
and Merseyrail Services Holding Company Limited ("Merseyrail"),
with dividends received of GBP15.5m (2019: GBP17.6m) and GBP1.5m
(2019: GBP7.8m) respectively. Total revenues generated by these
businesses were GBP1,106.8m (2019: GBP1,065.4m) and GBP150.7m
(2019: GBP177.9m) 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 AWE on 30 June
2021. The terms of the exit are in the process of being negotiated
and since the full services under the contract have not been
completed, judgement has been taken in relation to the milestone
achievements which are to be agreed and an estimate of costs
incurred in delivering services which cannot be recovered. The
agreement in respect of both of these items are to be finalised,
however the final outcome is not expected to have a material impact
on the Group's Financial Statements.
While the revenues and individual line items are not
consolidated in the Group's 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.
2020 2019
For the year ended 31 December GBPm GBPm
-------------------------------------------- ------ ------
Revenue 365.1 394.6
-------------------------------------------- ------ ------
Operating profit 15.4 33.8
Net investment revenue - 0.3
Income tax charge (2.7) (6.6)
-------------------------------------------- ------ ------
Profit after tax 12.7 27.5
-------------------------------------------- ------ ------
Dividends received from joint ventures and
associates 19.8 25.4
-------------------------------------------- ------ ------
The change in revenue and profits on the prior year is due to
changes in the underlying operating performance of the Group's
material joint ventures particularly with respect to the impact of
Covid-19 on the Merseyrail joint venture, as well as the disposal,
on 31 May 2020, of the Group's 33% interest in Viapath Analytics
LLP, Viapath Services LLP and Viapath Group LLP (together
"Viapath"). The decrease in dividends received is mainly due to
reduced profits, most notably in respect of the Merseyrail joint
venture, where passenger volumes were impacted by Covid-19.
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.
2020 2019
For the year ended 31 December GBPm GBPm
------------------------------------------------ ------ -------
Exceptional items arising
Exceptional profit on disposal of subsidiaries 11.0 -
and operations
Other exceptional operating items
Restructuring costs 0.1 (12.8)
Costs associated with UK Government review (1.3) (25.2)
Movement in other provisions and other items 2.6 19.3
Reversal of impairment in interest in joint 2.5 -
venture and related loan balances
Costs associated with the acquisition of
Naval Systems Business Unit (1.5) (4.7)
Costs associated with the acquisition of (0.9) -
Facilities First Australia
Other exceptional operating items 1.5 (23.4)
------------------------------------------------ ------ -------
Exceptional operating items 12.5 (23.4)
------------------------------------------------ ------ -------
Exceptional tax (0.4) (2.7)
------------------------------------------------ ------ -------
Total exceptional operating items net of
tax 12.1 (26.1)
------------------------------------------------ ------ -------
Exceptional items arising
The Group disposed of its interest in Viapath with effect from
31 May 2020. The Group had historically impaired its investment in
Viapath as it was not receiving any returns from this joint venture
due to the level of investment being made back into the business,
therefore the carrying value of the Group's investment in Viapath
was nil. Following the announcement during the first half of 2020
that Viapath had been unsuccessful in the tender process to provide
pathology services to five South East London hospitals as well as
associated GP surgeries, the Group exited the joint venture,
selling its stake to the remaining two investors. In May 2020, the
proceeds received by the Group in exchange for its holding in the
joint venture represents the profit on disposal of GBP11.0m.
At the same time as disposing of the Group's interest in
Viapath, certain historical balances were recovered which had
previously been impaired. Since the impairments associated with
those balances were historically treated as exceptional items, the
reversals of these impairments have been treated consistently. The
exceptional credit of GBP2.5m consists of the recovery of a loan
from the Group into the joint venture of GBP1.2m, the exceptional
element of the recovery of profit share which was previously
considered to be irrecoverable and the reversal of impairment.
Other exceptional operating items
The Group recognised the final costs associated with the
Strategy Review during 2019 and, on review, certain costs which had
been accrued but were not incurred were released back to
exceptional operating items resulting in a credit to exceptional
items of GBP0.1m during 2020 (2019: exceptional restructuring costs
of GBP12.8m). Non-exceptional restructuring charges are incurred by
the business as part of normal operational activity, which in the
year totalled GBP7.2m (2019: GBP8.9m) and were included within
operating profit before exceptional items.
There were exceptional costs totalling GBP1.3m (2019: GBP25.2m)
associated with the UK Government reviews and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2020. The 2019
costs included GBP22.9m for the fine and associated costs which
resulted from the SFO's investigation into Serco companies.
During 2019, the Group reached a legal settlement in relation to
a commercial dispute which resulted in the release of a provision
which accounted for the majority of the GBP19.3m exceptional
credit. The treatment of the release as exceptional was consistent
with the recognition of the charge associated with the same legal
matter in 2014. During 2020, the Group reached an agreement with
its insurer for the reimbursement of GBP2.6m of legal fees
associated with the matter and, consistent with the treatment of
other associated amounts, this has been treated as an exceptional
credit.
The Group completed the acquisition of Naval Systems Business
Unit ("NSBU") from Alion Science and Technology in 2019. The
transaction and implementation costs incurred during 2020 of
GBP1.5m (2019: GBP4.7m) have been treated as exceptional costs in
line with the Group's accounting policy and the treatment of
similar costs incurred during the year ended 31 December 2019. No
further costs associated with this acquisition are anticipated to
be recognised as exceptional.
On 17 December 2020, the Group announced it had reached an
agreement to acquire Facilities First Australia Holdings Pty
Limited ("FFA" or "Facilities First Australia") and the acquisition
was completed on 4 January 2021. Acquisition costs totalling
GBP0.9m have been incurred during 2020 in respect of the FFA
acquisition and have been treated as exceptional in accordance with
the Group's accounting policies. Further details on this post year
end transaction are provided in Note 24 to the Consolidated
Financial Statements.
Exceptional tax
Exceptional tax for the year was a charge of GBP0.4m (2019:
charge of GBP2.7m) which arises on exceptional items within
operating profit. This charge arises mainly in connection with the
reimbursement of legal fees from our insurer. The charge is
partially offset by tax deductions related to the acquisition of
Naval Systems Business Unit.
Finance costs and investment revenue
Investment revenue of GBP1.9m (2019: GBP2.7m) consists primarily
of interest accruing on net retirement benefit assets of GBP1.2m
(2019: GBP2.1m). The finance costs of GBP27.8m (2019: GBP24.5m)
include interest incurred on the US private placement loan notes
and the revolving credit facility of GBP15.3m (2019: GBP13.9m) and
lease interest payable of GBP9.5m (2019: GBP6.9m) as well as other
financing related costs including the impact of foreign exchange on
financing activities.
Of the increase in lease interest paid, the majority relates to
the Group's Asylum Accommodation and Support Services contract
("AASC"). The lease costs on the COMPASS contract (the predecessor
contract to AASC) in 2019 were recorded as operating lease costs
due to the short-term transitional arrangement under IFRS16 Leases.
Leases under the AASC contract were accounted for in accordance
with IFRS16 from the point at which service users moved to AASC,
typically 1 July 2019 for the North West region and 1 September
2019 for the Midlands and East of England region.
Tax
Tax charge
Underlying tax
In 2020 we recognised a tax charge of GBP31.2m on underlying
trading profits after finance costs. The effective tax rate (22.7%)
is slightly lower than in 2019 (24.8%). This reduction compared to
2019 is largely due to the utilisation of previously unrecognised
deferred tax in the UK used to offset current UK taxable profits.
The impact is partially offset by disallowable items in the current
year being higher than in 2019 and also the impact of reduced
profits from our joint ventures whose post tax profits are included
in our pre-tax results.
Pre-exceptional tax
We recognised a tax charge of GBP18.9m (2019: GBP27.4m) on
pre-exceptional profits which includes underlying tax (GBP31.2m),
tax credit from amortisation of intangibles arising on acquisition
of GBP1.8m and a GBP10.5m credit arising on non-underlying items.
This GBP10.5m credit consists of tax items that are in themselves
considered to be non-underlying:
-- During the current year we have recognised an additional GBP9.5m (2019:
GBP0.8m) of deferred tax asset in relation to the increase in expected
UK future tax rate from 17% to 19% and anticipated additional utilisation
of UK losses to reflect the improved forecast for taxable income of
our UK operations.
-- Generally, movements in the valuation of the Group's defined benefit
pension schemes and the associated deferred tax impact are reported
in the Statement of Comprehensive Income (SOCI) and do not flow through
the income statement, therefore do not impact profit before tax or
the tax charge. However, the net amount of deferred tax recognised
in the balance sheet relates to both the pension accounting and other
timing differences, such as recoverable losses. As the net deferred
tax balance sheet position is at the maximum level supported by future
profit forecasts, the increase in the deferred tax liability associated
with the pension scheme (with the benefit reported in the SOCI) leads
to a corresponding increase in the deferred tax asset to match the
future profit forecasts. Such an increase in the deferred tax asset
therefore leads to a credit to tax in the income statement. Where deferred
tax charges or releases are the result of movements in the pension
scheme valuations rather than trading activity, these are excluded
from the calculation of tax on underlying profit and the underlying
effective tax rate. These amounted to a GBP5.9m credit for 2020 (2019:
GBP2.7m charge).
-- An amount of GBP4.9m has been charged to non-underlying tax in respect
of the derecognition of balance sheet liabilities following the implementation
of IFRS16 Leases in 2019, a portion of which was not tax effected.
Since the adjustment does not relate to the current year, it is considered
to be non-underlying
The tax rate on profits before exceptional items, at 13.4%, is
lower than the UK standard corporation tax rate of 19%. This is due
mainly to the impact of the non-underlying tax items noted above
together with the impact of utilising previously unvalued deferred
tax in the UK to offset current year profits (reducing rate by
3.6%) and the impact of our joint ventures whose post-tax results
are included in our pre-tax profits (reducing rate by 1.8%). This
is only partially offset by higher tax being suffered on overseas
profits due to their higher statutory tax rates (increasing rate by
5.1%). To the extent that the UK generates significant taxable
profits or losses, our tax charge in future years could continue to
be materially impacted by our accounting for UK deferred taxes.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional items
section above.
Contingent tax assets
At 31 December 2020, the Group has gross estimated unrecognised
deferred tax assets of GBP1.0bn (tax effected: GBP198m), which are
potentially available to offset against future taxable income.
These principally relate to tax trading losses of GBP846m. Of these
tax losses, GBP698m have arisen in the UK business (tax effected:
GBP133m). GBP558m (tax effected GBP106m) of the unrecognised
deferred tax asset would be expected to be brought onto the balance
sheet as the UK trading profits improve.
A GBP30.6m UK tax asset has been recognised at 31 December 2020
(2019: GBP21.1m) on the basis of forecast utilisation against
future taxable income.
Taxes paid
Net corporate income tax of GBP35.9m (2019: GBP31.2m) was paid
during the year, relating primarily to our operations in AsPac of
GBP21.2m (2019: GBP19.4m), North America of GBP14.7m (2019:
GBP12.1), Europe of GBP1.3m (2019: GBP1.1m) and Middle East of
GBP0.8m (2019: GBP1.1m). The Group's UK operations have transferred
tax losses to its profitable joint ventures and associates giving a
cash tax inflow in the UK of GBP2.1m (2019: GBP2.5m).
The amount of tax paid (GBP35.9m) differs from the tax charge in
the period (GBP19.3m) mainly due to the effect of deferred tax
credits on costs incurred in the current year which will lead to
tax deductions in future years. In addition, taxes paid to/received
from Tax Authorities can arise in different periods to the
associated tax charge/credit and there is also a time lag on
receipts of cash from joint ventures and associates for losses
transferred to them.
Further detail is shown below of taxes that have been paid
during the year. Amounts below categorised as corporation tax paid
differs from the above as it only includes amounts paid to and
received from Tax Authorities, therefore excludes amounts received
from our joint ventures and associates. Withholding taxes, which
form part of the net income tax paid, are shown within other
taxes.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as
determined by local legislation in the countries in which we
operate, means that we pay a variety of taxes across the Group. In
order to increase the transparency of our tax profile, we have
shown below the cash taxes that we have paid across our regional
markets.
In total during 2020, Serco globally contributed GBP686.1m of
tax to governments in the jurisdictions in which we operate.
Taxes by category
Taxes Taxes
borne collected Total
For the year ended 31 December 2020 GBPm GBPm GBPm
------------------------------------- ------- ----------- ------
Corporation tax 37.9 - 37.9
VAT and similar 10.0 185.1 195.1
People taxes 119.2 328.5 447.7
Other taxes 5.1 0.3 5.4
------------------------------------- ------- ----------- ------
Total 172.2 513.9 686.1
------------------------------------- ------- ----------- ------
Taxes by region
Taxes Taxes
borne collected Total
For the year ended 31 December 2020 GBPm GBPm GBPm
------------------------------------- ------- ----------- ------
UK & Europe 80.8 263.2 344.0
AsPac 42.2 154.8 197.0
Americas 47.0 93.2 140.2
Middle East 2.2 2.7 4.9
------------------------------------- ------- ----------- ------
Total 172.2 513.9 686.1
------------------------------------- ------- ----------- ------
Corporation tax, which is the only cost to be separately
disclosed in our Consolidated Financial Statements, is only one
element of our tax contribution. For every GBP1 of corporate tax
paid directly by the Group (tax borne), we bear a further GBP3.54
in other business taxes. The largest proportion of these is in
connection with employing our people.
In addition, for every GBP1 of tax that we bear, we collect
GBP2.98 on behalf of national governments (taxes collected). This
amount is directly impacted by the people that we employ and the
sales that we make.
Dividends
When dividend payments were suspended in 2014, the Board
committed to resuming dividend payments to Serco's shareholders as
soon as it judged it prudent to do so. During 2020, a final
dividend was proposed in respect of the year ended 31 December
2019, however this was withdrawn in April 2020 as the potential
impact on the Group of the Covid-19 pandemic was unknown. This
remained the case when the Group announced its half year results
during August 2020.
After reassessing the Group's liquidity and repaying all direct
Government support the Group received in respect of the pandemic
where there was a mechanism to do so, combined with the strength of
the balance sheet at the end of 2020 and positive forecast
performance into 2021 and beyond, the Board is recommending the
payment of a final dividend in respect of the 2020 financial year
of 1.4p, aligned to the recommended dividend and outlook as
described in the Chief Executive's Review. The Group has also
announced its intention to repurchase shares equivalent to an
amount of GBP40m in 2021, of which GBP20m will be cancelled and the
remainder used for existing share schemes. The dividend, subject to
shareholder approval at the Annual General Meeting on 21 April
2021, would be paid on 4 June 2021.
Share count and EPS
The weighted average number of shares for EPS purposes was
1,229.1m for the year ended 31 December 2020 (2019: 1,171.4m) and
diluted weighted average number of shares was 1,254.3m (2019:
1,199.0m).
In the year, 10,000,000 (2019: 13,600,000) shares were issued to
the Employee Share Ownership Trust to satisfy awards under the
Group's share plan schemes.
In May 2019, the company completed a placement of 111,216,400
new ordinary shares of 2p each raising net proceeds of GBP138.7m.
There were no such placements in 2020.
Basic EPS before exceptional items was 9.90p per share (2019:
6.54p); including the impact of exceptional items, Basic EPS was
10.89p (2019: 4.31p). Basic Underlying EPS was 8.61p per share
(2019: 6.31p).
Diluted EPS before exceptional items was 9.70p per share (2019:
6.39p); including the impact of exceptional items, Diluted EPS was
10.67p (2019: 4.21p). Diluted Underlying EPS was 8.43p per share
(2019: 6.16p).
Cash flows
The UTP of GBP163.1m (2019: GBP120.2m) converts into a trading
cash inflow of GBP196.4m (2019: GBP115.5m). The improvement in 2020
cash generation reflects the increase in profitability from revenue
growth, delivery of cost efficiencies and improvements made in
managing working capital within the Group throughout the year. The
improvement in Trading Cash Flow is driven by operating profit
before exceptional items increasing by GBP40.8m, a marginal
increase in working capital outflow to GBP5.3m (2019: GBP0.1m) and
a reduction in OCP utilisation to GBP1.8m (2019: GBP53.6m),
although in 2019, GBP12.7m of the utilisation was not related to a
cash cost but rather was related to the impairment of right of use
assets created on adoption of IFRS16 within onerous contracts. The
working capital outflow of GBP5.3m is considered to be low given
the fact that the Group experienced significant organic growth year
on year. The improvement is a result of improved collections,
particularly in the US and Middle East where there was a
significant increase in receivables on certain contracts at the end
of 2019, and better management of debtor days across the Group. The
movement in working capital also benefits from GBP12.4m of tax
deferrals in the US as a result of Covid-19. This amount is
currently planned to be paid in equal instalments in 2021 and 2022.
The amount has not been repaid early in a manner consistent with
deferrals received in other jurisdictions, owing to the absence of
a mechanism to do so.
The table below shows the operating profit and FCF reconciled to
movements in Net Debt. FCF for the year was an inflow of GBP134.9m
compared to GBP62.0m in 2019. The improvement in FCF is largely as
a result of improved trading cash inflows as discussed above.
The movement in Adjusted Net Debt is a reduction of GBP156.7m in
2020, a reconciliation of which is provided at the bottom of the
following table.
The net cash inflow on acquisition and disposal of subsidiaries
of GBP6.1m (2019: outflow GBP183.9m acquisition and GBP9.3m
deferred consideration) includes GBP11.0m of consideration received
by the Group for its share of the Viapath joint venture. Offsetting
this are costs associated with the acquisition of Naval Systems
Business Unit including deferred consideration and working capital
adjustments as well as costs associated with the acquisition of
Facilities First Australia Holdings Pty Limited.
