I
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2
0
1
4
REGISTERED OFFICE
Interserve Plc
Interserve House Ruscombe Park Twyford
Reading Berkshire RG10 9JU
T. +44 (0)118 932 0123 F. +44 (0)118 932 0206
E. info@interserve.com
www.interserve.com
ingenuity at work
ANNUAL REPORT 2014
INTERSERVE ANNUAL REPORT 2014 OVERVIEW 2014 IN SUMMARY
OVERVIEW
2014 IN SUMMARY
INTRODUCTION
“ 2014 WAS A LANDMARK YEAR FOR THE
BUSINESS IN WHICH WE ADVANCED
OUR STRATEGY AND DELIVERED
35 PER CENT OPERATING PROFIT
GROWTH DESPITE CHALLENGING
CONDITIONS IN MANY OF OUR
MARKETS. WE MADE TWO STRATEGIC
ACQUISITIONS (INITIAL FACILITIES AND
PERFORMANCE
OPERATIONAL REVIEW
ESG), EACH OF WHICH DEEPENED OUR
PRESENCE IN CORE OUTSOURCING
MARKETS. OUR FOCUS ON PROVIDING
HIGH QUALITY SERVICES TO BOTH NEW
AND EXISTING CLIENTS RESULTED IN
STRONG WORK WINNING DURING THE
YEAR, WITH OUR FUTURE WORKLOAD
RISING 26 PER CENT TO £8.1 BILLION.”
ADRIAN RINGROSE CHIEF EXECUTIVE
CONTENTS
OVERVIEW
HIGHLIGHTS
DELIVERING SHAREHOLDER VALUE
CHAIRMAN’S STATEMENT
STRATEGIC REPORT
OUR STRATEGY
OPERATIONS AT A GLANCE
OUR BUSINESS MODEL
OUR MODEL IN ACTION
WHERE WE OPERATE
PROTECTING OUR BUSINESS
PRINCIPAL RISKS AND UNCERTAINTIES
SUSTAINABILITY REVIEW
FINANCIAL REVIEW
GOVERNANCE
DIRECTORS
ADVISERS
DIRECTORS’ REPORT
CORPORATE GOVERNANCE
AUDIT COMMITTEE REPORT
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ RESPONSIBILITY STATEMENT 102
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
COMPANY FINANCIAL STATEMENTS
NOTES TO THE COMPANY
FINANCIAL STATEMENTS
PRINCIPAL GROUP UNDERTAKINGS
FIVE-YEAR ANALYSIS
SHAREHOLDER INFORMATION
01
01
02
04
06
08
10
12
14
18
20
30
32
42
48
51
52
60
68
74
103
108
114
153
154
161
166
168
FOR FURTHER
INVESTOR INFORMATION:
www.interserve.com/investors
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I
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0
1
4
REGISTERED OFFICE
Interserve Plc
Interserve House Ruscombe Park Twyford
Reading Berkshire RG10 9JU
T. +44 (0)118 932 0123 F. +44 (0)118 932 0206
E. info@interserve.com
www.interserve.com
ingenuity at work
ANNUAL REPORT 2014
INTERSERVE ANNUAL REPORT 2014 OVERVIEW 2014 IN SUMMARY
OVERVIEW
2014 IN SUMMARY
INTRODUCTION
“ 2014 WAS A LANDMARK YEAR FOR THE
BUSINESS IN WHICH WE ADVANCED
OUR STRATEGY AND DELIVERED
35 PER CENT OPERATING PROFIT
GROWTH DESPITE CHALLENGING
CONDITIONS IN MANY OF OUR
MARKETS. WE MADE TWO STRATEGIC
ACQUISITIONS (INITIAL FACILITIES AND
ESG), EACH OF WHICH DEEPENED OUR
PRESENCE IN CORE OUTSOURCING
MARKETS. OUR FOCUS ON PROVIDING
HIGH QUALITY SERVICES TO BOTH NEW
AND EXISTING CLIENTS RESULTED IN
STRONG WORK WINNING DURING THE
YEAR, WITH OUR FUTURE WORKLOAD
RISING 26 PER CENT TO £8.1 BILLION.”
ADRIAN RINGROSE CHIEF EXECUTIVE
FOR FURTHER
INVESTOR INFORMATION:
www.interserve.com/investors
CONTENTS
OVERVIEW
HIGHLIGHTS
DELIVERING SHAREHOLDER VALUE
CHAIRMAN’S STATEMENT
STRATEGIC REPORT
OUR STRATEGY
OPERATIONS AT A GLANCE
OUR BUSINESS MODEL
OUR MODEL IN ACTION
WHERE WE OPERATE
PROTECTING OUR BUSINESS
PERFORMANCE
OPERATIONAL REVIEW
PRINCIPAL RISKS AND UNCERTAINTIES
SUSTAINABILITY REVIEW
FINANCIAL REVIEW
GOVERNANCE
DIRECTORS
ADVISERS
DIRECTORS’ REPORT
CORPORATE GOVERNANCE
AUDIT COMMITTEE REPORT
DIRECTORS’ REMUNERATION REPORT
01
01
02
04
06
08
10
12
14
18
20
30
32
42
48
51
52
60
68
74
DIRECTORS’ RESPONSIBILITY STATEMENT 102
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
COMPANY FINANCIAL STATEMENTS
NOTES TO THE COMPANY
FINANCIAL STATEMENTS
PRINCIPAL GROUP UNDERTAKINGS
FIVE-YEAR ANALYSIS
SHAREHOLDER INFORMATION
103
108
114
153
154
161
166
168
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INTERSERVE ANNUAL REPORT 2014 OVERVIEW DELIVERING SHAREHOLDER VALUE
DELIVERING SHAREHOLDER VALUE
N
O
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W
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C
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R
TO REDEFINE THE FUTURE FOR PEOPLE AND PLACES
• TAKE PRIDE IN WHAT YOU DO
• EVERYONE HAS A VOICE
• BRING BETTER TO LIFE
• DO THE RIGHT THING
Create places that
benefit people
Deliver public service
in the public interest
Build more skills and
more opportunities
Generate a positive environmental
impact
Achieve
sustainable growth
OUR STRATEGY
OPERATIONS
AT A GLANCE
OUR BUSINESS
MODEL
OUR MODEL
IN ACTION
WHERE WE
OPERATE
PROTECTING OUR
BUSINESS
READ MORE ON PAGE
04
READ MORE ON PAGE
06
READ MORE ON PAGE
08
READ MORE ON PAGE
10
READ MORE ON PAGE
12
READ MORE ON PAGE
14
SOCIAL VALUE MAPPING
BUILDING QATAR’S BIGGEST
MALL AT DOHA FESTIVAL CITY
DLR CONTRACT ADDS TO
TRANSPORT SECTOR GROWTH
BUILDING ADVANCED MEDICAL
AND TESTING FACILITIES
PARAGON FITS OUT MARKEL’S
‘WALKIE TALKIE’ LONDON OFFICE
COMMUNITY
CENTRE
READ THE STORY ON PAGE
34
READ THE STORY ON PAGE
26
READ THE STORY ON PAGE
22
READ THE STORY ON PAGE
25
READ THE STORY ON PAGE
29
This Annual Report was printed in the UK by CPI Colour Limited,
using vegetable based inks. The printer and paper mill are
accredited with ISO 14001 Environmental management Systems
and are Forest Stewardship Council chain-of-custody registered.
®
The paper is 100% recycled, produced from de-inked post consumer
waste. The silk laminate used on the outer cover is bio-degradable.
Designed and produced by
www.accruefulton.com
10339 INT – AR14 0 Cover AW01 tp.indd 2
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INTERSERVE ANNUAL REPORT 2014 OVERVIEW HIGHLIGHTS
01
HIGHLIGHTS
REVENUE
£2,913.0m +33%
PROFIT BEFORE TAX
£61.9m -9%
HEADLINE TOTAL
OPERATING PROFIT*
£117.2m +35%
HEADLINE PRE-TAX PROFIT*
£106.2m +31%
FULL-YEAR DIVIDEND
23.0p +7%
HEADLINE EARNINGS
PER SHARE*
58.8p +23%
Revenue growth of 33 per cent
(organic growth of 10 per cent)
Totaloperatingprofitgrowthof35percent
(organic growth of 9 per cent)
Headline earnings per share growth of 23 per cent
(organic growth of 14 per cent)
Full-year dividend: Recommended increase of 7 per cent to 23.0p
£4.1 billion of new business won in 2014
Record future workload of £8.1 billion, up 26 per cent
*ThisAnnualReportincludesanumberofnon-statutorymeasurestoreflecttheimpactofnon-tradingandnon-recurring
items.Seenote33totheconsolidatedfinancialstatementsforareconciliationofthesemeasurestotheirstatutory
equivalents and note 11 for calculation of earnings per share.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS
02
INTERSERVE ANNUAL REPORT 2014 OVERVIEW
CHAIRMAN’S STATEMENT
OVERVIEW
CHAIRMAN’S STATEMENT
“ OUR STRATEGY IS PROVING EFFECTIVE
AND I AM VERY CONSCIOUS THAT
THE ONGOING PERFORMANCE OF THE
BUSINESS IS ACHIEVED THROUGH THE
INGENUITY AND HARD WORK OF OUR
PEOPLE IN SERVING OUR CUSTOMERS.”
LORD BLACKWELL
Chairman
Interservemadefurthersignificant
progress during 2014, growing revenues
by 33 per cent and adding over 23,000
new colleagues during the year. It
is a central tenet of our corporate
strategy to build strong core businesses.
The acquisition of Initial Facilities in
March added breadth and depth to our
customer offering, positioning us as a
top-three player in the UK Facilities
Management (FM) market. In addition,
our performance was underpinned by
strong organic growth (a 10 per cent
increase in consolidated revenues),
demonstrating our potential in
recovering markets and our resilience
where market conditions have been
moredifficult.
Our strategy also envisages extending
out from our core businesses to
enter and grow in adjacent markets
where our skills can be applied to
gain competitive advantage. Since
2011, Interserve has been building
its capabilities to deliver ‘front-line’
services to the citizen, initially through
the Work Programme and subsequently
through our domiciliary care business.
Recently we have extended our reach
considerably; in December, we were
selected to provide probation services
as part of the Ministry of Justice’s
Transforming Rehabilitation programme.
Also in December, we acquired The
Employment and Skills Group (esg),
further extending our Work Programme
presence and adding capability to
provide skills, training and employability
services in the UK and further education
in the Kingdom of Saudi Arabia (KSA).
The broad range of capabilities we now
possess, together with our track record
as a trusted partner to UK Government,
providesasignificantopportunityto
deliver better, and better coordinated
services to the citizen, whilst improving
the outcomes sought by our clients.
During the period we expanded our
support services business into a number
of territories where we had existing
construction and RMD Kwikform activities,
COUNTRIES40OPERATING IN OVER
including in the KSA where our new joint
venture with local partner, Rezayat, gives
usaccesstoasignificantFMmarket.
In addition, the acquisition of esg adds
the establishment and management of
three education colleges in the KSA to
Interserve’s portfolio. We believe that
both the FM and education markets have
significantpotentialforus;notjustinthe
KSA, but in the Middle Eastern region as a
whole. Our oil and gas services businesses
in the Middle East have also performed
well and we took further steps to position
ourselves to grow our FM activities across
the region.
In Europe we are growing our capability to
serve major clients who look for a single
organisation to meet their support service
needs across the continent. Some 3,000
colleagues joined us in Spain through
the Initial Facilities acquisition whilst
organically we expanded our work for
theForeign&CommonwealthOfficeand
wonourfirstcross-bordercommercial
contract, with Sony Europe, wherein we
will provide services in 27 countries.
In our construction business we
delivered good revenue growth in the
UK. Whilst margins have been affected
by supply pressures, they remain within
our expected range. This is a tribute
to strong customer relationships and
prudent management of the business
through the economic cycle. In the
Middle East the business has delivered
a solid performance in challenging,
albeit improving, construction markets.
INTERSERVE ANNUAL REPORT 2014 OVERVIEW
CHAIRMAN’S STATEMENT
03
Equipment Services performed strongly
in2014,benefittingfromourinvestment
overrecentyearsinexpandingthefleet
in improving overall market conditions.
The margins in that business have now
recovered after the worldwide recession,
enabling us to achieve an attractive
return on investment. We opened new
facilities on the US west coast, in Panama
and in Cape Town, South Africa.
Health and Safety remains a critical
priority for the business, especially as our
continued growth results in many more
colleagues to induct into the Interserve
values and culture. Despite our continuing
focus on safety, we did not achieve an
in-year improvement in our overall rate
of reportable incidents, which included
one fatal incident early in the year. Our
thoughts remain with those affected by
this tragic event. We remain absolutely
committed to our medium-term target to
halve our accident/incident rate over the
period from 2010 to 2019.
Our strategy is proving effective and
I am very conscious that the ongoing
performance of the business is achieved
through the ingenuity and hard work of
our people in serving our customers. I
thank them all on behalf of the Board.
We have always sought to recognise those
individuals who epitomise our values. In
2014 we developed this further, holding our
firstGroup-wideawardscheme,celebrating
our colleagues who bring our values to life,
who exhibit leadership in Health and Safety
and who, both individually and in teams,
are role models to inspire us all.
We continue to embrace keenly our
obligation to act as a responsible
business, recognising that delivering real
social value and sustainable shareholder
value go hand in hand. During the
year we made further progress in
our SustainAbilities strategy and are
becomingincreasinglyconfidentinthe
differentiation this provides for us with
clients, suppliers and our own people.
We are also increasingly aware of our
responsibilities as a major employer
tohelpinform,guideandinfluence
relevant areas of public policy. In April
we published a report, in association
with the Social Market Foundation, on
how best to boost the skills and wage
prospects for the low paid in the UK.
We sponsored a social value summit
(recently repeated) at which a number of
key political leaders and policy thinkers
spoke. However, whilst publications
and events are useful focal points, it is
our everyday actions as a responsible
employer that really matter and which
arereflectedinourintegratedreporting
of our performance in social, natural and
knowledgeaswellasfinancialcapitals.
BOARD CHANGES
During the year, we were delighted to
welcome Nick Salmon and Russell King
to the Board as non-executive directors,
and members of the Audit, Nomination
and Remuneration Committees. They
both bring a wealth of commercial
and board governance experience.
Keith Ludeman assumed chairmanship of
the Remuneration Committee on 9 July
and David Thorpe retired from the Board
in August. David left with our gratitude
for the major contribution he made to
theCompanyoverfiveandahalfyears.
Looking ahead, after serving over
nine years on the Board, our Senior
Independent Director (SID), Les Cullen,
will be retiring at the forthcoming Annual
General Meeting. Les will be sorely
missed, but I am delighted that Russell
King has agreed to assume the role of SID
at that time.
Finally, having been Chairman since
January 2006 I have informed the Board
of my intention to stand down no later
than the 2016 AGM. Accordingly, the
Board, under Russell King’s leadership,
will undertake an external search for
my successor and will make further
announcements in due course.
PROSPECTS
2014 has been another year of strong
progress and growth for the business and
looking to the future we are encouraged by
its growth potential. In the majority of our
markets we are seeing signs of recovery,
with the business well positioned to
achieve further growth so long as the more
extreme global political and economic risks
do not crystallise. While optimistic, we
continue to manage the business prudently
to ensure it remains resilient against future
economic cycles.
DIVIDEND
We continue to believe our strategy is
able to deliver attractive, sustainable
returns for shareholders and support a
progressive dividend policy. Given our
confidenceinthemedium-termoutlook
for the business we are recommending an
increasedfinaldividendof15.5p(2013:
14.7p), bringing the total dividend for the
yearto23.0p(2013:21.5p),anincrease
of7.0percent.Thefinaldividendwillbe
paidon20May2015toshareholderson
the register at the close of business on
7April2015.
Lord Blackwell
Chairman
26February2015
23,000
NEW COLLEAGUES JOINED US IN 2014,
TAKING OUR TOTAL WORKFORCE TO CIRCA 80,000
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 04
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT OUR STRATEGY
STRATEGIC REPORT
OUR STRATEGY
STRATEGY
BUILD STRONG
CORE BUSINESSES
• Focus on long-term, added-value client relationships
• Understand client dynamics in depth
• Advise, manage and deliver outsourced services
• Framework agreements
• Public-private partnerships
• Extend our full range of services across existing markets
• Enter new growth markets with attractive fundamentals
• Operate in a range of markets to diversify and reduce risk
EXPAND
INTERNATIONALLY
CAPTURE RELATED
EXPANSION
OPPORTUNITIES
• Capture emerging opportunities for increasingly
integrated solutions
• Organic growth supplemented by selective
accretive acquisitions
• Growth with market expansion, displacement
and client relationship management
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OUR STRATEGY
05
MARKET
OUTCOMES –
DELIVERING SUSTAINABLE SHAREHOLDER VALUE
• Attractive UK medium-term
demand environment
– Structural growth in outsourcing
– Rising population, increasing pressure
on ageing infrastructure
–Driveforpublic-sectorefficiencies
• Emerging and high-growth markets
• Opportunities arising from
recovering economies
• Transferable skills in project
and change management
• Leveraging existing relationships
• Demand for increased integration
and efficiencies across the asset
life cycle
• Consolidation
• Enhancing existing offering or
market extension through
acquisition
• Evolving boundaries and expanding
addressable markets
Create places
that benefit people
Deliver public service
in the public interest
Build more skills and
more opportunities
Generate a positive
environmental impact
Achieve sustainable
growth
Delivering places and services that enhance people’s lives, that can be valued, that contribute to individuals’ wellbeing and that are designed and built for the future. Setting ourselves apart by delivering services that benefit people and demonstrating the value our employees offer society. Building the skills of employees and stakeholders by sharing know-how, providing opportunities for self-improvement and making a positive and productive contribution to society. Moving beyond compliance towards making a positive and restorative contribution to the environment through every project. Building a profitable business that takes into account the true costs of business and delivers sustained value for all. OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 06
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT OPERATIONS AT A GLANCE
STRATEGIC REPORT
OPERATIONS AT A GLANCE
At Interserve, we believe in putting ingenuity to work. Being inquisitive, putting our clients at the heart of what we do and asking
the right questions are ways in which we deliver the best solutions – adding value to what they do for their clients and customers.
DIVISION
SUPPORT
SERVICES
UK
SUPPORT
SERVICES
INTERNATIONAL
CONSTRUCTION
UK
2014 FOCUS
• Integration of new businesses
• Grow Pan-European capability
• Expand our offering to the citizen (Welfare, Healthcare, Justice)
• Mobilisation of new contracts
• Develop and expand Middle East FM business
• Further development of regional oil and gas service offering
• Strengthening order books
• Expanding front-line services
• Broaden sectoral expertise
• Further develop South East presence and
growfit-outbusiness
• Build on long-term relationships
CONSTRUCTION
INTERNATIONAL
• Maintain revenue through improved work-winning
• Continued focus on cost management
• Maintain our capabilities in key sectors
EQUIPMENT
SERVICES
• Strategic geographic expansion
• Invest for organic growth as markets improve
• Continued innovation in product development
INVESTMENTS
• Managing equity investments
• Exploring new areas for growth
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONS AT A GLANCE
07
TheGroup’sfuturegrowthisbasedonattractivedemanddriversinourmarketsandourfinancialstrengthtosupplement
organic growth with acquisitions.
HOW WE PERFORMED
WHERE NEXT
• Strong work winning –
• Providing wider suite of
• Continued revenue growth in the medium term
Ministry of Justice, Sony
Europe, Docklands Light
Railway and Defence
Infrastructure Organisation
services to our customers
– probation services,
training and welfare
• Rebalanced public/private
• Integration of Initial
sector mix
delivered through:
– Leveraging of enlarged private-sector capabilities
– Building on success of new business streams
• Margindevelopment:stableat5%
Facilities and completion
of esg acquisition
• Good organic
revenue growth
• Established new
partnership with Rezayat
to build FM capability in
Saudi Arabia
• Good revenue growth in a
recovering market
• Built on new business
areas (e.g. energy from
waste) and added new
framework agreements
• Improving margins
• Revenue growth delivered by:
• Development of oil and
gas offering across the
Middle East region
– Broader geographic offering
– Developing new service offering
– New partnerships
– Increased investment in business development
• Marginprogress:strengtheningtowards7%to8%range
• Maintained margins in
target range, despite
supply chain pressures in
a recovering market
• Build on new sector offering
• Continue volume growth and build on
strong work-winning
• Margins expected to remain in target range
(1.5%to2%)duetocontinuedsupplychain
cost pressures
• Order book growth as
• Margins continue to be
• Volume growth in recovering markets (boosted by
markets improve, notably
in Dubai and Abu Dhabi
impacted by competitive
pressures
infrastructure spending for Dubai’s Expo 2020 and the
2022 World Cup in Qatar)
• Margindevelopment:trendtowards6%
• Opened new sites
• Further margin
• Demand-ledrevenuegrowth,benefittingfrom2014
(California, Colombia and
South Africa)
• Investmentinnewfleet
development due to strong
operational leverage and
unit pricing
facilitating volume growth
• Product innovation
• New ground shoring
offering in UK
(3D modelling)
investmentinfleetexpansion
• Further geographic expansion
• Margindevelopment:to15%inthemedium-term
• Continued effective
• New property development
• Accessing more PF2 opportunities
management of project
investments
• Bidding on new PF2
opportunities
opportunities (Co-op
building, Newcastle;
Torphichen Street,
Edinburgh) and progressing
the Haymarket development
in Edinburgh
• Strategic business development leadership
• Investment portfolio management for third parties
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS
08
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT OUR BUSINESS MODEL
STRATEGIC REPORT
OUR BUSINESS MODEL
The success of our business is dependent on trust, our reputation and delivering great
service to our customers. This is what our Business Model is designed to support.
INPUTS
WHAT WE DO
FinancialCapital
• Share capital
• Borrowings
• Cash generated from operations
SocialCapital
• Employees
• Suppliers
• Customers
• Citizens
• Communities
KnowledgeCapital
• Skills
• Experience
• Talent
•
Innovation
• Understanding our customers
NaturalCapital
• Raw materials
• Water
• Energy
• Land
s
e
s
s
e
c
o
r
P
&
s
m
e
t
s
y
S
t
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e
m
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g
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a
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&
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a
M
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j
o
r
P
SUPPORT SERVICES
Facilities management
Front-line services
Estate management
Industrial services
Oil and gas services
CONSTRUCTION
Building
Infrastructure
Engineering services
Fit-out
Consulting
EQUIPMENT SERVICES
Design
Engineering
Propping and
shoring solutions
VALUE RE-INVESTED
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OUR BUSINESS MODEL
09
CORE SKILLS
OUTPUTS
FinancialCapital
Achievefinancialgrowthand
investment growth; grow EPS and
returnsforinvestors;financial
contribution to small businesses
through local supply chains and
generating UK tax through
employment and improving returns.
SocialCapital
Improved facilities and services for
customers and communities through
partnerships with central and local
government; strengthening small
businesses through local supply
chains; development and career
opportunities for employees.
KnowledgeCapital
Collaborative partnerships and
educational links with communities;
investment in skills development and
training for apprenticeships, graduates
and other employees; creating
innovative solutions for customers
in design, building services and IT.
NaturalCapital
Reduction in current CO2 emissions,
waste energy usage and water
consumption.
g
n
h
T
i
i
t
h
g
R
e
h
T
o
D
e
f
i
L
o
T
r
e
t
t
e
B
g
n
i
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B
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i
o
V
A
s
a
H
e
n
o
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r
e
v
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I
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i
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P
e
k
a
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o
D
u
o
Y
t
a
h
W
Training &
developing skills
Efficiency
Value for money
Manage complexity
Technical expertise
Self-delivery
Solution design
Bidding and management
of major contracts
Problem solving/applying
innovation
Management of
large dispersed (blue
collar) workforce
International operations
and skills transfer
Sustained joint ventures/
partnerships
Financing structures
VALUE RE-INVESTED
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS
10
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT OUR MODEL IN ACTION
STRATEGIC REPORT
OUR MODEL IN ACTION
Our business model is designed to generate value by using our capabilities to their maximum effect. These examples
demonstratethebreadthofouractivitiesandtheirimpactonfinancial,social,knowledgeandnaturalcapital.
DLR CONTRACT ADDS
TO TRANSPORT
SECTOR GROWTH
BUILDING ADVANCED
MEDICAL AND
TESTING FACILITIES
Read the full story on page 22
GROWING OUR
ENERGY FROM
WASTE OPERATIONS
Read the full story on page 27
Readthefullstoryonpage25
BUILDING QATAR’S BIGGEST
MALL AT DOHA FESTIVAL CITY
UNIVERSITY OF SUSSEX
BENEFITS FROM FM
PARTNERSHIP
Read the full story on page 26
Read the full story on page 47
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OUR MODEL IN ACTION
11
11
Principal outcomes
Create places
thatbenefitpeople
Deliver public service
in the public interest
Build more skills and
more opportunities
Generate a positive
environmental impact
Achieve
sustainable growth
MORE SKILLS, MORE
OPPORTUNITIES AT KHANSAHEB
TRAINING SCHOOL, DUBAI
BUILDING FOR THE FUTURE
SOCIAL
VALUE
MAPPING
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PARAGON FITS OUT
MARKEL’S ‘WALKIE
TALKIE’ LONDON OFFICE
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3D MODELLING KEY TO NEW
ABU DHABI AIRPORT TERMINAL
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OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 12
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT WHERE WE OPERATE
STRATEGIC REPORT
WHERE WE OPERATE
GEOGRAPHIES BY OPERATING PROFIT
UNITED KINGDOM
70%
23%MIDDLE EAST & AFRICA
7%REST OF THE WORLD
234
OFFICES WORLDWIDE
BUSINESSES BY OPERATING PROFIT
57.2% UK SUPPORT SERVICES
18.7% EQUIPMENT SERVICES
10.8% UK CONSTRUCTION
7.6% INTERNATIONAL CONSTRUCTION
5.1% INTERNATIONAL SUPPORT SERVICES
0.6% INVESTMENTS
5
1
1
3
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
WHERE WE OPERATE
13
4
163
1
4
1
1
1
4
4
1
3
6
1
1
1
3
1
4
16
4
SECTORS BY REVENUE
27.3% COMMERCE
14.3% INDUSTRY
14.0% INFRASTRUCTURE
13.4% DEFENCE
12.9% HEALTH
9.7% CENTRAL/LOCAL GOVERNMENT
5.9% EDUCATION
2.5% JUSTICE
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 14
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT PROTECTING OUR BUSINESS
STRATEGIC REPORT
PROTECTING OUR BUSINESS
This is a summary of the risks facing our business. For greater detail, see Principal Risks and Uncertainties
on pages 30 and 31.