Exceptional cash outflows of GBP2.0m as shown below differ to
the net exceptional credit on other exceptional operating items of
GBP1.5m due to cash payments associated with costs provided for in
2019.
2020 2019
For the year ended 31 December GBPm GBPm
----------------------------------------------- -------- --------
Operating profit 179.2 102.5
Remove exceptional items (12.5) 23.4
----------------------------------------------- -------- --------
Operating profit before exceptional items 166.7 125.9
Less: share of profit from joint ventures
and associates (12.7) (27.5)
Movement in provisions 16.2 (43.1)
Depreciation, amortisation and impairment
of owned property, plant and equipment and
intangible assets 39.2 43.3
Depreciation, amortisation and impairment
of leased property, plant and equipment and
intangible assets 93.9 75.6
Other non-cash movements 8.5 9.3
----------------------------------------------- -------- --------
Operating cash inflow before movements in
working capital, exceptional items and tax 311.8 183.5
Working capital movements (5.3) (0.1)
Tax paid (35.9) (31.2)
Non-cash R&D expenditure (0.1) (0.1)
----------------------------------------------- -------- --------
Cash flow from operating activities before
exceptional items 270.5 152.1
Dividends from joint ventures and associates 19.8 25.4
Interest received 0.3 0.4
Interest paid (24.9) (21.4)
Capital element of lease repayments (100.8) (70.2)
Capitalised finance costs paid (0.9) (1.2)
Purchase of intangible and tangible assets
net of proceeds from disposals (29.2) (23.3)
Proceeds received from exercise of share
options 0.1 0.2
----------------------------------------------- -------- --------
Free Cash Flow 134.9 62.0
Net cash inflow/(outflow) on acquisition
and disposal of subsidiaries, joint ventures
and associates 6.1 (193.2)
Issue of share capital - 138.7
Movements on other investment balances 0.5 0.2
Capitalisation and amortisation of loan costs - 0.1
Exceptional items (2.0) (49.2)
Exceptional proceeds from loans receivable 1.2 -
Exceptional distribution from joint venture 1.9 -
Cash movements on hedging instruments 2.4 (2.0)
Foreign exchange gain on Adjusted Net Debt 11.7 2.1
----------------------------------------------- -------- --------
Movement in Adjusted Net Debt 156.7 (41.3)
Opening Adjusted Net Debt (214.5) (173.2)
----------------------------------------------- -------- --------
Closing Adjusted Net Debt (57.8) (214.5)
----------------------------------------------- -------- --------
Lease liabilities (402.6) (369.9)
----------------------------------------------- -------- --------
Closing Net Debt at 31 December (460.4) (584.4)
----------------------------------------------- -------- --------
Net Debt
2020 2019
As at 31 December GBPm GBPm
---------------------------------- -------- --------
Cash and cash equivalents 335.7 89.5
Loans payable (388.8) (305.0)
Lease liabilities (402.6) (369.9)
Derivatives relating to Net Debt (4.7) 1.0
---------------------------------- -------- --------
Net Debt (460.4) (584.4)
Exclude lease liabilities 402.6 369.9
---------------------------------- -------- --------
Adjusted Net Debt (57.8) (214.5)
---------------------------------- -------- --------
Average Adjusted Net Debt as calculated on a daily basis for the
year ended 31 December 2020 was GBP209.2m (2019: GBP231.0m). Peak
Adjusted Net Debt was GBP355.7m (2019: GBP356.8m).
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 31 December 2020, the Group had committed funding of
GBP642m (2019: GBP508m), comprising GBP347m of US private placement
notes, a GBP45m term loan facility which was fully drawn and a
GBP250m revolving credit facility (RCF) which was undrawn in its
entirety. The Group does not engage in any external financing
arrangements associated with either receivables or payables.
The Group's RCF provides GBP250m of committed funding for five
years from the arrangement date in December 2018. The US private
placement 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 31 December 2020, GBP346.7m of debt was held
at fixed rates and Adjusted Net Debt was GBP57.8m.
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
were 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.
2020 2019
For the year ended 31 December GBPm GBPm
---------------------------------------------------- ------- -------
Operating profit before exceptional items 166.7 125.9
Remove: Amortisation and impairment of intangibles
arising on acquisition 9.0 7.5
Trading Profit 175.7 133.4
Exclude: Share of joint venture post-tax
profits (12.7) (27.5)
Include: Dividends from joint ventures 19.8 25.4
Add back: Net non-exceptional charges to
covenant OCPs 4.9 7.2
Add back: Net covenant OCP utilisation (0.7) -
Add back: Depreciation, amortisation and
impairment of owned property, plant and equipment
and non-acquisition intangible assets 30.2 35.8
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 4.3 5.8
Add back: Foreign exchange credit on investing
and financing arrangements (0.7) (0.8)
Add back: Share based payment expense 11.2 11.6
Other covenant adjustments to EBITDA (7.2) 9.8
---------------------------------------------------- ------- -------
Covenant EBITDA 224.8 200.7
---------------------------------------------------- ------- -------
Net finance costs 25.9 21.8
Exclude: Net interest receivable on retirement
benefit obligations 1.2 2.1
Exclude: Movement in discount on other debtors 0.1 0.1
Exclude: Other dividends received 0.4 -
Exclude: Foreign exchange on investing and
financing arrangements (0.7) (0.8)
Add back: Movement in discount on provisions (0.2) (1.2)
Other covenant adjustments to net finance
costs resulting from IFRS16 Leases (9.1) (6.6)
---------------------------------------------------- ------- -------
Covenant net finance costs 17.6 15.4
---------------------------------------------------- ------- -------
Adjusted Net Debt 57.8 214.5
Obligations under finance leases - in accordance
with IAS17 Leases 24.1 8.9
---------------------------------------------------- ------- -------
Recourse Net Debt 81.9 223.4
Exclude: Disposal vendor loan note, encumbered
cash and other adjustments (1.7) 4.1
Covenant adjustment for average FX rates 21.3 7.6
---------------------------------------------------- ------- -------
CTNB 101.5 235.1
---------------------------------------------------- ------- -------
CTNB / covenant EBITDA (not to exceed 3.5x) 0.45x 1.17x
---------------------------------------------------- ------- -------
Covenant EBITDA / covenant net finance costs
(at least 3.0x) 12.8x 13.0x
---------------------------------------------------- ------- -------
Net assets summary
2020 2019*
As at 31 December GBPm GBPm
------------------------------------------------ ---------- ----------
Non current assets
Goodwill 669.6 674.2
Other intangible assets 80.6 96.5
Property, plant and equipment 441.7 392.6
Other non current assets 44.5 50.1
Deferred tax assets 83.2 63.9
Retirement benefit assets 114.6 78.3
------------------------------------------------ ---------- ----------
Total non current assets 1,434.2 1,355.6
------------------------------------------------ ---------- ----------
Current assets
Inventories 21.4 18.3
Contract assets, trade receivables and other
current assets 614.1 610.4
Current tax assets 4.9 6.8
Cash and cash equivalents 335.7 89.5
------------------------------------------------ ---------- ----------
Total current assets 976.1 725.0
------------------------------------------------ ---------- ----------
Total assets 2,410.3 2,080.6
------------------------------------------------ ---------- ----------
Current liabilities
Contract liabilities, trade payables and other
current liabilities (585.5) (558.9)
Current tax liabilities (21.6) (18.7)
Provisions (62.1) (58.4)
Lease obligations (109.3) (84.6)
Loans (89.7) (56.1)
------------------------------------------------ ---------- ----------
Total current liabilities (868.2) (776.7)
------------------------------------------------ ---------- ----------
Non current liabilities
Contract liabilities, trade payables and other
non current liabilities (57.0) (72.7)
Deferred tax liabilities (26.9) (26.7)
Provisions (115.9) (103.4)
Lease obligations (293.3) (285.3)
Loans (299.1) (248.9)
Retirement benefit obligations (34.9) (24.0)
------------------------------------------------ ---------- ----------
Total non current liabilities (827.1) (761.0)
------------------------------------------------ ---------- ----------
Total liabilities (1,695.3) (1,537.7)
------------------------------------------------ ---------- ----------
Net assets 715.0 542.9
------------------------------------------------ ---------- ----------
* During the year ended 31 December 2020, the Group finalised
fair value measurements for a number of contracts which had
previously been provisionally valued associated with the
acquisition of Naval Systems Business Unit which was completed 1
August 2019. As a result, in accordance with IFRS3 Business
Combinations, goodwill has been revised and the fair value of
acquired assets and liabilities have been adjusted, resulting in an
amendment to their carrying value as presented as at 31 December
2019. Further information on the fair value can be found in Note 5
to the Condensed Consolidated Financial Statements.
At 31 December 2020 the Group had net assets of GBP715.0m, a
movement of GBP172.1m from the closing net asset position of
GBP542.9m as at 31 December 2019. The increase in net assets is
mainly due to the following movements:
-- An increase in property, plant and equipment of GBP49.1m, which includes
an increase in right of use assets of GBP42.2m. This is matched by
a corresponding increase in lease liabilities net of repayments made
of GBP32.7m. The increase in leases is primarily due to the Group's
Asylum Accommodation and Support Services Contract ("AASC") contract.
-- An increase in the net retirement benefit asset of GBP25.4m. Market
volatility seen throughout 2020 meant a decrease in risk free rates
and a corresponding decrease in the discount rate applied to the
defined benefit obligation associated with the Group's most significant
pension scheme. Whilst this increased the liability associated with
the scheme, it also served to increase the rates of return on more
secure assets, such as government bonds, meaning the buy and hold
approach adopted by the scheme saw favourable net returns during
the year.
-- Cash and cash equivalents have increased by GBP246.2m which includes
a net exchange gain of GBP1.8m. In the year the Group has generated
cash inflows of GBP270.5m from operations before exceptionals as
well as raising $200.0m (GBP155.9m) through an additional US private
placement. The net spend on tangible and intangible assets was GBP29.2m
and the capital element of lease repayments in the year was GBP100.8m.
-- Net loan balances have increased by GBP83.8m due to the offsetting
impacts of the Group obtaining an additional GBP155.9m through a
US private placement but repaying GBP50.0m of the revolving credit
facility that was drawn at the end of 2019. Other movements on the
loan balances are predominantly favourable foreign exchange gains.
Provisions
The total of current and non current provisions has increased by
GBP16.2m since 31 December 2019. The movement is predominantly due
to:
-- An increase in restructuring and other employee provisions
of GBP15.7m.
-- An increase of GBP5.4m across employee terminal gratuity
and long service award provisions.
-- A decrease of GBP2.0m in onerous contract provisions to
GBP14.5m (2019: GBP16.5m). OCP balances are subject to ongoing
review and a full bottom-up assessment of the forecasts
that form the basis of the OCPs is conducted as part of
the annual budgeting process. The net release to OCPs was
GBP0.2m in 2020 (2019: GBP1.0m charge) and utilisation was
GBP1.8m (2019: GBP53.6m).
In 2020, the release from OCPs is reflective of the Group's
ability to forecast the final years of contracts which are nearing
completion. Additional charges of GBP5.7m (2019: GBP10.6m) have
been made in respect of future losses on new and existing onerous
contract provisions to reflect the updated forecasts and releases
of GBP5.9m (2019: GBP9.6m) as settlements are agreed and contracts
near completion. The additional charges represent certain
operational issues and the associated risks which are resulting in
charges to existing onerous contract provisions.
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 31 December 2020, the provision recognised in respect of this
portfolio of contracts is GBP8.5m (2019: GBP6.2m).
Acquisitions
On 4 January 2021, the Group acquired 100% of the issued share
capital of Facilities First Australia Holdings Pty Limited ("FFA"
or "Facilities First Australia"), for consideration of A$52.6m,
subject to standard net working capital adjustments. Further
details on this post year end transaction are provided in note 24
to the Condensed Consolidated Financial Statements.
On 16 February 2021, the Group announced that it had agreed to
acquire Whitney, Bradley & Brown, Inc ("WBB"), a leading
provider of advisory, engineering and technical services to the US
Military, for $295m from an affiliate of H.I.G. Capital. The
acquisition 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 acquisition will be immediately
accretive to earnings and will be funded through existing debt
facilities; it is expected to complete in the second quarter of
2021, subject to regulatory approvals. As the transaction is yet to
complete, the financial results and impact of the transaction have
not been recognised in these Consolidated Financial Statements.
Disposals
On 31 May 2020, the Group disposed of its 33% interest in
Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP
(together "Viapath").
The Group had historically impaired its investment in Viapath as
it was not receiving any returns from this joint venture due to the
level of investment being made back into the business, therefore
the carrying value of the Group's investment in Viapath was nil.
Following the announcement during the first half of 2020 that
Viapath had been unsuccessful in the tender process to provide
pathology services to five South East London hospitals as well as
associated GP surgeries, the Group exited the joint venture,
selling its stake to the remaining two investors. Total cash
receipts on the date of the disposal were GBP15.1m. Of the
GBP15.1m, GBP1.2m was in respect of a loan that had previously been
impaired through exceptional costs and so the reversal has been
recognised as an exceptional gain. An additional amount of GBP2.9m
was received as a profit share which, because the Group's
investment in Viapath was fully impaired, resulted in a profit
being recognised. Since GBP1.0m of the impairment was recorded
within exceptional items in prior years, the associated profit was
treated as exceptional with the remainder being recognised within
Underlying Trading Profit. The remaining GBP11.0m was received in
respect of the Group's interest in Viapath and so, with no carrying
value attributed to Viapath, this has been recognised as a gain on
disposal of the investment in the joint venture.
Covid-19
The impact of Covid-19 on the Group during the year at a profit
level has been broadly neutral, however this includes significant
gross impacts. Whilst the Group has been successful in providing
support to governments in the majority of the locations in which it
operates, there are areas of the Group that have fared less
favourably. Our assistance with the UK testing programme, NHS Test
and Trace, and Immigration contracts in AsPac and the UK have
resulted in positive contributions to the Group's profit.
Offsetting these are higher costs within the Group's Health
contracts, the Group's Leisure business in the UK which has seen
significant adverse profit impacts from the lockdowns, both local
and national, and the Group's Transport contracts both in the UK
and the Middle East which have seen significant reductions in
volumes; these include the Merseyrail joint venture and Caledonian
Sleepers contract in the UK and Aviation businesses in the Middle
East. Some of these adverse impacts have been mitigated with
commercial customer support to offset the impact of the pandemic on
costs and volumes. The Group has also paid every member of
front-line staff an ex-gratia bonus of GBP100 resulting in a total
cost of c.GBP5m.
The Group's cash flow has benefitted from GBP12.4m of tax
deferrals in the North America division owing to the absence of a
mechanism to repay these early, but all other deferrals of taxes
have been repaid. Additionally, the Group has returned all furlough
amounts received in respect of Group's employees in the UK, meaning
the Group has not received any government assistance in respect of
Covid-19 and the US tax deferrals will be repaid early as soon as
there is a mechanism to do so.
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
20 to the Condensed Consolidated Financial Statements.
Condensed Consolidated Financial Statements
Consolidated Income Statement
For the year ended 31 December
2020 2019
Note GBPm GBPm
--------------------------------------------------- ---- --------- ---------
Revenue 7 3,884.8 3,248.4
Cost of sales (3,501.8) (2,928.3)
--------------------------------------------------- ---- --------- ---------
Gross profit 383.0 320.1
Administrative expenses (220.0) (214.2)
Exceptional profit on disposal of subsidiaries
and operations 6 11.0 -
Other exceptional operating items 8 1.5 (23.4)
Other expenses - amortisation and impairment
of intangibles arising on acquisition (9.0) (7.5)
Share of profits in joint ventures and associates,
net of interest and tax 4 12.7 27.5
--------------------------------------------------- ---- --------- ---------
Operating profit 179.2 102.5
--------------------------------------------------- ---- --------- ---------
Operating profit before exceptional items 166.7 125.9
--------------------------------------------------- ---- --------- ---------
Investment revenue 9 1.9 2.7
Finance costs 10 (27.8) (24.5)
Total net finance costs (25.9) (21.8)
--------------------------------------------------- ---- --------- ---------
Profit before tax 153.3 80.7
--------------------------------------------------- ---- --------- ---------
Profit before tax and exceptional items 140.8 104.1
--------------------------------------------------- ---- --------- ---------
Tax on profit before exceptional items 11 (18.9) (27.4)
Exceptional tax 11 (0.4) (2.7)
--------------------------------------------------- ---- --------- ---------
Tax charge (19.3) (30.1)
--------------------------------------------------- ---- --------- ---------
Profit for the year 134.0 50.6
--------------------------------------------------- ---- --------- ---------
Attributable to:
Equity owners of the Company 133.8 50.4
Non controlling interests 0.2 0.2
--------------------------------------------------- ---- --------- ---------
Earnings per share (EPS)
Basic EPS 13 10.89p 4.31p
Diluted EPS 13 10.67p 4.21p
--------------------------------------------------- ---- --------- ---------
The accompanying notes form an integral part of the financial
statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 December
2020 2019
Note GBPm GBPm
------------------------------------------------- ---- ----- ------
Profit for the year 134.0 50.6
Other comprehensive income for the year:
Items that will not be reclassified subsequently
to profit or loss:
Share of other comprehensive income in joint
ventures and associates 4 2.7 1.3
Remeasurements of post-employment benefit
obligations* 21 18.2 (20.3)
Actuarial gain on reimbursable rights* 21 3.9 3.2
Income tax relating to these items* 11 (5.9) 2.7
Items that may be reclassified subsequently
to profit or loss:
Net exchange gain/(loss) on translation of
foreign operations** 7.9 (33.3)
Fair value loss on cash flow hedges during
the year** (0.2) (0.1)
Total other comprehensive income/(expense)
for the year 26.6 (46.5)
Total comprehensive income for the year 160.6 4.1
------------------------------------------------- ---- ----- ------
Attributable to:
Equity owners of the Company 160.4 4.0
Non controlling interest 0.2 0.1
------------------------------------------------- ---- ----- ------
* Recorded in retirement benefit obligations reserve in the
Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the
Consolidated Statement of Changes in Equity.