We focus on those material issues which enable the Group to sustain growth into the future.
WhatismaterialisdefinedasanissuethatwouldimpactourBoardandcommitteedecisions,basedon:
•
•
•
impact on the business;
the degree to which our primary stakeholders are concerned with it; and
theextenttowhichitislikelytogrowinsignificanceandimpactinthefuture.
Throughthisprocess,14materialtopicswereidentified,allofwhicharekeyissuesaffectingtheperformanceandlong-term
viability of the Group.
• REPUTATIONAL RISK
• IT SYSTEMS/SECURITY
• FINANCING STRUCTURE
• MOBILISATION OF NEW CONTRACTS
• HEALTH & SAFETY
• INVESTMENT LEVELS IN OIL & GAS INDUSTRY
• MERGERS & ACQUISITIONS
• RATE OF INFRASTRUCTURE DEMAND
• COMPETITIVE LANDSCAPE
• EMPLOYEE SKILLS
• STABILITY/REGIME CHANGE/POLICY CHANGE
• WORKERS’ COST AND AVAILABILITY
• PENSION DEFICIT
• ENVIRONMENTAL RISKS
FinancialCapital
SocialCapital
KnowledgeCapital
NaturalCapital
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
PROTECTING OUR BUSINESS
15
REPUTATIONAL RISK
FINANCING STRUCTURE
WHAT IS IT ABOUT?
Where our reputation is at risk due to the
highprofileandoftenpoliticallysensitive
work we are involved in.
Our debt tenor, size and choice of providers
allaffectourabilitytofinancethebusiness
and deliver our strategy.
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
Promoting a good understanding of our brand
amongst our stakeholders, through timely,
clear and consistent communications, while
assessing reputational risk for all new business
opportunities.
Debt facilities remain under constant review
and in 2014 we extended the term of our
debtfacilitywitha10-year$350mUSPrivate
Placement.
HEALTH & SAFETY
MERGERS & ACQUISITIONS
WHAT IS IT ABOUT?
Maintaining high health and safety standards
to protect our people and our business.
Findingacquisitionsthatfitourstrategy.
How well we can integrate acquisitions.
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
Extensive training and communication
to ensure a strong health and safety
culture; regular monitoring and reward
and recognition of health and safety
achievements.
We have an experienced team for negotiating
M&A deals and business integration
specialists who are involved in business
change as part of everyday business
activities.
COMPETITIVE LANDSCAPE
STABILITY/REGIME CHANGE/POLICY CHANGE
WHAT IS IT ABOUT?
The competitive landscape has the potential
to restrict business opportunities and
margin development.
Political change posing a risk to our business
around the world.
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
A strong emphasis on business development
and work-winning, built up over many years,
coupledwithaflexiblecostbase.
We constantly monitor and assess levels of
political risk and have contingency plans to
mitigate this risk in any geography.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 16
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT PROTECTING OUR BUSINESS
STRATEGIC REPORT
PROTECTING OUR BUSINESS CONTINUED
PENSION DEFICIT
IT SYSTEMS/SECURITY
WHAT IS IT ABOUT?
Potentialriskofadeficitadversely
impacting the business.
Managing risk and opportunities through IT.
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
In2014weundertooka£350minsurance
buy-inwhichcoversaround35percentof
scheme liabilities.
Investing in IT applications and infrastructure
and bringing on board a high quality team to
implement our strategic IT roadmap – and
manage cyber security risk.
MOBILISATION OF NEW CONTRACTS
INVESTMENT LEVELS IN OIL & GAS INDUSTRY
WHAT IS IT ABOUT?
A risk of poor mobilisation of a new contract,
failingtodeliverpromisedcostorefficiency
improvements.
The rate of investment in the oil and gas
industry will impact our business
opportunities in the Middle East.
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
We treat the mobilisation of a new
partnership with the highest priority and
employ experts to effectively deploy
both the business and cultural change
requirements.
Our carefully managed investment in
this area is part of a global balanced
portfolio. We believe the potential growth
opportunities outweigh the risks in these
markets, where we have successfully
operated for many years.
FinancialCapital
SocialCapital
KnowledgeCapital
NaturalCapital
PROTECTING OUR BUSINESS CONTINUED
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
PROTECTING OUR BUSINESS
17
RATE OF INFRASTRUCTURE DEMAND
EMPLOYEE SKILLS
WHAT IS IT ABOUT?
Much of our construction market, both in
the UK and Middle East, is governed by the
rate of infrastructure spend.
Ensuring both our existing and future
workforce have the necessary skills
required to provide our services.
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
WHAT IS IT ABOUT?
HOW IT IMPACTS US
WHAT ARE WE
DOING ABOUT IT?
We monitor infrastructure planning closely
and spread risk through diverse and
flexibleoperations.Weseeklong-term
framework agreements where possible, but
also selectively target new markets such as
Energy from Waste.
We are committed to providing skills
development and training to our current
employees through work experience,
graduate and apprenticeship schemes,
and management training. We work with
organisations such as the Social Market
Foundation and the Skills Commission to lead
the debate with Government on training for
the UK workforce of tomorrow.
WORKERS’ COST AND AVAILABILITY
ENVIRONMENTAL RISKS
This is especially relevant to the Middle
East, where the scale and pace of
construction projects require a need to
import skilled labour and varying cost
and availability can be an issue.
Ensuring our business is well placed to
face the challenges brought about by
climate change and other environmental
issues and thereby responding to our
customers’ evolving needs.
Interserve’s associates have well
established recruitment services as well
as the scale to support a large labour
force across the Middle East. We are very
conscious of workers’ rights issues and
monitor involving standards and costs
of compliance very closely.
Our SustainAbilitiesPlanidentifiesanumber
ofspecificandchallengingtargetsinareas
including waste, emissions, recycling and
water use. For more information visit
www.sustainabilities.interserve.com.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 18
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT PERFORMANCE
STRATEGIC REPORT
PERFORMANCE
KPIs
We use a set of financial and non-financial KPIs to measure critical aspects of the Group’s performance.
These KPIs are aligned with:
•
Achieving the Group’s strategic objectives of delivering a substantial future workload and generating strong
earnings growth and cash conversion.
• TheGroup’skeybehaviouralgoals,specificallyregardingouremployeesandthehealthandsafetyofeveryone
working both directly and indirectly for Interserve.
HEADLINE EARNINGS PER SHARE
ACCIDENT INCIDENT RATE3
2014
58.8p
2014
209
2013
47.7p
2013
201
Target: Double headline EPS over the five years to 2015
Target: Halve the rate by 2020 from a 2010 base
FUTURE WORKLOAD1
VOLUNTARY EMPLOYEE TURNOVER4
2014
74%
2014
13.3%
2013
75%
2013
8.6%
Target: Visibility over 70% of next 12 months’ revenue
(market consensus)
Target: Reduce voluntary employee turnover to under 10% by 2018
GROSS OPERATING CASH CONVERSION2
APPRENTICESHIPS & GRADUATE INTAKE5
2014
61.7%
2014
331
2013
92.1%
2013
231
Target: 100% over medium-term
Target: Double the number of apprenticeships,
traineeships and graduate training opportunities
1. Future workload comprises forward orders and pipeline. Forward orders
are those for which we have secured contracts in place and pipeline covers
contractsforwhichweareinbilateralnegotiationsandonwhichfinalterms
are being agreed.
2. Seenote33onpage152foradefinitionofgrossoperatingcashconversion.
3. Accident Incident Rate is based on the number of injuries meeting the RIDDOR
reporting requirements per 100,000 workforce and includes associate entities.
4. Staffturnovermeasurestheproportionofmanagerial,technicalandoffice-
based staff leaving voluntarily over the course of the period. This measure
willbemodifiedinfutureperiodstoincludeallemployees.
5. ApprenticesandgraduatesemployedintheUK.
PERFORMANCE
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
PERFORMANCE
19
EMERGING MEASURES
As we continue to embed our SustainAbilities Plan into our corporate strategy, there are a number of evolving measures upon
which we will be reporting in future periods.
Social Capital
Employee volunteering
Sustainable procurement strategy
Health & Wellbeing programme
Target
2014 Performance
UK
ROW
15%by
2016
By 2014
By 2014
3.6%
2.4%
✔
✔
Knowledge Capital
Target
2014 Performance
Apprenticeships, traineeships, graduates (number on programme)
Work placements
Sustainability targets in managers’ appraisals
Natural Capital
Water consumption (m3) (relative metric: m3/£m1)
Construction waste (tonnes) (relative metric: tonnes/£m1)
Total carbon emissions (tonnes CO2e) (relative metric: CO2e/£m1)
500
by 2018
Placements
1,000/yr
Experience
n/a
Total
1,000/yr
100
by 2014
320
422
654
1,076
762
2014 Performance vs. 2013
Absolute
Relative
-4.3%
-10.0%
+12.9%
+4.6%
+4.7%
-10.0%
+6.3%
+0.2%
-1.6%
-16.6%
-0.1%
-7.1%
UK
ROW
UK
ROW
UK
ROW
20%
reduction
by 2016
25%
reduction
by 2016
50%
reduction
by 2020
1£m revenue includes share of associate and joint venture revenues.
Previouslyquoted2013figureshavebeenrestatedtotakeintoaccountsignificantacquisitionsandincludeourinternationaloperations.
Thesefiguresformour2013baselineformeasuringperformanceagainstSustainAbilities targets.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 20
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT OPERATIONAL REVIEW
STRATEGIC REPORT
OPERATIONAL REVIEW
“ 2014 WAS A GOOD
YEAR FOR INTERSERVE.
WE STRENGTHENED
OUR BUSINESS BOTH
ORGANICALLY AND
THROUGH ACQUISITIONS
AND EXPANDED OUR
REACH IN A NUMBER OF
UK AND INTERNATIONAL
MARKETS.”
ADRIAN RINGROSE
Chief Executive
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONAL REVIEW
21
SUPPORT SERVICES
Support Services focuses on the management and delivery of
operational services to both public and private-sector clients in
the UK and internationally.
Results summary
Revenue
– UK
– International1
Contribution to
TotalOperatingProfit
– UK
– International1
Operating margin (UK)
Operating margin (International)2
Future workload
– UK
– International1
2014
2013
Change
£1,679.9m £1,196.6m +40%
£157.2m
£100.5m
£88.8m
£60.1m
£81.4m
£56.0m
£7.4m
£4.1m
4.8%
4.8%
4.7%
4.4%
+56%
+48%
+45%
+80%
£6.2bn
£0.3bn
£5.1bn
£0.2bn
+21%
+74%
1Including share of associates.
2 Operating margin is calculated based on the underlying operating margin
of associates and the reported operating margin of subsidiaries.
We delivered strong organic growth in the UK and continued
the development of the business by acquiring Initial Facilities
(“Initial”), while our support services businesses in the
Middle East continued to perform well. During the year we
further expanded our reach in the delivery of front-line public
services in the UK and broadened our offering in the Middle
East facilities management market through the formation of
Interserve Rezayat, a joint venture in Saudi Arabia.
OVERVIEW
Interserve serves the needs of its broad client-base by
providing a range of integrated services in the outsourcing
and construction markets. Our success is founded on the skills
and ingenuity of our people, and so we invest extensively in
the development and training of our 80,000 strong team to
ensure we continue to retain and attract the right people.
In this way we can apply our collective knowledge and
experience to meet our customers’ needs and develop
lasting, long-term relationships.
2014 was a good year for Interserve. We strengthened our
business both organically and through the acquisitions of
Initial Facilities (March) and esg (December). Overall we grew
our headcount by more than 40 per cent and expanded our
reach in a number of UK and international markets.
We delivered organic headline earnings per share growth
of 14 per cent in the face of mixed market conditions,
supported by targeted investment and a continued focus on
the factors that differentiate us as a business. This growth
was complemented by the performance of recently acquired
businesses which, in aggregate, boosted our total earnings per
share growth to 23 per cent and delivered healthy returns on
invested capital. This strong performance, together with our
recordfutureworkload(up26percent)andconfidenceinour
medium-term prospects underpins the recommended increase
in dividend, which we have grown by a compound annual
growthrateofoverfivepercentoverthelast10years.
Sustainability remains fundamental to the business. Our
commitment to making positive contributions in natural,
social and knowledge capital as well as through ‘conventional’
financialperformanceisanincreasinglystrongdifferentiator
with clients, investors, our people and our supply chain. During
the year we made substantial progress against our ambitious
sustainability targets and continued to invest in skills, research
and events; positioning Interserve as both a thought leader and
leading practitioner in this sphere.
We segment our results into four main areas - Support Services,
Construction, Equipment Services and Investments - all of which
are supported by central Group Services.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS
22
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT OPERATIONAL REVIEW
STRATEGIC REPORT
OPERATIONAL REVIEW CONTINUED
UK
Wedeliveredstrongoperatingprofit
growth,up45percentto£81.4million.
Our strong organic performance (up
9 per cent) was bolstered by the
acquisition of Initial as we made further
strategic progress on a number of fronts
and built on a key aspect of our growth
strategy: to broaden our offering in
front-line services.
In recent years we have built capability
in healthcare, welfare-to-work and
justice. Our welfare-to-work business,
which operates in multiple UK regions
providing personalised support and
training, supported over 7,000 customers
into employment during the year. Our
healthcare business, which provides care
in the home for high acuity patients,
grewwell,benefittingfromincreased
investment and is well-placed to expand
furtherduring2015.Towardstheendof
the year we added to our welfare offering
through the acquisition of The Employment
and Skills Group (esg). We also started to
mobilise new contracts in the justice sector
after we secured seven-year contracts
worth £622 million in aggregate to provide
probation and rehabilitation services for
lowandmedium-riskoffendersinfiveareas
ofEnglandfromFebruary2015aspartof
the Ministry of Justice’s (MoJ) Transforming
Rehabilitation (TR) programme.
Our work-winning was strong during
the year (£2.0 billion) and we achieved
a number of notable successes that
reflectthediversityofourcapabilities
including: The Docklands Light Railway
(DLR), Exterion Media, Southampton
NHS Trust and the Royal National
Lifeboat Institution.
We remain one of the Ministry of
Defence’s (MoD) key delivery partners,
havingwonanewfive-year,£322million
contract to manage its National Training
Estate (NTE) with the option to extend
forafurtherfiveyears.Ourdefence
FM portfolio includes Welbeck Defence
Sixth Form College, the Defence
Communication Services Agency and
the Permanent Joint Overseas Bases
(Falklands, Ascension, Cyprus, Gibraltar).
We were, though, unsuccessful in our bids
for the Next Generation Estates Contracts
which, together with the more limited
scope of the new NTE contract will result
in a net reduction in the scale of our
defence business in the near term.
Initial’s performance in 2014 was in line
withtheBoard’sexpectations.Thefirst
wave of integration and re-branding
of the business is complete, with the
finalphaseduetocompletein2015.As
anticipated, following the acquisition we
have been able to further develop our
portfolio of private-sector clients, for
instance in the transport sector where
we have developed and strengthened
our presence through contract wins and
extensions. In the UK we now provide
cleaning at 16 major Network Rail
stations and recently agreed a two-year
extension of our contract for services
for London Underground. We also won
a new contract to deliver cleaning and
CASE STUDY
DLR CONTRACT ADDS TO
TRANSPORT SECTOR GROWTH
WE FURTHER STRENGTHENED OUR PRESENCE IN THE TRANSPORT SECTOR BY
WINNING A SEVEN-YEAR CONTRACT TO PROVIDE CLEANING AND SECURITY
SERVICES FOR LONDON’S DOCKLANDS LIGHT RAILWAY (DLR) ON BEHALF OF
KEOLISAMEY DOCKLANDS.
The £32 million contract, which started in December 2014, covers seven routes
and45depotsandsupportsthe278,000passengersthatusetheDLReveryday.
Over 130 new staff transferred to Interserve to manage the 24/7 operation,
whichcoversstationandfleetcleaning,vegetationcontrol,winterisation,depot
security, events stewarding, security revenue protection and barrier control.
We were chosen by KeolisAmey Docklands to support the DLR due to our
extensive experience in the transport sector. This includes servicing underground,
overground and high-speed rail networks in the UK and Spain, as well as
supporting critical rail infrastructure through maintaining tracks, depots,
stationsandofficesforvarioustransportauthorities.
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONAL REVIEW
23
security services for the Docklands Light
Railway.Weaddedtooursignificant
transport operations in Spain, covering
the rail and aviation markets for clients
including Iberia, Alstom and Renfe, by
winning a contract to provide cleaning,
maintenance and assistance to passengers
with restricted mobility for Spanish
airport operator, Aena.
Our enlarged UK Support Services
business now has a broader customer
proposition and the ability to cross-
sell more services to existing clients,
growing single-service contracts into
multi-service Facilities Management
(FM) packages. Examples of this include
winninga£35millioncontractextension
with B&Q to provide services across
its entire 361-store estate, up from
182 stores. We also grew the scope and
size of FM contracts with Alliance Boots
and Southwark Council and added to
contracts with Co-op Midlands, CBRE
and Deutsche Bank.
As a consequence of the developments
outlined above, our revenue is now
split evenly between the public and
private sectors.
Wesuccessfullymobilisedourfive-year
facilities management contract with
the BBC. This involves the management
and delivery of services at over
150locationsacrosstheUKincluding
New Broadcasting House in London and
MediaCityUK in Salford, where we
are responsible for services ranging
from critical broadcast engineering
to business continuity planning.
We have also expanded our capability
to serve several of our pan-European
clients. Our contract with the Foreign
&CommonwealthOffice(FCO)was
expanded – and extended by two years -
to deliver support services in France, in
addition to the FM services we already
provide to the FCO’s UK estate and to
14 diplomatic missions across Europe. Our
reach was further developed through our
appointment by Sony Europe to support
their business in 27 countries, providing
services at 40 locations.
International
Internationally we provide a broad
range of facilities management services
in sectors such as hospitality, leisure,
education, defence and retail and,
through esg, the operation of further
education colleges in Saudi Arabia. We
also offer maintenance, turnaround
services and training to the oil and gas
sector in the United Arab Emirates
(UAE), Qatar and Oman.
A mix of contract wins with new and
existing customers, particularly those in
the oil and gas, defence and education
sectors, delivered very strong organic
operatingprofitgrowthof37percent
which, together with the full-year impact
of businesses acquired during 2013,
resulted in overall growth in operating
profitof80percentto£7.4million.
Highlights during the year included
winning a new three-year contract to
provide Qatar Shell GTL with a range
ofmechanicalservicesandafive-year
facilities management contract with
ExxonMobil in Qatar. We also secured a
three-year extension to our longstanding
logisticsandoilfieldservicescontract
with Occidental Petroleum in Oman.
Other contract wins included two
mechanical services contracts with
the UAE military, consultancy work for
Dubai’s Roads and Transport authority
and FM contracts for several schools and
colleges in Qatar.
In Saudi Arabia we won contracts to
manage services at the Information
Technology and Communications
Complex (ITCC) and King Abdullah
Financial District in Riyadh. We are also
encouraged by the prospects for our
recently launched joint venture with
the Rezayat Group (Interserve Rezayat)
which will deliver facilities management
services in Saudi Arabia. The addition
of esg to the Group also creates a
platform to extend front-line services
into Saudi Arabia, where we operate
three further education colleges under
the Colleges of Excellence programme,
which complements our existing safety
and management skills training activities
in Qatar and Oman.
With our new businesses, TOCO and
Adyard (each acquired during 2013 in
Oman and the UAE, respectively) joining
our longstanding Madina operations
(based in Qatar), we have developed
greater reach and capability across the
oil and gas services sector in the Gulf
region, opening up access to a wider pool
of customers and pan-regional, as well
as national, opportunities. TOCO and
Adyard delivered strong work winning and
started2015withrecordorderbooks.Key
new wins included contracts with ZADCO,
NABORS, GASCO, Hyundai Engineering
& Construction Co., Asia Gulf Power
Service, TAPCO, Gulf Petrochemical
ServicesandEnerflex.
INCREASE IN GROUP HEADLINE TOTAL
OPERATING PROFIT OF 35 PER CENT TO
£117.2 MILLION
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 24
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONAL REVIEW
STRATEGIC REPORT
OPERATIONAL REVIEW CONTINUED
CONSTRUCTION
We offer design, development, consultancy and construction
services to create whole-life, sustainable solutions for building
and infrastructure projects. Our focus is on forming long-
term relationships and delivering repeat business through
commercial structures such as framework agreements and
project-financedschemes.
Our presence in the Middle East is structured through
longstanding joint-venture partnerships, enabling us to
form enduring relationships with clients and to combine our
international experience with our partners’ local knowledge
to deliver outstanding service.
Results summary
Revenue
– UK
– International1
Contribution to
TotalOperatingProfit
– UK
– International1
Operating margin (UK)
Operating margin (International)2
Future workload
– UK
– International1
1Share of associates.
2014
2013
Change
£970.7m £802.2m
+21%
£207.9m £215.9m
£26.2m
£27.8m
£15.4m
£14.7m
£10.8m
£13.1m
1.6%
4.7%
1.8%
5.1%
-4%
-6%
+5%
-18%
£1.4bn
£0.3bn
£1.0bn
£0.2bn
+39%
+37%
2 Operating margin is calculated based on the underlying operating margin
of associates.
UK
Against a backdrop of improving demand but also of increasing
supply chain pressures, we performed well, growing revenue
21 per cent to £970.7 million. This growth was boosted by a
strong performance from Paragon, the London-based specialist
fit-outandrefurbishmentbusinessweacquiredin2013,andby
ourgrowingEnergyfromWaste(EfW)activities.Italsoreflects
a robust performance from our traditional regional building
activities.Operatingprofitroseto£15.4millionatamarginof
1.6 per cent.
Future workload grew 39 per cent to £1.4 billion (FY 2013:
£1.0billion),benefittingfromoursuccessfultargetingofa
mixture of new and existing frameworks, and from selective
opportunities in the private sector.
We made further progress in the EfW market, entering (in joint
venture with Shanks Group plc) into an agreement with Derby
City and Derbyshire County Councils to build and operate a new
wastetreatmentfacilityinthecityundera27-year,£950million
Public Private Partnership (PPP) contract. This contract adds
to a pipeline of EfW projects that we already have underway in
Glasgow, Peterborough, Rotherham and East Lothian (signed in
early2015)togetherwithanumberofotheropportunitiesinthis
growing sector.
Much of our work for the public sector is channelled
through framework agreements in the health and education
sectors, which provide a strong foundation and good visibility
for our business.
Ineducation,wewereconfirmedaspreferredbidderinthe
Priority School Building Programme to develop seven secondary
schools across Hertfordshire, Luton and Reading. We also won
contracts to build facilities for the universities in Birmingham,
Southampton and Wolverhampton. These projects extend our
track record in this sector where we have now completed the
constructionofover50educationalfacilities.
Wewonsignificantworkinthehealthsectorduringtheyear,
including contracts to design and build a high-energy proton
beam cancer therapy facility for the Christie NHS Foundation
Trust in Manchester and a centre of excellence for the Scottish
National Blood Transfusion Service in Edinburgh.
During the year we were awarded a place on the Highways
Agency’sfour-year,£5billioncollaborativedeliveryframework
schemesvaluedbetween£25millionand£50million,which
will provide us with opportunities on a large programme of
infrastructure investment over the coming years.
Our credentials in building advanced production testing
facilities were reinforced through a number of new awards,
suchasforaresearchandassemblyplant–Factory2050–at
theUniversityofSheffield’sAdvancedManufacturingResearch
Centre. This was further reinforced by the award of a contract
to build an advanced experimental station and electron
microscopy facility at Diamond Light Source in Oxfordshire.
Combiningourprojectfinanceandconstructionskills,wesecured
two further major city development schemes featuring a range
of retail and leisure clients: a project to develop and build a
150-roomPremierInnhotelincentralEdinburghandthe
development of a mixed-use project on the site of the
former Co-op building in Newcastle city centre.
Paragoncontinuestothrive,benefittingfrombothabuoyant
Londonofficefit-outmarket,andfromtheadditionalclient
base and balance sheet strength provided by the Group since
acquisition. Since becoming part of Interserve, Paragon has won
morethan£160millionofnewwork,includingcontractstofit
outthreefloorsofMarkelInsurance’sFenchurchStreetoffices
and BMW’s UK headquarters in Farnborough.
In July we were delighted to be named Contractor of the Year
by industry journal Construction News, highlighting our leading
position within the UK construction market and the excellent
teamwork demonstrated by our people.
OPERATIONAL REVIEW CONTINUED
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONAL REVIEW
25
CASE STUDY
BUILDING ADVANCED MEDICAL
AND TESTING FACILITIES
INTERSERVE’S ABILITY TO DESIGN, BUILD AND DELIVER
ADVANCED MEDICAL AND PRODUCTION TESTING
FACILITIES WAS FURTHER REINFORCED DURING THE YEAR
THROUGH A NUMBER OF SIGNIFICANT CONTRACT WINS.
We won a contract to build a next generation aerospace
factoryattheUniversityofSheffield’sAdvanced
ManufacturingResearchCentre–knownasFactory2050–
whichwillbetheUK’sfirstfullyreconfigurableassembly
and component research factory.
We were also awarded a contract to design, construct
and co-ordinate a high-energy proton beam cancer
therapy facility for the Christie NHS Foundation Trust in
Manchester. Full Level 2 Building Information Modelling
(BIM) is being used throughout the design process on the
facility, which will offer a specialist form of radiotherapy
to very precisely target certain cancers when it becomes
operational in 2018.
Other awards included contracts to build an advanced
experimental station and electron microscopy facility at
Diamond Light Source on the Harwell Oxford Campus. In
addition, we are also building a new testing and processing
facility for the Scottish National Blood Transfusion Service.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 26
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONAL REVIEW
STRATEGIC REPORT
OPERATIONAL REVIEW CONTINUED
CASE STUDY
BUILDING QATAR’S BIGGEST
MALL AT DOHA FESTIVAL CITY
OUR ASSOCIATE CONSTRUCTION BUSINESS IN QATAR, GULF CONTRACTING COMPANY (GCC), WAS AWARDED A £325 MILLION
CONTRACT IN JOINT VENTURE WITH ALEC QATAR TO DELIVER THE MAIN WORKS FOR DOHA FESTIVAL CITY, THE COUNTRY’S
LARGEST EVER MIXED-USE RETAIL AND LEISURE DEVELOPMENT.
Set to open in September 2016, Doha Festival City
willfeaturea250,000squaremetremallhousingover
550stores,85restaurantsandcafes,carshowrooms,
a hotel and convention centre. It will also include
state-of-the-art cinemas, a snow park and an
8,000 space car park.
Phase 1 of the 430,000 square metre Doha Festival City
developmentsawtheopeningofQatar’sfirstIkeastore.
Phase 2 comprises the enabling works to basement and
groundfloorlevels,andPhases3,4and5,theremaining
mallconstructionandfinishingwork.
The joint venture was previously awarded the mall's
substructure works contract for the construction of
basementandgroundfloorlevels.
OPERATIONAL REVIEW CONTINUED
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27
International
International Construction performed as expected in
challenging, albeit slowly improving markets, in which
competition remains high. Volumes increased slightly on
a constant currency basis (up 1 per cent) and strong work
winning led to growth in the order book of 37 per cent at the
year end compared to the end of 2013.
Key contract wins in the UAE included work with Halliburton,
DP World, the UAE Roads and Transport Authority, Meraas and
the RIVA Group. We completed work on ‘The Beach’ retail and
entertainment village and started work on the £110 million
redevelopment, expansion and upgrade of the Mall of the
Emirates, on behalf of longstanding client, Majid Al Futtaim.
In Qatar we were awarded a £323 million contract, in joint
venture, to build Doha Festival City, which will be Qatar's largest
retail and entertainment development. We also won work on the
Msheireb Heart of Doha redevelopment and a project to build a
central energy plant at Education City for the Qatar Foundation.
In Oman, contract wins included the civil engineering works for
theexpansionoftheSoharrefineryforPetrofac/Daelimandan
extension to the Muscat City Centre mall for Majid Al Futtaim.
We further developed our power and water portfolio by winning
the civil engineering works to a seawater reverse osmosis plant
inBarkaforOsmoflo.
EQUIPMENT SERVICES
Equipment Services operates globally, designing, hiring
and selling formwork and falsework solutions for use in
infrastructure and building projects. Our activities have a broad
geographic spread, the mix of which can change quickly, hence
wemanageourequipmentfleetglobally,therebycombining
our scale and expertise with agility and responsiveness to meet
customers’ needs.
Results summary
Revenue
Contribution to
TotalOperatingProfit
2014
2013
£195.5m
£26.6m
£169.6m
£20.1m
Change
+15%
+32%
Operating margin
13.6%
11.9%
Performanceintheperiodwasstrong,increasingprofitby
32 per cent to £26.6 million (FY 2013: £20.1 million) with
operating margins gaining 170 basis points as this operationally-
gearedbusinessbenefittedfromincreasedactivityinglobal
infrastructuremarketsandfromthesignificantinvestmentwe
have made over the last two years to facilitate growth.
We further extended our reach during the year, opening new
branches in South Africa (Cape Town and Nelspruit), the United
States (San Leandro, California) and Panama (Panama City) but
also downsized in weaker markets, such as Australia, relocating
ourfleettoexploitopportunitiesandkeepingourcostbase
responsivetodemandfluctuations.
CASE STUDY
GROWING OUR ENERGY FROM WASTE OPERATIONS
WE CONTINUED TO GROW OUR ENERGY FROM WASTE (EFW) ACTIVITIES DURING THE
YEAR BY ENTERING AN AGREEMENT WITH DERBY CITY AND DERBYSHIRE COUNTY
COUNCILS TO BUILD A NEW WASTE TREATMENT FACILITY IN THE CITY UNDER A
27-YEAR, £950 MILLION PUBLIC PRIVATE PARTNERSHIP (PPP) CONTRACT.
Constructionofthe£145million
Mechanical Biological Treatment
facilityandon-sitegasificationplant
inSinfin,SouthDerbyisunderway
and is expected to be complete by
April 2017.
The new facility will divert up to
98 per cent of residents’ residual
wastefromlandfill,whilealso
generating enough green electricity
to power approximately 14,000 homes.
This electricity will be supplied to the
national grid, offsetting the cost of
the waste treatment to the Councils.
Thecontractwillmakeasignificant
contribution to the local economy:
approximately250peoplewillbe
recruited to work on construction
and a further 34 permanent positions
will be created once the facilities
are operational.
The contract adds to a pipeline
of EfW projects that we already
have underway in Peterborough,
Rotherham, Glasgow and East Lothian.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS
28
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
OPERATIONAL REVIEW
STRATEGIC REPORT
OPERATIONAL REVIEW CONTINUED
Middle East and Africa
WecontinuetoseestronggrowthintheMiddleEast,benefitting
fromincreaseddemandintheUAE,withbusinessconfidence
growing in Dubai and ongoing work on large projects including
theMidfieldTerminalprojectatAbuDhabiairport.Wearewell
positioned to take advantage of opportunities in Qatar as new
large-scale infrastructure projects gear up, while Oman has also
seenasignificantincreaseindemand,boostedbyprojectssuch
as the Nizwa Mosque, which was completed during the period.
After very strong levels of demand in 2013 our activity in Saudi
Arabiacontinuedtogrow,boostedbysignificantnewcontract
wins, including work to supply a new transportation complex
being built in Mecca and early wins on major projects such as
the King Abdullah Financial District and Riyadh metro.
Asia-Pacific
DemandcontinuedtoweakengraduallyinAustralia,reflecting
more subdued economic conditions emerging in the last 12 to
18 months and the completion of a number of major energy
and mining projects in Western Australia.
ElsewhereintheAsia-Pacificregiondemandgrew,withHong
Kongparticularlybuoyantduetoaseriesofsignificanttransport
infrastructure projects including the Macau Bridge and West
Kowloon Rail Terminus. We traded strongly in New Zealand
through a broad base of projects across both the North and
South islands. We also performed well in the Philippines, in both
the commercial and power sectors, helped by new contracts
including the Davao power plant: a project that should stand us
ingoodsteadtobenefitfromfurtherinvestmentinthesector.
Europe
WeperformedverywellintheUK,benefittingfromourrole
in the development of a leisure and entertainment complex
being built near Birmingham and from work on sizeable rail
improvement projects in Reading and on the Stockley Viaduct
project near Heathrow airport. Other notable contract wins
include work on Scotland’s new Forth Bridge and the bridge
deck to support the Friargate development in Coventry, while
our Ascent-s Safety Screen was used on a number of new high-
rise developments.
The market remained slow across much of mainland Europe.
We took further action on our cost base in Ireland and Spain
reflectingpersistentweaknessindomesticdemand,butalso
made further progress in developing export opportunities, in
particular to other Spanish-speaking markets, such as Panama
and Colombia.
Americas
We operate in the USA, Colombia, Panama, Chile and export
into Peru. The recovery in the US construction market has been
somewhat slower than anticipated and government investment
remains sluggish. However, our expansion in California is now
bearing fruit, with ongoing work on a number of sizeable
commercial developments in the Bay Area and downtown San
Francisco. We continued our expansion in Latin America, by
developing and investing in our businesses in Colombia and
Panama. Performance in Chile was subdued due in large part
to low copper prices suppressing general economic activity.
INVESTMENTS
Investments leads the Group’s project-investment activities
and manages our equity investments both in Public Private
Partnership (PPP) and private-sector projects.
ContributiontoTotalOperatingProfit
Interest received on subordinated
debt investments
Total
ExceptionalprofitfromPFIdisposals
2014
£0.8m
£0.8m
£1.6m
£nil
2013
£0.8m
£0.6m
£1.4m
£3.6m
Our strategy includes combining our investment, development
andprojectmanagementskillstofinanceanddeliverprojects
over many years. In recent years we have extended this from
our core PFI activities into selective private-sector commercial
developments and now have an aggregate portfolio (invested
and committed) of £47 million.
Havingachievedanumberoffinancingandplanningmilestones,
we started work in February 2014 on the Haymarket
development in central Edinburgh, which will become one of
the city’s largest mixed-use commercial developments. During
the year we also invested in projects to redevelop the Alder Hey
Children’s Hospital and a centre of excellence for the Scottish
National Blood Transfusion Service in Edinburgh.
Wewereappointedpreferredbiddertofinance,design,build
and provide FM services for seven secondary schools across
Hertfordshire,LutonandReading,thefirstbatchtobeprocured
under the Priority School Building Programme, part of the
government’s PF2 initiative.
OurpresenceinYorkshirehasgrownsignificantlyinrecent
years and during the year we completed work on the last
of three major developments for West Yorkshire Police to
provide a modern working environment for over 1,000 police
officersandcivilianstaff,builttothehighestenergyand
sustainability standards.
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29
GROUP SERVICES
Allcentralcosts,includingthoserelatedtoourfinancingand
central bidding activities, are disclosed within the Group
Services segment.
GroupServices’costsin2014were£25.2million(FY2013:
£22.1 million), accommodating an increased investment in
back-officecapabilities,ITinfrastructure,peopledevelopment
and communications.
We anticipate this increased level of investment will continue
in the medium term, as we ensure that we continue to scale
our support and assurance functions appropriately with the
growth of our operational businesses.
OUTLOOK
Against a backdrop of uncertainty in many of our markets, we
remainconfidentinourstrategyofmanaginganddiversifyingrisk
and focussing our resources on markets with strong long-term
growth drivers. Our attractive positioning in our core markets and
our ability to identify, invest in and deliver on attractive project
and corporate opportunities is a powerful differentiator.
We expect our Support Services business to make further
progress as we continue to win new work and extend
relationships with existing clients. Our increased private-sector
exposure should act as a counterweight to any temporary hiatus
in further government outsourcing, which we expect to resume
and accelerate after the UK General Election, with particular
emphasis on front-line public services. We believe that the
spread of our activities in the Middle East support services
market will mitigate against the potential impact of continued
weaknessintheoilpriceduring2015.
In Construction we expect to see further volume growth in
theUKin2015,muchofwhichisvisibleinourfutureworkload,
although margins will likely remain close to current levels. In
the Middle East we expect to make volume progress as we
deliver contracted orders and continue to pursue opportunities
across various sectors.
We expect Equipment Services to continue to grow in
expandingglobalconstructionmarketsandtobenefitfrom
further operational gearing.
While optimistic, we continue to manage the business prudently
to ensure it remains resilient against future economic cycles.
CASE STUDY
PARAGON FITS OUT
MARKEL’S ‘WALKIE
TALKIE’ LONDON OFFICE
OUR INTERIOR FIT-OUT BUSINESS, PARAGON,
COMPLETED THE OFFICE REFURBISHMENT FOR
INSURANCE FIRM MARKEL AT THE ‘WALKIE TALKIE’
BUILDING, THE NEWEST COMMERCIAL SKY SCRAPER
IN LONDON’S FINANCIAL DISTRICT.
Theproject,whichspansthreefloorsofthe34-storey,
525-feettallbuilding,includedfittingoutopen-plan
offices,flexiblemeetingspaces,twocommercialkitchens,
a15,000squarefootstaffcanteenandareceptionarea.
Paragon also created a boardroom, an executive suite
includingseveraloffices,privatediningroomsaswell
as a range of executive video conferencing rooms. A
number of breakout spaces and business lounges were
alsocreatedoverthethreefloors,whicharelinkedby
a new feature staircase.
Due to the complexity of transporting a large amount
ofequipmentanddelicatefurnishingsandfittings
up25floors,Paragonworkedcloselywithspecialist
subcontractors to prefabricate and preassemble as
much of the project as possible.
The project, which lasted 34 weeks, was handed
over in December 2014.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 30
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES
STRATEGIC REPORT
PRINCIPAL RISKS AND UNCERTAINTIES
We operate in a business environment in which a number of risks and uncertainties exist. While it is not possible to eliminate
these completely, the established risk-management and internal control procedures, which are regularly reviewed by the Group
Risk Committee on behalf of the Board, are designed to manage their effects and thus contribute to the creation of value for the
Group’s shareholders as we pursue our business objectives.
The Group continues to be dependent on effective maintenance of its systems and controls. Over and above that, the principal
risks and uncertainties which the Group addresses through its risk-management measures are detailed below.
RISK
POTENTIAL IMPACT
MITIGATION AND MONITORING
BUSINESS,
ECONOMIC
AND POLITICAL
ENVIRONMENT
Among the changes which could affect our business are:
• shifts in the economic climate both in the UK and
internationally, including changes in the oil and gas
industry;
• alterations in the UK government’s policy with regard
to expenditure on improving public infrastructure,
buildings, services and modes of service delivery
and delays in or cancellation of the procurement of
government-related projects;
• the imposition of unusually onerous contract conditions
by major clients;
• changes in our competitors’ behaviour;
• adeteriorationintheprofileofourcounterpartyrisk;and
• civil unrest and/or shifts in the political climate in some
of the regions in which we operate
any one or more of which might result in a failure to win new
orsufficientlyprofitablecontractsinourchosenmarketsor
tocompletecontractswithsufficientprofitability.
We seek to mitigate these risks by fostering long-
term relationships with our clients and partners, our
governmental/quasi-governmental medium-to-long-term
revenue streams, the development of additional capabilities
to meet anticipated demand in new growth areas, careful
supply chain management and by operating in various
regions of the world, including the Middle East, where we
are able to transfer resources to maximum effect between
the differing economies of that region.
Wealsohaveinplacecommittedfinancingwithlong
maturity dates.
We constantly monitor market conditions and assess our
capabilities in comparison to those of our competitors.
Whether we win, lose or retain a contract we analyse
the reasons for our success or shortcomings and feed the
information back at both tactical and strategic levels. We
also constantly monitor our cost base and take action to
ensure it is suitable given the prevailing market environment.
We have also set ourselves the goals of delivering
sustainability solutions to our clients, ensuring that we
and our suppliers uphold the highest standards in equality,
diversity, human rights and ethics, playing an active
role in the communities in which we operate and placing
sustainability at the heart of our business.
MAJOR
CONTRACTS
OPERATING
SYSTEM
As we focus on large-volume relationships with certain major
clientsforasignificantpartofourrevenue,terminationof
one or more of the associated contracts would be likely to
reduceourrevenueandprofit.Inaddition,themanagement
of such contracts entails potential risks including mis-pricing,
inaccuratespecification,failuretoappreciaterisksbeing
taken on, poor control of costs or of service delivery, sub-
contractor insolvency and failure to recover, in part or in
full, payments due for work undertaken.
Among our mitigation strategies are targeting work within,
or complementary to, our existing competencies, the
fostering of long-term relationships with clients, operating
an authority matrix for the approval of large bids, monthly
management reporting with key performance indicators at
contract and business level, the use of monthly cost-value
reconciliation, supply chain management and ensuring that
periodic benchmarking and/or market testing are included
in long-term contracts PFI/PPP contracts.
In PFI/PPP contracts, which can last for periods of around
30 years, there may be increases in costs, including wage
inflation,beyondthoseanticipated.
We enjoy demonstrable success in working with third parties
both through joint ventures and associated companies in the
UK and abroad. This success results in a material proportion
ofourprofitsandcashflowbeinggeneratedfrombusinesses
in which we do not have overall control. Any weakening of
our strong relationships with these business partners could
haveaneffectonourprofitsandcashflow.
We have a proven track record of developing and re-enforcing
suchrelationshipsinamutuallybeneficialwayoveralong
period of time and our experience of this places us well to
preserve existing relationships and create new ones as part of
our business model. The measures taken to limit risk in this
area include: board representation, shareholders’ agreements,
management secondments, local borrowings and rights of audit
in addition to investing time in personal relationships.
PRINCIPAL RISKS AND UNCERTAINTIES
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
PRINCIPAL RISKS AND UNCERTAINTIES
31
RISK
POTENTIAL IMPACT
MITIGATION AND MONITORING
KEY PEOPLE
The success of our business is dependent on recruiting,
retaining, developing, motivating and communicating
withsufficientnumbersofappropriatelyskilled,
competent people of integrity at all levels of the
organisation. This is particularly relevant during periods
of rapid growth and expansion into new markets.
We have a Group-wide leadership programme designed
to support the strategic aims of the Company. We have
various incentive schemes and run a broad range of training
courses for people at all stages in their careers. With active
human resources management and Investors in People
accreditation in many parts of the Group, we manage our
people professionally and encourage them to develop and
fulfiltheirmaximumpotentialwiththeGroup.
We have also set ourselves the goals of inspiring the next
generation of professionals, measuring and recognising
the value of people, society and the environment.
HEALTH AND
SAFETY REGIME
The nature of the businesses conducted by the Group
involves exposure to health and safety risks for both
employees and third parties. Management of these
risks is critical to the success of the business and is
implemented through the adoption and maintenance
of rigorous operational and occupational health and
safety procedures.
A commitment to safety forms part of our mission
statement and the subject leads every Board meeting
both at Group and divisional level. Each member of the
Executive Board undertakes dedicated visits to look at
health and safety measures in place at our operational
sites and we have ongoing campaigns across the Group
emphasising its importance.
FINANCIAL
RISKS
Wearesubjecttocertainfinancialriskswhichare
discussed in the Financial Review on page 46.
In particular, we carry out major projects which, from
time to time, require substantial amounts of cash
tofinanceworkingcapital,capitalexpenditureand
investment in PFI projects. Failure to manage working
capital appropriately could result in us being unable
to meet our trading requirements and ultimately to
defaulting on our banking covenants.
Issues arising within contracts, from the management of
our businesses or from the behaviour of our employees
at all levels, can have broader repercussions on the
Group’s reputation than simply their direct impact and
may have an adverse impact upon the Group’s “licence
to operate”. This risk increases as we expand the range
of front-line services being delivered.
DAMAGE TO
REPUTATION
ENVIRONMENTAL
CHANGE
Adverse weather events, travel disruption, long-term
climate shifts, water stress and sea-level rises which
could have uncertain implications for our business
and for many of our clients, who increasingly require
us to help them address the impact of these issues on
their activities.
We have policies in place to monitor the effective
management of working capital, including the production
of daily balances, weekly cash reports and forecasts
together with monthly management reporting.
Wehaveinplacecommittedfinancingwithlong
maturity dates.
Control procedures and checks governing the operation
of our contracts and of our businesses, supported by
business continuity plans are in place. With the expansion
of our front-line services there is even more emphasis
placed upon having proper procedures in place to monitor
performance, escalate issues and monitor our response.
We have a clear set of core values which we strive to
embed within our organisation and set ourselves the goals
of creating a culture of innovation in sustainability and
offering transparency to clients on public-sector projects.
We have in place business continuity plans for our own
businesses and work closely with our clients in respect of
their business continuity arrangements.
We have set ourselves the goals of being responsible
for zero net loss in biodiversity, procuring products and
services beyond best practice in environmental and
social standards, becoming a water positive business,
halving our absolute carbon emissions and those from
our supply chain, helping our clients to increase their
energy security, caring for the natural resources we use
(including treating waste as a resource) and building
resilience to environmental change in everything we do.
The Group continues to have no material exposure to currency risks. Whilst it does not trade in commodities, the Group does
operate in countries where their economies depend upon commodity extraction and are therefore subject to volatility in
commodity prices. The Group’s principal businesses operate in countries which we regard as politically stable.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 32
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
SUSTAINABILITY REVIEW
STRATEGIC REPORT
SUSTAINABILITY REVIEW
“ SUSTAINABILITY IS AT THE
FOREFRONT OF OUR DECISION MAKING
AS WE MANAGE RISKS AND REALISE
OPPORTUNITIES FOR SUSTAINABLE
AND PROFITABLE GROWTH.”
TIM HAYWOOD
Group Finance Director & Head of Sustainability
In 2013 we launched SustainAbilities,asingle,unifiedplan
to embed sustainability in every aspect of how we operate.
SustainAbilities recognises that a business must be sustainable
tobesuccessful,andthatfinancialsuccessdependsona
broad range of factors: the strength of our reputation, our
relationship with our employees, customers and communities,
and how we conduct our operations. Our decision making
needstotakeaccountofthesetoensurewehavefirm
foundations in place for future growth. Sustainability can
no longer be viewed as an optional extra or compliance-
driven corporate governance, but fundamental good business
sense, building strong business relationships, reducing waste,
minimising energy consumption, investing in skills, reducing
riskandgivingconfidencetocustomers.
SustainAbilities is our ambitious, Group-wide plan setting out
fiveoutcomes,15goalsand48targetsovertheperiod2013
to 2020. It is much more than a corporate social responsibility
plan, rather a strategy which is embedded into our daily
activities and one which puts sustainability at the forefront of
our decision making, managing risks and realising opportunities
forsustainableandprofitablegrowth.
It was for this reason that Interserve participated in the
International Integrated Reporting Council’s (IIRC) Pilot
Programme and, in 2013, our Annual Report was one of the
THE FOUR CAPITALS
•
Socialcapital – the contribution to communities, local
employment, wellbeing, networks and interactions that
enable societies to function and thrive
Knowledgecapital – the know-how, skills, capabilities,
innovation and experience possessed by society and
organisations
Naturalcapital – everything we rely on from the natural
environment to provide a resource or service, e.g. land,
air and water
Financialcapital – the money used to generate an
income or invested, for the purpose of economic growth
•
•
•
firsttoshowcasethisthinking.Ourstrategyandbusinessmodel
wasredrawntorecognisenotonlyfinancialperformancebut
alsonon-financialfactors–whatwecallthe‘capitals’–social,
knowledge,naturalandfinancial.Thisenabledustoarticulate
how these are at the heart of our business.
MEASURING NON-FINANCIAL PERFORMANCE
Whilemeasuringfinancialperformanceisawell-establishedpart
ofourannualfinancialreportingprocess,tomeasurethesenon-
financial‘capitals’requiresanewapproachandabroadersetof
data. To achieve this we have designed, built and implemented
a new IT system, called Insight, which has enabled us to source
data from across the business to assess progress against the
SustainAbilities Plan.
SetoutherearethefirstresultsfromourSustainAbilities Plan.
Covering the year ended 31 December 2014, compared with
ourbaseline2013year,theyrepresentsignificanteffortinthe
collectionandcollationofover175,000itemsofdata,and
the implementation of numerous site-level and Group-wide
initiatives to drive improvement and behavioural change in the
business. More detailed analysis of our progress against the
SustainAbilitiesPlanwillbeavailableinour2015Progress
Report which will be published later in the year.
While2013wasabaselineyear,whereweidentifiedand
captured relevant data to establish the benchmarks for our
futureperformance,2014hasbeenthefirstyearoftruly
measurable, comparable progress towards our goals. During
our review of data we discovered a number of imperfections
and omissions in our original 2013 baseline, which we have
consequently corrected. We have also amended the baselines
toreflectthetransformationalimpactofouracquisitions
during the year. We now believe that we have meaningful
comparatives and a robust baseline against which to measure
ourprogress.Asourconfidenceinthecompletenessand
accuracy of our various measures increases, we will move
towards external assurance of our reported progress.
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
SUSTAINABILITY REVIEW
33
175,000
ITEMS OF DATA COLLECTED
TO MEASURE OUR PROGRESS
AGAINST TARGETS SET OUT IN
OUR SUSTAINABILITIES PLAN
CHALLENGES OF DATA
•
Gathering data from across the Group where existing
systems do not capture this
•
•
•
Developing a ‘Capitals scorecard’, applicable across
the business and our wide range of activity
Definingandcomparingnon-financialoutcomes–
there are few precedents for this kind of work
Helping our stakeholders to understand the merit of
non-financialoutcomes,aswellasfinancialones
STAKEHOLDER ENGAGEMENT
Much of the focus during the inaugural year of SustainAbilities
was to establish it across the business, ensuring that its vision,
objectives and targets are understood and supported by our
people. We have increased awareness and engagement of the
Planwithane-learningpackagecompletedby4,500+peopleand
managers’ presentations to help our people understand how to
incorporate its outcomes into their roles.
In parallel with our internal engagement activity, SustainAbilities
- and the vision, values and objectives that underpin it – has
provided a platform for us to engage with our peers, industry, the
political establishment and the wider public to address common
issues, identify opportunities to collaborate and achieve positive
benefits.Theroleofbigbusinessinsupportingcommunities,
providing jobs and raising skills levels is one which is increasingly
in the spotlight. In 2014 we commissioned some major research
to examine public attitudes towards big business in society.
The research, undertaken in the autumn of 2014, explored the
public’s current perception of business, comparing this with
what they believed its role should be. The results demonstrate a
widespread mistrust of, and cynicism toward business, with the
driveforprofitandshareholderrewardperceivedassignificantly
more important to business than any wider concerns for the
environment, job creation, social cohesion and investment in
skills and training for the future. This is clearly at odds with our
view of the essentials for a sustainable business, and we believe
that overcoming the deteriorating public view of business will
be important to our future success. The results of the research,
publishedinthefirstquarterof2015,arebeingusedtoshapeour
discussions with policy makers and in how we communicate more
widely with our various audiences.
Source: Interserve/Ipsos Mori research February 2015
We work closely with a wide range of stakeholder groups and
organisations. The aim is to both share our experiences and
best practice through these channels and to help support,
influenceandshapepolicydevelopmentinameaningfulway.
Our membership and collaboration with organisations such as
the Business Services Association (BSA), UK Contractors Group
(UKCG) and the Confederation of British Industry (CBI) allows for
participation in a wider dialogue on issues affecting business and
society in the UK.
This approach to partnership extends to our working membership
of parliamentary groupings – the All Party Group on Corporate
Responsibility and the All Party Group for Skills & Employment,
and think tanks including Policy Exchange and the Institute of
Public Policy Research. We also work closely with bodies such as
Business in the Community, Social Enterprise UK and Groundwork
UK on issues related to sustainability and good business practice.
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Our work on SustainAbilities has also been recognised by
industry and during 2014 we were awarded the British
Quality Foundation’s Sustainable Future Achievement Award
for demonstrating how our policies are embedded across
the organisation and have improved the sustainability of our
business practices. In addition we were Highly Commended in
the Finance for the Future Awards recognising the role of
financeinsupportingsustainablebusiness.Wehavealso
maintained our listing in the FTSE4Good Index.
SOCIAL CAPITAL
As a major provider of public services and facilities, we are
dedicated to supporting public agencies, the third sector and
delivering public services directly to the citizen while having
a positive impact on the communities we interact with. Public
interest, therefore, is at the heart of what we do. We are
evidencing this through our commitment to using SMEs, tracking
local supply chain spend, setting clear targets on community
engagement, increasing the employability skills of young people
and providing real opportunities for disadvantaged groups.
We are also working with Government to help incorporate
sustainability targets such as these into public procurement
through the implementation of the Social Value Act. Our activity
has also focused on raising awareness of the importance of
considering social capital in decision making, understanding
methods for measuring social capital and opportunities to have
a positive impact.
•
•
In2014,weconvenedtheUK’sfirstSocialValueSummit
in partnership with Social Enterprise UK to share and
learn from existing good practice across sectors in
relation to social value.
InFebruary2015wehostedthesecondSocialValue
Summit to examine progress, where we launched our
Social Value Mapping Tool.