The accompanying notes form an integral part of the financial
statements.
Consolidated Statement of Changes in Equity
Retirement Share Hedging
Share Capital benefit based Own and Total Non
Share premium redemption Retained obligations payment shares translation shareholders' controlling
capital account reserve earnings reserve reserve reserve reserve equity interest
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
At 1 January
2019 22.0 327.9 0.1 111.1 (137.4) 75.0 (18.7) 5.4 385.4 1.4
Opening
balance
adjustment
- IFRS16 - - - 3.0 - - - - 3.0 -
Total
comprehensive
income for
the year - - - 51.8 (14.4) - - (33.4) 4.0 0.1
Issue of
share
capital 2.5 135.0 - - - - (0.3) - 137.2 -
Shares
transferred
to award
holders
on exercise
of share
awards - - - - - (14.4) 14.6 - 0.2 -
Expense in
relation to
share based
payments - - - - - 11.6 - - 11.6 -
At 1 January
2020 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 year - - - 136.5 16.2 - - 7.7 160.4 0.2
Issue of share
capital 0.2 0.2 - - - - (0.2) - 0.2 -
Shares
transferred
to award
holders
on exercise
of share
awards - - - - - (2.4) 2.5 - 0.1 -
Expense in
relation to
share based
payments - - - - - 11.2 - - 11.2 -
At 31 December
2020 24.7 463.1 0.1 302.4 (135.6) 81.0 (2.1) (20.3) 713.3 1.7
-------------- ------- ------- ---------- -------- ----------- ------- ------- ----------- ------------- -----------
The accompanying notes form an integral part of the financial
statements.
Consolidated Balance Sheet
At 31 December At 31 December
2020 2019*
Note GBPm GBPm
--------------------------------- ---- -------------- --------------
Non current assets
Goodwill 14 669.6 674.2
Other intangible assets 80.6 96.5
Property, plant and equipment 441.7 392.6
Interests in joint ventures
and associates 4 19.2 23.6
Trade and other receivables 15 25.3 26.5
Deferred tax assets 12 83.2 63.9
Retirement benefit assets 21 114.6 78.3
--------------------------------- ---- -------------- --------------
1,434.2 1,355.6
--------------------------------- ---- -------------- --------------
Current assets
Inventories 21.4 18.3
Contract assets 15 296.1 287.5
Trade and other receivables 15 313.5 319.9
Current tax assets 4.9 6.8
Cash and cash equivalents 335.7 89.5
Derivative financial instruments 4.5 3.0
--------------------------------- ---- -------------- --------------
976.1 725.0
Total assets 2,410.3 2,080.6
--------------------------------- ---- -------------- --------------
Current liabilities
Contract liabilities 16 (42.3) (66.8)
Trade and other payables 16 (533.9) (490.2)
Derivative financial instruments (9.3) (1.9)
Current tax liabilities (21.6) (18.7)
Provisions 19 (62.1) (58.4)
Lease obligations 17 (109.3) (84.6)
Loans (89.7) (56.1)
--------------------------------- ---- -------------- --------------
(868.2) (776.7)
--------------------------------- ---- -------------- --------------
Non current liabilities
Contract liabilities 16 (47.5) (58.2)
Trade and other payables 16 (9.4) (14.5)
Derivative financial instruments (0.1) -
Deferred tax liabilities 12 (26.9) (26.7)
Provisions 19 (115.9) (103.4)
Lease obligations 17 (293.3) (285.3)
Loans (299.1) (248.9)
Retirement benefit obligations 21 (34.9) (24.0)
--------------------------------- ---- -------------- --------------
(827.1) (761.0)
--------------------------------- ---- -------------- --------------
Total liabilities (1,695.3) (1,537.7)
--------------------------------- ---- -------------- --------------
Net assets 715.0 542.9
--------------------------------- ---- -------------- --------------
Equity
Share capital 24.7 24.5
Share premium account 463.1 462.9
Capital redemption reserve 0.1 0.1
Retained earnings 302.4 165.9
Retirement benefit obligations
reserve (135.6) (151.8)
Share based payment reserve 81.0 72.2
Own shares reserve (2.1) (4.4)
Hedging and translation reserve (20.3) (28.0)
--------------------------------- ---- -------------- --------------
Equity attributable to owners
of the Company 713.3 541.4
Non controlling interest 1.7 1.5
--------------------------------- ---- -------------- --------------
Total equity 715.0 542.9
--------------------------------- ---- -------------- --------------
* During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
The accompanying notes form an integral part of the financial
statements.
The financial statements were approved by the Board of Directors
on 24 February 2021 and signed on its behalf by:
Rupert Soames Angus Cockburn
Group Chief Executive Officer Group Chief Financial Officer
Consolidated Cash Flow Statement
For the year ended 31 December
2020 2019
Note GBPm GBPm
---------------------------------------------------- ---- ------- -------
Net cash inflow from operating activities before
exceptional items 270.5 152.1
Exceptional items (2.0) (49.2)
---------------------------------------------------- ---- ------- -------
Net cash inflow from operating activities 3 268.5 102.9
---------------------------------------------------- ---- ------- -------
Investing activities
Interest received 0.3 0.4
Decrease in security deposits 0.1 0.2
Dividends received from joint ventures and
associates 19.8 25.4
Exceptional distribution from joint ventures 1.9 -
Other dividends received 0.4 -
Proceeds from disposal of property, plant and
equipment 20.9 1.0
Net cash inflow on disposal of subsidiaries
and operations 6 11.0 -
Acquisition of subsidiaries, net of cash acquired 5 (4.9) (193.2)
Proceeds from loans receivable 1.2 -
Purchase of other intangible assets (8.3) (6.8)
Purchase of property, plant and equipment (41.8) (17.5)
---------------------------------------------------- ---- ------- -------
Net cash inflow/(outflow) from investing activities 0.6 (190.5)
---------------------------------------------------- ---- ------- -------
Financing activities
Interest paid (24.9) (21.4)
Capitalised finance costs paid (0.9) (1.2)
Net advances/repayments of loans 99.4 72.3
Capital element of lease repayments (100.8) (70.2)
Cash movements on hedging instruments 2.4 (2.0)
Issue of share capital - 138.7
Proceeds received from exercise of share options 0.1 0.2
Net cash (outflow)/inflow from financing activities (24.7) 116.4
---------------------------------------------------- ---- ------- -------
Net increase in cash and cash equivalents 244.4 28.8
Cash and cash equivalents at beginning of year 89.5 62.5
Net exchange gain/(loss) 1.8 (1.8)
Cash and cash equivalents at end of year 335.7 89.5
---------------------------------------------------- ---- ------- -------
The accompanying notes form an integral part of the financial
statements.
Notes to the Condensed Consolidated Financial Statements
1. General information, going concern and changes in accounting
standards
The basis of preparation in this preliminary announcement is set
out below.
The financial information in this announcement does not
constitute the Group's or the Company's statutory accounts as
defined in section 434 of the Companies Act 2006 for the years
ended 31 December 2020 or 2019, but is derived from those accounts.
Statutory accounts for 2019 have been delivered to the registrar of
companies, and those for 2020 will be delivered in due course. The
auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to
which the auditor drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under
section 498 (2) or (3) of the Companies Act 2006.
The preliminary announcement has been prepared in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 ("Adopted IFRS") and are
prepared in accordance with international financial reporting
standards adopted pursuant to Regulation (EC) No 1606/2002 as it
applies to the European Union. Whilst the financial information
included in this preliminary announcement has been computed in
accordance with IFRS, this announcement does not itself contain
sufficient information to comply with IFRS. The Company expects to
publish full Group and parent company only financial statements
that comply with IFRS and FRS101 respectively, in March 2021 and
this includes the Group's and parent company's accounting
policies.
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. The
following principal accounting policies adopted have been applied
consistently in the current and preceding financial year except as
stated below.
Going concern
In assessing the basis of preparation of the financial
statements for the year ended 31 December 2020, 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 31 December 2020, the Group's principal debt facilities
comprised a GBP250m revolving credit facility, an acquisition
facility of GBP45m and GBP347m of US private placement notes,
giving GBP642m of committed credit facilities and committed
headroom of GBP582m. As at December 2020, the Group's leverage
ratio is below its covenant of 3.5x and below the Group's target
range of 1x-2x at 0.45x.
The Directors have undertaken a rigorous assessment of going
concern and liquidity taking into account key uncertainties and
sensitivities, including the potential impact of Covid-19 on the
future performance of the Group. 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 is the Board-approved budget, which
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. In setting
the Group's budgets for 2021 and 2022, consideration has been 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.
The Directors have considered various downside scenarios,
including the anticipated impact of Covid-19 on the Group's
operations, and have excluded the positive impacts on profitability
experienced to date as a result of the virus. The key assumptions
considered in these downside scenarios include a range of lower
passenger volumes on the Group's train operating contracts, higher
costs within the Health portfolio and slower recovery in usage of
leisure centres in the UK through to the end of 2021. In a more
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 two three-month lockdowns during the
assessment period. In these different downside scenarios, the Group
continues to have sufficient covenant and liquidity headroom.
Due to the limited impact of Covid-19 on the Group's
profitability, the Directors believe that appropriate sensitivities
in assessing the Group and Company'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 loans of $152m due to mature before 30
June 2022 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.
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.62% 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. The
Group does not bid for contracts at margins below its target
range.
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 (cGBP20m) 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 and
Company 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 financial statements and therefore have prepared
the financial statements on a going concern basis.
Adoption of new and revised standards
There have been no new accounting standards implemented by the
Group during the year and no revisions to accounting standards have
had a material impact on the Group's Financial Statements.
Amendments to IFRS16 Covid-19 Related Rent Concessions
On 28 May 2020, the IASB issued Covid-19 Related Rent
Concessions - amendment to IFRS16 Leases. The amendments provide
relief to lessees from applying IFRS16 guidance on lease
modification accounting for rent concessions arising as a direct
consequence of the Covid-19 pandemic. As a practical expedient, a
lessee may elect not to assess whether a Covid-19 related rent
concession from a lessor is a lease modification. A lessee that
makes this election accounts for any change in lease payments
resulting from the Covid-19 related rent concession the same way it
would account for the change under IFRS16, if the change were not a
lease modification.
Whilst the amendment applies to annual reporting periods
beginning on or after 1 June 2020, earlier application is
permitted. The impact of applying the amendment to the Group's
Financial Statements was immaterial.
2. Critical accounting judgements and key sources of estimation
uncertainty
In the process of applying the Group's accounting policies,
which are described in note 2 to the Group's Consolidated Financial
Statements, Management has made the following judgements that have
the most significant effect on the amounts recognised in the
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 measurement 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 year for contracts which the Directors have assessed do
not require a provision as at 31 December 2020. The estimates made
in relation to onerous contracts differ according to whether an
existing provision is recognised or not.
Major sources of uncertainty within existing onerous contract
provisions, which could result in a material adjustment within the
next financial year, 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 longer term impact 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, in the absence of any customer
support.
In the current year, an amount of GBP0.1m was charged to
historic provisions, and releases of GBP5.9m have been made. One
new OCP was recognised during the year with the charge being
GBP3.3m within Underlying Trading Profit. All of these revisions
have resulted from triggering events in the current year, either
through changes in contractual positions or changes in
circumstances which could not have been reasonably foreseen at the
previous balance sheet date such as the impact of Covid-19. 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. A detailed bottom up review
of the provisions is performed as part of the Group's formal annual
budgeting process.
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. Discount rates used are calculated
based on the estimated risk-free rate of interest for the region in
which the provision is located and matched against the ageing
profile of the provision.
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 31 December 2020, the provision recognised in
respect of this portfolio of contracts is GBP8.5m (2019:
GBP6.2m).
The Group operates a large number of long-term contracts.
Onerous contract provisions totalling GBP6.0m are estimated for
individual contracts, based on the specific characteristics of the
contract including possible contract extensions or 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 GBP14.5m (see note
19). 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 the accounts.
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 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 approved forecasts, with the key assumptions being revenue
growth, margins and cash conversion rates. During the current year,
the process for setting future budgets and longer-term business
planning, has required an assessment of the likely future impact of
Covid-19 on the Group's operations and its future activities. As
noted above, in relation to both going concern and onerous contract
provisions, the potential impact of Covid-19 in the future is
uncertain. Management, as part of the budgeting process, have
included an estimate of the potential future impact, and as a
result, no specific adjustment has been made in relation to the
cash flows used in the assessment of 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 are
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. However, no impairment of goodwill was noted in the year
ended 31 December 2020.
Current tax
Liabilities for tax contingencies require Management judgement
and estimates in respect of tax audits and also 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 for the Group 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.
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 outflow, but on resolution, to the
extent this differs from the liability held, this will be reflected
through the tax charge or credit, which could be material for that
period to the extent that the outcomes differ from the current
estimates. Each potential liability and contingency is revisited on
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 and other
pension scheme arrangements are covered in note 21.
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
During the year ended 31 December 2020, the Group's results have
been impacted by Covid-19, and in a number of instances, the
recognition and measurement of amounts as at 31 December 2020 has
required judgements to be made about the impact of Covid-19.
Management assessed each balance on the balance sheet for the
impact of Covid-19 as at 31 December 2020, as well as a number of
other critical judgements which could also reasonably be considered
to be impacted by the ongoing effects of Covid-19. Those items for
which Covid-19 was considered to be a critical element of the
judgements made, are summarised below. In reviewing areas of the
financial statements that could be impacted by Covid-19, Management
identified a number of areas subject to judgement, but where it was
considered unlikely that a material difference would result from
the judgements made. These areas included:
-- Compliance with banking covenants due to the headroom levels
available under the current facilities;
-- The impact of changes in cash flows on financing arrangements
and hedging effectiveness due to the assumption that current
financing arrangements are sufficient and will continue
unchanged for the duration of the arrangements;
-- Dividends and capital management restrictions, owing to
the limited impact of Covid-19 on the Group's financial
results and considerations disclosed in the Chief Executive's
Review around the proposed dividend in relation to the year
ended 31 December 2020;
-- Alternative Performance Measures (APMs), as the impact of
Covid-19 was considered too subjective to require a change
to the Group's APMs, and the APMs continue to be appropriate
to meet investors' requirements and for further clarity
and transparency of the Group's financial performance; and
-- Post balance sheet events, owing to the fact that Covid-19
has been factored into other assumptions and judgements
around forecast performance into 2021, and in the absence
of material events subsequent to 31 December 2020, no additional
judgements were required to be made.
Going concern
As noted on page 44, the impact of Covid-19 on the ability of
the Group to continue as a going concern has been considered by
Management. The critical judgements are focused on the economic
recovery of certain sectors in which the Group operates, as well as
the potential impacts of future actions taken by governments
globally. The judgements made represent severe but plausible
scenarios that could occur within the going concern assessment
period. The conclusion drawn by Management based on these
judgements is that no material uncertainties exist in respect of
the ability for the Group to continue as a going concern.
Onerous contract provisions
The calculation of onerous contract provisions is a key source
of estimation uncertainty. Within the calculation of onerous
contract provisions judgements have been made by Management
regarding the recovery of global economies from the impacts of
Covid-19, particularly in the sectors in which the Group operates.
In particular, the short-term impacts of Covid-19 have been
estimated specific to each of the Group's contracts and these
impacts have been included in budgets used to identify any
contracts which require an onerous contract provision to be
recognised. Judgements related to Covid-19 include the potential
for further lock-downs, the length of any such lock-downs and the
scale and speed of future recoveries. Should this be incorrect then
this could lead to onerous contract provisions being recognised in
future periods.
Impairment of assets
The impairment of assets is a key source of estimation
uncertainty. In calculating the value in use of CGUs, Management
are required to form an estimate of the future cash flows which
inherently includes a degree of estimation uncertainty. Moreover,
when looking at future cash flows as at 31 December 2020,
Management has made judgements regarding the impact of Covid-19
over the same timeframe as the cash flows used to calculate value
in use. During this timeframe, Management has considered the impact
of Covid-19 specific to each existing contract, as well as
opportunities in the Group's pipeline and this judgement is
included in budgeted cash flows. Should this be incorrect then this
could lead to impairments being recognised in future periods.
Recoverability of trade receivables
At 31 December 2020, the Group's trade receivables balance is
recorded at the carrying value of trade receivables less an
allowance for bad or doubtful debts. Due to the global impact of
the Covid-19 pandemic, Management has reassessed the judgement made
in previous periods that any expected credit losses associated with
trade receivables is immaterial. Management remain confident that
as the Group's customers are predominantly sovereign in nature,
there remains limited risk to the recoverability of the trade
receivables balances at the end of the year as a result of expected
credit losses. Should this be incorrect, a charge associated with
irrecoverable debts could be recognised in future periods.