Our work to support social capital includes adopting new business
models. We extended our network of relationships with third-
sector organisations by forming Purple Futures, an Interserve-led
partnership for the provision of probation and rehabilitation
servicesinfiveareasoftheUK(CheshireandGreaterManchester;
Hampshire; Humberside, Lincolnshire and West Yorkshire;
Merseyside and West Yorkshire). This new business model will see
us working in partnership with the housing charity Shelter; the
drug and alcohol treatment charity AddAction; P3, the national
charity providing social inclusion services to people with complex
needs; and 3SC, a social enterprise that will build and manage
the voluntary sector supply chain on our behalf. Where we bring
business expertise and investment capability, our third-sector
partners bring experience in service delivery and community
engagement.Wemanagethefinancialrisksofthecontracts,
allowingourpartnerstobenefitfromthestablecashflowa
company of our size and scale can provide. We have created
and published a ‘Charity Charter’ which sets out what we can
offer our Volunteering, Community and Social Enterprise (VCSE)
partners and, in turn, what we expect from them.
CASE STUDY
SOCIAL VALUE MAPPING
WE BELIEVE OUR SUCCESS CAN ONLY BE JUDGED IF SEEN IN
THE CONTEXT OF THE LOCATIONS WHERE WE OPERATE AND THE
SOCIAL AND ECONOMIC CONDITIONS THAT EXIST DURING OUR
BUSINESS OPERATIONS.
Our Social Value Mapping Tool has been developed to combine data
from our business systems with publicly available data to create a
contextual picture or map of the impacts we have. We are bringing
anonymous spatial data on payroll and supplier spend, employee
skills, skills progression, education standards, together with public
socio-economic data sets on multiple indices of deprivations,
reported crime, education standards and house price values. In
2014wedevelopedtheproofofconceptforthetoolandin2015
we will be looking to roll it out to key parts of the UK business and
begin to develop its predictive capability.
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
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•
•
We signed up to BITC’s Ban the Box campaign to give
people with criminal convictions a second chance at
fulfillingtheirpotentialbygivingthemfairaccessto
employment opportunities.
Landmarc,ourpartnershipwithAmericantrainingfirm
PAE, launched a venture with X Forces to help hundreds of
ex-service personnel into the world of business. As well as
providing mentors to work with X Forces’ entrepreneurs,
Landmarcalsogivesaccesstoofficeandmeetingspace,
to help get new businesses on their feet.
Community engagement
Social capital is inherently linked to local circumstances, issues
and communities. Our community engagement is structured
to help local groups and communities tackle local issues by
providing support for our people to make a difference in their
community through the Interserve Employee Foundation (IEF).
The IEF was established with the aim of improving the quality
of life for people in the communities where we operate through
enlisting their skills, capabilities, resources and enthusiasm
and encouraging our people all over the world to engage in
community and charitable activities.
Employees receive two days of time per year to participate
in a community volunteering project/charitable activity.
In 2014 3.1 per cent of employees supported projects
through volunteering during company time, a total of
1,912 volunteering days.
ThecharitiesandgoodcausessupportedbyIEFreflectthe
wide scope of our operations and of the interests and concerns
of our staff. Examples of support in 2014 include:
•
•
•
A team of cyclists from our Construction division raised
over £160,000 for charities following the London to Paris
bikerideinMay2014.Some65employeestookpartin
thechallengewhichsawtheteamcycle275milesover
three days.
ColleaguesinBirminghamcollectednearly3,500items
of food (1.6 tonnes) for the Birmingham Central Foodbank,
enoughtoprovideover750mealsforfamiliesinneed
over the Christmas period. The donation is the largest
ever provided to the Foodbank from a single company.
55employeesgavetheirtimetosupportJustAroundthe
Corner (JAC), a Berkshire charity that uses the restorative
effects of horse riding as a therapy to support children and
families affected by mental health problems by building
paths, fencing paddocks, digging vegetable allotments and
weather-proofingbuildings.
Social Capital
Employee volunteering
UK
ROW
Sustainable procurement strategy
Health & Wellbeing programme
Target
2014
Performance
15%by2016
By 2014
By 2014
3.6%
2.4%
�
�
CASE STUDY
BUILDING FOR
THE FUTURE
THIS INITIATIVE WAS FOUNDED IN 2007 BY PARENTS OF
DISABLED CHILDREN, WHO DISCOVERED THERE WAS NO
SUITABLE PLAY AREA FOR CHILDREN WITH DISABILITIES
ANYWHERE IN THE WOKINGHAM BOROUGH.
Once the charity secured a building, Interserve staff
applied to the Interserve Employee Foundation for a
grant which would be used to carry out necessary work.
The building needed to be made safe and wheelchair
accessible. Work was also needed to transform it into a
bright, engaging environment where the children could
play.Thecharitydirectorsawarded£7,500towardsthe
costs. Staff from our Developments division, along with
Facilities Management employees at Slough Borough
Council,gaveatotalof75daysoftheirtimetoundertake
the majority of work. They also used supplier and local
trades and business contacts to secure materials at cost
value as well as getting some of the materials donated.
The facility was opened by Their Royal Highnesses The
Earl and Countess of Wessex in May 2014.
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KNOWLEDGE CAPITAL
We are now one of the largest private employers in the UK, with
a worldwide workforce of over 80,000 throughout 40 countries.
In turn we support thousands of SMEs through our supply chain,
supporting hundreds of thousands more. Our areas of specialism,
particularly within construction and engineering, demand a
skilled workforce. Our long-term sustainability depends on
a pool of educated, work-ready labour which can meet the
growing needs of our business. We are therefore committed to
sharing know-how, increasing levels of skills and training and
providing opportunities for self-improvement to add to society’s
collective pool of knowledge.
Knowledge Capital
Target
2014 Performance
Apprenticeships,
traineeships, graduates
(number on programme)
Number of training days UK
ROW
500
by 2018
n/a
n/a
Work placements
Placements
1,000/yr
Experience
n/a
Total
1,000/yr
100
Sustainability targets
in managers’ appraisals
CASE STUDY
320
12,159
39,950
422
654
1,076
762
Under our group-wide Innovation Programme this year we
launched a ‘Big Ideas Hunt’ to encourage employees to
bring our strapline ‘ingenuity at work’ to life, and contribute
innovative ideas to improve our business. Over 400 ideas were
submitted, largely captured through our new employee portal,
MyInterserve. These were shortlisted by the Innovation Steering
Board, with employees then voting for their top 10 ideas.
We also expanded the level of support for Early Career entrants
into our business. This Group-wide programme focusing on the
nextgenerationofInterserveprofessionalshasseenasignificant
increase in opportunities for graduates, apprentices and work
placements. In 2014 we had 320 apprentices, trainees and
graduates on the programme across the Group. As part of our
drive to increase both awareness and work-readiness of future
school leavers, we delivered work experience events to a total
of 1,076 participants. This was split between 422 students on
formalworkplacementsand654studentswhoattendedwork
experienceworkshopstohelpdefineanddevelopessential
employability skills.
A further element in our mission to bring closer together the
worlds of education and business was the establishment of the
InterserveAcademiesTrust(IAT)–anot-for-profitcharitable
organisation, with the aim of becoming a multi-academy
sponsor. In July, the Department for Education approved the
IAT as the sponsor of Crawshaw Academy in Leeds, a mixed
MORE SKILLS, MORE OPPORTUNITIES
AT KHANSAHEB TRAINING SCHOOL, DUBAI
PROVIDING CONSTRUCTION WORKERS WITH GREATER EXPERTISE AND WIDER
CAREER OPPORTUNITIES, INTERSERVE’S ASSOCIATE CIVIL ENGINEERING BUSINESS
IN DUBAI IS PAVING THE WAY WITH THE ESTABLISHMENT OF ITS OWN IN-HOUSE
TRADES TRAINING SCHOOL.
Opened in March 2014, the Khansaheb Training Centre runs a full trades training
curriculumtaughtbyCITBqualifiedtutors.Thecentretrains160employeesper
month, on a 12-day structured curriculum for each trade. Over 1,700 of our people
havealreadybenefitted.Thecurriculumcoverskeysiteskills,suchasmasonry,
block-laying,plastering,tilingandpaving,steelfixing,carpentryandsupervisory
skills. Health and safety is also a critical component of the training, which includes
demonstrated, practical tutorials with mentorship and ongoing peer review on how
to get the job done, the safe way. As well as noticing a steady increase in quality,
and health and safety performance, managers have seen a dramatic increase in
employee engagement. Site supervisors reported a jump in the pride in workmanship,
motivation and team work of those who had been through the training.
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
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school for 12–18 year olds. The Trust assumed management of
the Academy in September and is delivering a curriculum that
seeks to equip school leavers with the necessary skills to thrive
in the workplace.
Our people strategy is based around capability, leadership
and people experience. Leadership development is an
important part of our commitment to developing our people
and maintaining our ability to sustain and grow our business.
This year, we have launched new waves of our Trusted
Partner Programme, now in its fourth year and aimed at
our leadership population one and two tiers beneath our
Executive Board; and our Ingenuity at Work Programme, in its
second year and aimed at our leadership population three and
four tiers beneath our Executive Board. These programmes
focus on business projects that support near-term business
performance and effectiveness as well as progress us towards
our longer term business goals.
Career development and access to opportunities for training
and skills development is an important focus for the Group.
Overthepastyearwe’veprovided52,109trainingdaysfor
ourpeople.We’vealsoinvestedresourcesindefining
development pathways across our business from operational
into management and strategic roles to clearly illustrate the
potential development opportunities available to our people,
whatever their level within the organisation.
In addition to the activity we’ve undertaken this year
internally, we were keen to contribute to the wider debate
about skills, productivity and pay. We wanted to investigate
ways to unlock untapped potential in the workforce by giving
the right support and opportunities to progress. We recognised
this was a challenge that was bigger than any single company
or sector and joined forces with the Social Market Foundation
(SMF) to examine how skills could be put at the heart of
tackling the low wage / limited opportunities cycle. As a
result a report was launched in April calling for a radical
new government-backed ‘Skills for Progress’ scheme to
boost the skills and wages of those trapped in low pay.
We co-founded the FM Supply Chain Sustainability School,
which was set up last year. This has enabled us to work in
collaboration with our supply chain and help it to help
us achieve our targets.
In December, we acquired The Employment and Skills Group
(esg), further strengthening our focus on education and
skills. esg is one of the UK’s largest private-sector providers
of training and employment services and also provides
vocational training in three new further education colleges
in Saudi Arabia under the Kingdom’s Colleges of Excellence
programme. With approximately 700 employees, esg supports
over65,000peopleayearintoworkortraining.
CASE STUDY
LIGHT GAUGE STEEL
ROLLED OUT IN OMAN
INTERSERVE’S OMAN-BASED CONSTRUCTION BUSINESS,
DOUGLAS OHI, PARTNERED WITH LEADING STEEL
PROVIDER, THE HADLEY GROUP, TO OFFER CLIENTS
LIGHT GAUGE STEEL (LGS) – GALVANISED STEEL
SHEETS ROLLED INTO DIFFERENT SECTIONS TO FORM
A BUILDING’S STRUCTURAL FRAMEWORK.
The majority of the light-weight framing solution is
manufactured from recycled steel with cold rolled
sections of steel supplied in pre-cut bespoke lengths,
reducing material wastage. LGS takes less time to
construct and uses fewer natural resources than the
traditional steel alternative. On-site noise pollution
is also vastly reduced because cutting is virtually
eliminated, reducing CO2 emissions. The use of LSG also
reduces construction time by around 30 per cent and has
long-termenvironmentalbenefits,withbetterthermal
insulation compared to a traditional build. Steel is
100 per cent recyclable and uses 60 per cent less energy
to convert from scrap than iron ore. Douglas OHI and the
Hadley Group recycle all galvanised steel removed in the
production process and only source from suppliers who
can prove the use of old steel to make new.
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NATURAL CAPITAL
Working with clients in the built environment, we take our social and environmental responsibilities very seriously and through our
SustainAbilities Plan have made a commitment to go beyond compliance and aim to make a positive difference both through our own
operations and the work we undertake for clients.
Wehaveidentifiedthefollowingkeyenvironmentalrisks/opportunitiesforourSustainAbilities programme to address:
CO2e emissions from our use of energy including electricity, gas, fuel and travel
–
– Waste management – generation, treatment and disposal
– Water use and scarcity
–
Damage to natural ecosystems – biodiversity, air, land and water
Natural Capital
Total carbon emissions
Metric: tonnes CO2e (000’s)
Emissions from energy use on permanent sites
Metric: tonnes CO2e (000’s)
Emissions from business travel
Metric: tonnes CO2e (000’s)
Emissions from construction site-based
electricity generation
Metric: tonnes CO2e (000’s)
Total water consumption
Metric: m3 (000’s)
Construction waste
Metric: tonnes (000’s)
Office waste
Metric: tonnes (000’s)
Target
50%reductionby2020
50%reductionby2020
30%reductionby2016
30%reductionby2016
20%reductionby2016
25%reductionby2016
50%reductionby2016
UK
ROW
UK
ROW
UK
ROW
UK
ROW
UK
ROW
UK
ROW
UK
ROW
Absolute
2014 Performance vs. 2013
2014
65.2
224.1
8.7
54.9
49.7
89.0
1.5
2013*
Absolute
61.3
223.6
8.5
50.7
46.1
70.8
+6.3%
+0.2%
+2.6%
+8.3%
+7.9%
+25.8%
2.0
-25.8%
Relative
-0.1%
-7.1%
-3.5%
+0.4%
+1.5%
+16.5%
-30.2%
not currently available –
we are developing processes to report this
50.3
1,741.6
40.1
165.2
1.2
3.9
52.5
1,542.9
38.8
183.5
1.3
3.6
-4.3%
+12.9%
+4.7%
-10.0%
-5.7%
+8.5%
-10.0%
+4.6%
-1.6%
-16.6%
-11.3%
+0.5%
*Previouslyquoted2013figureshavebeenrestatedtotakeintoaccountsignificantacquisitionsandincludeourinternationaloperations.Thesefiguresformour
2013 baseline for measuring performance against SustainAbilities targets.
Our overall environmental performance has shown some positive outcomes during 2014. Total carbon emissions including emissions
fromourinternationalsubsidiariesandassociatesincreased1.5percentto289,251tonnesCO2e in 2014 (2013: 284,883), this equates
toa4.8percentrelativereduction.Thisfigurecanbebrokendownas53percentScope1(152,559tonnes),19percentScope2
(54,505tonnes)and28percentScope3(82,184).
Scope 1 emissions are the direct emissions associated with fuel that we use and fugitive emissions. Scope 2 emissions are indirect
emissions associated with the energy we use, predominantly emissions from the generation of the electricity we use. Scope 3
emissionsareindirectsupplychainemissionsfromgoodsandservicesweuse,includingflights,railandgreyfleetmileage.
In the UK we have achieved absolute reductions in our water consumption (down 4.3 per cent) and carbon emissions from
constructionsite-basedelectricity(down25.8percent).Emissionsfrombusinesstravelandfixedlocationshaveremainedbroadly
consistent despite organic growth.
Our international operations, where we include natural capital impacts of accommodation for our c30,000 staff, account for the
majorityofourenvironmentalimpact.However,thishasbeenthefirstyearwehavehaddetaileddatafromthisregionandwe
consider this to be an area of considerable opportunity for future reductions. We also recognise achieving the behavioural and
operationalchangesrequiredtomeetourtargetswilltaketime.Fromaninternationalperspective,therewassignificantprogress
made during 2014 in terms of employee engagement and understanding of our sustainability strategy. Every business has processes
inplacetoreportonitsperformanceandamorecomprehensivesetofdatatousetotakedecisionsonduring2015.
Our Khansaheb business in the UAE has reduced construction waste produced by over 20,000 tonnes compared to its 2013 baseline.
This has been achieved in part through better planning for materials and site logistics due to the implementation of the ‘K’ standard
and improved working practices through the introduction of the trade training school.
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
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The achievements in the UK Construction site-based electricity
emissions reductions are as a result of innovation and adopting
new working practices and technologies. Our construction
business developed and implemented a hybrid power system
that enables us to reduce generator capacity on site and
to further supplement it with photovoltaic, wind and other
renewable sources.
We have developed a travel plan framework that can be used
across the Group and provides a hierarchy for travel choices.
Wearealsotargetinglocalemissionvehicleswithinourfleet
and improving our IT infrastructure to support the use of
alternatives to travel including desktop and video conferencing
where practicable.
Working with Smiths Gore, Jacobs SKM and the University
of Exeter, Landmarc has developed a pilot natural capital
decision support tool that enables more intelligent land-use and
environmental resource planning for our work on the Ministry
ofDefence's(MoD)220,000hectaretrainingestate.Thefirst
operational tool of its kind, it contains a mixture of natural
capital, ecosystem services and constraint datasets covering
two pilot training areas, Barry Budden in Scotland and Dartmoor
in the South West.
We are committed to helping our clients by delivering our
services in a way that minimises energy use and offers them
ideas, expertise and solutions to build their resilience to energy
outages, price spikes and scarcity.
FINANCIAL CAPITAL
Alongsidefinancialperformance,ourcommercialand
procurementdecisionshaveasignificantinfluenceoverour
achievement of the goals and targets within the SustainAbilities
Plan. Over the past year we have focused on strengthening
sustainable procurement policies and procedures. All UK
operating divisions have incorporated sustainable procurement
requirements into their supplier codes of conduct and have
reviewed or adopted sustainable, ethical and responsible
procurement policies.
During 2014 sustainability was further embedded into our
tendering processes, which now includes more rigorous supplier
selection criteria and relationship management, audits and
risk management. Sustainability targets have also been
integrated into the annual performance appraisals of
central procurement staff. Our Al Manjara joinery business in
Gulf Contracting achieved Forest Stewardship Council (FSC)
certificationduring2014forsupplyoftimberproducts.
Ultimately, sustainable growth recognises that value represents
morethanmoney–thataprofitablebusinessisonethattakes
into account the true cost and wider considerations of business
to deliver sustained value for all. It is an aspiration increasingly
shared by our customers and our stakeholders, and one which
we have proven, through successive periods of improving
financialresults.
OUR PEOPLE
Health and safety
Interserve adopts a formal and proactive approach to the
management of health and safety throughout our operations.
Senior directors have responsibility for health and safety in
each division and together with divisional Heads of Safety
meet quarterly to review performance and the various health
and safety initiatives being undertaken. During the year we
established a Board-level Serious Health and Safety Incident
Committee to review our incident investigations and oversee
the implementation of any improvement recommendations.
Our standard is for all operating businesses to implement safety
management systems that meet the OHSAS 18001 standard.
Across the world 93 per cent of our employees work under safety
managementsystemscertifiedtothisstandard.Tosupportour
management systems, in the Middle East we have launched our
BrownfieldHotworkGoldStandardandourLifeSavingRulesto
provide clear guidance on standards to operating staff.
Safetyperformanceisclearlydefinedasaline-management
responsibility and, together with formal management systems,
we provide appropriate training and professional support to
ensure managers are able to effectively discharge their duties.
Proactive site visits and safety inspections are carried out by
directors, management teams and safety advisers. Members
of the Executive Board carried out a total of 126 site safety
visits during the year and across the Group a total over 1,300
management safety tours were recorded. As a result of these and
otherinspectionsover126,000unsafeconditionswereidentified
and corrected, preventing potential incidents.
We are regularly recognised for our contributions to delivering
high standards of health and safety and in 2014 this included:
•
•
•
•
Industrial Services achieved the British Safety Council
Sword of Honour
MadinareceivedRasGascertificateofappreciationfor
commitmenttoachieving25millionmanhourswithout
a lost-time incident
Gulf Contracting received recognition from JGC Barzan
OnshoreProjectforcontributionto‘250,000observations’
31 RoSPA awards: three Presidents Award (for between
10 and 14 Gold Awards), 10 Gold Medals (for between
fiveandnineGoldAwards),and12GoldAwards
• Carys Marwood received a RoSPA Guardian Angel Award.
The result of this proactive approach is that over the year our
overall accident rates have reduced by eight per cent for lost-time
injuries and 18 per cent for fatal and major injuries. However, our
reportableinjuryincidencerateincreasedbyfivepercentand
during the year we suffered one incident in the Middle East in
which an individual suffered fatal injuries. A full investigation was
carried out into the circumstances of the incident to ensure that
lessons could be learned to prevent recurrence.
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All labour AIR
(UK and RMDK globally)
AIR (including associates)
Target
Lost Time Accident (LTA)
Incident Rate
2014
255
209
195
426
2013
242
201
224
474
2012
298
239
240
524
2011
310
260
302
n/a
2010
377
326
310
n/a
The Accident Incident Rate (AIR) is based on the number
of injuries meeting the RIDDOR reporting requirements per
100,000 workforce.
Employee consultation and participation
We believe in involving our people in matters affecting them as
employees and keeping them informed of all relevant factors
concerningtheGroup’sperformance,strategy,financialstatus,
charitable activities and other issues. We achieve this through
formalandinformalbriefings,ourGroupnewspaper‘Focus’and
our intranet.
During the reporting period we launched a new web-based
employee portal, www.MyInterserve.com,specificallyaimedat
reaching our thousands of front-line employees. The portal has
been designed to be accessible on mobile devices, giving staff
access to company news, the ability to participate in discussion
forums, and to give days of their time in support of good causes,
as well as access to staff discounts at a range of retailers and
leisure outlets.
We operate two all-employee HMRC-approved share schemes in
order to support our Employer of Choice goal and to encourage
our employees to share in the future of the Group. In our
Sharesave Scheme, employees save small amounts each month
which can be then used to purchase Company shares at a discount
to the market price. In our Share Incentive Plan, employees can
purchase Company shares through lump-sum or monthly payments
which are deducted from their salaries before income tax and
national insurance liabilities are assessed.
Number of persons who were directors of the Company1
Number of persons who were senior managers of the Group2
Number of persons who were employees of the Group3
Total
Equal opportunities
Interserve is committed to eliminating discrimination among our
workforce in order that we may offer employees an environment
where there is no unlawful discrimination and all decisions are
based on merit.
Our policy is to promote equality and fairness for all in our
employment. The Group aims to ensure that no job applicant or
employee receives less favourable treatment or is disadvantaged
by imposed conditions or requirements that cannot be shown to
bejustifiable,onthegroundsofgender(includingsex,maritalor
civil partner status, gender re-assignment), race (including ethnic
origin, colour, nationality and national origin), disability, sexual
orientation, religion or belief, age, and pregnancy or maternity.
We take every step to ensure working environments are free
from harassment and bullying, where all individuals are treated
equally and fairly and that selection for employment, promotion,
trainingoranyotherbenefitwillbetakensolelyonmeritand
ability against job-based criteria. We avoid discrimination in
working conditions and terms of employment and are committed
to making reasonable adjustments for disabled employees. We
oppose all forms of unlawful and unfair discrimination.
Employee diversity
In 2014 we signed up to the National Equality Standard (NES)
further strengthening our commitment to achieving our equality
and diversity goals. The NES is a cross-industry recognised standard
covering all areas of Equality, Diversity and Inclusion (EDI) in
the UK. Interserve already works with a variety of different
organisations who are helping us put in place programmes and
practices that build our diversity culture by providing access to
opportunities. These include BITC (Business in the Community),
Investors in Diversity (IiD), Leonard Cheshire and Two Ticks (for
disability). The NES will be the consolidating standard that binds
all our activities together and through their process will help our
selection of partner organisations moving forward.
As at 31 December 2014, 32,830 of our global workforce of
59,829weremaleand26,999werefemale.Furtherinformation
is provided in the table below.
Gender
Male
Female
Total
2014
10
103
2013
9
81
2014
1
4
2013
1
4
2014
11
107
2013
10
85
32,717
32,830
20,669
20,759
26,994
26,999
13,777
13,782
59,711
59,829
34,446
34,541
1Plc board directors at year end.
2Subsidiary directors and Persons Discharging Managerial Responsibility at year end.
3Employees of wholly-owned subsidiaries included within Group consolidation at year end.
Throughout our worldwide operations we strive to operate to high standards of human rights in accordance with our values and all
appropriate legislation.
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CASE STUDY
3D MODELLING KEY TO NEW
ABU DHABI AIRPORT TERMINAL
CURRENTLY UNDER CONSTRUCTION, THE NEW MIDFIELD TERMINAL COMPLEX (MTC) AT ABU DHABI INTERNATIONAL AIRPORT
WILL HAVE THE CAPACITY TO HANDLE MORE THAN 20 MILLION PASSENGERS A YEAR WHEN IT OPENS IN JULY 2017.
Our Equipment Services business, RMD Kwikform, has
provided a range of shoring, propping and formwork
solutions for the complex design and geometry of the
630,000 square metre main terminal building, which
features a huge curved roof.
Curving horizontally and vertically, construction of the
terminal building relies on achieving millimetre accuracy
for the installation of specially fabricated segments to form
steel arches and a central girder. As part of the construction
planning process, RMD Kwikform engineers - working with
the steel roof sub-contractor - used 3D modelling to design
bespoke components for the phased erection of the arches.
This process included the design of a heavy-duty support
system for the erection of the steel arches and a jacking
frame. To ensure the frame was able to cope with the large
loading forces and high winds and heat, the engineering
teams used the latest modelling technology before
components were then fabricated and tested.
RMD Kwikform also designed and supplied the support
towers,whichvariedinheightfrom15to45metres.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 42
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT FINANCIAL REVIEW
STRATEGIC REPORT
FINANCIAL REVIEW
SUMMARY
Financial highlights of 2014 included:
•
•
•
AstrongtradingperformancewithRevenueup33percent(10percentorganic)andHeadlineTotalOperatingProfitup
35percent(9percentorganic).
Increase in Headline earnings per share of 23 per cent.
Investment of £271.4 million in acquisitions to broaden our UK Facilities Management (FM) footprint (Initial Facilities)
and enhance our skills and Welfare-to-Work expertise (esg).
• Further strengthening the balance sheet for the long term by:
•
enhancingourdebtfacilitieswitha10-year$350millionUSprivateplacementandextensionofourexistingbank
facilities to 2019; and
• completingapensionbuy-intransactionforc35percentoftheliabilitiesoftheInterservePensionScheme.
• Further investment for growth in capex and working capital.
REVENUE AND OPERATING PROFIT
Consolidated revenues increased by 33 per cent compared
with 2013, and total gross revenues (including our share of
joint ventures and associates) by 28 per cent.