Retirement benefit obligations
The net position on defined benefit pension schemes is a key
source of estimation uncertainty. Covid-19 could have a material
impact on any number of judgements used in valuing the Group's
pension schemes as at 31 December 2020, including, but not
necessarily limited to, the discount rate used, future inflation
rates and the mortality assumptions in place. To ensure appropriate
judgements are taken based on the most relevant information
available, Management has continued to engage with third-party
advisors in assessing each of these judgements. The discount rate
is derived from the return on corporate bond yields, and whilst
this is largely observable, any change in discount rates in the
future could have a material impact on the carrying value of the
defined benefit obligation. Similarly, inflation rates and
mortality assumptions impact the defined benefit obligation as they
are used to model future salary increases and the duration of
pension payments. Whilst current assumptions use projected future
inflation rates and the most up to date information available on
mortality, if these judgements change, the defined benefit
obligation could also change materially in future periods.
Management also considered whether an allowance was required for
assets held in pension schemes owing to the impact of Covid-19 on
the carrying value of assets. In concluding that such an adjustment
was not required, Management's judgement focused on the fact that a
significant proportion of the assets are either quoted or have
market observable prices and for those which are not directly
observable, sufficient assurance has been received from asset
managers regarding the appropriateness of the carrying values of
the underlying assets.
Going concern
Whilst there are no material uncertainties over the ability of
the Group to continue as a going concern, in preparing the going
concern assessment the Directors are required to make a number of
judgements to reach such a conclusion. In particular, when forming
an opinion for the current year, the ongoing impact of Covid-19 and
the impact on headroom in the Group's financing facilities has been
the most critical area of judgement.
In order to model severe but plausible scenarios to stress test
the potential impact of Covid-19 on the Group's forecast, the
Directors have considered, amongst other scenarios, lower passenger
volumes on the Group's train operating contracts, higher costs
within the Health portfolio and slower recovery in usage of leisure
centres in the UK through to the end of 2021, without mitigations
that are outside of the Group's control. The Directors have also
considered, for the plausible downside scenario, the absence of any
repeat of contracts associated with the UK Government's response to
the pandemic. The Directors have reviewed the impact on overseas
operations and considered the impact of a future wave in Australia
which may impact the ability to deliver operations within contact
centres, or drive higher absenteeism in the delivery of its larger
operations such as the Fiona Stanley Hospital or Department of
Immigration and Border Protection contracts. In the United States,
the recent change in administration and escalation of Covid-19
cases has made an assessment of the impact of the response to the
pandemic difficult to estimate, as the response could take a
different approach to that seen under the previous administration.
In an extreme case, the Directors have modelled the negative
financial impact of Covid-19 as experienced during the year to 31
December 2020, without the mitigations outlined above, through
another two three-month lockdown periods during the assessment
period and allowed for the impact of a change in direction of the
response in the United States. The scenario indicates that the
Group has sufficient liquidity to withstand a potential future wave
of the virus if the impact is consistent with that experienced
during the first wave.
After considering these severe but plausible scenarios, the
forecasts indicate sufficient capacity in the Group's financing
facilities and associated covenants to support the Group. In order
to satisfy themselves that they have adequate resources for the
future, the Directors have reviewed the Group's existing debt
levels, the committed funding and liquidity positions under its
debt covenants and its ability to generate cash from trading
activities and working capital requirements, as well as a series of
identified mitigating actions that could be used to preserve cash
in the business. In order to reverse stress test the headroom
available on the Group's debt covenants and liquidity available,
the Directors have considered the impact of reductions to expected
win rates for new contracts and rebid contracts combined with lower
margins in the period of assessment and concluded that, given the
headroom available, these do not present a material risk in its
ability to continue as a going concern.
In making the going concern assessment, the Directors have
assumed that the US private placement loans of $152m due to mature
before 30 June 2022 are repaid without any additional refinancing
occurring.
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 8.
The segmental analysis of operations 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 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 for unused tax losses to the
extent that it is probable that taxable profit will be available
against which the losses can be utilised. Significant Management
judgement is required to determine the amount of deferred tax
assets that can be recognised, based upon the likely timing and the
level of future taxable profits. Recognition has been based on
forecast future taxable profits.
Further details on deferred taxes are disclosed in note 12.
3. Segmental information
The Group's operating segments reflecting the information
reported to the Board in 2020 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 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 financial statements.
The accounting policies of the reportable segments are the same
as the Group's accounting policies described in note 2 to the
Group's Consolidated Financial Statements.
Information about major customers
The Group has four major governmental customers which each
represent more than 5% of Group revenues. The customers' revenues
were GBP1,517.0m (2019: GBP1,043.3m) for the UK Government within
the UK & Europe segment, GBP913.1m (2019: GBP734.9m) for the US
Government within the Americas segment, GBP703.8m (2019: GBP597.5m)
for the Australian Government within the AsPac segment and
GBP237.2m (2019: GBP255.5m) for the Government of the United Arab
Emirates within the Middle East segment.
Segmental information
Segmental revenue is analysed on an external basis.
Inter-segment revenue is not presented as it is not significant in
the context of revenue as a whole. Net finance costs are not
presented for each operating segment as they are reviewed on a
consolidated basis by the CODM.
Specific corporate expenses are allocated to the corresponding
segments. Segment assets comprise goodwill, other intangible
assets, property, plant and equipment including right of use
assets, inventories, trade and other receivables (excluding
corporation tax recoverable) and any retirement benefit asset.
Segment liabilities comprise trade and other payables, lease
liabilities, provisions and retirement benefit obligations.
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
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 from operations 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 restructuring costs incurred by the Corporate
segment are not allocated to other segments. Such items may
represent costs that will benefit the wider business. Included
within Other 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 the wider Group, including
defined benefit pension schemes and corporate intangible
assets.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ----- ------ --------- -------
Revenue 1,361.7 915.7 621.4 349.6 - 3,248.4
------------------------------------------- ------- -------- ----- ------ --------- -------
Result
------------------------------------------- ------- -------- ----- ------ --------- -------
Trading Profit/(loss) from operations* 48.2 91.7 31.2 13.9 (51.6) 133.4
Amortisation and impairment of intangibles
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) before exceptional
items 47.0 85.5 31.1 13.9 (51.6) 125.9
Other exceptional operating items** (24.8) 15.3 (3.0) - (10.9) (23.4)
------------------------------------------- ------- -------- ----- ------ --------- -------
Operating profit/(loss) 22.2 100.8 28.1 13.9 (62.5) 102.5
Investment revenue 2.7
Finance costs (24.5)
Profit before tax 80.7
Tax charge (27.4)
Tax on exceptional items (2.7)
------------------------------------------- ------- -------- ----- ------ --------- -------
Profit for the year from operations 50.6
------------------------------------------- ------- -------- ----- ------ --------- -------
* Trading Profit/(loss) is defined as operating profit/(loss)
before exceptional items and amortisation and impairment of
intangible assets arising on acquisition.
** Exceptional restructuring costs incurred by the Corporate
segment are not allocated to other segments. Such items may
represent costs that will benefit the wider business.
Middle
UK&E Americas AsPac East Corporate Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- -------- ------- ------- --------- ---------
Supplementary information
------------------------------------------- ------- -------- ------- ------- --------- ---------
Share of profits in joint ventures
and associates, net of interest and
tax 27.3 - 0.2 - - 27.5
------------------------------------------- ------- -------- ------- ------- --------- ---------
Depreciation of plant, property and
equipment (37.3) (17.4) (9.0) (4.7) (6.0) (74.4)
Impairment of plant, property and
equipment (18.9) - - - - (18.9)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Total depreciation and impairment
of plant, property and equipment (56.2) (17.4) (9.0) (4.7) (6.0) (93.3)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Amortisation of intangible assets
arising on acquisition (1.2) (6.2) (0.1) - - (7.5)
Amortisation of other intangible
assets (0.3) (1.2) (4.8) (0.4) (11.4) (18.1)
Total amortisation and impairment
of intangible assets (1.5) (7.4) (4.9) (0.4) (11.4) (25.6)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Segment assets****
Interests in joint ventures and associates 22.4 - 0.8 0.4 - 23.6
Other segment assets*** 645.4 757.5 227.3 132.0 131.6 1,893.8
------------------------------------------- ------- -------- ------- ------- --------- ---------
Total segment assets 667.8 757.5 228.1 132.4 131.6 1,917.4
Unallocated assets 163.2
------------------------------------------- ------- -------- ------- ------- --------- ---------
Consolidated total assets 2,080.6
------------------------------------------- ------- -------- ------- ------- --------- ---------
Segment liabilities****
Segment liabilities ***(/) **** (536.3) (234.0) (151.8) (103.0) (160.3) (1,185.4)
Unallocated liabilities (352.3)
------------------------------------------- ------- -------- ------- ------- --------- ---------
Consolidated total liabilities (1,537.7)
------------------------------------------- ------- -------- ------- ------- --------- ---------
*** The Corporate segment assets and liabilities include balance
sheet items which provide benefit to the wider Group, including
defined benefit pension schemes and corporate intangible
assets.
**** During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
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 year or prior year.
Dividends of GBP15.5m (2019: GBP 17.6m ) and GBP1.5m (2019: GBP 7.8
m) respectively were received from these companies in the year. The
decrease in dividends received is mainly due to reduced profits
from joint ventures, most notably in respect of MSHCL, where
passenger volumes in particular were negatively impacted by
Covid-19.
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.
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 terms of the exit are in the process of being negotiated
and since the full services under the contract have not been
completed, judgement has been taken in relation to the milestone
achievements which are to be agreed and an estimate of the costs
incurred in delivering services which cannot be recovered. The
agreement in respect of both of these items are to be finalised,
however the final outcome is not expected to have a material impact
on the Group's Financial Statements.
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:
31 December 2020
Group portion
Group portion of other
AWEML MSHCL of material joint venture
(100% of (100% of joint ventures arrangements
Summarised financial results) results) and associates* and associates* Total
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 - 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% of (100% of joint ventures arrangements
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.
The Group's share of liabilities within joint ventures is
GBP224.5m. Of this, an amount of GBP163.1m relates to a defined
benefit pension obligation, against which Serco is fully
indemnified, and a further GBP49.7m 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.
The financial statements of MSHCL are for a period which is
different from that of the Group, being for the 52 week period
ended 9 January 2021 (2019: 52 week period ended 4 January 2020).
The 52 week period reflects the joint venture's internal reporting
structure and is sufficiently close so as to not require adjustment
to match that of the Group.
Certain employees of the groups headed by AWEML and MSHCL are
members of sponsored defined benefit pension schemes. Given the
significance of the schemes to understanding the position of the
entities, the following key disclosures are made:
Main assumptions: 2020 AWEML MSHCL
---------------------------------------------------- ----- -----
Rate of salary increases (%) 1.9% 2.8%
Inflation assumption (CPI %) 1.9% 1.9%
Discount rate (%) 1.5% 2.4%
Post-retirement mortality:
Current male industrial pensioners at 65 (years) 23.0 N/A
Future male industrial pensioners at 65 (years) 25.1 N/A
---------------------------------------------------- ----- -----
Retirement benefit funding position (100% of results) GBPm GBPm
------------------------------------------------------ --------- -------
Present value of scheme liabilities (2,597.7) (450.5)
Fair value of scheme assets 1,931.8 233.8
------------------------------------------------------ --------- -------
Net amount recognised (665.9) (216.7)
Members' share of deficit - 86.7
Franchise adjustment* - 130.0
Related asset, right to reimbursement 665.9 -
------------------------------------------------------ --------- -------
Net retirement benefit obligation - -
------------------------------------------------------ --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
31 December 2019
Group
portion Group portion
of material of other
AWEML MSHCL joint joint venture
(100% of (100% of ventures arrangements
Summarised financial results) results) and associates* and associates* Total
information GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ---------------- ---------------- -------
Revenue 1,065.4 177.9 350.0 44.6 394.6
------------------------------ --------- --------- ---------------- ---------------- -------
Operating profit 95.4 18.9 32.7 1.1 33.8
Net investment revenue 0.8 0.2 0.3 - 0.3
Income tax charge (18.8) (3.8) (6.4) (0.2) (6.6)
Profit from operations 77.4 15.3 26.6 0.9 27.5
Other comprehensive income - 2.5 1.3 - 1.3
------------------------------ --------- --------- ---------------- ---------------- -------
Total comprehensive income 77.4 17.8 27.9 0.9 28.8
------------------------------ --------- --------- ---------------- ---------------- -------
Non current assets 510.0 23.2 136.6 2.4 139.0
Current assets 186.8 64.6 78.1 18.7 96.8
Current liabilities (163.0) (48.4) (64.1) (14.7) (78.8)
Non current liabilities (509.3) (12.7) (131.2) (2.2) (133.4)
------------------------------ --------- --------- ---------------- ---------------- -------
Net assets 24.5 26.7 19.4 4.2 23.6
Proportion of group ownership 24.5% 50.0% - - -
------------------------------ --------- --------- ---------------- ---------------- -------
Carrying amount of investment 6.0 13.4 19.4 4.2 23.6
------------------------------ --------- --------- ---------------- ---------------- -------
* 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% of (100% of joint ventures arrangements
results) results) and associates* and associates* Total
GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ---------------- ---------------- -----
Cash and cash equivalents 101.3 39.9 44.8 7.4 52.2
Current financial liabilities
excluding trade and other
payables and provisions (7.6) (7.3) (5.6) (0.2) (5.8)
Non current financial
liabilities excluding
trade and other payables
and provisions (0.1) (12.5) (6.3) (2.3) (8.6)
Depreciation and amortisation - (1.6) (0.8) (0.9) (1.7)
Interest income 0.8 0.2 0.3 - 0.3
------------------------------ --------- --------- ---------------- ---------------- -----
* Total results of the entity multiplied by the respective proportion of Group ownership.
Key disclosures with respect of the defined benefit pension
schemes of material joint ventures and associates:
Main assumptions: 2019 AWEML MSHCL
--------------------------------------------------- ----- -----
Rate of salary increases (%) 2.1% 3.1%
Inflation assumption (CPI %) 2.1% 2.2%
Discount rate (%) 2.1% 2.1%
Post-retirement mortality:
Current male industrial pensioners at 65 22.9 N/A
(years)
Future male industrial pensioners at 65 (years) 25.0 N/A
--------------------------------------------------- ----- -----
Retirement benefit funding position (100%
of results) GBPm GBPm
------------------------------------------ --------- -------
Present value of scheme liabilities (2,213.6) (374.5)
Fair value of scheme assets 1,716.6 218.5
------------------------------------------ --------- -------
Net amount recognised (497.0) (156.0)
Members' share of deficit - 62.4
Franchise adjustment* - 93.6
Related asset, right to reimbursement 497.0 -
------------------------------------------ --------- -------
Net retirement benefit obligation - -
------------------------------------------ --------- -------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
AWEML is not liable for any deficiency in the defined benefit
pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL covers only that
portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In
addition, the defined benefit position reflects an adjustment in
respect of funding required to be provided by employees.
5. Acquisitions
The Group made no acquisitions during the period. On 17 December
2020, the Group announced it had reached an agreement to acquire
Facilities First Australia Holdings Pty Limited ("FFA") and the
acquisition was completed on 4 January 2021 for consideration of
A$52.6m, subject to standard net working capital adjustments.
Acquisition costs totalling GBP0.9m have been incurred during 2020
in respect of the FFA acquisition and have been treated as
exceptional in accordance with the Group's accounting policies.
Further details on this post year end transaction are provided in
Note 24.
On 16 February 2021, the Group announced that it had agreed to
acquire Whitney, Bradley & Brown, Inc ("WBB"), a leading
provider of advisory, engineering and technical services to the US
Military, for $295m from an affiliate of H.I.G. Capital. The
acquisition 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 acquisition will be immediately
accretive to earnings and will be funded through existing debt
facilities; it is expected to complete in the second quarter of
2021, subject to regulatory approvals. As the transaction is yet to
complete, the financial results and impact of the transaction have
not been recognised in these Condensed Consolidated Financial
Statements.
During the period the Group finalised the integration of Naval
Systems Business Unit ("NSBU"), completed the analysis of balances
acquired as part of the transaction and made closing net working
capital settlements with the vendor. Two main activities were
undertaken that resulted in adjustments to the fair value of
acquired assets and liabilities. There were no material impacts to
the post-acquisition income statement. Firstly, the Group finalised
its review of provisional working capital balances which resulted
in fair value changes to both receivables and payables. Secondly,
one of the acquired fixed price contracts required a revision to
the provisional estimate of the costs required to complete the
contract. The estimated cost of completion was increased as a
result of a technical defect relating to machine parts that had
been in place at the acquisition date and which became known
through initial testing that completed during the first six months
of 2020. As a result of these activities, the Group revised the
fair values of the acquired assets and liabilities as at the
transaction date as follows:
Fair value Fair value
as originally adjustment* Revised
stated GBPm fair value
GBPm GBPm
--------------------------------------------- -------------- ------------ -----------
Goodwill 115.3 3.0 118.3
Acquisition related intangible assets 52.6 - 52.6
Property, plant and equipment 3.6 - 3.6
Trade and other receivables 46.6 (1.8) 44.8
Cash and cash equivalents 0.4 - 0.4
Deferred tax asset 0.9 - 0.9
Trade and other payables (30.7) (0.5) (31.2)
Deferred tax liability (2.4) - (2.4)
--------------------------------------------- -------------- ------------ -----------
Acquisition date fair value of consideration
transferred 186.3 0.7 187.0
--------------------------------------------- -------------- ------------ -----------
Satisfied by:
Cash 184.3 - 184.3
Deferred consideration 2.0 0.7 2.7
--------------------------------------------- -------------- ------------ -----------
Total consideration 186.3 0.7 187.0
--------------------------------------------- -------------- ------------ -----------
* The fair value adjustments recorded represent items that were
in existence at the acquisition date and therefore have no material
impact on profits or losses subsequent to acquisition.
The total impact of acquisitions to the Group's cash flow
position during the current period was as follows:
GBPm
--------------------------------------------------- ----
Deferred consideration paid in respect of historic
acquisition:
Carillion health contracts 0.9
NSBU 2.7
Anglia Support Partnership 1.3
--------------------------------------------------- ----
Net cash outflow in relation to acquisitions 4.9
--------------------------------------------------- ----
Exceptional acquisition related costs:
NSBU 1.5
Facilities First 0.2
--------------------------------------------------- ----
Net cash outflow related to acquisition costs 1.7
--------------------------------------------------- ----
Net cash impact in the period on acquisitions 6.6
--------------------------------------------------- ----
Costs associated with the acquisition of NSBU which were not
directly related to the issue of shares or arrangement of the
acquisition facility and costs associated with the acquisition of
FFA are shown as exceptional costs in the Group's Consolidated
Income Statement for the year. The total acquisition related costs
recognised in exceptional items for the year ended 31 December 2020
was GBP2.4m, of which, as noted above, GBP1.7m were paid during the
year.
6. Disposals
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. A summary of the disposal is as follows:
Viapath
GBPm
---------------------------------------------- -------
Consideration 11.0
Less: Investment in joint venture disposed of -
Profit on disposal 11.0
---------------------------------------------- -------
The net cash inflow arising on disposal and the impact on both
Net Debt and Adjusted Net Debt is:
Viapath
GBPm
----------------------------------------- -------
Consideration 11.0
Less: Costs associated with the disposal -
Net cash flow on disposal 11.0
----------------------------------------- -------
As well as consideration for its share of the net assets of
Viapath, the Group also received GBP2.9m for the Group's share of
profits and GBP1.2m for loans due from Viapath.
7. Revenue from contracts with customers
Revenue
Information regarding the Group's major customers and a
segmental analysis of revenue is provided in note 3.
An analysis of the Group's revenue from its key market sectors,
together with the timing of revenue recognition across the Group's
revenue from contracts with customers, is as follows:
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
------------------------------------ ------- -------- ----- ------ -------
Timing of revenue recognition
------------------------------------ ------- -------- ----- ------ -------
Revenue recognised from performance
obligations satisfied in previous
periods 1.1 - (0.8) - 0.3
Revenue recognised at a point in
time 14.2 - 0.8 - 15.0
Products and services transferred
over time 1,762.1 1,064.3 718.9 324.2 3,869.5
------------------------------------ ------- -------- ----- ------ -------
1,777.4 1,064.3 718.9 324.2 3,884.8
------------------------------------ ------- -------- ----- ------ -------
Middle
UK&E Americas AsPac East Total
Yar ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- -------- ----- ------ -------
Key sectors
Defence 215.9 575.5 89.5 28.1 909.0
Justice & Immigration 311.9 - 279.6 - 591.5
Transport 143.5 99.7 19.7 215.3 478.2
Health 259.9 - 94.8 30.2 384.9
Citizen Services 430.5 240.5 137.8 76.0 884.8
------------------------------------ ------- -------- ----- ------ -------
1,361.7 915.7 621.4 349.6 3,248.4
------------------------------------ ------- -------- ----- ------ -------
Timing of revenue recognition
Revenue recognised from performance
obligations satisfied in previous
periods 3.3 - (0.4) - 2.9
Revenue recognised at a point in
time 19.0 - 2.6 - 21.6
Products and services transferred
over time 1,339.4 915.7 619.2 349.6 3,223.9
------------------------------------ ------- -------- ----- ------ -------
1,361.7 915.7 621.4 349.6 3,248.4
------------------------------------ ------- -------- ----- ------ -------
Transaction price allocated to remaining performance
obligations
The following table shows the transaction price allocated to
remaining performance obligations. This represents revenue expected
to be recognised in subsequent periods arising on existing
contractual arrangements. The Group has not taken the practical
expedient in IFRS15.121 not to disclose information about
performance obligations that have original expected durations of
one year or less and therefore no consideration from contracts with
customers is excluded from the amounts included below.
In assessing the future transaction price, the judgements of
most relevance are the future term over which the transaction price
is calculated and the estimation of variable revenue to be
included.
Where a contract with a customer includes, within the term of
the committed contract, provisions for price-rebasing or a
provision for market testing, revenue beyond these is included to
the extent that there are no indicators which suggest that the
contract will not continue past this point and it is highly
probable that a significant reduction will not occur. Where there
is a requirement for the Group, or a customer, to enter into to a
new contract, rather than continuing an existing contract, such an
extension is not included for the purposes of calculating future
transaction price.
Additionally, the Group has a small subset of contracts that
contain a termination for convenience clause, for example due to
national security considerations which are assumed by the Group not
to be without cause. These contracts are considered to run for the
full intended term for the purpose of calculating the transaction
price allocated to remaining performance obligations, other than
instances where the Group believes that termination will occur
before the original contract end date.
Under the terms of certain contracts which the Group has with
its customers, the Group's compensation for providing those
services is based on volumes or other drivers of variable activity,
such as additional activities awarded under existing contracts.
These volumes are not guaranteed, however based on historic volumes
and the nature of the contracts in operation, such as the provision
of asylum seeker accommodation or passenger transport, Management
are able to prepare a sufficiently reliable estimate of the minimum
level of variable revenue that is likely to be earned. As a result,
variable revenue is included only to the level at which Management
remain confident that a significant reduction will not occur.
As part of the considerations around variable revenue,
Management consider the impact that factors such as contractual
performance, anticipated demand and pricing (including indexation)
may have on future revenue recognised. Management also considers
whether there are possible impacts from climate change and other
environmental related risks, with certain sectors considered to be
more at risk than others, however no adjustment was identified in
relation to existing contracts' future revenue forecasts.
Middle
UK&E Americas AsPac East Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------- -------- ------- ------ --------
Within 1 year (2021) 1,296.0 507.0 673.3 223.1 2,699.4
Between 2 - 5 years (2022 - 2025) 3,624.2 140.1 1,394.5 139.6 5,298.4
5 years and beyond (2026+) 3,751.5 0.2 1,647.6 145.1 5,544.4
8,671.7 647.3 3,715.4 507.8 13,542.2
---------------------------------- ------- -------- ------- ------ --------
8. 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 underlying
performance of the Group.
Other exceptional operating items
2020 2019
For the year ended 31 December GBPm GBPm
------------------------------------------------ ------ -------
Exceptional items arising
Exceptional profit on disposal of subsidiaries 11.0 -
and operations
Other exceptional operating items
Restructuring costs 0.1 (12.8)
Costs associated with UK Government review (1.3) (25.2)
Movement in other provisions and other items 2.6 19.3
Reversal of impairment in interest in joint 2.5 -
venture and related loan balances
Costs associated with the acquisition of
Naval Systems Business Unit (1.5) (4.7)
Costs associated with the acquisition of (0.9) -
Facilities First Australia
Other exceptional operating items 1.5 (23.4)
------------------------------------------------ ------ -------
Exceptional operating items 12.5 (23.4)
------------------------------------------------ ------ -------
Exceptional tax (0.4) (2.7)
------------------------------------------------ ------ -------
Total exceptional operating items net of
tax 12.1 (26.1)
------------------------------------------------ ------ -------
Exceptional items arising
As explained in note 6, the Group disposed of its interest in
Viapath with effect from 31 May 2020. The Group had historically
impaired its investment in Viapath as it was not receiving any
returns from this joint venture due to the level of investment
being made back into the business, therefore the carrying value of
the Group's investment in Viapath was nil. Following the
announcement during the first half of 2020 that Viapath had been
unsuccessful in the tender process to provide pathology services to
five South East London hospitals as well as associated GP
surgeries, the Group exited the joint venture, selling its stake to
the remaining two investors. In May 2020, the proceeds received by
the Group in exchange for its holding in the joint venture
represents the profit on disposal of GBP11.0m.
At the same time as disposing of the Group's interest in
Viapath, certain historical balances were recovered which had
previously been impaired. Since the impairments associated with
those balances were historically treated as exceptional items, the
reversals of these impairments have been treated consistently. The
exceptional credit of GBP2.5m consists of the recovery of a loan
from the Group into the joint venture of GBP1.2m, the exceptional
element of the recovery of profit share which was previously
considered to be irrecoverable and the reversal of impairment.
Other exceptional operating items
The Group recognised the final costs associated with the
Strategy Review during 2019 and, on review, certain costs which had
been accrued but were not incurred were released back to
exceptional operating items resulting in a credit to exceptional
items of GBP0.1m during 2020 (2019: exceptional restructuring costs
of GBP12.8m). Non-exceptional restructuring charges are incurred by
the business as part of normal operational activity, which in the
year totalled GBP7.2m (2019: GBP8.9m) and were included within
operating profit before exceptional items.
There were exceptional costs totalling GBP1.3m (2019: GBP25.2m)
associated with the UK Government reviews and the programme of
Corporate Renewal. These costs have historically been treated as
exceptional and consistent treatment is applied in 2020. The 2019
costs included GBP22.9m for the fine and associated costs which
resulted from the SFO's investigation into Serco companies.
During 2019, the Group reached a legal settlement in relation to
a commercial dispute which resulted in the release of a provision
which accounted for the majority of the GBP19.3m exceptional
credit. The treatment of the release as exceptional was consistent
with the recognition of the charge associated with the same legal
matter in 2014. During 2020, the Group reached an agreement with
its insurer for the reimbursement of GBP2.6m of legal fees
associated with the matter and, consistent with the treatment of
other associated amounts, this has been treated as an exceptional
credit.
The Group completed the acquisition of Naval Systems Business
Unit ("NSBU") from Alion Science and Technology in 2019. The
transaction and implementation costs incurred during 2020 of
GBP1.5m (2019: GBP4.7m) have been treated as exceptional costs in
line with the Group's accounting policy and the treatment of
similar costs incurred during the year ended 31 December 2019. No
further costs associated with this acquisition are anticipated to
be recognised as exceptional.
On 17 December 2020, the Group announced it has reached an
agreement to acquire Facilities First Australia Holdings Pty
Limited ("FFA" or "Facilities First Australia") and the acquisition
was completed on 4 January 2021. Acquisition costs totalling
GBP0.9m have been incurred during 2020 in respect of the FFA
acquisition and have been treated as exceptional in accordance with
the Group's accounting policies.
Exceptional tax
Exceptional tax for the year was a charge of GBP0.4m (2019:
GBP2.7m charge) which arises on exceptional items within operating
profit. This charge arises mainly in connection the reimbursement
of legal fees from our insurer. The charge is partially offset by
tax deductions related to the acquisition of Naval Systems Business
Unit.
9. Investment revenue
2020 2019
Year ended 31 December GBPm GBPm
---------------------------------------------------------- ----- -----
Interest receivable on other loans and deposits 0.2 0.5
Net interest receivable on retirement benefit obligations
(note 21) 1.2 2.1
Other dividends received 0.4 -
Movement in discount on other debtors 0.1 0.1
---------------------------------------------------------- ----- -----
1.9 2.7
---------------------------------------------------------- ----- -----
10. Finance costs
2020 2019
Year ended 31 December GBPm GBPm
----------------------------------------- ----- -----
Interest payable on lease liabilities 9.5 6.9
Interest payable on other loans 15.3 13.9
Facility fees and other charges 2.1 1.7
Movement in discount on provisions 0.2 1.2
----------------------------------------- ----- -----
27.1 23.7
Foreign exchange on financing activities 0.7 0.8
----------------------------------------- ----- -----
27.8 24.5
----------------------------------------- ----- -----
11. Tax
11 (a) Income tax recognised in the income statement
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
2020 2020 2020 2019 2019 2019
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------ ----------- ------ ------------ ----------- -----
Current income tax
Current income tax charge/(credit) 41.8 0.4 42.2 22.7 (1.1) 21.6
Adjustments in respect of
prior years (1.3) - (1.3) (0.2) - (0.2)
Deferred tax
Current year (credit)/charge (23.5) - (23.5) 4.7 3.8 8.5
Adjustments in respect of
prior years 1.9 - 1.9 0.2 - 0.2
----------------------------------- ------------ ----------- ------ ------------ ----------- -----
18.9 0.4 19.3 27.4 2.7 30.1
----------------------------------- ------------ ----------- ------ ------------ ----------- -----
The tax expense for the year can be reconciled to the profit in
the Consolidated Income Statement as follows:
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
2020 2020 2020 2019 2019 2019
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ ----------- ----- ------------ ----------- -----
Profit before tax 140.8 12.5 153.3 104.1 (23.4) 80.7
---------------------------------- ------------ ----------- ----- ------------ ----------- -----
Tax calculated at a rate of
19.00% (2019: 19.00%) 26.7 2.4 29.1 19.7 (4.4) 15.3
Expenses not deductible for
tax purposes* 6.5 (0.2) 6.3 0.9 4.4 5.3
UK unprovided deferred tax** (4.2) (1.9) (6.1) 4.4 2.1 6.5
Other unprovided deferred
tax 2.5 - 2.5 3.0 - 3.0
Effect of the use of unrecognised
tax losses (1.1) - (1.1) - - -
Recognition of previously
unrecognised UK tax losses (9.5) - (9.5) (0.9) - (0.9)
Impact of changes in statutory
tax rates on current income
tax - - - (0.2) - (0.2)
Overseas rate differences 7.2 0.1 7.3 5.9 0.6 6.5
Statutory tax benefits - - - (0.2) - (0.2)
Other non taxable income (1.4) - (1.4) (3.1) - (3.1)
Adjustments in respect of
prior years*** 0.6 - 0.6 - - -
Adjustments in respect of
deferred tax on pensions (5.9) - (5.9) 3.0 - 3.0
Adjustments in respect of
equity accounted investments (2.5) - (2.5) (5.1) - (5.1)
---------------------------------- ------------ ----------- ----- ------------ ----------- -----
Tax charge 18.9 0.4 19.3 27.4 2.7 30.1
---------------------------------- ------------ ----------- ----- ------------ ----------- -----
* Relates to costs that are not allowable for tax deduction under local tax law.
** Arises due to timing differences between when an amount is
recognised in the income statement and when the amount is subject
to UK tax. In the current year, the Group has received tax credits
for amounts which have been charged to the income statement in
previous periods in connection with items such as fixed assets.
*** Included within adjustments in respect of prior years is a
charge of GBP4.9m being an immaterial adjustment in the current
year related to the deferred tax impact of the derecognition of
balance sheet liabilities recognised in retained earnings on
implementation of IFRS16 Leases in 2019.
The income tax charge for the year is based on the UK statutory
rate of corporation tax for the period of 19.00% (2019: 19.00%).
Taxation for other jurisdictions is calculated at the rates
prevailing in the respective jurisdictions.
11 (b) Income tax recognised in the SOCI
2020 2019
Year ended 31 December GBPm GBPm
------------------------------------------------ ----- -----
Deferred tax
Relating to cash flow hedges - 0.1
Taken to retirement benefit obligations reserve (5.9) 2.7
------------------------------------------------ ----- -----
(5.9) 2.8
------------------------------------------------ ----- -----
12. Deferred tax
Deferred income taxes are calculated in full on temporary
differences under the liability method using local substantively
enacted tax rates.
The movement in net deferred tax assets during the year was as
follows:
2020 2019
GBPm GBPm
------------------------------------------------------ ------ ------
At 1 January - asset (37.2) (39.5)
IFRS16 restatement - (5.1)
Opening asset restated (37.2) (44.6)
Income statement (credit)/charge* (21.6) 8.7
Items recognised in equity and in other comprehensive
income 5.9 (2.8)
Arising on acquisition - 1.5
Exchange differences (3.4) -
At 31 December - asset (56.3) (37.2)
------------------------------------------------------ ------ ------
* Included within the income statement (credit)/charge is a
charge of GBP4.9m being an immaterial adjustment in the current
year related to the deferred tax impact of the derecognition of
balance sheet liabilities recognised in retained earnings on
implementation of IFRS16 Leases in 2019.
The movement in deferred tax assets and liabilities during the
year was as follows:
Share based
Temporary payment Retirement
differences and employee benefit Tax Other temporary
on assets/intangibles benefits schemes OCPs losses differences Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ---------------------- ------------- ---------- ----- ------- --------------- ------
At 1 January 2020 24.4 (15.6) 6.8 (1.9) (21.0) (29.9) (37.2)
Charged/(credited)
to income statement
(note 11a)* 2.8 (6.2) - 1.3 (10.1) (9.4) (21.6)
Items recognised
in equity and in
other comprehensive
income (note 11b) - - 5.9 - - - 5.9
Reclassification - (2.0) 2.0 - - - -
Exchange differences (1.7) (0.9) 0.1 0.1 - (1.0) (3.4)
--------------------- ---------------------- ------------- ---------- ----- ------- --------------- ------
At 31 December 2020 25.5 (24.7) 14.8 (0.5) (31.1) (40.3) (56.3)
--------------------- ---------------------- ------------- ---------- ----- ------- --------------- ------
* Included within other temporary differences is a charge of
GBP4.9m being an immaterial adjustment in the current year related
to the deferred tax impact of the derecognition of balance sheet
liabilities recognised in retained earnings on implementation of
IFRS16 Leases in 2019.
Other temporary differences include amounts such as provisions
and accruals which, under certain tax laws, are only allowable when
expended.