UK Support Services, boosted by the March acquisition of Initial
Facilities, delivered a strong performance with a 40 per cent
increase in revenues (3 per cent organic). The International
Support Services division revenues also increased sharply to
£157.2millionaswecontinuedtheintegrationofourregional
servicesofferingandbenefittedfromafull-yearcontributionof
Adyard. The upturn in UK Construction market activity levels
andastrongperformancebyourParagonfit-outbusinesshelped
drive an increase in revenues of 21 per cent (18 per cent organic).
Middle East construction markets remained resilient with 1 per
cent revenue growth on a constant currency basis. Equipment
Servicesbenefittedfromfurtherinvestmentandgenerally
improvingmarketstoshowrevenuegrowthof15percent.
Full-year operating margin of 4.0 per cent (2013: 4.0 per cent)
reflectsanumberofdifferingtrendswithindivisions.Support
Services UK delivered an operating margin of 4.8 per cent, a slight
improvement on the 2013 outturn of 4.7 per cent. International
Support Services made further progress with margins rising to
4.8 per cent (2013: 4.4 per cent). UK Construction margins fell
to 1.6 per cent (2013: 1.8 per cent), remaining within our guided
rangebutreflectingthesupplychainpressurescurrentlypresent
within the market. Margins in our International Construction
operationsheldupwellindifficultmarkets,decliningslightlyto
4.7percent(2013:5.1percent).Marketconditionsandtender
opportunities are generally improved from 2013 but markets
remaintight.EquipmentServicescontinuedtoshowthebenefits
of a high operational gearing as margins rose further to 13.6 per
cent (2013: 11.9 per cent).
Average and closing exchange rates used in the preparation of
these results were:
US dollar
Australian dollar
Qatar Rial
Omani Rial
UAE Dirham
Average rates
Closing rates
2014
1.65
1.83
5.99
0.63
6.04
2013
1.57
1.63
5.72
0.60
5.76
2014
1.55
1.90
5.65
0.60
5.70
2013
1.65
1.86
6.00
0.63
6.06
At 2013 average rates the Group would have generated an
additional£2.3millionofTotalOperatingProfit.
INVESTMENT REVENUE AND FINANCE COSTS
The net interest charge for the year of £11.0 million can be
analysed as follows:
£million
Net interest on Group debt
Interest receivable from PFI sub-debt
Pensionfinancecredit/(charge)
Group net interest charge
2014
(12.1)
0.8
0.3
(11.0)
2013
(4.8)
0.6
(1.4)
(5.6)
Driven predominantly by the acquisition of Initial Facilities,
the average net debt for the year was £240.8 million (2013:
£14.9 million) and this increase can be seen in the higher net
interest charge on Group debt. Allowing for the timing of the
payment of the consideration for Initial Facilities, there was
no material difference between average and year end net
debt levels.
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
FINANCIAL REVIEW
43
Interest receivable on sub-debt increased slightly to
£0.8million(2013:£0.6million)reflectingthereturn
on our continuing PFI investments.
Theimprovedpensiondeficitpositionresultedinapension
financecreditof£0.3million(2013:£1.4millioncharge).
TAXATION
The tax charge for the year of £12.0 million represents an
effectiverateof19.4percentontotalGroupprofitbefore
taxation, broadly unchanged from 2013. The factors underlying
this effective rate are shown in the table below.
£million
Profit
Tax
Rate
Profit
Tax
Rate
2014
2013
Group companies
89.7
(18.7) 20.8%
16.5
–
0.0%
63.9
17.2
(15.0) 23.5%
–
0.0%
Joint ventures
and associates*
Headlineprofit
before tax
Amortisation of
intangible assets
Other
exceptional items
Effective tax
charge and rate
106.2
(18.7) 17.6%
81.1
(15.0) 18.5%
(24.4)
4.5 18.4%
(8.9)
1.5
16.9%
(19.9)
2.2 11.1%
(4.1)
0.4
9.8%
61.9
(12.0) 19.4%
68.1
(13.1) 19.2%
* The Group’s share of the post-tax results of joint ventures and associates
isincludedinprofitbeforetaxinaccordancewithIFRS.
The reduction in the Group companies’ rate is predominantly
driven by the 2 per cent fall in the UK corporation tax rate
during 2014, together with an increased proportion of overseas
profitsarisinginlowertaxjurisdictions.
Profitbeforetaxof£61.9million(2013:£68.1million)is
lower than the previous year due to increased exceptional
costs and amortisation, both principally driven by the
acquisition of Initial Facilities.
DIVIDEND
Thedirectorsrecommendafinaldividendfortheyearof
15.5pence,tobringthetotalfortheyearto23.0pence,
an increase of 7.0 per cent over last year. This dividend is
covered 2.6 times by Headline earnings per share.
NET DEBT AND CASH FLOW
Net debt has increased to £268.9 million (2013: £38.6 million),
reflectingourcontinuinginvestmentsinacquisitions
(2014:£168.5millionnetofshareissue),netcapitalexpenditure
(2014:£54.3million)andworkingcapital(2014:£53.3million).
£million
Operatingprofitbeforeexceptional
items and amortisation of intangible assets
Other exceptional items
Depreciation and amortisation
Net capital expenditure
Gain on disposal of property, plant
and equipment
Other
Working capital movement
Operatingcashflow
Pension contributions in excess of
the income statement charge
Dividends received from associates
and joint ventures
Tax paid
Other
Freecashflow
Dividends paid
Investments (net)
Disposals
Acquisitions (net)
Share issues
Other non-recurring
Increase in net debt
2014
100.6
–
39.3
(54.3)
(12.2)
3.4
(53.3)
23.5
(18.2)
2013
69.4
(2.1)
33.8
(33.7)
(13.4)
7.6
(19.7)
41.9
(18.5)
17.8
13.7
(10.2)
(10.5)
2.4
(34.4)
(10.1)
-
(243.7)
75.2
(19.7)
(5.7)
(5.3)
26.1
(29.1)
(10.6)
(0.2)
(49.1)
3.3
(4.8)
(230.3)
(64.4)
Theoperatingcashflowof£23.5million(2013:£41.9million)
reflectstheincreasedlevelofcapitalexpenditureand
an increase in working capital levels, both of which were
anticipated at the start of the year and seen in our half-year
results. Our rolling three-year gross operating cash conversion is
61.7 per cent (2013: 92.1 per cent). This compares to our target
of 100 per cent and is impacted by a period of investment in
growth.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 44
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
FINANCIAL REVIEW
STRATEGIC REPORT
FINANCIAL REVIEW CONTINUED
Thenetworkingcapitaloutflowof£53.3million(2013:
£19.7millionoutflow)reflectsboththegrowthofthebusiness,
particularly in Equipment Services, and continued pressures on
payment terms, particularly in UK Construction.
Capitalexpenditureincreasedsignificantlyto£54.3million
(2013:£33.7million).ThisreflectsinvestmentintheEquipment
Servicesfleettoenableustobenefitfromimprovingmarkets,
andfurtherinvestmentinourback-officeandclient-facing
assets in UK Support Services.
Despite tight trading conditions in the Middle East our remitted
dividendsof£17.8millionwereinexcessoftheprofitsearned
(£15.1million).
Taxpaidof£10.2million(2013:£5.7million)remainslowerthan
the Consolidated Income Statement charge incurred by the
Group,principallydrivenbytaxdeductionsforpensiondeficit
payments and timing differences.
Investmentsoutflowintheyearof£10.1million(2013:
£10.6million)reflectsourincreasinginvestmentsinproperty
development schemes, principally Haymarket.
Acquisitionsnetoutflowof£243.7millionin2014representsthe
net consideration for the acquisitions of Initial Facilities and esg.
Other non-recurring costs of £19.7 million mostly relate to the
exceptional charges for the acquisition and integration of Initial
Facilities (£18.4 million).
ACQUISITIONS
On 18 March 2014 we acquired 100 per cent of the facilities
services business (Initial Facilities) of Rentokil Initial plc, for a
cashconsiderationof£245.7million.Theacquisitionstrengthens
our Support Services offering, allowing the provision of a
significantlyenhancedserviceoffering.Theenlargedbusiness
offers a full range of services across all contract sizes, evenly
split between public- and private-sector customers. The post-
acquisitionreviewoffairvaluesidentifiedacquirednetassets
of£105.4millionincluding£87.8millionofintangibleassets,
predominantly representing customer relationships. These
acquiredassetswillbeamortisedoverperiodsuptofiveyears.
£140.3 million has been recognised as goodwill.
On5December2014weacquiredTheEmploymentandSkills
Group (esg), a training and skills business. The acquisition
boosts our skills offering in the UK and Middle East. Total
cashconsiderationwas£25.7million.Thereviewoffair
valuesidentifiedacquirednetassetsof£13.8millionincluding
£19.1 million of acquired intangible assets, representing
customer relationships. These acquired assets will be amortised
overperiodsuptofiveyears.Thebalanceof£11.9millionhas
been recognised as goodwill.
We maintain a selective approach to reviewing potential
acquisition opportunities, seeking out strategically attractive
assets in growth markets. With our expanded debt capacity
and facilities, we remain able to take advantage of further
appropriateacquisitionopportunitiesastheyareidentified.
PENSIONS
At31December2014theGrouppensiondeficitunderIAS19,
net of deferred tax, has decreased slightly to £3.8 million
(2013:£5.9million):
£million
Definedbenefitobligation
Aviva buy-in asset
Other scheme assets
Totaldeficit
Deferred tax thereon
Netdeficit
2014
924.9
(360.7)
(559.4)
4.8
(1.0)
3.8
2013
826.9
–
(819.2)
7.7
(1.8)
5.9
On 1 August 2014 we made further substantive progress with our
ongoing plan to reduce risk in our pension scheme by entering
into a buy-in transaction with Aviva Plc. This buy-in contract
protects the Group from risks associated with approximately
35percentoftheScheme'sdefinedbenefitliabilities.
This de-risking has proved its worth in the period by allowing us
to reduce the risk of asset underperformance. If the transaction
had not been entered into and the assets instead invested in
theFTSE100thenetdeficitwouldhavebeenapproximately
£35millionhigheratyearend.
Defined benefit liabilities and funding
The Group’s principal pension scheme is the Interserve Pension
Scheme, comprising approximately 92 per cent of the total
definedbenefitobligationsoftheGroup.
The most recent completed triennial actuarial valuation of
the Scheme was as at 31 December 2011 which set the annual
recovery payments at £12 million per annum, indexed each
year, until 2019. A new triennial valuation process, based on
the position as at 31 December 2014, has now commenced.
Investment risks
Scheme assets are invested in a mixed portfolio that consists
of a balance of performance-seeking assets (such as equities)
and lower-risk assets (such as gilts and corporate bonds). As
at 31 December 2014, 48 per cent of the Scheme assets were
invested in performance-seeking assets (2013: 49 per cent).
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
FINANCIAL REVIEW
45
The agreed investment objectives of the Scheme are:
•
•
tosecure,withahighdegreeofcertainty,liabilitiesinrespectofalldefinedbenefitmembers;and
to adopt a long-term strategy which aims to capture outperformance from equities and move gradually into
bondstoreflecttheincreasingmaturityofthedefinedbenefitmembershipwithaviewtoreducingthevolatility
of investment returns.
ThemajorityofequitiesheldbytheSchemeareininternationalblue-chipentities.Theaimistoholdagloballydiversified
portfolioofequities,withanultimatetargetof50percentofequitiesbeingheldinUKand50percentinUS,Europeanand
Asia-Pacificequities.
IAS 19 assumptions and sensitivities
Assumptions adopted in assessment of the income statement charge and funding position under IAS 19 are reviewed by our
actuarial advisers, Lane Clark & Peacock LLP.
Theprincipalsensitivitiestotheassumptionsmadewithregardtothebalancesheetdeficitareasfollows:
Assumption adopted
2014
2013
Sensitivity
Indicative change in liabilities
Key financial assumptions
Discount rate
RPI / CPI
3.6%
4.5%
3.1% / 2.1% 3.4%/2.4%
+/-0.5%
+/-0.5%
-/+6%
+/-8%
-/+£55m
+/- £73m
Life expectancy (years)
Current pensioners1
Men
Women
Future pensioners2
Men
Women
87.5
89.5
89.3
91.0
87.4
89.4
89.2
90.9
}
1Lifeexpectancyofacurrentpensioneraged65.
2Lifeexpectancyatage65foranemployeecurrentlyaged45.
Movement in net pension deficit
+ 1 year
+3%
+£30m
0.0
-20
-40
-60
-80
-100
-120
5.9
9.2
0.8
3.8
27.8
87.1
71.4
Opening
deficit
Service cost &
administration
expenses
Change in
liabilities
Contributions
Return
on assets
Tax
movement
Closing
deficit
£ million OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS 46
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
FINANCIAL REVIEW
STRATEGIC REPORT
FINANCIAL REVIEW CONTINUED
TREASURY RISK MANAGEMENT
We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks.
TheTreasuryfunctionisnotaprofitcentreanditdoesnotenterintospeculativetransactions.Itaimstoreducefinancialrisk
by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board.
Liquidity risk
Weseektomaintainsufficientfacilitiestoensureaccesstofundingforourcurrentandanticipatedfuturerequirements,
determined from budgets and medium-term plans.
FollowingtheacquisitionofInitialFacilities,andtheresultingstepchangeinGroupdebt,wehaveputinplacea$350millionUS
privateplacement.Theseloaninstrumentshaveaweightedaveragematurityofmid-2024andarefullyhedgedintoafixedinterest
ratesterlingamount.Additionallywehaveaccesstocommittedrevolvingbankfacilitiestotalling£250million,whichwereextended
during the year until February 2019.
Ouraggregatefinancefacilitiesthereforestandatc£450millionwith£250millionofthisavailableuntilFebruary2019andthe
remainder available on average until mid-2024.
Market price risk
The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that
adequate interest cover is maintained, in line with Board-approved targets and banking covenants.
OurborrowingsundertheUSprivateplacementaredenominatedinUSdollarsandsubjecttofixedinterestrates.Theseare
fullyhedgedbackintoasterlingfixedratewithFXswapslastingforthedurationoftheloanperiod.
OurotherborrowingsareprincipallydenominatedinsterlingandmostlysubjecttofloatingratesofinterestlinkedtoLIBOR.
We have in place interest rate caps and swaps which limit interest rate risk. The weighted average duration to maturity of
these instruments is approximately seven months.
Foreign currency risk
Transactional currency translation
The revenues and costs of our trading entities are typically denominated in their functional currency. Where a material trade is
transacted in a non-functional currency, the entity is required to take out instruments through the centralised Treasury function to
offset the currency exposure. The instruments used will normally be forward currency contracts. The impact of retranslating any
entity’s non-functional currency balances into its functional currency was not material.
Consolidation currency translation
We do not hedge the impact of translating overseas entities' trading results or net assets into the consolidation currency.
Inpreparingtheconsolidatedfinancialstatements,profitsandlossesfromoverseasactivitiesaretranslatedattheaverage
exchange rates applying during the year. The average rates used in this process are disclosed on page 42.
The balance sheets of our overseas entities are translated at the year-end exchange rates. The impact of changes in the year-end
exchangerates,comparedtotheratesusedinpreparingthe2013consolidatedfinancialstatements,hasledtoanincreasein
consolidated net assets of £12.8 million (2013: £13.0 million decrease).
INTERSERVE ANNUAL REPORT 2014 STRATEGIC REPORT
FINANCIAL REVIEW
47
GOING CONCERN
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set
outintheStrategicReportandGovernancesections.Ourfinancialposition,cashflows,liquiditypositionandborrowingfacilities
anddetailsoffinancialriskmanagementaredescribedintheFinancialReview.
The majority of our revenue is derived from long-term contracts, which provides a strong future workload and good forward
revenuevisibility.Wehaveaccesstocommitteddebtfacilitiestotallingc£450millionuntilarangeofdatesthatextendbeyondat
least February 2019. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully
despite the current uncertain economic outlook.
After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the
financialstatements.
TheStrategicReportwasapprovedbytheBoardofDirectorson26February2015andsignedonitsbehalfby:
A M Ringrose
Director
T P Haywood
Director
CASE STUDY
UNIVERSITY OF SUSSEX BENEFITS
FROM FM PARTNERSHIP
SUSSEX ESTATES AND FACILITIES (SEF), AN INNOVATIVE
10-YEAR PARTNERSHIP BETWEEN INTERSERVE AND THE
UNIVERSITY OF SUSSEX, STARTED PROVIDING ESTATES AND
FACILITIES MANAGEMENT SERVICES TO 4,000 STUDENTS AND
2,100 STAFF ACROSS THE CAMPUS IN JANUARY 2014.
Duringthefirstyearofthecontractthe235-strongteam
has provided customer service training to all staff and
installed a new 24/7 service centre – answering 2,000 calls
a month. The partnership has also committed to investing
£5milliontoimprovethecampus,recruitedundergraduates
and apprentices and is supporting the University to meet its
target of reducing carbon usage by 44 per cent.
SEF has also used technology to share maps of the campus
and surrounding areas through the use of Quick Response
(QR) codes.
The team was recently awarded ‘centre of excellence’ status
by the British Institute of Cleaning Science in recognition of
the quality of training it provides staff.
OVERVIEW GOVERNANCE STRATEGIC REPORT FINANCIAL STATEMENTS
48
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE DIRECTORS
GOVERNANCE
DIRECTORS
NORMAN BLACKWELL
(LORD BLACKWELL) 1 3
Chairman
Norman was appointed Chairman of
Interserve in January 2006 having
joined the Group as a non-executive
director the previous September. A
former partner of McKinsey & Company,
Norman was Head of the Prime
Minister’s Policy Unit from 1995 to 1997
and was appointed a life peer in 1997.
He was appointed Chairman of Lloyds
Banking Group in April 2014, having
served as a non-executive director
since June 2012. He was also Chairman
of Lloyds’ insurance business, Scottish
Widows, from September 2012 to
June 2014. Norman has held a number
of other senior positions in banking and
insurance including Director of Group
Development at NatWest and Senior
Independent Director at Standard
Life. Other past business roles include
non-executive directorships at Halma,
SEGRO and the Dixons Group. He has
also served on the boards of OFCOM,
the Centre for Policy Studies and the
Office of Fair Trading. Norman also
chairs the Nomination Committee.
ADRIAN RINGROSE 1
Chief Executive
Adrian has been Chief Executive of
Interserve since 2003 during which time
the Group has developed significantly,
from c15,000 to c80,000 people, with
operations in over 40 countries providing
services to governments and a range
of commercial and industrial clients.
Adrian’s background is in commercial
management and business development.
Prior to leading Interserve he spent
time in the outsourcing and utilities
sectors. Adrian is a member of the
CBI President’s Committee and was
for four years chairman of the CBI’s
Public Services Strategy Board until late
2013. He is also a past President of the
Business Services Association. He is a
member of the Chartered Institute of
Marketing, a Fellow of the Chartered
Management Institute and a Fellow
of the Institute of Directors. He is an
adviser to the University of Liverpool
from where he has a degree in Political
Theory and Institutions.
TIM HAYWOOD
Group Finance Director
Tim joined Interserve as Group
Finance Director in November 2010
and was previously Finance Director
of St Modwen Properties. He is also a
non-executive director of Tarsus Group.
Earlier roles include Group Finance
Director at Hagemeyer UK and senior
finance director and financial controller
positions in Williams Holdings. Tim is
a Fellow of the Institute of Chartered
Accountants in England and Wales.
Since 2011 he has also been Head of
Sustainability, launching Interserve’s
SustainAbilities Plan in March 2013.
He is a member of the sustainability
committee of the Institute of Chartered
Accountants in England and Wales and
of the Enterprise Leadership Team of
Business in the Community.
1 Member of the Nomination Committee
2 Member of the Audit Committee
3 Member of the Remuneration Committee
4 Senior Independent Director
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS
49
BRUCE MELIZAN
Executive Director
Bruce is Managing Director of
Interserve’s Support Services division.
He joined Interserve in 2003 and was
appointed to the Board in January 2008.
Bruce has been in the outsourcing
industry for nearly 20 years and has
held a wide variety of roles ranging
from direct delivery through to sales,
marketing and general management.
Previous organisations include Amey,
Mowlem, Schlumberger and TYE
Manufacturing both in the UK and
globally. Bruce holds an MBA from
Cranfield School of Management and
a BSc in Electrical Engineering from
Queen’s University, Canada. He is
a member of the Business Services
Association Council and the Chair of
the charity, Safer London.
DOUGIE SUTHERLAND
Executive Director
Dougie is Managing Director of
Interserve’s Developments division and
responsible for UK Construction. He was
appointed to the Board of Interserve in
January 2011. Dougie joined Interserve
in September 2006 from 3i, where he
was a partner in its infrastructure team.
Previously he was a divisional managing
director at Amey and Lend Lease, and
also worked for HM Treasury developing
the Private Finance Initiative. Dougie
begain his career with seven years in the
Royal Engineers. He has an MBA from
Cranfield School of Management and
a BSc (Hons) in Civil Engineering from
Edinburgh University.
STEVEN DANCE
Executive Director
Steven is Managing Director of RMD
Kwikform, the Group’s Equipment
Services division. He is the Board’s lead
director in Health and Safety. He was
appointed to the Board of Interserve
in January 2008. Steven began his
career with Schlumberger in the Middle
East in the oilfield sector, after which
he completed his MBA and moved
into manufacturing. He then served
12 years with Coats Viyella where he
held a variety of general management
positions and was based in Germany,
Portugal, South America and the UK. He
subsequently worked for four years with
ScottishPower, executing a number of
M&A transactions including the disposal
of utility subsidiaries in Australia and
the UK, and the flotation of Thus. Most
recently he spent three years with
ERICO heading divisions supplying the
international construction market with
couplers, fixing and fastening systems,
before joining Interserve in 2004. Steven
is a Chartered Director and a member of
the Board of Examiners at the Institute
of Directors. He holds an MA in Natural
Sciences from Oxford University and an
MBA from London Business School.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 50
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS
GOVERNANCE
DIRECTORS CONTINUED
LES CULLEN 1 2 3 4
Non-Executive Director
Les brings a wealth of experience from
a number of senior financial roles in
the UK and internationally. He joined
Interserve as a non-executive director
in October 2005. He is a non-executive
director of F&C Global Smaller
Companies. He has held the post of Group
Finance Director at De La Rue, Inchcape
and Prudential. Les became Senior
Independent Director in May 2013.
ANNE FAHY 1 2 3
Non-Executive Director
Anne was appointed as non-executive
director of Interserve on 1 January 2013.
She is also Chief Financial Officer of
BP’s Aviation Fuels business. During
her 26 years at BP Anne has gained
extensive experience of global business,
developing markets, risk management,
internal control, compliance and
strategy development in BP’s aviation,
petrochemicals, trading and retail
sectors. Anne is a Fellow of the Institute
of Chartered Accountants in Ireland
having worked at KPMG in Ireland and
Australia prior to joining BP in 1988.
Anne has chaired the Audit Committee
since May 2013.
RUSSELL KING 1 2 3
Non-Executive Director
Russell joined Interserve as a non-
executive director on 1 September 2014.
He is Non-Executive Chairman of
Hummingbird Resources, Senior
Independent Director and Remuneration
Committee Chairman of both Aggreko
and Spectris, and a non-executive
director of Sepura. Until June 2014
Russell was Chairman of GeoProMining.
Between 2007 and late 2009 he was
a non-executive director of Anglo
Platinum and Chairman of Bergteamet
between 2011 and 2012. Russell held
various general management roles at
ICI, followed by eight years at Anglo
American as Executive Vice President
of Group Human Resources and Business
Development, and from 2009 as Chief
Strategy Officer.
1 Member of the Nomination Committee
2 Member of the Audit Committee
3 Member of the Remuneration Committee
4 Senior Independent Director
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS
51
NICK SALMON 1 2 3
Non-Executive Director
Nick was appointed as non-executive
director of Interserve on 1 August 2014.
He brings a wealth of experience from a
number of senior roles. In October 2014
Nick was appointed as a non-executive
director of Elementis and became Senior
Independent Director in December 2014.
He has also been appointed as a non-
executive director of Acal with effect
from 1 March 2015. Nick served as the
Senior Independent Director of United
Utilities Group from 2007 to 2014. He
was Chief Executive of Cookson Group
from 2004 until the end of 2012 and
prior to that an Executive Vice President
of Alstom SA and Chief Executive of
Babcock International Group.
KEITH LUDEMAN 1 2 3
Non-Executive Director
Keith was appointed as non-executive
director of Interserve in January 2011.
He is non-executive Chairman of
Eversholt Rail Group and Bristol
Water, a director of European Rail
Finance (GB) and a director/trustee
of the London Transport Museum.
Keith is also a former non-executive
director of Network Rail, Network
Rail Infrastructure and Network Rail
Consulting. Keith has many years’
experience in the rail and bus service
industries, including some 15 years with
Go-Ahead Group, of which he was Chief
Executive for five years and where he
was responsible for the negotiation
and operation of complex public-
service contracts and the management
and motivation of large workforces.
His early career included nine years
working with Greater Manchester
Transport and three years working
on transport policy in Hong Kong.
Keith has chaired the Remuneration
Committee since July 2014.
ADVISERS
Group Company Secretary
Trevor Bradbury
Registered Office
Interserve House
Ruscombe Park
Twyford
Reading
Berkshire RG10 9JU
T +44 (0)118 932 0123
F +44 (0)118 932 0206
info@interserve.com
www.interserve.com
Registered Number
88456
Registrar and Share
Transfer Office
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
T +44 (0)20 8639 3399
F +44 (0)1484 600911
shareholderenquiries@capita.co.uk
www.capitashareportal.com
Auditors
Grant Thornton UK LLP
Stockbrokers
J.P. Morgan Cazenove Limited
Numis Securities Limited
Lawyers
Ashurst LLP
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 52
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE DIRECTORS’ REPORT
DIRECTORS’ REPORT
TREVOR BRADBURY
Company Secretary
The directors present their report and the audited consolidated financial statements for the year ended 31 December 2014.
SCOPE OF REPORTING
For the purposes of compliance with paragraphs 4.1.5R(2) and 4.1.8R of the Disclosure and Transparency Rules of the Financial
Conduct Authority (the “FCA”), the required content of the “management report” can be found in the Strategic Report and this
Directors’ Report (including the sections of the Annual Report and Accounts incorporated by reference).
The directors’ responsibility for the preparation of the Annual Report and Financial Statements, which forms part of this report,
and the statement by the auditors about their reporting responsibilities, are set out on pages 102, and 103 to 107, respectively,
of this Annual Report.
A review of the development of the Group and its future prospects is included in the Chairman’s Statement, which is incorporated
into this Directors’ Report by reference. The Group’s business model and strategy are summarised in the Strategic Report.