The reclassification between categories in the year reflects
payments in connection with employees which are considered more
akin to employee benefits than retirement benefit schemes.
The movement in deferred tax assets and liabilities during the
previous year was as follows:
Share
Temporary based
differences payment Retirement Derivative Other
on assets/ and employee benefit financial Tax temporary
intangibles benefits schemes OCPs instruments losses differences Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------------ ------------- ---------- ----- ------------- ------- ------------ ------
At 1 January 2019 24.6 (13.7) 9.9 (7.4) - (20.6) (32.3) (39.5)
IFRS16 restatement (5.1) - - - - - - (5.1)
----------------------- ------------ ------------- ---------- ----- ------------- ------- ------------ ------
Opening asset restated 19.5 (13.7) 9.9 (7.4) - (20.6) (32.3) (44.6)
Charged/(credited)
to income statement
(note 11a) 4.1 (1.6) (0.4) 5.4 - (0.4) 1.6 8.7
Items recognised
in equity and in
other comprehensive
income (note 11b) - - (2.7) - (0.1) - - (2.8)
Arising on acquisition 2.4 (0.9) - - - - 1.5
Exchange differences (1.6) 0.6 - 0.1 0.1 - 0.8 -
----------------------- ------------ ------------- ---------- ----- ------------- ------- ------------ ------
At 31 December
2019 24.4 (15.6) 6.8 (1.9) - (21.0) (29.9) (37.2)
----------------------- ------------ ------------- ---------- ----- ------------- ------- ------------ ------
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to set off current tax assets
against current tax liabilities and when the deferred income taxes
relate to the same fiscal authority. The following is the analysis
of the deferred tax balances (after offset) for financial reporting
purposes:
2020 2019
GBPm GBPm
------------------------- ------ ------
Deferred tax liabilities 26.9 26.7
Deferred tax assets (83.2) (63.9)
------------------------- ------ ------
(56.3) (37.2)
------------------------- ------ ------
As at the balance sheet date, the UK has a potential deferred
tax asset of GBP189.9m (2019: GBP180.8m) available for offset
against future profits. A deferred tax asset has currently been
recognised of GBP30.6m (2019: GBP21.1m). Recognition has been based
on forecast future taxable profits. Due to the history of tax
losses within the UK, no deferred tax asset has been recognised in
respect of the remaining asset (net GBP159.3m) due to the current
absence of sufficient convincing evidence of further improvements
in the UK profit forecast. Measures enacted during 2016 cut the
future tax rate from April 2020 from 19% to 17%. However, the March
2020 Budget announced that a rate of 19% would continue to apply
with effect from 1 April 2020 and this change was substantially
enacted on 17 March 2020. These measures increase the Group's
future current tax charge accordingly. The deferred tax balance at
31 December 2020 has been calculated reflecting the increased rate
of 19%.
Losses of GBP0.1m (2019: GBP0.1m) expire within 5 years, losses
of GBP0.5m (2019: GBP0.1m) expire within 6-10 years, losses of
GBP0.7m (2019: GBP0.7m) expire within 20 years and losses of
GBP1,052.3m (2019: GBP1,063.9m) may be carried forward
indefinitely.
13. 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:
2020 2019
Number of shares millions millions
---------------------------------------------- --------- ---------
Weighted average number of ordinary shares
for the purpose of basic EPS 1,229.1 1,171.4
Effect of dilutive potential ordinary shares:
Shares under award 25.2 27.6
---------------------------------------------- --------- ---------
Weighted average number of ordinary shares
for the purpose of diluted EPS 1,254.3 1,199.0
---------------------------------------------- --------- ---------
Earnings per share
Per share Per share
Earnings amount Earnings amount
2020 2020 2019 2019
Basic EPS GBPm pence GBPm pence
--------------------------------------------- -------- --------- -------- ---------
Earnings for the purpose of basic EPS 133.8 10.89 50.4 4.31
Effect of dilutive potential ordinary shares - (0.22) - (0.10)
--------------------------------------------- -------- --------- -------- ---------
Diluted EPS 133.8 10.67 50.4 4.21
--------------------------------------------- -------- --------- -------- ---------
Basic EPS excluding exceptional items
--------------------------------------------- -------- --------- -------- ---------
Earnings for the purpose of basic EPS 133.8 10.89 50.4 4.31
Add back exceptional items (12.5) (1.02) 23.4 2.00
Add back tax on exceptional items 0.4 0.03 2.7 0.23
--------------------------------------------- -------- --------- -------- ---------
Earnings excluding exceptional items for
the purpose of basic EPS 121.7 9.90 76.5 6.54
Effect of dilutive potential ordinary shares - (0.20) - (0.15)
--------------------------------------------- -------- --------- -------- ---------
Excluding exceptional items, diluted 121.7 9.70 76.5 6.39
--------------------------------------------- -------- --------- -------- ---------
14. Goodwill
Accumulated
impairment Carrying
Cost losses amount
GBPm GBPm GBPm
----------------------- ------- ----------- --------
At 1 January 2019 919.2 (339.6) 579.6
Exchange differences (31.5) 7.8 (23.7)
Acquisitions 115.3 - 115.3
Fair value adjustment* 3.0 - 3.0
At 31 December 2019* 1,006.0 (331.8) 674.2
Exchange differences (11.6) 7.0 (4.6)
----------------------- ------- ----------- --------
At 31 December 2020 994.4 (324.8) 669.6
----------------------- ------- ----------- --------
Movements in the balance since the prior year end can be seen as
follows:
Goodwill Goodwill Headroom Headroom
balance Exchange balance on impairment on impairment
1 January differences 31 December analysis analysis
2020* 2020 2020 2020 2019*
GBPm GBPm GBPm GBPm GBPm
------------ ---------- ------------ ------------- -------------- --------------
UK & Europe 183.2 1.2 184.4 688.5 799.2
Americas 379.1 (12.4) 366.7 658.3 417.3
AsPac 101.7 6.9 108.6 328.0 162.7
Middle East 10.2 (0.3) 9.9 103.2 63.3
------------- ---------- ------------ ------------- -------------- --------------
674.2 (4.6) 669.6 1,778.0 1,442.5
------------ ---------- ------------ ------------- -------------- --------------
* During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
Included above is the detail of the headroom on the CGUs
existing at the year end which reflects where future discounted
cash flows are greater than the underlying assets and includes all
relevant cash flows, including where provisions have been made for
future costs and losses. The increase in headroom compared to 2019
is predominantly due to higher forecast cashflows as the Group
continues to forecast growth across all divisions which in most
instances outweighs the increase in discount rates. This is not the
case in the UK & Europe CGU, where rising discount rates have
meant a reduction in headroom, whilst the impact of increased
future cash flows in the AsPac CGU is enhanced by a marginal
reduction in discount rates.
The key quantifiable assumptions applied in the impairment
review are set out below:
Terminal Terminal
Discount Discount growth growth
rate rate rates rates
2020 2019 2020 2019
% % % %
------------ -------- -------- -------- --------
UK & Europe 10.2 9.4 1.9 1.7
Americas 10.7 10.4 2.5 2.2
AsPac 9.4 9.7 2.2 2.3
Middle East 12.1 11.9 1.6 1.8
------------ -------- -------- -------- --------
Discount rate
Pre-tax discount rates derived from the Group's post-tax
weighted average cost of capital have been used in discounting the
projected cash flows. These rates are reviewed annually with
external advisers and are adjusted for risks specific to the market
in which the CGU operates.
Terminal growth rates
The calculations include a terminal value based on the
projections for the fifth year of the short-term plan, with a
growth rate assumption applied which extrapolates the business into
perpetuity. The terminal growth rates are based on long term
inflation rates of the geographic market in which the CGUs operate
and therefore do not exceed the average long-term growth rates
forecast for the individual markets. These are provided by external
sources.
Short term growth rates
The annual impairment test is performed immediately prior to the
year end, based initially on five-year cash flow forecasts approved
by senior Management. Short term revenue growth rates used in each
CGU five-year plan are based on internal data regarding our current
contracted position, the pipeline of opportunities and forecast
growth for the relevant market.
Short term profitability and cash conversion is based on our
historic experiences and a level of judgement is applied to
expected changes in both. Where businesses have been poor
performers in recent history, turnaround has only been assumed
where a detailed and achievable plan is in place and all forecasts
include cash flows relating to contracts where onerous contract
provisions have been made.
As explained in Note 7, Management consider certain sectors in
which the Group operates to be more exposed to environmental risks
than others. For example, changes in consumer attitudes to aviation
or the use of private vehicles, may have an impact on the Group's
Transport contracts. Currently, no adjustment to existing contracts
is required, although Management will continue to monitor the
potential impact of environmental risks and will include these in
future analysis as required.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption,
a 1% movement in discount rates and a 1% movement in terminal
growth rates are considered to be reasonably possible, as has a
degree of estimation uncertainty in the cash flows associated with
each CGU of up to 10% in the final year of the plan. Performing a
sensitivity analysis on short term growth rates is not a numerical
exercise, as growth rates are based on known opportunities and the
likelihood of those opportunities being won and turned into
resulting cash flows. In order to model a sensitivity scenario for
short term growth rates, Management have calculated the growth
rates over the five years of cash flows, restricted these to be
equivalent to the long term growth rate, and assessed what change
in discount rate would be required to have resulted in the same
reduction in value in use. In doing so, Management have identified
increases in discount rates of between 1.0% and 3.5% across CGUs.
No impairment results from these changes even when these increases
in discount rates, which reflect a reduction in short term growth
rates, are combined with the additional 1% increase in discount
rates and 1% reduction in terminal growth rates.
15. Contract assets, trade and other receivables
2020 2019*
Contract assets: Current GBPm GBPm
---------------------------------------------- ----- -----
Accrued income and other unbilled receivables 278.0 264.5
Capitalised bid costs 2.8 3.8
Capitalised mobilisation and phase in costs 15.3 19.2
---------------------------------------------- ----- -----
296.1 287.5
---------------------------------------------- ----- -----
* During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
The Group's Consolidated Balance Sheet includes capitalised bid
and phase in costs that are realised as a part of the normal
operating cycle of the Group. These assets represent up-front
investment in contracts which are recoverable and expected to
provide benefits over the life of those contracts. Bid costs are
capitalised only when they relate directly to a contract and are
incremental to securing the contract. Any costs which would have
been incurred whether or not the contract is actually won are not
considered to be capitalised bid costs.
Contract costs can only be capitalised when the expenditure
meets all three criteria identified in note 2 to the Group's
Consolidated Financial Statements.
An Expected Credit Loss (ECL) is recognised against contract
assets only when it is considered to be material and there is
evidence that the credit worthiness of a counterparty may render
balances irrecoverable.
Movements in the period were as follows:
2020 2019
Capitalised bid and phase in costs GBPm GBPm
----------------------------------- ----- -----
At 1 January 23.0 22.1
Additions 1.3 7.1
Amortisation (6.8) (6.7)
Reclassified from contract asset - 0.9
Exchange differences 0.6 (0.4)
----------------------------------- ----- -----
At 31 December 18.1 23.0
----------------------------------- ----- -----
Total trade and other receivables held by the Group at 31
December 2020 amount to GBP338.8 m (2019*: GBP346.4m).
2020 2019
Trade and other receivables: Non current GBPm GBPm
----------------------------------------- ----- -----
Trade receivables 3.1 7.3
Other investments 9.4 8.9
Prepayments 1.7 0.3
Security deposits 0.5 0.5
Other receivables 10.6 9.5
----------------------------------------- ----- -----
25.3 26.5
----------------------------------------- ----- -----
Other non current receivables include long term employee
compensation plans, advances and other non-trade receivables.
2020 2019*
Trade and other receivables: Current GBPm GBPm
---------------------------------------------- ----- -----
Trade receivables 244.3 254.2
Prepayments 45.5 42.1
Amounts owed by joint ventures and associates 0.2 0.6
Security deposits 0.2 0.2
Other receivables 23.3 22.8
---------------------------------------------- ----- -----
313.5 319.9
---------------------------------------------- ----- -----
* During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
Other receivables include amounts due from third parties,
advances paid to suppliers, employee benefit schemes and other
non-trade receivables.
The management of trade receivables is the responsibility of the
operating segments, although they report to Group on a monthly
basis on debtor days, debtor ageing and significant outstanding
debts. The average credit period taken by customers is 23 days
(2019*: 29 days) and no interest was charged on overdue amounts in
the current or prior reporting period.
Each customer has an external credit score which determines the
level of credit provided. However, the majority of our customers
have a sovereign credit rating as a result of being government
organisations. Of the trade receivables balance at the end of the
year, GBP63.5m is due from agencies of the UK Government, the
Group's largest customer, GBP57.1m from the Australian Government,
GBP42.7m from the Government of the United Arab Emirates and
GBP27.8m from the US Government. There are no other customers who
represent more than 5% of the total balance of trade receivables.
Of the trade receivables balance at the end of 2019, GBP51.8m was
due from agencies of the UK Government. The maximum potential
exposure to credit risk in relation to trade receivables at the
reporting date is equal to their carrying value. The Group does not
hold any collateral as security.
The Group does not have any material impairments associated with
expected credit losses due to the sovereign credit rating of most
customers. Further specific impairments to trade receivables are
based on estimated irrecoverable amounts and provisions on
outstanding balances greater than a year old unless there is firm
evidence that the balance is recoverable. The total amount of these
impairments for the Group was GBP7.0m as of 31 December 2020 (2019:
GBP5.5m).
2020 2019*
Ageing of trade receivables GBPm GBPm
---------------------------------- ----- -----
Not due 175.5 188.7
Overdue by less than 30 days 49.1 43.7
Overdue by between 30 and 60 days 5.5 6.4
Overdue by more than 60 days 21.2 20.9
Allowance for doubtful debts (7.0) (5.5)
---------------------------------- ----- -----
244.3 254.2
---------------------------------- ----- -----
* During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
Of the total overdue trade receivable balance, 73% (2019: 70%)
relates to the Group's four major governmental customers (being the
governments of the UK, US, Australia and the United Arab
Emirates).
2020 2019
Movements on the Group allowance for doubtful debts GBPm GBPm
---------------------------------------------------- ----- -----
At 1 January 5.5 2.8
Net charges and releases to income statement 1.9 2.9
Utilised (0.2) (0.1)
Exchange differences (0.2) (0.1)
At 31 December 7.0 5.5
---------------------------------------------------- ----- -----
Included in the current other receivables balance is a further
GBP0.2m (2019: GBP1.0m) due from agencies of the UK Government.
16. Contract liabilities, trade and other payables
2020 2019
Contract liabilities: Current GBPm GBPm
------------------------------ ----- -----
Deferred income 42.3 66.8
------------------------------ ----- -----
2020 2019
Contract liabilities: Non current GBPm GBPm
---------------------------------- ----- -----
Deferred income 47.5 58.2
---------------------------------- ----- -----
The allocation of deferred income between current and non
current is presented on the basis that the current portion will
unwind in the following twelve months through revenue. There were
no material items in the current portion of deferred income in 2019
which did not unwind during the year.
Total trade and other payables held by the Group at 31 December
2020 amount to GBP543.3m (2019: GBP504.7m ).
2020 2019*
Trade and other payables: Current GBPm GBPm
---------------------------------- ----- -----
Trade payables 99.6 100.8
Other payables 134.5 94.6
Accruals 299.8 294.8
---------------------------------- ----- -----
533.9 490.2
---------------------------------- ----- -----
* During the year ended 31 December 2020, but within twelve
months of the date of the acquisition, the Group finalised fair
value measurements for a number of contracts, which had previously
been provisionally valued, associated with the acquisition of Naval
Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill
has been revised and the fair value of acquired assets and
liabilities have been adjusted, resulting in an amendment to their
carrying value as presented as at 31 December 2019. Further
information on the fair value can be found in Note 5.
The average credit period taken for trade purchases is 25 days
(2019 : 26 days).
The range of costs included in the calculation of the average
credit period taken has been updated in 2020 to better reflect the
nature of the Group's purchases. The average credit period for 2019
has been adjusted to ensure that the calculation is consistent with
the method used for the current year. Using the prior year
calculation method, the average credit period in 2020 would be 32
days (2019: 36 days).
2020 2019
Trade and other payables: Non current GBPm GBPm
---------------------------------------- ----- -----
Other payables 9.4 14.5
---------------------------------------- ----- -----
17. Leases
The Directors estimate that the fair value of the Group's lease
obligations approximates their carrying amount. The Group uses
leases in the delivery of its contractual obligations and the
services required to support the delivery of those contracts,
including administrative functions. There are no material future
cash flows relating to leases in place as at 31 December 2020 that
are not reflected in the minimum lease payments disclosed above and
the Group does not have any leases to which it is contracted but
which are not yet reflected in the minimum lease payments.
Additionally, the Group does not have any leases where payments are
variable. As explained in note 2 to the Consolidated Financial
Statements, the Group has a significant number of leases which
include either termination or extension options, or both. The
amounts included in amounts payable under leases below represents
Management's best estimate of the mix of options likely to be
exercised in line with current operational requirements.
No lease liability is recognised in respect of leases which have
a lease term of less than twelve months in duration at the point of
entering into the lease, or where the purchase price of the
underlying right of use asset is less than GBP5,000.
The Group has not materially benefitted from the amendment to
IFRS16 issued during the year which allows rent concessions to be
recognised directly in the income statement.
Minimum Minimum
lease payments lease payments
2020 2019
Amounts payable under leases GBPm GBPm
------------------------------------------------ --------------- ---------------
Within one year 115.3 93.3
Between one and five years 228.9 226.5
After five years 90.5 69.7
------------------------------------------------ --------------- ---------------
434.7 389.5
Less: future finance charges (32.1) (19.6)
------------------------------------------------ --------------- ---------------
Present value of lease obligations 402.6 369.9
Less: amount due for settlement within one year
(shown within current liabilities) (109.3) (84.6)
------------------------------------------------ --------------- ---------------
Amount due for settlement after one year 293.3 285.3
------------------------------------------------ --------------- ---------------
The following amounts are included in the Group's Condensed
Consolidated Financial Statements in respect of its leases:
2020 2019
GBPm GBPm
-------------------------------------------- ------- -------
Additions to right of use assets (including
transitional adjustments) 159.1 516.5
Depreciation charge on right of use assets
(including transitional adjustments) (93.5) (167.1)
Impairment of right of use assets (0.4) (16.5)
Net disposals of right of use assets (20.7) (2.3)
Net reclassifications (from)/to right of
use assets (2.0) (1.0)
Net exchange differences on right of use
assets (0.3) (4.8)
Carrying amount of right of use assets 387.5 345.3
Current lease liabilities 109.3 84.6
Non current lease liabilities 293.3 285.3
Capital element of lease repayments (100.8) (70.2)
Interest expense on lease liabilities (9.5) (6.9)
Profit on early termination of leases 2.9 0.9
Expenses relating to short-term or low
value leases (5.6) (5.5)
--------------------------------------------- ------- -------
18. Analysis of Net Debt
The analysis below provides a reconciliation between the opening
and closing positions in the balance sheet for liabilities arising
from financing activities together with movements in derivatives
relating to the items included in Net Debt. There were no changes
in fair value noted in either the current or prior year.
At 1 January Cash Exchange Non cash At 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)
---------------------------- ------------ ------ ------------ ----------- --------------
Opening At 31
At 1 January adjustment Cash Exchange Non cash December
2019 - IFRS16 flow Acquisitions* differences movements 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ------------ ----------- ------ ------------- ------------ ----------- ---------
Loans payable (239.5) - (72.3) - 6.7 0.1 (305.0)
Lease obligations (14.8) (129.1) 70.2 - 4.7 (300.9) (369.9)
--------------------------- ------------ ----------- ------ ------------- ------------ ----------- ---------
Liabilities arising
from financing activities (254.3) (129.1) (2.1) - 11.4 (300.8) (674.9)
Cash and cash equivalents 62.5 - 28.4 0.4 (1.8) - 89.5
Derivatives relating
to Net Debt 3.8 - - - (2.8) - 1.0
--------------------------- ------------ ----------- ------ ------------- ------------ ----------- ---------
Net Debt (188.0) (129.1) 26.3 0.4 6.8 (300.8) (584.4)
--------------------------- ------------ ----------- ------ ------------- ------------ ----------- ---------
* Acquisitions represent the net cash/(debt) acquired on acquisition.
19. Provisions
Employee
related Property Contract Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- -------- --------- --------- ------ ------
At 1 January 2020 62.1 13.3 16.5 69.9 161.8
Charged to income statement
- exceptional 0.1 - - 1.0 1.1
Charged to income statement
- other 25.5 5.5 5.7 6.0 42.7
Released to income statement
- exceptional (0.2) - - - (0.2)
Released to income statement
- other (0.7) (3.1) (5.9) (6.2) (15.9)
Included in the valuation
of right of use asset - 1.3 - - 1.3
Utilised during the year (5.8) (1.7) (1.8) (6.2) (15.5)
Unwinding of discount - 0.2 - - 0.2
Exchange differences 2.2 0.2 - 0.1 2.5
----------------------------- -------- --------- --------- ------ ------
At 31 December 2020 83.2 15.7 14.5 64.6 178.0
----------------------------- -------- --------- --------- ------ ------
Analysed as:
Current 20.9 5.8 13.8 21.6 62.1
Non current 62.3 9.9 0.7 43.0 115.9
----------------------------- -------- --------- --------- ------ ------
83.2 15.7 14.5 64.6 178.0
----------------------------- -------- --------- --------- ------ ------
Employee related provisions are for long-term service awards and
terminal gratuity liabilities which have been accrued and are based
on contractual entitlement, together with an estimate of the
probabilities that employees will stay until rewards fall due and
receive all relevant amounts. There are also amounts included in
relation to restructuring. The provisions will be utilised over
various periods driven by local legal or regulatory requirements,
the timing of which is 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 the lease. Dilapidations
associated with leased properties are held as a provision until
such time as they fall due, with the longest running lease ending
in June 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. Discount rates are calculated based on the estimate
risk-free rate of interest for the region in which the provision is
located and matched against the ageing profit of the provision.
Other provisions are held for indemnities given on disposed
businesses, legal and other costs that the Company expects to incur
over an extended period, in respect of past events, for which a
provision has been recorded. 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 twelve months or over a longer period with
the majority expected to be settled by 31 December 2023.
20. 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 (2019: GBP4.3m). The actual commitment outstanding
at 31 December 2020 was GBP3.8m (2019: GBP4.3m).
The Company and its subsidiaries have provided certain
guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of
business. The total commitment outstanding as at 31 December 2020
was GBP247.9m (2019: GBP257.5m).
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
nil 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.
21. Retirement benefit schemes
Characteristics
The Group contributes to defined benefit schemes for qualifying
employees of its subsidiaries in the UK and Europe. The normal
contributions expected to be paid during the financial year ending
31 December 2021 are GBP8.0m (2020: GBP12.7m).
Among our non-contract specific schemes, the largest is the
Serco Pension and Life Assurance Scheme (SPLAS). The most recent
full actuarial valuation of this scheme was undertaken as at 5
April 2018 and resulted in an actuarially assessed deficit of
GBP26.0m for funding purposes. Pension obligations are valued
separately for accounting and funding purposes and there is often a
material difference between these valuations. As at 31 December
2020 the estimated actuarial deficit of SPLAS was GBP20.0m (2019:
GBP27.0m) based on the actuarial assessment on the funding basis
whereas the accounting valuation resulted in an asset of GBP114.6m
(2019: GBP78.3m). 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.
The scheme was comfortably on track to achieve full funding on
the funding basis by March 2028 as planned in the 2018 valuation.
As a scheme well hedged for inflation risk, the impact of RPI
reform is significant at a GBP65m increase to liabilities. This
will be partially offset by changes to mortality assumptions and
the scheme will work with the Trustees during the 2021 valuation
process to address the impact on the funding level.
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 GBP9.2m of these have
already been made, with further amounts of GBP4m due in March 2021
then GBP1.7m for the years 2022 to 2028.
Events in the year
The Group agreed with the Trustees of SPLAS a staggered schedule
for the GBP4.0m deficit recovery payment which originally fell due
in March 2020 during the period when the impact of Covid-19 on the
Group's cash flows was being evaluated. Following that review, the
outstanding instalments were paid in June 2020. A further GBP4m due
for payment in March 2021 will be paid in tranches from January
2021 to March 2021 as a gesture of goodwill for the Trustees
agreeing to the delayed payments in 2020.
Values recognised in total comprehensive income in the year
The amounts recognised in the Consolidated Financial Statements
for the year are analysed as follows:
Contract Non contract
specific specific Total
2020 2020 2020
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- --------- ------------ ------
Current service cost - employer 1.2 3.5 4.7
Administrative expenses and taxes 0.1 1.5 1.6
----------------------------------------------- --------- ------------ ------
Recognised in arriving at operating profit
after exceptionals 1.3 5.0 6.3
----------------------------------------------- --------- ------------ ------
Interest income on scheme assets - employer (0.2) (29.1) (29.3)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.4 27.8 28.2
----------------------------------------------- --------- ------------ ------
Finance cost/(income) 0.1 (1.3) (1.2)
----------------------------------------------- --------- ------------ ------
Contract Non contract
specific specific Total
2020 2020 2020
Included within the SOCI GBPm GBPm GBPm
--------------------------------------------- --------- ------------ -------
Actual return on scheme assets 0.1 216.7 216.8
Less: interest income on scheme assets (0.3) (29.1) (29.4)
--------------------------------------------- --------- ------------ -------
(0.2) 187.6 187.4
Effect of changes in demographic assumptions 0.4 - 0.4
Effect of changes in financial assumptions (3.6) (170.0) (173.6)
Effect of experience adjustments (0.6) 4.6 4.0
--------------------------------------------- --------- ------------ -------
Remeasurements (4.0) 22.2 18.2
--------------------------------------------- --------- ------------ -------
Change in franchise adjustment 2.5 - 2.5
Change in members' share 1.3 0.1 1.4
--------------------------------------------- --------- ------------ -------
Actuarial profit on reimbursable rights 3.8 0.1 3.9
--------------------------------------------- --------- ------------ -------
Total pension (loss)/gain recognised in the
SOCI (0.2) 22.3 22.1
--------------------------------------------- --------- ------------ -------
Contract Non contract
specific specific Total
2019 2019 2019
Recognised in the income statement GBPm GBPm GBPm
----------------------------------------------- --------- ------------ ------
Current service cost - employer 1.1 3.2 4.3
Past service cost 0.2 1.2 1.4
Administrative expenses and taxes - 2.0 2.0
----------------------------------------------- --------- ------------ ------
Recognised in arriving at operating profit
after exceptionals 1.3 6.4 7.7
----------------------------------------------- --------- ------------ ------
Interest income on scheme assets - employer (0.4) (37.5) (37.9)
Interest on franchise adjustment (0.1) - (0.1)
Interest cost on scheme liabilities - employer 0.5 35.4 35.9
----------------------------------------------- --------- ------------ ------
Finance income - (2.1) (2.1)
----------------------------------------------- --------- ------------ ------
Contract Non contract
specific specific Total
2019 2019 2019
Included within the SOCI GBPm GBPm GBPm
--------------------------------------------- --------- ------------ -------
Actual return on scheme assets 2.8 125.3 128.1
Less: interest income on scheme assets (0.5) (37.6) (38.1)
--------------------------------------------- --------- ------------ -------
2.3 87.7 90.0
Effect of changes in demographic assumptions (0.7) 40.6 39.9
Effect of changes in financial assumptions (4.8) (143.8) (148.6)
Effect of experience adjustments - (1.6) (1.6)
--------------------------------------------- --------- ------------ -------
Remeasurements (3.2) (17.1) (20.3)
Change in franchise adjustment 2.0 - 2.0
Change in members' share 1.1 0.1 1.2
--------------------------------------------- --------- ------------ -------
Actuarial profit on reimbursable rights 3.1 0.1 3.2
--------------------------------------------- --------- ------------ -------
Total pension loss recognised in the SOCI (0.1) (17.0) (17.1)
--------------------------------------------- --------- ------------ -------
Balance sheet values
The assets and liabilities of the schemes at 31 December
are:
Contract Non contract
specific specific Total
2020 2020 2020
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- ------------ ---------
Equities 11.3 44.3 55.6
Bonds except LDIs 4.1 363.2 367.3
Pooled investment funds - 62.8 62.8
LDIs - 408.3 408.3
Property 1.6 - 1.6
Cash and other 4.1 10.6 14.7
Annuity policies - 690.2 690.2
----------------------------------------- --------- ------------ ---------
Fair value of scheme assets 21.1 1,579.4 1,600.5
Present value of scheme liabilities (37.0) (1,497.8) (1,534.8)
----------------------------------------- --------- ------------ ---------
Net amount recognised (15.9) 81.6 65.7
Franchise adjustment* 8.4 - 8.4
Members' share of deficit 5.6 - 5.6
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (1.9) 81.6 79.7
----------------------------------------- --------- ------------ ---------
Net pension liability (1.9) (33.0) (34.9)
Net pension asset - 114.6 114.6
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (1.9) 81.6 79.7
Deferred tax liabilities - (15.2) (15.2)
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (after tax) (1.9) 66.4 64.5
----------------------------------------- --------- ------------ ---------
* The franchise adjustment represents the amount of scheme
deficit that is expected to be funded outside the contract
period.
Contract Non contract
specific specific Total
2019 2019 2019
Scheme assets at fair value GBPm GBPm GBPm
----------------------------------------- --------- ------------ ---------
Equities 10.8 43.9 54.7
Bonds except LDIs 4.1 298.1 302.2
LDIs - 447.4 447.4
Property 1.7 - 1.7
Cash and other 4.1 5.1 9.2
Annuity policies - 614.0 614.0
----------------------------------------- --------- ------------ ---------
Fair value of scheme assets 20.7 1,408.5 1,429.2
Present value of scheme liabilities (31.1) (1,353.4) (1,384.5)
----------------------------------------- --------- ------------ ---------
Net amount recognised (10.4) 55.1 44.7
Franchise adjustment* 5.8 - 5.8
Members' share of deficit 3.8 - 3.8
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (0.8) 55.1 54.3
----------------------------------------- --------- ------------ ---------
Net pension liability (0.8) (23.2) (24.0)
Net pension asset - 78.3 78.3
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (0.8) 55.1 54.3
Deferred tax liabilities - (9.2) (9.2)
----------------------------------------- --------- ------------ ---------
Net retirement benefit asset (after tax) (0.8) 45.9 45.1
----------------------------------------- --------- ------------ ---------
* 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.
As required by IAS19 Employee Benefits, the Group has considered
the extent to which the pension plan assets should be classified in
accordance with the fair value hierarchy of IFRS13 Fair Value
Measurement. Virtually all equity and debt instruments have quoted
prices in active markets. Annuity policies, private debt mandates
and property assets can be classified as Level 3 instruments, and
LDIs are classified as Level 2.
Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 91%
of total liabilities and 94% of total assets of the defined benefit
pension scheme 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 been decreased from 0.4% at 31 December
2019 to 0.3% at 31 December 2020, reflecting a decrease in
potential market distortions caused by the RPI reform proposals.
For CPI, the Group increased the assumed difference between the RPI
and CPI by 0.3% to an average of 0.9% per annum for pre-retirement
scheme participants.
The average duration of the benefit obligation at the end of the
reporting period is 17.4 years (2019: 16.8 years).
2020 2019
Main assumptions % %
---------------------------------------- -------------- --------------
Rate of salary increases 2.50 2.70
Rate of increase in pensions in payment 2.40 (CPI) and 2.20 (CPI) and
2.75 (RPI) 3.00 (RPI)
Rate of increase in deferred pensions 2.20 (CPI) and 2.30 (CPI) and
2.80 (RPI) 3.30 (RPI)
Inflation assumption - pre-retirement 2.00 (CPI) and 2.20 (CPI) and
2.90 (RPI) 3.20 (RPI)
Inflation assumption - post-retirement 2.40 (CPI) and 2.20 (CPI) and
2.75 (RPI) 2.70 (RPI)
Discount rate 1.40 2.10
2020 2019
Post retirement mortality years years
---------------------------------- ------ ------
Current pensioners at 65 - male 21.6 21.6
Current pensioners at 65 - female 24.2 24.1
Future pensioners at 65 - male 23.9 23.8
Future pensioners at 65 - female 26.3 26.2
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 31 December 2020 where the 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
defined benefit obligation as at 31 December 2020 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 defined benefit obligation.
(Increase)/decrease in defined benefit 2020 2019
obligation GBPm GBPm
---------------------------------------- ------- -------
Discount rate - 0.5% increase (125.3) (108.5)
Discount rate - 0.5% decrease 142.4 122.9
Inflation - 0.5% increase 103.7 88.9
Inflation - 0.5% decrease (96.6) (83.3)
Rate of salary increase - 0.5% increase 3.7 3.2
Rate of salary increase - 0.5% decrease (3.5) (3.1)
Mortality - one-year age rating 59.8 48.6
Management acknowledges that the method used of presuming that
all other assumptions remaining constant has inherent limitation
given that it is more likely for a combination of changes but
highlights the value of each individual risk and is therefore a
suitable basis for providing this analysis.
Assumptions in respect of the expected return on scheme assets
are required when calculating the franchise adjustment for the
contract-specific plans. These assumptions are based on market
expectations of returns over the life of the related obligation.
Due consideration has been given to current market conditions as at
31 December 2020 in respect to inflation, interest, bond yields and
equity performance when selecting the expected return on assets
assumptions.
The expected yield on bond investments with fixed interest rates
is derived from their market value. The yield on equity investments
contains an additional premium (an 'equity risk premium') to
compensate investors for the additional anticipated risks of
holding this type of investment, when compared to bond yields. The
Group applies an equity risk premium of 4.6% (2019: 4.6%).
The overall expected return on assets is calculated as the
weighted average of the expected returns for the principal asset
categories held by the scheme.
22. 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. Transactions
between the Group and its joint venture undertakings and associates
are disclosed below.
Transactions
During the year, Group companies entered into the following
transactions with joint ventures and associates:
Current Non current
outstanding outstanding
Transactions 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
Joint venture receivable and loan 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.
Outstanding
Transactions at 31 December
2019 2019*
GBPm GBPm
Sale of goods and services
Joint ventures 1.3 0.1
Associates 8.4 0.5
Other
Dividends received - joint ventures 7.8 -
Dividends received - associates 17.6 -
Receivable from consortium for tax - joint
ventures 4.4 4.8
Total 39.5 5.4
* All amounts outstanding as at 31 December 2019 are due within
12 months of the balance sheet date.
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.
Remuneration of key Management personnel
The Directors of Serco Group plc had no material transactions
with the Group during the year other than service contracts and
Directors' liability insurance.