The FCA’s Disclosure and Transparency Rules also require certain information to be included in a corporate governance statement
in the Directors’ Report. Information that fulfils the requirements of the corporate governance statement can be found in the
Corporate Governance report and the Audit Committee Report, which are incorporated into this Directors’ Report by reference.
For the purpose of paragraph 9.8.4CR of the FCA’s Listing Rules, the information required to be disclosed by paragraph 9.8.4R can
be found in the following locations:
Section of
LR 9.8.4R
Topic
(1)
(2)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Amount of interest capitalized
Publication of unaudited financial information
Details of long-term incentive schemes
Waiver of emoluments by a director
Waiver of future emoluments by a director
Non-pre-emptive issues of equity for cash
Item (7) in relation to major subsidiary undertakings
Parent participation in a placing by a listed subsidiary
Contracts of significance
Provision of services by a controlling shareholder
Shareholder waivers of dividends
Shareholder waivers of future dividends
Agreements with controlling shareholders
Location
Not applicable
Not applicable
Directors’ Remuneration Report
Directors’ Remuneration Report
Directors’ Remuneration Report
Not applicable
Not applicable
Not applicable
Directors’ Report
Not applicable
Directors’ Report
Directors’ Report
Not applicable
All the information cross-referenced above is hereby incorporated by reference into this Directors’ Report.
Disclosure of financial risk management objectives and policies is made on page 46 of the Strategic Report.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REPORT
53
THE COMPANY
Legal form
Interserve Plc (the “Company”) is a company incorporated in
the United Kingdom with company number 88456. The principal
subsidiaries and associated undertakings are listed on pages 161
to 165.
Branches
The Company, through various subsidiaries, has established
branches in a number of different countries in which the
Group operates.
Amendment of the Articles of Association
The Company’s constitution, known as the Articles of
Association, is essentially a contract between the Company and
its shareholders, governing the management of the Company.
A copy of the Articles can be obtained on request from the
Company Secretary. The Articles may only be changed by
special resolution of shareholders which requires, on a vote on
a show of hands, at least three-quarters of the shareholders or
proxies present at the meeting to be in favour of the resolution
or, on a poll, at least three-quarters in nominal value of the
votes cast by shareholders or their proxies to be in favour of
the resolution.
FINANCIAL RESULTS
The Group’s Consolidated Income Statement set out on
page 108 shows Group profit before taxation of £61.9 million
(2013: £68.1 million). The detailed results of the Group are given
in the financial statements on pages 108 to 152 and further
comments on divisional results are given in the Operational
Review on pages 20 to 29.
There have been no post balance sheet events that require
disclosure or adjustment in the financial statements.
DIVIDENDS
An interim dividend of 7.5p per 10p ordinary share (2013: 6.8p)
was paid on 23 October 2014. The directors recommend a
final dividend of 15.5p per 10p ordinary share, making a total
distribution for the year ended 31 December 2014 of 23.0p
per 10p ordinary share (2013: 21.5p). Subject to approval of
shareholders at the Annual General Meeting (“AGM”) on
12 May 2015, the final dividend will be paid on 20 May 2015
to shareholders appearing on the register at the close of
business on 7 April 2015. The shares will be quoted
ex-dividend on 2 April 2015.
The Company’s dividend reinvestment plan continues to be
available to eligible shareholders. Further details of the plan
are set out in the Shareholder Information section on page 169.
Capita Trustees Limited, the trustee of the Interserve Employee
Benefit Trust (the “Trust”), waived its right to receive a
dividend over 612,479 shares held by the Trust in the name
of Capita IRG Trustees (Nominees) Limited in respect of the
dividend paid in May 2014 (May 2013: 368,601 shares) and
513,629 shares in respect of the dividend paid in October 2014
(October 2013: 647,411 shares).
DIRECTORS AND DIRECTORS’ INTERESTS
The following have served as directors during the year:
Lord Blackwell* (Group Chairman)
Adrian Ringrose (Chief Executive)
Les Cullen* (Senior Independent Director)
Steven Dance
Anne Fahy*
Tim Haywood
Russell King*1
Keith Ludeman*
Bruce Melizan
Nick Salmon*2
Dougie Sutherland
David Thorpe*3
*Non-executive director
1Appointed to the Board on 1 September 2014
2Appointed to the Board on 1 August 2014
3Resigned from the Board on 31 August 2014
The biographical details of the directors of the Company are
given on pages 48 to 51.
The powers of the directors, and their service contracts
and terms of appointment, are described in the Corporate
Governance report.
The directors’ beneficial interests in, and options to acquire,
ordinary shares in the Company, are set out in the Directors’
Remuneration Report on pages 95 to 99 of this Annual Report
and Financial Statements.
The directors do not have any interest in any other Group
company, other than as directors. No director has, or has had,
a material interest, directly or indirectly, at any time during
the year under review in any contract significant to the
Company’s business.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 54
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DIRECTORS’ REPORT
DIRECTORS’ REPORT CONTINUED
APPOINTMENT AND REPLACEMENT OF DIRECTORS
The Board must comprise of not less than three and no
more than twelve directors. Directors may be appointed by
shareholders (by ordinary resolution) or by the Board.
Under the Company’s Articles of Association, any director
appointed by the Board since the last AGM may only hold office
until the date of the next AGM, at which time that director
must stand for election by shareholders. Russell King and and
Nick Salmon will therefore be standing for election at the AGM
on 12 May 2015.
The Articles also require one-third of the directors to retire
by rotation at each AGM. Any director who has not retired
by rotation must retire at the third AGM after his or her last
appointment or re-appointment. However, in accordance with
the Corporate Governance Code, which requires all directors
of FTSE 350 companies to be subject to annual re-election by
shareholders, the Board has again decided that all the directors
(save for Les Cullen who will not be standing for re-election) will
be subject to election or re-election at this year’s AGM.
No person other than a director retiring at a general meeting
shall, unless recommended by the directors for election, be
eligible for election to the office of director unless, not less
than seven nor more than 21 days beforehand, the Company has
been given notice, executed by a shareholder eligible to vote at
the meeting, of his intention to propose such person for election
together with a notice executed by that person of his willingness
to be elected.
The Company may, by ordinary resolution, of which special
notice has been given in accordance with section 312 of the
Companies Act 2006 (the “2006 Act”), remove any director
before the expiration of his period of office and may, by
ordinary resolution, appoint another person in his stead.
DIRECTORS’ INDEMNITIES AND INSURANCE
As permitted by the Company’s Articles of Association, qualifying
third-party indemnities have been in place throughout the period
under review and remain in force at the date of this report in
respect of liabilities suffered or incurred by each director. The
Company also undertakes to loan such funds to a director as
it, in its reasonable discretion, considers appropriate for the
director to meet expenditure incurred by him in defending any
criminal or civil proceeding or in connection with any application
under section 661(3) or 1157 of the 2006 Act on terms which
require repayment by the director of amounts so advanced upon
conviction of final judgment being given against him. The deeds
of indemnity are available for inspection by shareholders at the
Company’s registered office. The Company also maintains an
appropriate level of directors’ and officers’ insurance in respect
of legal actions against the directors. Neither the qualifying third-
party indemnities nor the insurance provide cover where the
director has acted fraudulently or dishonestly.
On 26 September 2007 the rules of the Interserve Pension
Scheme were amended in order to provide the directors of
Interserve Trustees Limited, the corporate trustee of the
Interserve Pension Scheme, with a qualifying pension scheme
indemnity to the extent that insurance has not been taken out
by the trustee to cover its liabilities, or such liabilities cannot
be paid from the proceeds of any insurance taken out by the
trustee. That qualifying pension scheme indemnity remains in
force at the date of this report and is available for inspection by
shareholders at the Company’s registered office.
In January 2011 an indemnity was given to the trustees of the
Douglas Group Compass Pension Plan for any claim, costs, loss,
damages and expenses which may be made against them or
which they may pay or incur (save as a consequence of breach
of trust committed knowingly and intentionally or as a result of
negligence) in connection with the administration of the Plan
and the winding-up of the Plan. Two of the trustees were also
directors of one or more Group subsidiary companies. This Plan
was formally wound up on 7 January 2011 but the indemnity
remains in force.
In January 2012 an indemnity was given to the trustees of
the Interserve Retirement Plan against all and any claims,
costs, damages and expenses which may be made against
them or which they may pay or incur in connection with their
administration of the Plan and the winding-up of the Plan (other
than liabilities arising as a consequence of breach of trust
committed knowingly and intentionally). One of the trustees
was also a director of various Group subsidiary companies. This
Plan was formally wound up 31 January 2012 but the indemnity
remains in force.
EMPLOYEES
The average number of persons, including directors, employed
by the Group and their remuneration, is set out in note 6 to
the financial statements. A breakdown of employee diversity,
as required by the 2006 Act, can be viewed on page 40 of the
Sustainability Review section of the Strategic Report. The
Group’s statement with regard to its employees, including its
disclosure on employee consultation, equal opportunities and
diversity, is set out within the Sustainability Review on page 40.
GREENHOUSE GAS EMISSIONS
In this section we report on greenhouse gas (“GHG”) emissions
in accordance with the Companies Act 2006 (Strategic Report
and Directors’ Report) Regulations 2013.
A range of approaches can be taken to determine the
boundaries of an organisation for the purposes of GHG reporting
including ‘financial control’, ‘operational control or ‘equity
share’. We report using the financial control approach to define
our organisational boundary.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REPORT
55
On this basis, we are including emissions associated with our
owned and controlled businesses but not the emissions from our
associate companies. GHG emissions from our leased vehicles
when used on company business are not reported. Were we
to have adopted the operational control approach, the GHG
emissions associated with the use of those same vehicles for
both private and company business would have been reported.
in law reform or governmental policy review or involvement
in seminars and functions that may be attended by politicians.
To avoid any possibility of inadvertently contravening the 2006
Act, the directors are again seeking shareholder authority at
the AGM (Resolution 17) to ensure that the Company acts within
the provisions of current UK law when carrying out its normal
business activities.
Summary table
Global GHG emissions data for 1 January 2014 to
31 December 2014, with comparable data for 2013, is as follows:
Tonnes CO2e
2014
2013
Emissions from:
– Combustion of fuel and operation
39,231
36,562
of facilities
– Electricity, heat, steam and cooling
14,294
10,088
purchased for own use
Intensity measurement:
– Emissions reported above, normalised
to tonnes CO2e per £m revenue
18.37
21.28
We have reported on all of the emissions sources required under
the Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013. These sources fall within our consolidated
financial statements.
We have used the “Environmental Reporting Guidelines:
including mandatory greenhouse gas emissions reporting
guidance” (June 2013) issued by DEFRA and the “2014 UK
Government GHG Conversion Factors for Company Reporting”
to calculate our emissions based on data gathered from each
of our business units.
Further disclosures relating to the Group’s GHG emissions
and the actions being taken to reduce them are set out within
the Sustainability Review section of the Strategic Report on
pages 38 and 39.
POLITICAL DONATIONS
No political donations were made during the period (2013:
£nil). It is not the Company’s policy to make cash donations to
political parties. This policy is strictly adhered to and there is
no intention to change it. However, the definitions used in the
2006 Act for “political donation” and “political expenditure”
remain very broad, which may have the effect of covering
a number of normal business activities that would not be
considered political donations or political expenditure in the
usual sense. These could include support for bodies engaged
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Group’s exposure to and management of capital, liquidity,
credit, interest rate and foreign currency risk are set out
within the Financial Review section of the Strategic Report
on page 46.
SHARE CAPITAL AND STRUCTURE
General
The Company’s issued share capital as at 31 December 2014
comprised a single class of ordinary shares. All shares rank
equally and are fully paid. No person holds shares carrying
special rights with regard to control of the Company.
During the year 12,897,771 shares (representing approximately
9.99 per cent of the existing issued share capital) were issued
at 580.0p per share via an equity placing to partially fund
the acquisition of the facilities services business of Rentokil
Initial plc (“Initial Facilities”), raising total gross proceeds of
approximately £74.8 million. The acquisition was approved by
shareholders at a General Meeting held on 17 March 2014.
A further 1,861,376 shares were issued at par fully paid to the
nominee account of Capita Trustees Limited (as trustee of the
Interserve Employee Benefit Trust) in order to satisfy the awards
granted to participants of the Performance Share Plan (the
“PSP”) in April 2011, which vested in April 2014.
A further 104,702 shares were issued fully paid to participants
of the 2002 Executive Share Option Scheme (the “2002 ESOS”)
at prices of 253.25p and 359.33p per share.
As a result of the foregoing allotments, the Company’s
issued share capital at the end of the year stood at 143,917,617
(2013: 129,053,768) ordinary shares of 10p each (£14,391,761.70)
(2013: £12,905,376.80). No further shares have been issued
since the year end. The issued share capital at the date of
this report therefore stands at 143,917,617 ordinary shares of
10p each (£14,391,761.70).
Details of outstanding awards and options over shares in the
Company as at 31 December 2014 are set out in notes 27 and 29
to the financial statements on pages 143 and 144 respectively.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 56
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
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DIRECTORS’ REPORT CONTINUED
Issue of shares
Section 551 of the 2006 Act provides that the directors may not
allot shares unless empowered to do so by the shareholders. A
resolution giving such authority was passed at the AGM held on
13 May 2014. The AGM authorities were used in 2014 in relation
to the issue of shares pursuant to the acquisition of Initial
Facilities and the satisfaction of awards granted to participants
of the PSP and the 2002 ESOS, as described above.
In accordance with the Share Capital Management Guidelines
published in July 2014 by The Investment Association, following
its merger with ABI Investment Affairs, the directors propose
Resolution 19 set out in the Notice of AGM to renew the
authority granted to them at the 2014 AGM to allot shares up to
an aggregate nominal value of one-third of the Company’s issued
share capital plus a further one-third (i.e. two-thirds in all)
where the allotment is in connection with a rights issue.
Under section 561 of the 2006 Act, if the directors wish to
allot unissued shares for cash (other than pursuant to an
employee share scheme) they must first offer them to existing
shareholders in proportion to their holdings (a pre-emptive
offer). Resolution 20 set out in the Notice of AGM will be
proposed as a special resolution in order to renew the directors’
authority to allot shares for cash other than by way of rights
to existing shareholders. By restricting such authority to an
aggregate nominal value of no more than five per cent of the
Company’s total issued equity capital, the Company will be
in compliance with the Pre-Emption Group’s Statement of
Principles (the “Principles”).
Shareholders should note that the Listing Rules of the FCA
do not require shareholders’ specific approval for each issue
of shares for cash on a non-pre-emptive basis to the extent
that under section 570 of the 2006 Act the provisions of
section 561 are disapplied generally. If given, this authority
will expire on the date of the next AGM of the Company.
The Principles also request that in any rolling three-year
period a company does not make non-pre-emptive issues for
cash or of equity securities exceeding 7.5 per cent of the
company’s issued share capital without prior consultation
with shareholders.
The percentages of shares issued by the Company on a non-pre-
emptive basis in 2014 and in the period 2012 to 2014 pursuant
to employee share schemes (calculated by reference to the
Company’s closing issued share capital at 31 December 2014),
were 1.4 per cent and 3.6 per cent respectively.
Save for issues of shares in respect of various employee share
schemes, the directors have no current plans to make use of the
renewed authorities sought by Resolutions 19 and 20 although
they consider their renewal appropriate in order to retain
maximum flexibility to take advantage of business opportunities
as they arise.
Purchase of own shares
The Company has authority under a shareholders’ resolution
passed at the 2014 AGM to repurchase up to 14,200,458 of the
Company’s ordinary shares in the market. The shares may be
purchased at a price ranging between the nominal value for
each share and an amount equal to the higher of (i) 105 per cent
of the average of the middle-market price of an ordinary share
for the five business days immediately preceding the date on
which the Company agrees to buy the shares concerned and (ii)
the higher of the price of the last independent trade and the
highest independent current bid on the London Stock Exchange
at the time the purchase is carried out. This authority expires
at the conclusion of the forthcoming AGM on 12 May 2015.
No shares have been repurchased by the Company under the
authority granted at the 2014 AGM.
Resolution 21 set out in the Notice of AGM will be proposed as
a special resolution in order to renew this authority. Although
the directors have no immediate plans to do so, they believe
it is prudent to seek general authority from shareholders to
be able to act if circumstances were to arise in which they
considered such purchases to be desirable. This power will
only be exercised if and when, in the light of market conditions
prevailing at that time, the directors believe that such purchases
would increase earnings per share and would be for the benefit
of shareholders generally. Any shares purchased under this
authority will be cancelled (unless the directors determine
that they are to be held as treasury shares) and the number
of shares in issue will be reduced accordingly.
Whilst the Company does not presently hold shares in treasury,
the Treasury Shares Regulations allow shares purchased by the
Company out of distributable profits to be held as treasury
shares, which may then be cancelled, sold for cash or used
to meet the Company’s obligations under its employee share
schemes. The authority sought by this resolution is intended to
apply equally to shares to be held by the Company as treasury
shares in accordance with the Treasury Shares Regulations.
SHAREHOLDERS’ RIGHTS
General
The rights attaching to the ordinary shares are set out in
the 2006 Act and the Company’s Articles of Association.
A shareholder whose name appears on the register of members
may choose whether those shares are evidenced by share
certificates (certificated form) or held in electronic form
(uncertificated) in CREST.
Voting
Subject to the restrictions set out below, a shareholder
is entitled to attend (or appoint another person as his
representative (a “proxy”) to attend) and to exercise all
or any of his rights to speak, ask questions and vote at any
general meeting of the Company. A shareholder may also
appoint more than one proxy, provided that each proxy is
appointed to exercise the rights attached to a different
share or shares held by that shareholder. A proxy need not
be a shareholder of the Company.
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57
The right to appoint a proxy does not apply to a person who
has been nominated under section 146 of the 2006 Act to
enjoy information rights (a “Nominated Person”). He/she may,
however, have a right under an agreement with the registered
shareholder holding the shares on his/her behalf to be appointed
(or to have someone else appointed) as a proxy. Alternatively, if
a Nominated Person does not have such a right, or does not wish
to exercise it, he/she may have a right under such an agreement
to give instructions to the person holding the shares as to the
exercise of voting rights.
In accordance with section 327 of the 2006 Act, in order to be
valid, any form of proxy sent by the Company to shareholders
or any proxy registered electronically in relation to any general
meeting must be delivered to the Company’s registrars not later
than 48 hours before the time fixed for holding the meeting (or
any adjourned meeting). In calculating the 48-hour period no
account shall be taken of any part of a day that is not a working
day. Full details of the deadlines for exercising voting rights in
respect of the 2015 AGM are set out in the Notice of AGM.
Subject to any rights or restrictions for the time being attached
to any class or classes of shares and to any other provisions
of the Articles of Association or statutes, on a vote on a
resolution at a general meeting on a show of hands every
shareholder present in person, every proxy present who has
been duly appointed by one or more shareholders entitled to
vote on the resolution and every authorised representative of
a corporation which is a shareholder of the Company entitled
to vote on the resolution, shall have one vote. If a proxy has
been duly appointed by more than one shareholder and has
been instructed by one or more of those shareholders to vote
for the resolution and by one or more of those shareholders to
vote against it, that proxy shall have one vote for and one vote
against the resolution. On a poll, every shareholder present in
person or by proxy shall have one vote for every share held.
A resolution put to the vote at a general meeting shall be
decided on a show of hands unless the notice of the meeting
specifies that a poll will be called on such resolution or a poll
is (before the resolution is put to the vote on a show of hands
or on the declaration of the results of the show of hands)
directed by the Chairman or demanded in accordance with
the Articles of Association.
If a person fails to give the Company any information required
by a notice served on him by the Company under section 793 of
the 2006 Act (which confers upon public companies the power
to require information to be supplied in respect of a person’s
interests in the Company’s shares) then the Company may, no
sooner than 21 days later, and after warning that person, serve
a disenfranchisement notice upon the shareholder registered
as the holder of the shares in respect of which the section 793
notice was given. Unless the information required by the
section 793 notice is given within 14 days, such holder will not
be entitled to receive notice of any general meeting or attend
any such meeting of the Company and shall not be entitled to
exercise, either personally or by proxy, the votes attaching to
such shares in respect of which the disenfranchisement notice
has been given unless and until the information required by
the section 793 notice has been provided.
The Company operates a number of employee share schemes.
Under some of these arrangements, shares are held by trustees
on behalf of employees. The employees are not entitled to
exercise directly any voting or other control rights. The trustees
abstain from voting on these shares.
General meetings
No business may be transacted at a general meeting unless a
quorum is present consisting of not less than two shareholders
present in person or by proxy or by two duly authorised
representatives of a corporation. Two proxies of the same
shareholder or two duly authorised representatives of the same
corporation will not constitute a quorum.
An AGM must be called on at least 21 days’ clear notice. All
other general meetings are also required to be held on at least
21 days’ clear notice unless the Company offers shareholders
an electronic voting facility and a special resolution reducing
the period of notice to not less than 14 days has been passed.
The directors are proposing Resolution 22 set out in the Notice
of AGM to renew the authority obtained at last year’s AGM to
reduce the notice period for general meetings (other than AGMs)
to at least 14 days. It is intended that this shorter notice period
will only be used for non-routine business and where merited in
the interests of shareholders as a whole.
The business of an AGM is to receive and consider the accounts
and balance sheets and the reports of the directors and
auditors, to elect directors in place of those retiring, to elect
auditors and fix their remuneration and to declare a dividend.
Providing that notice is given to the Company no later than six
weeks before an AGM or no later than the date on which the
notice of an AGM is given, shareholders representing at least
five per cent of the total voting rights of all the shareholders
who have a right to vote at the AGM or at least 100 shareholders
who have that right and who hold shares in the Company on
which there has been paid up an average sum per shareholder
of at least £100, may require the Company to include an item
in the business to be dealt with at the AGM.
Dividends
Subject to the provisions of the 2006 Act, the Company may,
by ordinary resolution, declare a dividend to be paid to the
shareholders but the amount of the dividend may not exceed
the amount recommended by the directors. The directors may
also pay interim dividends on any class of shares on any dates
and in any amounts and in respect of any periods as appear
to the directors to be justified by the distributable profits of
the Company.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 58
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Liquidation
If the Company is wound up the liquidator may, with the
sanction of a special resolution of the Company, and any other
sanction required by law, divide amongst the shareholders
the whole or any part of the assets of the Company. He may,
for such purposes, set such value as he deems fair upon any
property to be divided and may determine how such division
shall be carried out as between the shareholders or different
classes of shareholders. The liquidator may also transfer the
whole or any part of such assets to trustees to be held in trust
for the benefit of the shareholders. No shareholder can be
compelled to accept any shares or other securities which
would give him any liability.
Modification of rights
If at any time the capital of the Company is divided into
different classes of shares, the rights attached to any class or
any of such rights may be modified, abrogated, or varied either:
(a) with the consent of the holders of 75 per cent of the
issued shares of that class; or
(b) with the sanction of a special resolution passed at a
separate general meeting of the holders of the shares
of the class.
The rights attached to any class of shares shall not (unless
otherwise provided by the terms of issue of the shares of that
class or by the terms upon which such shares are for the time
being held) be deemed to be modified or varied by the creation
or issue of further shares ranking pari passu therewith.
The Company may, by ordinary resolution, convert any paid-up
shares into stock and reconvert any stock into paid-up shares of
any denomination.
Transfer of shares
There are no specific restrictions on the transfer of securities
in the Company, or on the size of a shareholder’s holding, which
are both governed by the Articles of Association and prevailing
legislation. In accordance with the Listing, Prospectus,
and Disclosure and Transparency Rules of the FCA, certain
employees are required to seek the approval of the Company
to deal in its shares.
The Company is not aware of any agreements between its
shareholders that may result in restrictions on the transfer
of securities or on voting rights.
Subject to the 2006 Act, the directors may refuse to register
any transfer of any share which is not fully paid (whether
certificated or uncertificated), provided that the refusal does
not prevent dealing in shares in the Company from taking place
on an open and proper basis.
The directors may also decline to register the transfer of any
certificated share unless the instrument of transfer is duly
stamped (if stampable) and accompanied by the certificate
of the shares to which it relates and such other evidence as
the directors may reasonably require to show the right of the
transferor to make the transfer.
Transfers of uncertificated shares must be conducted through
CREST and the directors can refuse to register transfers in
accordance with the regulations governing the operation of CREST.
All share transfers must be registered as soon as practicable.
SUBSTANTIAL SHAREHOLDINGS
As at 31 December 2014 the Company had been notified,
pursuant to paragraph 5 of the FCA’s Disclosure and
Transparency Rules, of the following notifiable voting rights
in its ordinary share capital:
Name of holder
Standard Life
Investments Ltd
Old Mutual Plc
Mondrian Investment
Partners Ltd
Number of
ordinary shares
Percentage of
total voting rights
Nature
of holding
14,422,796
11,489,129
7,212,846
10.0
8.0
5.0
Direct and
indirect
Indirect
Indirect
Between the year end and the date of this report (being a date
not more than one month prior to the date of the AGM Notice),
the Company has been notified that the interests in the voting
rights have changed as follows:
• Standard Life Investments Ltd – increase to 17,487,526
shares (12.2 per cent); and
• Henderson Global Investors Ltd – increase to 7,503,276
shares (5.2 per cent – previously below 5.0 per cent)
(indirect holding).
SIGNIFICANT AGREEMENTS –
CHANGE OF CONTROL PROVISIONS
The following significant agreements contain provisions entitling
the counterparties to exercise termination rights in the event of
a change of control in the Company:
• Under the terms of the banking facility agreements detailed
on page 46 of the Strategic Report, if any person, or group
of persons acting in concert, gains control of the Company,
any lender (i) is no longer obliged to fund any loan, save for
a rollover loan; and (ii) may, by not less than 15 days’ notice,
cancel its commitment under the facility and declare its
participation in all outstanding loans, together with accrued
interest and all other amounts payable under the facility,
immediately due and repayable.
• Under the terms of the Note Purchase Agreement in relation
to the US private placement detailed on page 46 of the
Strategic Report, upon a change of control the Company
is required to make an offer to all noteholders to prepay
the entire unpaid principal amount of the notes, together
with interest.
• The Group’s share schemes also contain provisions relating
to the vesting and exercising of awards/options in the event
of a change of control of the Group. These are set out on
page 84 the Directors’ Remuneration Report.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REPORT
59
AUDITORS
Resolutions to re-appoint Grant Thornton UK LLP as the Company’s auditors and to authorise the directors to determine their
remuneration will be proposed at the forthcoming AGM.