The remuneration of the key Management personnel of the Group is
set out below in aggregate for each of the categories specified in
IAS24 Related Party Disclosures:
2020 2019
GBPm GBPm
----------------------------- ----- -----
Short-term employee benefits 9.3 8.9
Share based payment expense 5.4 5.3
----------------------------- ----- -----
14.7 14.2
----------------------------- ----- -----
The key Management personnel comprise the Executive Directors,
Non-Executive Directors and members of the Executive Committee
(2020: 18 individuals, 2019: 17 individuals).
Aggregate Directors' remuneration
The total amounts for Directors' remuneration in accordance with
Schedule 5 to the Accounting Regulations were as follows:
2020 2019
GBPm GBPm
----------------------------------------------------- ----- -----
Salaries, fees, bonuses and benefits in kind 3.6 3.9
Amounts receivable under long-term incentive schemes 3.4 3.0
Gains on exercise of share awards 3.6 5.1
----------------------------------------------------- ----- -----
10.6 12.0
----------------------------------------------------- ----- -----
None of the Directors are members of the Company's defined
benefit or money purchase pension schemes.
23. Notes to the Consolidated Cash Flow statement
2020 2019
Before Before
exceptional 2020 Exceptional 2020 exceptional 2019 Exceptional 2019
items items Total items items Total
Year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
Operating profit for the year 166.7 12.5 179.2 125.9 (23.4) 102.5
Adjustments for:
Share of profits in joint ventures
and associates (12.7) - (12.7) (27.5) - (27.5)
Exceptional distribution from
joint venture - (1.9) (1.9) - - -
Share based payment expense 11.2 - 11.2 11.6 - 11.6
Impairment of property, plant
and equipment - owned 0.3 - 0.3 2.4 - 2.4
Impairment of property, plant
and equipment - leased 0.4 - 0.4 16.5 - 16.5
Depreciation of property, plant
and equipment - owned 15.9 - 15.9 15.3 - 15.3
Depreciation of property, plant
and equipment - leased 93.5 - 93.5 59.1 - 59.1
Amortisation of intangible assets
- owned 23.0 - 23.0 25.6 - 25.6
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) (0.9) - (0.9)
Profit on disposal of property,
plant and equipment (0.4) - (0.4) (0.6) - (0.6)
Loss on disposal of intangible
assets 0.6 - 0.6 0.4 - 0.4
Increase/(decrease) in provisions 16.2 (4.0) 12.2 (43.1) (20.5) (63.6)
Other non cash movements - - - (1.2) - (1.2)
Total non cash items 145.1 (18.1) 127.0 57.6 (20.5) 37.1
Operating cash inflow/(outflow)
before movements in working
capital 311.8 (5.6) 306.2 183.5 (43.9) 139.6
(Increase)/decrease in inventories (2.9) - (2.9) 4.4 - 4.4
Increase in receivables (0.1) - (0.1) (36.7) - (36.7)
(Decrease)/increase in payables (2.3) 3.6 1.3 32.2 (5.3) 26.9
Movements in working capital (5.3) 3.6 (1.7) (0.1) (5.3) (5.4)
Cash generated by operations 306.5 (2.0) 304.5 183.4 (49.2) 134.2
Tax paid (35.9) - (35.9) (31.2) - (31.2)
Non cash R&D expenditure (0.1) - (0.1) (0.1) - (0.1)
Net cash inflow/(outflow) from
operating activities 270.5 (2.0) 268.5 152.1 (49.2) 102.9
24. Post balance sheet events
Facilities First Australia
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 $52.6m (GBP29.8m) 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
financial results and impact of this transaction have not been
recognised in these Consolidated Financial Statements, the
operating results, assets and liabilities will be recognised with
effect from 4 January 2021. The amounts shown below in respect of
the assets and liabilities acquired remain provisional until the
Group has finalised the associated acquisition accounting.
Provisional
fair value Provisional
AU Dollars fair value
$m GBPm
---------------------------------------------
Acquisition related intangibles 78.0 44.2
Property, plant and equipment 7.0 4.0
Deferred tax asset 3.3 1.9
Trade and other receivables 28.3 16.0
Cash and cash equivalents 3.6 2.0
Trade and other payables (42.9) (24.3)
Borrowings (16.5) (9.4)
Current tax liabilities (1.3) (0.7)
Non current payables (6.9) (3.9)
Acquisition date fair value of consideration
transferred 52.6 29.8
Acquisition of shares 52.6 29.8
Total Cash Consideration 52.6 29.8
Whitney, Bradley & Brown, Inc
On 16 February 2021, the Group announced that it had agreed to
acquire Whitney, Bradley & Brown, Inc ("WBB"), a leading
provider of advisory, engineering and technical services to the US
Military, for $295m from an affiliate of H.I.G. Capital. The
acquisition 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 acquisition will be immediately
accretive to earnings and will be funded through existing debt
facilities; it is expected to complete in the second quarter of
2021, subject to regulatory approvals. As the transaction is yet to
complete, the financial results and impact of the transaction have
not been recognised in these Consolidated Financial Statements.
Serco share repurchase programme
On 31 December 2020, the Group announced that with effect from 4
January 2021, it was commencing a programme to purchase its own
shares with a value of up to GBP40m over the period to 11 June
2021, subject to a maximum number of shares of 122,338,063 being
purchased. These shares will subsequently be transferred into
treasury, either to be used for existing employee share schemes or
to be cancelled.
Dividends
Subsequent to the year end, the Board has recommended the
payment of a final dividend in respect of the year ended 31
December 2020 of 1.4p. The dividend remains subject to shareholder
approval at the Annual General Meeting and therefore no amounts
have been recognised in respect of a dividend in these Consolidated
Financial Statements.
Financing facility
On 24 February 2021, the Group entered into a new financing
facility totalling GBP75m with a syndicate of banks. The three year
facility is undrawn, but it is anticipated that it will be drawn at
completion of the acquisition of WBB, currently expected to be
during the second quarter of 2021.
REPORT OF KPMG LLP TO SERCO GROUP PLC ("THE COMPANY") IN
RELATION TO THE COMPANY'S PRELIMINARY ANNOUNCEMENT OF RESULTS FOR
THE YEARED 31 DECEMBER 2020
The UK Listing Rules require that we, as independent auditor,
agree to the publication of the Company's preliminary announcement
of results for the year ended 31 December 2020 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 Cash
Flow Statement and the Notes to the Condensed Consolidated
Financial Statements as well as the Stock Exchange Announcement
including the Chief Executive's Review, the Divisional Reviews and
the Finance Review.
At your request we have provided this report to set out the
procedures performed by us to agree to the publication, the status
of the audit report on the statutory financial statements, and the
key audit matters addressed in that audit report in respect of the
consolidated financial statements of the group.
Our audit of the statutory financial statements is complete and
we have issued an unmodified audit opinion
The annual report and statutory financial statements of Serco
Group plc for the year ended 31 December 2020 were approved by the
board on 24 February 2021.
Our audit of those financial statements is complete and we
signed our auditor's report on 24 February 2021. Our opinion in
that report is not modified and does not include a material
uncertainty related to going concern, or emphasis of matter,
paragraph.
This report is in addition to, should not be regarded as a
substitute for, our auditor's report on the statutory financial
statements, which has been released to the Company and will be
available when the Company publishes its annual report.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in the audit of the
consolidated financial statements and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) identified by us, including those which had the greatest
effect on: the overall audit strategy; the allocation of resources
in the audit; and directing the efforts of the engagement team.
Key audit matters were addressed, and our findings are based on
procedures undertaken, in the context of, and solely for the
purpose of, our audit of the consolidated financial statements as a
whole, and in forming our opinion thereon, and consequently are
incidental to that opinion, and we do not provide a separate
opinion on these matters. The overall materiality applied in the
audit of the consolidated financial statements as a whole was
GBP6.2 million.
In our auditor's report on the statutory financial statements of
the Company, we reported on the key audit matters in respect of the
consolidated financial statements of the group described below. No
additional work in relation to key audit matters has been
undertaken for the purpose of this report.
Revenue and margin recognition
Revenue GBP3,884.8m (2019: GBP3,248.4m), Operating Profit
GBP179.2m (2019: GBP102.5m), Onerous Contract Provisions of
GBP14.5m (2019: GBP16.5m) and Contract Assets GBP296.1m (2019:
GBP287.5m)
Assessment of risk vs. prior year: Unchanged
Refer to note 2 Critical accounting judgements and key sources
of estimation uncertainty, note 7 Revenue from contracts with
customers, note 15 Contract assets, trade and other receivables and
note 19 Provisions.
The risk
Accounting application
The contractual arrangements that underpin the measurement and
recognition of revenue by the group can be complex, with
significant judgement involved in the assessment of current and
future financial performance. The key judgements impacting the
recognition of revenue and resulting operating profit include:
-- Interpretations of terms and conditions in relation to the
required service obligations in accordance with contractual
arrangements;
-- The allocation of revenue and costs to performance obligations
where multiple deliverables exist;
-- Assessment of stage of completion and cost to complete, where
percentage completion accounting is used;
-- Consideration of the Group's performance against contractual
obligations and the impact on revenue and costs of delivery;
-- The recognition and recoverability assessments of contract
related assets, including those recognised as direct incremental
costs prior to service commencement.
Subjective estimate
Judgement is required to determine whether a contract is
onerous, based upon the estimated future performance of the
contract. Where a contract is determined to be loss-making, an
onerous contract provision is required, which requires further
judgement in assessing the level of provision, based on estimated
income and cost to complete, taking into account contractual
obligations to the end of the contract, extension periods and
customer negotiations.
The effect of these matters is that, as part of our risk
assessment, we determined that the onerous contract provision has a
high degree of estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount.
Our response
Our audit procedures included:
Contracts were selected for substantive audit procedures based
on qualitative factors, such as commercial complexity, and
quantitative factors, such as financial significance and
profitability that we considered to be indicative of risk. Our
audit testing for the contracts selected included the
following:
Assessing policy application
We inspected customer contracts to assess the method of revenue
recognition to determine that it was in accordance with the Group's
accounting policy and relevant accounting standards, including the
appropriate recognition of revenue as the performance obligation is
satisfied on service contracts.
Accounting analysis
We inspected and challenged accounting papers prepared by the
Group to explain the positions taken in respect of key contract
judgements including contract modifications (such as those arising
due to COVID-19). We also challenged whether it is highly probable
that the variable revenue recognised will not be reversed in future
periods as required by the application of the revenue constraint in
accordance with the Group's accounting policy and relevant
accounting standards.
Tests of details
To assess whether the revenue constraint was appropriately
applied in accordance with the Group's accounting policy and
relevant accounting standards:
-- we vouched a sample of unbilled revenue to documents such
as post year end invoices or purchase orders, or customer
agreements for the work performed;
-- we inspected a sample of customer contracts to identify contractual
KPI requirements and assessed the contracts operational performance
against those requirements; and
-- we inspected a sample of customer contracts to identify contractual
variations and claims and where these arose, obtained evidence
of correspondence with customers and third parties.
Site visits
For contracts selected for testing:
-- we attended a selection of monthly Divisional and Business
Unit Performance Reviews used to assess business performance
in order to inform our assessment of operational and financial
performance of the contracts; and
-- we performed virtual site visits and enquired with contract
and Business Unit management teams as to matters related to
operational and financial performance in order to assess whether
indicators of an onerous contract exist.
For selected contract related assets, representing capitalised
bid and phase in costs, our procedures included:
Assessing application: We assessed whether contract related
assets have been recognised in accordance with the Group's
accounting policy and relevant accounting standards.
Historical comparisons: We compared forecast contract cash flows
and profits with historical actuals and assessed whether the
forecasts supported the carrying value of the assets.
Independent reperformance: We compared the amortisation period
with the duration of the contract and checked that the amortisation
had been calculated correctly.
For onerous and potentially onerous contracts identified through
application of quantitative selection criteria, our procedures to
address the subjective estimate risk included:
Benchmarking assumptions
We compared contract level forecast revenues and costs to the
Group's annual budgets and longer-term forecasts approved by the
directors. We challenged key assumptions made by the Group in
preparing these forecasts, including those in relation to revenue
growth and cost reductions, by comparing them to external evidence
(for example customer correspondence) where possible, and assessing
against business plans.
Our sector experience
We assessed the contractual terms and conditions to identify the
key obligations of the contract and compared these with common
industry risk factors to inform our challenge of completeness of
forecast costs.
Our major projects expertise
For a specific contract we used our own major project
specialists to assess the reasonableness of the cost estimates
where there was material estimation uncertainty.
Historical comparisons
We compared the contract forecasts to historic and in year
performance to assess the historical accuracy of the forecasts.
Tests of details
For contracts we assessed as being potentially onerous, we
compared the allocation of central functional costs to the group's
policy and challenged the underlying assumptions using our
understanding of the contract operations.
Assessing transparency
We also assessed whether the Group's disclosures about the
estimates and judgements applied reflected the risks related to the
estimation of onerous contracts.
Our findings
We found no material errors in the group's application of its
revenue accounting policy (2019: no material errors). We found the
resulting estimate of onerous contract provision to be balanced
(2019: balanced).
Recoverability of group goodwill
Group: GBP669.6m (2019: GBP674.2m);
Assessment of risk vs. prior year: Unchanged
Refer to note 14 Goodwill
The risk
Goodwill in the group is significant and at risk of
irrecoverability due to estimation uncertainty in valuing the
recoverable amounts of the Group's cash generating units. The
estimated recoverable amount of these balances through value in use
calculations is subjective due to the inherent uncertainty involved
in forecasting and discounting future cash flows.
The CGUs which were most sensitive to a deterioration in the
division's cash flow projections or an increase in discount rate
were the AsPac CGU and Middle East CGU. As at year end 31 December
2020, the AsPac CGU was estimated to have headroom of GBP328.0m and
Middle East has headroom of GBP103.2m.
The effect of these matters is that, as part of our risk
assessment, we determined that the value in use of CGUs has a high
degree of estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount. The
financial statements (note 14) disclose the sensitivity for
goodwill estimated by the Group.
Our response
Our audit procedures included:
Benchmarking assumptions: With the assistance of our valuation
specialists, we challenged the growth rate and discount rate used
in the value in use calculation by comparing the Group's
assumptions to external data. We challenged the implied cumulative
annual growth rate within the five year forecasts and assessed this
against past performance and the terminal growth rate. We
challenged forecast assumptions around new contract wins or
extensions, contract attrition and the profitability of existing
contracts.
Historical comparisons
We compared current year actual cash flows to historic forecasts
to assess the historical accuracy of the forecasts used in the
impairment model.
Sensitivity analysis
We tested the sensitivity of impairment calculations to changes
in key underlying assumptions, which were the short term cash-flow
projections, the discount rate and terminal growth rates. We
assessed the impact on headroom with the inclusion of an alpha
factor in the discount rate in order to reflect any country
specific and forecasting risks we considered might be present in
each division. We challenged the projected win probabilities
(including contract extensions) on key contracts and sensitised the
five year cash flow forecasts by reducing new wins and extensions
within the pipeline. We specifically considered the impact of
COVID-19 on trading and compared the forecasts against the
company's experience to date during the pandemic.
Comparing valuations
We considered whether the forecast cash flow assumptions used in
the value in use calculation were consistent with the assumptions
used to calculate the expected loss on onerous contract provisions,
the recognition of deferred tax assets and the Directors'
assessment of going concern and viability.
Assessing transparency
We also assessed whether the Group's disclosure about the
sensitivity of outcomes reflects the risks inherent in the
valuation of goodwill.
Our findings:
We found the Group's assessment that there is no impairment of
the carrying amount of Group's goodwill to be balanced (2019:
balanced) and the related sensitivity disclosures to be
proportionate (2019: proportionate).
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement, we conducted procedures having regard to the
Financial Reporting Council's Bulletin: The auditors' association
with preliminary announcements made in accordance with the
requirements of the UK Listing Rules. Our work included considering
whether:
-- the financial information included in the preliminary announcement
has been accurately extracted from the audited statutory financial
statements, and that it reflects the presentation adopted
in the audited statutory financial statements;
-- based on our statutory financial statements audit work, the
financial information included in the preliminary announcement
is materially misstated;
-- the information included in the preliminary announcement (including
the management commentary) is materially consistent with the
content of the annual report;
-- based on our statutory financial statements audit work, the
assessment of the Company's position and prospects in the
preliminary announcement is fair, balanced and understandable;
and
-- the preliminary announcement includes the disclosures required
under the UK Listing Rules and s435 of the Companies Act 2006.
Directors' responsibilities
The preliminary announcement is the responsibility of, and has
been approved by, the directors. The directors are responsible for:
preparing, presenting and publishing the preliminary announcement
in accordance with the Listing Rules of the UK FCA; ensuring that
its content is consistent with the information included in the
annual report and audited statutory financial statements; and, as
required under the UK Corporate Governance Code, for ensuring that
the assessment of the Company's position and prospects in the
preliminary announcement is fair, balanced and understandable.
Our responsibility
Our responsibility under the Listing Rules is to agree to the
publication of the preliminary announcement based on our work. In
addition, under the terms of our engagement our responsibility is
to report to the Company setting out the procedures performed by us
to agree to the publication, the status of the audit report on the
statutory financial statements, and the key audit matters addressed
in that audit report.
We do not express an audit opinion on the preliminary
announcement.
We are not required to agree to the publication of presentations
to analysts or webcasts.
This report is made solely to the Company in accordance with the
terms of our engagement. Our work has been undertaken so that we
might state to the Company those matters we have agreed 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 work, for this report, or for
the conclusions we have reached.
This report is not the auditor's report on the Company's
statutory financial statements. It relates only to the matters
specified and does not extend to the Company's statutory financial
statements taken as a whole.
John Luke
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
24 February 2021
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