Statement of disclosure of information to auditors
The directors in office at the date of approval of this report confirm that:
(a) so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and
(b) they have each made such enquiries of their fellow directors and of the Company’s auditors and have each taken such
other steps as were required by their duty as a director of the Company to exercise due care, skill and diligence in order to make
themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the 2006 Act.
ANNUAL GENERAL MEETING
The resolutions to be proposed at the AGM to be held on 12 May 2015, together with the explanatory notes, appear in the separate
Notice of Annual General Meeting accompanying this Annual Report. The Notice is also available on our website at www.interserve.com.
APPROVAL
This report was approved by the Board of Directors on 26 February 2015 and signed on its behalf by:
Trevor Bradbury
Company Secretary
26 February 2015
Interserve House
Ruscombe Park
Twyford
Reading
Berkshire
RG10 9JU
CAUTIONARY STATEMENT
The Directors’ Report has been prepared solely for existing members of the Company in compliance with UK company law and
the Listing, Prospectus, and Disclosure and Transparency Rules of the FCA. The Company, the directors and employees accept no
responsibility to any other person for anything contained in the Directors’ Report. The directors’ liability for the Directors’ Report
is limited, as provided in the 2006 Act. The Company’s auditors report to the Board whether, in their opinion, the information given
in the Directors’ Report is consistent with the financial statements, but the Directors’ Report is not audited. Statements made in
this Directors’ Report reflect the knowledge and information available at the time of its preparation. The Directors’ Report contains
forward-looking statements in respect of the Group’s operations, performance, prospects and financial condition. By their nature,
these statements involve uncertainty. In particular, outcomes often differ from plans or expectations expressed through forward-
looking statements, and such differences may be significant. Assurance cannot be given that any particular expectation will be met.
No responsibility is accepted to update or revise any forward-looking statement, resulting from new information, future events or
otherwise. Liability arising from anything in this Annual Report and Financial Statements shall be governed by English law. Nothing
in this Annual Report and Financial Statements should be construed as a profit forecast.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 60
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE CORPORATE GOVERNANCE
GOVERNANCE
CORPORATE GOVERNANCE
LORD BLACKWELL
Chairman
Dear Shareholder
Our role as a Board is to provide entrepreneurial leadership within an appropriate governance framework, set the standards
of behaviour, values and ethics by which the business is expected to operate and to call to account those who do not abide by
those principles.
As in previous years, the Board has had strong engagement in reviewing and developing our business strategy within this framework.
Our continued focus is on building strong core businesses and growing in adjacent markets and geographies that draw upon our
distinctive commercial skills. Our success rests upon our ability to deliver outstanding service and innovative solutions to our existing
and potential customers. This in turn depends on motivated and experienced employees supported by systems and processes that
are strongly aligned with our values.
For shareholders our aim is to deliver above market growth with a strong balance sheet and resilient profitability from our portfolio
of established and growing businesses, supporting a continued progressive dividend policy. We therefore set ourselves stretching
financial objectives while maintaining our prudent risk appetite.
As we continue to expand, our front-line service offering our continued “licence to operate” relies increasingly on maintaining
the trust and confidence of our wider stakeholder base. SustainAbilities, our vision for creating a sustainable business, is helping
us establish stronger ties with the communities in which we work. The components of that plan and our progress in meeting its
ambitious goals and targets are an important component of this report.
One of the goals within our SustainAbilities Plan is further developing the diversity of our senior management to reflect the diversity
of the business, with specific measures and targets to measure progress. The diversity agenda is an important element of our people
strategy and the practices which we have implemented over recent years. These have included training in diversity and inclusion
awareness for the managers at divisional board level and above, monitoring female participation in senior leadership programmes,
and developing mentoring and coaching for women alongside our ‘Women in Interserve’ support network.
To perform the Board’s role effectively we believe we need a strong and diverse Board, with an open culture of debate and challenge,
with all directors appointed on merit for the experience and insights they can bring to the Board and their commitment to our values.
We again refreshed the Board composition during the course of year, with David Thorpe retiring and Nick Salmon and Russell King
joining as non-executive directors. Whilst we did not achieve parity of numbers between the executive and non-executive directors
until the latter part of the year, the strength and independence of our non-executives, our open style of debate and my observations
of the manner in which the Board functions satisfied me that there was an effective governance check within the Board.
In making the two new appointments to the Board we again engaged the Zygos Partnership, an international search firm with a
strong diversity record in board-level appointments, with a remit to identify a long list of candidates that would support our diversity
objectives. The final appointments reflected the need to balance a range of criteria, including both relevance and diversity of past
experience. We will continue to monitor our success in developing the diversity of the Board as part of the annual evaluation of
Board effectiveness.
As was the case last year, all directors wishing to remain in office will seek re-election at the AGM.
Lord Blackwell
Chairman
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
CORPORATE GOVERNANCE
61
COMPLIANCE WITH THE CODE
The Financial Conduct Authority requires the Company to
disclose how it has applied the principles of the UK Corporate
Governance Code published in September 2012 (the “Code”)
and whether there has been compliance with its provisions
throughout the financial year. In the case of non-compliance,
the Company must specify those provisions with which it has not
complied and give reasons for this. The Code may be found on
the Financial Reporting Council’s website (www.frc.org.uk).
The directors consider that the Company has complied fully
with the provisions of the Code applicable to it throughout
the accounting period ended 31 December 2014 with the
following exception:
• Provision B.1.2 of the Code requires at least half the
board, excluding the Chairman, to comprise non-executive
directors determined by the board to be independent. Until
1 August 2014, the Board comprised five executive and four
non-executive directors plus the Chairman. Nick Salmon
and Russell King were appointed as non-executive directors
on 1 August 2014 and 1 September 2014, respectively,
and David Thorpe resigned as a non-executive director on
31 August 2014. As at the year end the Board comprised five
executive and five non-executive directors plus the Chairman
and therefore now complies with Provision B.1.2 of the Code.
Key matters dealt with by the Board during the course of the
year, in addition to the ongoing monitoring of operational and
financial performance of the Group, were:
•
•
•
•
setting the health and safety targets for the Group and
monitoring performance on a monthly basis;
reviewing the health and safety systems of the International
division with reference to the kind of work undertaken,
the safety culture of the businesses, challenges specific to
working in the Middle East environment, how improvements
were planned to be achieved, the delivery of safety
management and leadership, how competence is assessed
and the way in which reward and discipline is used to drive
safety improvement;
the acquisitions of Initial Facilities and The Employment and
Skills Group (esg);
reviewing the Group’s strategic direction, governance,
ethics, values and risk management. In particular, the Board
satisfied itself with regard to the concentration risk arising
from the number of projects secured in the energy-from-
waste market and the increased reputational risk arising
from the expansion of the Group’s front-line service delivery
– most notably in relation to its success in securing 25 per
cent of the Transferring Rehabilitation Programme;
Whilst non-executive and executive parity was not achieved
until towards the end of 2014, the Board was satisfied that the
strength and independence of the non-executives, its open
style of debate and the manner in which the Board functions
meant that no one individual or small group of individuals could
dominate Board decision making.
•
reviewing the communication of the Company’s brand
both internally and externally;
• ongoing monitoring of key contracts where outcomes
could impact financial performance;
•
reviewing progress against the HR strategy;
LEADERSHIP
The Board
Operation of the Board
The Board has a formal schedule of matters reserved for its
decision, whilst day-to-day operational decisions are managed
by the Executive Board, as referred to on page 64.
In order to facilitate the efficient use of its time the Board has
delegated certain of its powers to Board committees, details
of which are set out later in this report. From time to time the
Board also establishes certain other committees to deal with a
specific issue which the Board has approved.
•
reviewing the strategy for the Group’s UK construction
business, in light of the expected upturn in the UK
construction market, and the potential for its expansion
into selected overseas markets;
•
setting the Group’s annual budget and plan;
• approval of the annual and half-year report;
• declaration of the interim dividend and recommendation
of the final dividend;
• ensuring the maintenance of a sound system of internal
controls and an effective risk management and assurance
strategy; and
• monitoring progress against the Group’s SustainAbilities Plan.
The Board also undertook a visit to the Group’s oil and gas
services operations in Abu Dhabi and the oil and gas services,
equipment services, training and construction operations
in Oman.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 62
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE CORPORATE GOVERNANCE
CORPORATE GOVERNANCE CONTINUED
Division of responsibilities
The role of the Group Chairman and Chief Executive are
split and clearly defined in written terms of reference.
The role of the Chairman
The Group Chairman is responsible for the leadership of
the Board and creating the conditions for overall Board and
individual director effectiveness, both inside and outside the
boardroom. The Group Chairman regularly considers succession
planning and the Board’s composition with the Nomination
Committee and ensures effective communication with
shareholders and other stakeholders.
The Group Chairman, assisted by the Company Secretary,
sets the agenda for Board meetings and ensures that Board
members receive timely information and are briefed on
issues arising at Board meetings to assist them in making
an effective contribution.
The role of the Chief Executive
The Chief Executive bears primary responsibility for the
management of the Group and in leading the formulation of
and, once set by the Board, implementing strategy. The Chief
Executive chairs the Executive Board and Risk Committee, leads
the executive management team and investor communications
and is responsible for social and ethical matters within the Group.
The role of the Company Secretary
The Company Secretary is responsible for distributing Board
papers and other information sufficiently far in advance of each
meeting for the directors to be properly briefed, presenting
certain papers to the Board and its committees, advising on
Board procedures and ensuring the Board follows them.
The Board papers include information from management on
financial, business and corporate issues. Matters requiring
Board and committee approval are generally the subject of a
written proposal and circulated as part of the Board papers.
The Company Secretary plays a key role in the good governance
of the Company and in particular by supporting the Group
Chairman on all board matters pertaining to governance.
Non-executive director independence and appointments
The Group Chairman and the non-executive directors are
considered by the Board to be independent in character
and judgement and free from any relationships or
circumstances which are likely to affect, or could appear
to affect, their judgement.
Les Cullen, who will not be standing for re-election at the
2015 AGM, completed a term of nine years as a non-executive
director on 1 October 2014. Notwithstanding this period
in office, the Board continues to regard Mr Cullen as
independent both in thought and in action.
Nick Salmon and Russell King were appointed as non-executive
directors on 1 August 2014 and 1 September 2014, respectively.
On 31 August 2014 David Thorpe resigned as a director.
Keith Ludeman succeeded David as chair of the Remuneration
Committee on 9 July 2014.
The Senior Independent Director is available to shareholders
should they have any concerns which contact through other
channels has failed to resolve or for which such contact
may be inappropriate. He also provides a sounding board
for the Chairman and serves as an intermediary for the
other directors when necessary.
As at 31 December 2014 the Board comprised 11 members: the
Group Chairman, five executive and five non-executive directors.
Non-executive directors and the Group Chairman are required
to confirm, on appointment, that they have sufficient time to
meet what is expected of them and to seek the committee
chairman’s agreement, or in the case of the Group Chairman,
the Senior Independent Director’s agreement, before accepting
additional commitments that might impact upon the time they
are able to devote to their role as a non-executive director of
the Company. The letters of appointment of the non-executive
directors and the Group Chairman specify the anticipated level
of time commitment.
The terms and conditions of appointment of the non-executive
directors and the Group Chairman are available for inspection at
the Company’s registered office during normal business hours.
BOARD EFFECTIVENESS
Meetings
The Board normally meets monthly throughout the year and on
an ad hoc basis to consider any matters which are time-critical.
Attendance at Board and committee meetings is set out in the
table below.
Board
Audit
Remuneration
Nomination
Number of Meetings
Lord Blackwell
L G Cullen
S L Dance
A K Fahy
T P Haywood
R J King1
K L Ludeman
B A Melizan
A M Ringrose
N R Salmon2
D I Sutherland
D A Thorpe3
14
14
14
13
14
14
4
14
13
14
5
14
9
6
6
6
1
6
2
4
12
12
12
12
4
12
5
7
6
6
6
6
2
6
6
2
3
The non-executive directors have complementary skills,
experience and qualifications in a wide range of economic
sectors and so are able to bring independent judgement to bear
on matters for consideration.
1Appointed on 1 September 2014
2Appointed on 1 August 2014
3Resigned on 31 August 2014
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
CORPORATE GOVERNANCE
63
The Board also holds a strategy day in January each year to
review the strategic direction of the Group.
The Group Chairman held two formal sessions with the non-
executive directors without any executive directors being
present and a number of informal discussions both with and
without the Chief Executive being present. The non-executive
directors also met once during the year, under the chairmanship
of the Senior Independent Director, without either the Group
Chairman or the executive directors being present.
Board induction, time commitment and development
A tailored induction programme was arranged by the Company
Secretary for Nick Salmon and Russell King, which included
refresher training on the duties of a listed company director
delivered by the Company Secretary and a series of site visits
encompassing a representative cross-section of most of the
Group’s UK operations accompanied by the executive director
responsible for that part of the Group.
An ongoing programme of site visits, staff meetings and business
presentations provides additional opportunities for the Chairman
and non-executive directors to visit various operations of the
Group and to receive insight and feedback from employees.
During the year under review the non-executive directors have
attended a number of seminars and/or other non-executive
forums relevant to their roles.
In April the Chairman was appointed as Chairman of the Lloyds
Banking Group, having previously served as a non-executive
director for nearly two years.
Performance evaluation
During the course of the year the performance of the directors
was reviewed by the Group Chairman and the Chief Executive
and, in the case of the Chief Executive, by the Group Chairman,
having consulted with other directors. The Group Chairman’s
performance was reviewed by the Senior Independent Director
who held separate meetings with each of the directors and the
Company Secretary. As part of this review process the Chairman
met with the directors individually to review performance and
review and agree any development and training needs.
The overall time commitment of the non-executive directors
in the attendance of Board meetings/visits was in the order of
22 days in addition to the time taken to read Board papers and
attendance at three meetings held by the Group Chairman.
The Board appointed Independent Audit to undertake the Board
evaluation for 2013, the outcome of which was presented to the
Board in April 2014. The evaluation highlighted that the Board
was operating effectively, aided by its collegiate approach,
and brings a wider perspective to the business, reducing the
risk of executive groupthink. The tone of the meetings enables
the detailed operational discussions which are necessary, given
the nature of the Group’s business, without compromising
strategic consideration. It highlighted the shift in emphasis
from operational to more time being spent on Group-wide and
strategic matters as the Group continues to grow, and that
investment in building Group management and capability, whilst
work-in-progress, would enable and require a shift in the way
the Board exercises its oversight and leadership.
The review also identified that the executive reward system was
due a revision in order to renew the link between incentives and
longer-term strategic goals.
In view of the externally facilitated Board evaluation in 2013
the Board conducted an internal evaluation of its performance
in 2014 which concluded that the Board continued to operate
effectively and that the diversity of skills and experience of the
Board had been maintained.
Board strategy was considered to be clear and well
communicated. The balance between operational and strategic
matters at meetings was considered to be appropriate, with
the impact on the Company’s risk profile of changes in strategy,
major new projects and other significant commitments being
appropriately assessed. Risk assessments were thought to be
well integrated into the decision-making process which was
enhanced by the Board’s skills, knowledge, experience and the
level of support provided to it.
Further progress has been made in the development of the
Group’s infrastructure and organisation.
Reporting on the crystallisation of significant risks to the Board
was considered to be generally good.
The Board’s safety culture and its values were considered to
be well communicated, with the leadership style, management
structure, HR policies and reward systems all playing their part
in supporting the risk management and internal control systems.
The Audit, Remuneration and Nomination committees carried
out a self-evaluation of their performance against their terms
of reference and also reviewed those terms of reference.
Information and support
Individual directors may, after consultation with the Group
Chairman, take independent legal advice in furtherance of
their duties at the Company’s expense up to a limit of £10,000
in relation to any one event. In the case of the Group Chairman
he must consult with the Senior Independent Director. All
directors have access to the advice and services of the
Company Secretary, whose appointment or removal is a matter
reserved for the approval of the Board or any duly delegated
committee thereof.
Election and re-election
Russell King and Nick Salmon will submit themselves for election
by shareholders at the AGM on 12 May 2015. With the exception
of Les Cullen, all remaining directors will submit themselves for
re-election at the AGM.
Biographical details for each of the directors standing for
election or re-election are set out on pages 48 to 51.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 64
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE CONTINUED
EXECUTIVE BOARD
The Executive Board, which, during the year, comprised the
executive directors together with Trevor Bradbury (Group
Company Secretary), George Franks (Managing Director
of Interserve International), Robin O’Kelly (Director of
Communications), Ian Renhard (Managing Director of UK
Construction) and Catherine Ward (Group Director of Human
Resources), is chaired by the Chief Executive.
The Executive Board, which met 11 times during the course
of the year, is responsible for the operational management
and delivery against budget and forecast of the Group,
implementing resolutions of the Board, formulation of strategy,
annual budgets and other proposals for consideration by the
Board, the identification and evaluation for consideration
by the Board of risks faced by the Group and for designing,
operating and monitoring a suitable system of internal control
embracing the policies adopted by the Board. It is also
responsible for devising and, once approved by the Board,
implementing suitable policies and monitoring procedures for
health and safety, environmental, social and ethical, treasury,
human resources and information technology.
AUDIT COMMITTEE
Details of the Audit Committee are included in the Audit
Committee Report on pages 68 to 73 and are incorporated
into this Corporate Governance report by reference.
NOMINATION COMMITTEE
The Nomination Committee is chaired by the Group Chairman
and the majority of the members are independent non-
executive directors. External consultants are used for new
appointments. The committee keeps the Board structure,
size and composition, balance of skills and knowledge and
experience (both executive and non-executive) under review
and makes recommendations for any changes to the Board.
The Company’s policy relating to the terms of appointment and
remuneration of the executive and non-executive directors is
detailed in the Directors’ Remuneration Report on pages 74 to 101.
For the recruitment of the two non-executive director
positions the committee again engaged the Zygos Partnership,
an international search firm which focuses upon board level
appointments and well known for its strong diversity record.
There are no other connections between Zygos and the Company.
As well as personal characteristics, the candidate specifications
for the non-executive positions required strong industry
experience, including an understanding of major complex
contracts, as well as plc board level experience.
From the long list identified by Zygos, eight potential candidates
who best matched the above criteria were selected by the
committee for further evaluation. Each of these was then
interviewed by the Chairman and at least one other committee
member. After taking references the two preferred candidates
were recommended to the Board for appointment.
The committee also undertook a review of senior management
succession planning and the annual review of senior
management talent. Consideration was also given to the
diversity (ethnicity and gender) and the age profile of the
workforce down to two levels below the Executive Board.
Development below Board level is covered in the Knowledge
Capital section of the Sustainability Review.
Diversity at senior level
The Group’s Diversity Policy states that diversity in all its forms
is fundamental to the Group’s business. It is available on the
website at www.interserve.com/about-us/policies. The goal
is to recruit, motivate, develop and retain outstanding people
that reflect the diversity of the communities in which the
Group operates.
The committee’s terms of reference set out clearly its
authority and duties, and are available on the Company’s
website at www.interserve.com and on request.
The Board monitors the extent to which the Group is meeting
this objective and is committed to taking action where
necessary or helpful to promote equal opportunity.
Overview of activities
Business conducted during the year included recommendations
to the Board for the re-election of retiring directors at the
AGM, selecting candidates for two non-executive director
appointments, reviewing the Board structure and composition
and senior management succession and development up to and
including those at Board level, and Board succession planning.
The effectiveness of the committee and its terms of reference
were also reviewed.
The success in developing the diversity of the Board is monitored
as part of our annual evaluation of Board effectiveness.
We have increased the diversity of the Board and would expect
our diversity policy to lead to greater diversity on the Board
and divisional boards over time. We have also set ourselves the
target of having boards that better reflect the diversity of our
business by 2016 and are tracking diversity measures against
this goal.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
CORPORATE GOVERNANCE
65
Along with many in our sector, there is more work to do on
improving the representation of women on our boards given
that that the pipeline of candidates at senior levels (both
internally and externally) is for roles which, traditionally,
have not had a diverse entry - although this is improving. Our
ongoing programmes seek to ensure a diverse entry and career
management to retain and progress employees through their
career paths.
OTHER BOARD COMMITTEES
The Conflicts Committee comprises the Group Chairman or, in
the event that he is interested in the matter to be considered,
the Senior Independent Director, and the Company Secretary.
The General Purposes Committee comprises any two executive
directors (one of whom must be the Chief Executive or, in his
absence, the Group Finance Director).
We have also taken the following steps aimed at improving
the diversity of our senior level roles:
• our Group talent and succession process for the top 300
managers includes reviewing and monitoring progress of
female talent;
• ongoing monitoring of all appointments by gender and
ethnicity for roles at £75,000 per annum and above;
• as part of external recruitment for senior appointments,
executive search firms are instructed to provide
diverse shortlists;
• data monitoring the diversity mix across the Group is
included within the HR data set presented to the Executive
Board and the Board on a quarterly basis;
•
the diversity of participant nominations to senior leadership
development programmes are monitored and actively ensure
female representation on each course;
• diversity and inclusion awareness has been provided to
the majority of our managers at divisional board level and
above. This has included Unconscious Bias sessions run by a
leading expert in this field;
• a Women in Interserve (“WiN”) network has been
established which is used to provide a platform for
networking among women, enabling women working within
the organisation to lift their visibility and profile, and to
provide development opportunities; and
• established a Mentoring/Coaching programme for women
across the organisation, run in conjunction with WiN.
Further information on progress made with wider employee
diversity matters can be found in the ‘Our People’ section of
the Sustainability Review on pages 39 and 40.
REMUNERATION COMMITTEE
The Remuneration Committee is composed entirely of
independent non-executive directors, details of which are
set out in the table on page 62. Keith Ludeman replaced
David Thorpe as committee chairman on his retirement.
The responsibilities of the committee, together with an
explanation of the work undertaken and how it applies the
directors’ remuneration principles of the Code, are set out
in more detail in the Directors’ Remuneration Report on
pages 74 to 101 and are incorporated by reference into this
Corporate Governance report.
The Inside Information Committee comprises the Group
Chairman, Chief Executive and Group Finance Director.
The PFI Committee comprises any two or more directors.
Each committee has written terms of reference and reports
on the business conducted to the following Board meeting.
Committee meetings held during the year are as follows:
Committee
Conflicts
General Purposes
Inside Information
PFI
Number of meetings
–
57
–
1
ACCOUNTABIITY
Risk Committee
The Board has overall responsibility for internal control (including
risk management and the ongoing review of its effectiveness)
and sets appropriate policies having regard to the objectives
of the Group. It formally reviews the Group’s register of risks
and mitigation plans twice a year and discusses any significant
developments in risk exposure as and when appropriate.
As discussed on page 64, the Executive Board has a key role
in risk management. In order to assist it with discharging this
responsibility the Executive Board created a Risk Committee.
The committee, which met five times during the year,
comprises the Chief Executive, Group Finance Director,
Group Health, Safety and Environmental Manager, Group
Insurance Manager, the Group Company Secretary (who is
its secretary), the Group General Counsel, the Group Chief
Information Officer, the Group Information Security Officer and
a representative from each of the Group’s operating divisions.
The internal audit partner has a standing invitation to attend.
The committee has written terms of reference and provides
copies of its meeting minutes to the Board.
The business covered during the year included: reviews of the
Group’s prime risk areas and of contract risk allocation and
control; reputation management; business continuity planning
and IT disaster recovery; information security risk assessment;
regular reviews of the risks presented by forthcoming
legislation; and updates on current insurance, internal audit,
health and safety, HR and IT developments.
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INTERSERVE ANNUAL REPORT 2014 GOVERNANCE CORPORATE GOVERNANCE
CORPORATE GOVERNANCE CONTINUED
FINANCIAL AND BUSINESS DISCLOSURES
In order to present a balanced assessment of the
Company’s position and prospects, the Annual Report
contains a Directors’ Responsibility Statement on page 102,
an Independent Auditors’ Report about their reporting
responsibilities on pages 103 to 107 and a going concern
statement on page 47. An explanation of the Company’s business
model and strategy for delivering the Company’s objectives
is set out on pages 8 and 9, and 4 and 5, respectively.
The Directors’ Report contained on pages 52 to 59, of which
this Corporate Governance report forms part, contains the
information required by paragraph 13(2)(c),(d),(f),(h) and (i)
of Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (as amended
by The Companies Act 2006 (Strategic Report and Directors’
Report) Regulations 2013 and The Large and Medium-sized
Companies and Groups (Accounts and Reports) (Amendment)
Regulations 2013)).
INTERNAL CONTROL PROCESSES
The Board has a continuous process for identifying, evaluating
and managing the significant risks the Group faces together
with an ongoing process to embed internal control and risk
management further into the operations of the businesses. This
has been in place for the period under review and until the date
of approval of this Annual Report and Financial Statements.
The Audit Committee, the Risk Committee and Executive Board
assist the Board in the application of these principles.
The Board has documented a risk management policy setting
out the prime risk areas including the threats, risk indicators,
control strategy and sources of assurance. The policy is included
within the Group’s internal controls manual. Internal controls
are reviewed by the Board in advance of the publication of the
Group’s half-year and annual reports.
The Board received and reviewed bi-annual reports from the
Executive Board on the effectiveness of the Group’s system of
internal control for the period under review and implements
improvements from time to time in order to strengthen the
control processes.
Because of the limitations that are inherent in any system
of internal control, the Group’s system of internal control is
designed to manage rather than eliminate the risk of failure to
achieve business objectives, and can only provide reasonable,
but not absolute, assurance against material misstatement or
loss. The Group’s governance framework distinguishes between
entities which are wholly controlled and joint ventures and
associate companies in which the Group does not have overall
control. For these joint ventures and associate companies,
systems of internal control are applied as agreed between the
Group and the other joint-venture parties or members of the
associate company, as the case may be.
Financial reporting
Based on submissions from the trading divisions, a budget
is prepared by the Group for approval by the Board before
the start of each financial year. Subsequently, forecasts of
prospective financial performance are prepared as at the end
of March, May and September of each year. Budgets and
forecasts include the financial results, financial position
and cash flows for each division and the Group Centre.
The Group has risk management systems and documented
accounting policies and procedures to be applied by all entities
in the Group in submitting their financial statements for
consolidation to ensure that adequate accounting records are
maintained and transactions are recorded accurately and fairly
to permit the preparation of consolidated financial statements
in accordance with International Financial Reporting Standards.
Each month, every entity within the Group submits management
accounts in local currency to the Group Finance team. The
consolidated management accounts include the financial results,
financial position, cash flows and projections and are submitted,
along with analytical commentary, to the Executive Board and
subsequently the Board for review.
The management accounts submitted by members of the Group
for June and December are used to prepare the half-yearly and
annual financial statements. The Group Finance team reviews
the disclosures in the financial statements to ensure that they
comply with applicable reporting standards. The half-yearly
and annual financial statements are reviewed by the Executive
Board, the Audit Committee and the Board before publication.
The financial reporting process is reviewed periodically by
internal audit in accordance with the programme approved by
the Audit Committee each year.
A summary of the key financial risks inherent in the Group’s
business is given on page 46 and a description of how the Group
manages those risks is set out on page 31.
Operational controls
The principal features of the Group’s system of operational
control are:
• An established management structure comprising the Board
with its various committees and an Executive Board.
• Executive Board and Board review of the monthly finance
and divisional trading reports.
• Documented delegated authority limits which are kept
under regular review. Larger value proposals and business
acquisitions and disposals are controlled by the Board.
• Manuals setting out Group policy and procedures,
with which all Group companies must comply.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
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67
Having due regard to their importance as stakeholders, we also
undertake regular one-to-one meetings and group presentations
with our bank and private placement lenders, in which
operational, strategic and market issues are discussed, together
with the implications for our future financing requirements.
The Group’s annual and half-yearly results, interim management
statements, trading updates, presentations given to analysts and
all announcements made through the RIS are published on the
Company’s website at www.interserve.com.
All shareholders are given at least 21 clear days’ notice of the
AGM. It is standard practice for all directors to attend the
AGM to which all shareholders are invited and at which they
may put questions to the chairmen of the various committees
or the Board generally. The proxy votes for and against each
resolution, as well as abstentions (which may be recorded on the
proxy form accompanying the notice of AGM) are counted before
the AGM commences and are made available to shareholders
at the close of the formal business of the meeting. The proxy
votes are also announced through the RIS and posted on the
Company’s website shortly after the close of the meeting.
APPROVAL
This report was approved by the Board of Directors on
26 February 2015 and signed on its behalf by:
Lord Blackwell
Chairman
26 February 2015
• The Group has certain key areas which are subject to
central management or control, which include health,
safety and environmental policies, legal, insurance, tax and
treasury, real estate, internal and external communication,
investor relations, information technology network services
and operating systems, human resources and company
secretarial. These functions report to members of the
Executive Board.
• One or more members of the Executive Board and, in many
cases, either the Chief Executive or the Group Finance
Director, attend divisional board meetings.
• During the course of each year members of the Executive
Board or other senior operational and financial management
visit or review all trading companies to discuss and monitor
the performance of those businesses.
• The Group has in place a whistleblowing policy which sets
out a framework for dealing with any allegations of fraud,
financial misreporting and any whistleblowing notification. A
copy of the policy is available on the Company’s website at
www.interserve.com.
RELATIONSHIP WITH SHAREHOLDERS
The main communications with financial investors are the half-
year and full-year results presentations. These presentations are
posted on our website and are available for all investors to view,
along with a recording of the presentations themselves.
The Company encourages two-way communication with both
institutional and private investors to develop an understanding
of the views of major shareholders about the Company. The
Chief Executive, accompanied by the Group Finance Director,
attended 46 meetings with analysts and institutional investors
during the year ended 31 December 2014 and, respectively, 13
and 39 individual meetings. Following his usual invitations, the
Group Chairman held a meeting with a major shareholder and
meetings were also held with major shareholders by the Chairs
of the Audit and Remuneration committees, the details of which
are included in their respective reports.
One-to-one meetings held with shareholders focus on such
matters as Group strategy, operational performance, market
trends, macro-economic influences, financial performance,
merger and acquisition ambitions, peer group issues, the
political environment and progress of key bids and key
contract renewals.
One-to-one and group meetings held with analysts focus on the
above issues and, in addition, the key factors which influence
analysts’ financial forecasts, with a view to ensuring market
consensus is based on accurate and up-to-date information,
properly interpreted.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 68
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE AUDIT COMMITTEE REPORT
AUDIT COMMITTEE REPORT
ANNE FAHY
Chair of the Audit Committee
INTRODUCTION FROM THE AUDIT COMMITTEE CHAIR
I am pleased to present, on behalf of the Board, our Audit Committee Report on our work in relation to the financial year ended
31 December 2014.
2014 has been a busy year during which, in addition to our normal work programme, we changed our auditors from Deloitte LLP to
Grant Thornton UK LLP (“Grant Thornton”), following a short but intensive tender and selection process which elicited very high quality
submissions from all those involved. We also examined in depth the acquisition accounting for Initial Facilities and reviewed its internal
control environment supported by Internal Audit. We welcomed two new members and had one retirement from the committee.
During the year the focus of our normal work programme has been upon the trading judgements and estimates which underpin our
revenue and margin recognition on long-term construction and service contracts, impairment testing of the value of goodwill and
retirement benefit obligations, all of which are covered in more detail within the body of the report.
In addition, we have also spent time evaluating the independence and the effectiveness of both internal and external audit
processes as well as of the committee itself.
Anne Fahy
Chair of the Audit Committee
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
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MEMBERSHIP
The committee is composed entirely of independent non-
executive directors and is chaired by Anne Fahy. The directors
who have served on the committee during the year are:
Name
A K Fahy
L G Cullen
R J King
K L Ludeman
N R Salmon
D A Thorpe
Date of appointment to committee
1 January 2013
14 November 2005
1 September 2014
1 January 2011
1 August 2014
1 January 2009
Nick Salmon and Russell King were appointed to the committee
on 1 August and 1 September 2014, respectively. David Thorpe
retired from the committee on 31 August 2014.
Appointments to the committee are made by the Board,
on the recommendation of the Nomination Committee and
in consultation with the committee Chair. Anne Fahy and
Les Cullen are both financially qualified. The other non-
executive directors all have substantial financial experience.
Directors’ biographies are included on pages 48 to 51.
The Company Secretary is secretary to the committee.
TERMS OF REFERENCE
The committee has written terms of reference based on the
FRC’s Guidance on Audit Committees and which set out clearly
its authority and duties. These are available on the Company’s
website at www.interserve.com and on request. The terms of
reference are considered at least annually by the committee
and were last updated in December 2014.
The committee may investigate any activity within its terms of
reference and is authorised to seek any information it requires
from, and require the attendance at, any meeting of any
director, officer or employee of the Company or of the Group.
The committee is authorised by the Board to obtain, at the
Company’s expense, external legal or other professional advice
on any matters within its terms of reference.
A full set of committee papers is provided to every director and
the Chair of the committee reports to the subsequent Board
meeting on the committee’s work. The Board also receives a
copy of the minutes of each meeting.
ROLE AND RESPONSIBILITIES
The role and responsibilities of the committee are to:
•
•
review with management and the external auditors the
Group’s consolidated report and accounts and the half-
year report and any formal announcements relating to the
Group’s financial performance based on the statutory audit
or half-yearly review, as the case may be, before submission
to the Board;
review the annual report and accounts and advise the Board
as to whether, taken as a whole, it is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Company’s performance, business
model and strategy;
• make recommendations to the Board on the appointment
of and take responsibility for reviewing the effectiveness
of, and agreement of, the fees for the statutory audit and
approval of fees to be paid to the external auditors for non-
audit work;
• approve the annual work programme of the internal auditor,
the fees to be paid in connection with that work and review
the effectiveness of the internal audit process;
• provide an independent overview of the Group’s systems
of internal control, whistleblowing processes and outcomes,
and financial reporting processes, through the co-ordination
and supervision of the scope, quality, independence and
effectiveness of the internal and external audit and other
enquiries; and
•
review the Company’s processes for detecting fraud.
The effectiveness of the Company and the Group’s internal
control and risk management systems is reviewed by the Board.
MEETINGS
The committee met six times during the year. The external
auditors were present at four of the meetings and the Head of
Internal Audit and representatives from PricewaterhouseCoopers
LLP (“PwC”), the provider of the internal audit function,
were present at two of the meetings. The Group Chairman,
Chief Executive, Group Finance Director and Group Financial
Controller attended each of the meetings by invitation.
The committee has twice taken the opportunity to seek the
views of the external and internal auditors in private and both
the external and internal auditors have the opportunity to
address the committee in private at any time should they so
wish. In addition, the Chair met with both parties periodically
to review audit and internal control topics on an ongoing basis,
which was beneficial in a period during which we changed our
external auditors and completed a significant acquisition.
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AUDIT COMMITTEE REPORT CONTINUED
OVERVIEW OF ACTIVITIES
In connection with the 2014 financial year the committee:
•
reviewed the risk register and ensured that the audit
activities aligned with it;
• concluded the tender process to appoint external auditors
which resulted in the resignation of Deloitte LLP and the
subsequent appointment of Grant Thornton, further details
of which are set out in the External Audit paragraph below;
•
•
•
•
•
reviewed the 2014 half-year report and annual report and
financial statements. As part of this review the committee
satisfied itself as to the clarity and completeness of
disclosures in the financial statements and that they were
appropriately contextualised. It also reviewed the Chairman’s
Statement, Strategic Report and Corporate Governance
statement relating to audit and risk management. As part
of each review the committee received a report from the
external auditors on their audit of the annual report and
review of the half-year report, respectively;
reviewed, prior to their consideration by the Board, the
representation letters to be given to the external auditors
in respect of the annual and half-year reports;
reviewed audit effectiveness following the audit of the
2014 annual report taking into account the partners’ and
senior audit staff’s understanding of the business, the
effectiveness of the audit work in relation to major issues
and how those were addressed, the quality of suggested
control improvements, the appropriateness of assurance
gained over parts of the Group not audited by Grant
Thornton, the appropriateness and deployment of experts
on technical items, the quality and comprehensibility of
the audit findings report and feedback from management
on the audit process generally;
reviewed and approved the external auditors’ terms of
engagement for the 2014 half-yearly review and for the
audit of the 2014 annual report;
received a briefing from the Group Finance Director on the
principal judgements made in determining the 2014 half-year
report and the 2014 annual report and financial statements,
reviewed those judgements and, taking into account the
external auditor’s view, satisfied itself that the judgements
and estimates were both appropriate and robust and in
accordance with the Group’s accounting policies;
•
reviewed minor textual changes to the key accounting
policies and satisfied itself that there had been no
change in substance and that the accounting policies
remained appropriate;
• considered and agreed the scope and fees to be paid to
the external auditors for the 2014 half-yearly review and
2014 audit;
•
received a bi-annual update on the Group’s monitoring of
fraud risk assessment;
• ensured itself as to the adequacy of controls across the
worldwide businesses, particularly with regard to entities
which are not controlled by the Group;
• monitored non-audit fees in comparison to the audit fees
in accordance with the Company’s policy on the provision
of non-audit services (as detailed in External Auditor
Objectivity and Independence below);
•
•
•
reviewed the internal audit programme and findings and
remediation actions as well as agreeing the internal audit
plan for 2015, ensuring an adequate coverage of risks;
received a report at each meeting on the progress and
outcome of the investigation of whistleblowing notifications;
reviewed its terms of reference and whether any changes
needed to be proposed to the Board;
• conducted an evaluation exercise to review its own
effectiveness; and
• based upon the review of audit effectiveness, made a
recommendation to the Board regarding the continuation
in office for a second year of Grant Thornton for the 2015
external audit.
SIGNIFICANT ISSUES CONSIDERED
The committee has reviewed the key judgements applied
in the preparation of the consolidated financial statements
which have been prepared in accordance with the accounting
policies and detailed notes to the financial statements on
pages 114 to 152. The committee received a paper, prepared
by management and reviewed by Grant Thornton, setting
out by division the key judgements made in relation to the
following matters:
•
Revenue and margin recognition
The recognition of revenue and profits on long-term
construction and service contracts requires management
to exercise significant levels of judgement involving a high
degree of discretion and control. For construction-type
contracts the key judgement concerns the recognition
of profits, the recovery of work-in-progress and debtors,
especially on non-certified amounts (including variations and
claims) and forecast outcomes. For service-type contracts
the key accounting risk is that the revenue and costs are not
recognised in the correct period and provisions are not made
for losses when foreseen. For contracts in the Equipment
Services division, where revenue is recognised on either the
sale of equipment or over the period of an equipment hire,
the key accounting risk relates to whether the appropriate
cut-off for sales and period of hire has been applied and the
recoverability of debtors.
GOVERNANCE
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The committee reviewed the audit findings and management
judgements/reviews undertaken on a selection of contracts
perceived to carry the highest risk of misstatement against
the background of its familiarity with the operationally and/
or commercially challenged contracts which are regularly
discussed at Board meetings. This also included the
committee satisfying itself as to the recoverability of long-
dated debtor and work-in-progress balances.
The committee reviewed the level of provisioning made
by management at both contract level and centrally at the
year-end in order to form a view of the completeness of
provisions on loss-making contracts and whether there was a
requirement to include a forward loss provision. The quality
of earnings and movement in provisions during the course of
the year was also reviewed.
FAIR, BALANCED AND UNDERSTANDABLE
FINANCIAL STATEMENTS
The directors are responsible for preparing the annual report.
At the request of the Board the committee considered whether
the report and accounts taken as a whole was fair, balanced
and understandable. In making that assessment, the committee
took into account whether the report and accounts provided the
necessary information for shareholders to assess the Company’s
performance, business model and strategy.
The committee was satisfied that, taken as a whole, the
2014 annual report was fair, balanced and understandable
and contained the information set out above and reported
accordingly to the Board. The Board’s statement in this regard
is set out on page 102.
• Acquisition accounting for the acquisition of
Initial Facilities and esg
The committee reviewed the fair value of the consideration,
opening net asset position and examined the fair value
adjustments, how the acquisition expenses had been
charged to the income statement, the calculation of the
fair value of intangible assets acquired with the business
in respect of the order book and customer relationships
(including the significant assumptions made by management
in the determination of those values) and satisfied itself that
these were appropriate.
• Carrying value of goodwill and other intangible assets
The carrying value of goodwill and other intangible assets on
the balance sheet at the year-end was £524.5 million which
included goodwill with a value of £401.4 million.
The committee reviewed management’s determination of
cash generating units, the key assumptions used such as
the discount rate and future cash flows in light of current
business performance and future projections and satisfied
itself of the appropriateness of management’s impairment
testing, that significant headroom exists and that any
reasonable sensitivity to the assumptions did not indicate
any impairment.
• Retirement benefit accounting
Calculation of the retirement benefit obligation requires
management to make a number of assumptions including the
selection of an appropriate discount rate and mortality.
The committee satisfied itself as to the reasonableness of the
assumptions set out in note 30 to the financial statements,
taking into account the independent third-party confirmations
of the pension assets valuation held at the balance sheet date
and the accounting entries relating to the insurance buy-in
completed by the pension trustees in August. The committee
also satisfied itself that the accounting treatment for the
insurance contract buy-in was appropriate and in accordance
with relevant accounting standards.
EXTERNAL AUDIT
Having decided in 2013 to tender the provision of external audit
services, a timetable and process was devised which would
permit the committee to make a recommendation to the Board
in sufficient time to enable a decision to be made in advance of
posting the 2014 AGM Notice.
In order to conduct the process of receiving tender bids,
evaluating presentations by the competing audit firms and
making a recommendation in an efficient manner, this task was
delegated to a panel comprising the Chair of the committee,
the Senior Independent Director, the Group Finance Director,
the Company Secretary and the Group Financial Controller.
Tenders were invited from four audit firms during the second
week of January 2014 with a submission closing date five weeks
later. During the bid preparation period a two-week window
was set aside for meetings to take place between each of the
bidders and key members of staff from around the Group.
The tenders were evaluated against relevant criteria and oral
presentations were delivered to the panel by each of the four
firms, following which the panel made its recommendation to
the committee.
The committee Chair then undertook a brief consultation
with key shareholders and completed reference checks. The
recommendation to appoint Grant Thornton was made to and
accepted by the Board.
Grant Thornton was formally appointed as the Company’s
auditor on 13 June 2014 following approval by shareholders
at the AGM and Deloitte LLP’s resignation as auditor.
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AUDIT COMMITTEE REPORT CONTINUED
EXTERNAL AUDITOR OBJECTIVITY
AND INDEPENDENCE
The Company has an established policy aimed at safeguarding
the independence and objectivity of the Group’s external
auditors and this was one of the factors taken into account
during the audit tender process.
The external auditors may carry out certain categories of
non-audit work in areas that have been pre-approved by the
committee up to a monetary limit of £150,000 per transaction.
Any other work for which management may wish to instruct the
external auditors up to a value of £250,000 must be approved in
advance by the committee or, more normally, by the committee
Chair on its behalf. Instructions above £250,000 require prior
approval of the Board. The pre-approved services may be
summarised as follows:
• assurance services, tax compliance and advisory services
and where audit reports are required by statute or
regulation; and
• other services, encompassing general consultancy services.
The above policy also prohibits the auditors auditing their
own work, making management decisions, entering into any
arrangement in relation to audit work whereby a joint interest
is created between the Company and the auditor, acting in
the role of advocate for the Company or being appointed as
recruitment consultants without the committee’s prior consent.
The committee received a report at each of its meetings
itemising the fees expended and forecast to be expended with
Grant Thornton for non-audit services. In addition to the above
safeguards, non-audit services were delivered by specialists and
advisers who were independent of the audit team.
The committee reviewed the nature and extent of non-audit
fees expended on bid support to one of the Group’s associate
companies for a PFI project (the engagement for which had been
entered into some considerable time before Grant Thornton’s
appointment as auditor), advising on completion accounts for
the Initial Facilities’ acquisition, tax and VAT compliance and
the review of the half-year report (representing 26.5 per cent,
2.3 per cent, 2.3 per cent and 9.5 per cent, respectively, of the
overall audit fee of £945,000), and the committee concluded
that the safeguards set out above were sufficient so as not to
compromise auditor objectivity and independence.
Further details of the audit and non-audit fees paid to Grant
Thornton are included in note 4 to the financial statements on
page 123.
The committee also assessed Grant Thornton’s objectivity,
independence and effectiveness at the end of the half-year
review and 2014 audit cycles, taking into account the views of a
number of those involved in the audit process as well as having
private meetings with the auditors and informal conversations
with the Chair. The committee concluded that the audit had
been effective and that Grant Thornton remained independent
throughout the process.
INTERNAL AUDIT
The function of internal audit is to provide an independent and
objective appraisal to the Board, through the committee, of
the adequacy and effectiveness of the processes established
to control the business and to assist the Board in meeting its
objectives and discharging its responsibilities.
The committee is responsible for monitoring, reviewing
and assessing the role and effectiveness of internal audit in
the overall context of the Group’s risk management system
and review.
The details of the annual internal audit programme for
the following year are submitted to the Audit Committee
each December for approval, and may be modified
(subject to agreement of the Audit Committee) based
on changing circumstances.
The 2014 programme was modified to include a post-acquisition
review of Initial Facilities, together with other minor changes.
The internal audit programme of work is risk based, with key
business activities and financial reporting processes considered
for internal audit review on a cyclical basis. The work is carried
out by PwC under an outsource contract, renewable annually.
The principal objectives for the 2014 plan were to provide core
assurance against those areas identified as high risk together
with further assurance on some of the medium-risk areas
identified for rotational audit testing.
The committee received a summary of each internal
audit review covering the findings, proposed corrective
actions and management’s responsiveness to those findings
and recommendations.
Closure of the agreed corrective actions is tracked via a web-
based system and is monitored by management and reported
to the committee in June and December each year.
In order to monitor the level of control across the Group
all material business units and relevant central and support
functions were again required to complete an online self-
assessment of their compliance with key controls covering
15 different business processes.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
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This year, in order to facilitate a greater level of analysis across
the Group, each business unit which was subject to a field audit
in the year was also required to complete the online
self-assessment. The principal findings were:
• most businesses either maintained or improved their
compliance to a level in excess of 95 per cent; and
• business continuity planning can be further improved in
the Construction and International businesses by
conducting more regular testing of the plans.
Whilst compliance scores were generally lower in the Initial
Facilities businesses within Support Services, as it is in the
course of transition to the higher control standards of the
Group, considerable improvement has already been made in
this direction, underpinning effective integration.
The Internal Audit partner has direct access to the Chair of the
committee and they meet on a periodic basis in addition to the
formal committee process.
In December the committee agreed the internal audit work plan
for 2015. Consistent with previous years, the plan is designed
to provide core assurance against areas identified as high risk
against an updated audit universe to reflect the changing risk
profile of the Group, together with further assurance on some
of the medium-risk areas identified for rotational testing and
review of new activities and businesses.
In view of PwC’s eight-year tenure as internal auditor, initially
in a co-sourced capacity and latterly as a fully outsourced
function, the committee intends to put the provision of internal
audit services out to tender during the course of 2015.
REVIEW
After undertaking a review of its own performance the
committee concluded that it had been effective in discharging
the obligations entrusted to it by the Board.
AGM
The Chair of the Audit Committee will be available at the
AGM to answer questions about the work of the committee.
APPROVAL
This report was approved by the Board of Directors on
26 February 2015 and signed on its behalf by:
Anne Fahy
Chair of the Audit Committee
26 February 2015
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INTERSERVE ANNUAL REPORT 2014 GOVERNANCE DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
KEITH LUDEMAN
Chairman of the Remuneration Committee
CHAIRMAN’S SUMMARY STATEMENT
Dear Shareholder
I am pleased to present the Remuneration Committee’s
annual report on directors’ remuneration, having succeeded
David Thorpe as Remuneration Committee Chairman on
9 July 2014.
As described in the Strategic Report, 2014 has been a significant
year in terms of delivering against our growth strategy. In
continuing challenging market conditions, we have continued
to target and achieve above market levels of growth and
profitability from our portfolio of businesses. This is as a result
of establishing strong core businesses that draw upon our
distinctive commercial skills and growing in adjacent markets
and geographies. Furthermore, our operations are underpinned
by a strong balance sheet which enables our continued focus on
delivering a progressive dividend policy.
In relation to the execution of our strategy, 2014 can be seen
as a successful year. In particular, the £250 million acquisition
of the facilities services business of Rentokil Initial plc in
March, followed in December by securing 25 per cent of
the Government’s outsourcing of the probation service and
completing the acquisition of The Employment and Skills
Group (esg), have all further contributed to achieving a
business that continues to grow in terms of its scale,
breadth and sophistication.
The change in the scale, breadth and sophistication of our
Company resulted in the Remuneration Committee reviewing
the directors’ remuneration policy during the year under review.
This was the first comprehensive review undertaken since 2012
and also timely given our existing long-term incentive plan is
due to expire in 2016. The outcome of this review was that a
number of modifications to our current remuneration policy and
practices should take place. The key changes are summarised
below, along with the relationship between performance and
reward in 2014, with full details included in the wider Directors’
Remuneration Report.
Given that we are seeking to make changes to our
remuneration policy for the current financial year, the Directors’
Remuneration Report that follows has been split into two parts:
• our revised Policy on Directors’ Remuneration, which sets
out our proposed future remuneration policy (pages 76 to 86)
which will be put to a binding shareholder resolution
at the forthcoming AGM; and
• our Annual Report on Remuneration, which describes how
our previously approved policy was implemented in 2014
and how the new policy will, subject to approval, be applied
in 2015 (pages 87 to 101). This will be put to an advisory
shareholder resolution.
2014 remuneration payments
Annual Variable Pay
Supporting our strategy of delivering profitable growth and
pursuing a progressive dividend policy, Annual Variable Pay for
the year under review was to be earned based on performance
against a challenging range of Normalised EPS growth targets
(see definition on page 87). Only modest payments could be
earned for achieving budgeted performance levels with a
maximum payout requiring substantial out-performance of our
budget. In practice, we achieved Normalised EPS for the 2014
financial year of 58.8p per share (being a 23.27 per cent growth
on the 2013 result) which resulted in Annual Variable Pay being
earned against the targets set of 62.59 per cent of the maximum
(being 100 per cent of basic annual salary for each of the
executive directors).
Long-term variable pay
Further supporting our targeted objective of delivering
long-term profitable growth, our 2012 long-term incentive
arrangements required a combination of Normalised EPS growth
to be achieved along with creating above-market total returns
for our shareholders for maximum payments to take place.
Based on the performance achieved against the targets set
over the three-year period ending 31 December 2014, these
awards will vest at 54.23 per cent of the maximum. This level
of vesting is reflective of a period of strong underlying financial
performance driven by effective leadership. During the three-
year period, revenue and headline earnings per share increased
by 43.0 per cent and 27.6 per cent respectively (from £2.3 billion
and 46.1p per share to £3.3 billion and 58.8p per share). At the
same time as driving forward revenue and earnings, we disposed
of our PFI portfolio for £170 million, reduced the net pension
deficit to £3.8 million, diversified our funding relationships
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through a US$350 million private placement and a £74.8 million
equity issue, and acquired BEST (Interserve Working Futures),
Paragon, Advantage Healthcare (Interserve Healthcare),
TOCO, Topaz (Adyard), Initial Facilities and The Employment
and Skills Group (esg) and significantly expanded our facilities
management footprint in the Middle East. This combination of
robust financial performance and effective leadership resulted
in growth in TSR of 111.6 per cent, being within the top quartile
against our sector-based peer group, over the three-year
performance period.
In light of the performance achieved, the Remuneration
Committee is satisfied that the above reward outcomes are
appropriate and justified.
Review of remuneration policy
As described above, the Company has been transformed in
terms of the scale, breadth and sophistication of its operations
in recent years, currently employing c80,000 people in over
40 countries.
3. The current long-term incentive plan will be proposed for
renewal at the 2015 AGM on broadly the same terms as the
existing plan (noting it is due to expire in 2016), albeit with
a reduction in the threshold vesting target (as it currently
applies to the TSR performance condition) from 30 per cent
to 25 per cent to bring it into line with current institutional
investors’ expectations.
4. The holding period and current recovery and withholding
provisions (i.e. clawback and/or malus) under the long-term
incentive plan are to be enhanced so that they operate
for a period of two years from the relevant receipt date
of incentive payments (from the current one-year period).
5. Higher share ownership guidelines are to operate at 200 per
cent of salary (increased from 100 per cent of salary).
6. Subject to shareholder approval at the AGM, the changes set
out in paragraph 2 will come into effect as of 1 January 2015
and in paragraphs 3 to 5 to awards to be granted after
12 May 2015.
Mindful of this change, and the fact that a formal remuneration
review had not been undertaken since 2012, the Remuneration
Committee undertook a comprehensive review of remuneration
policy and practice during 2014. The review considered (i)
the need to continue to align remuneration policy with the
Company’s strategy; (ii) the increased responsibilities of each of
the senior executives in light of the factors noted above; (iii) the
need to retain and motivate our highly regarded executive team
in the current commercial context which has seen a number of
our competitors appoint new leadership teams; (iv) comparable
market rates of pay and (v) developments in institutional
investors’ ‘best practice’ expectations.
The above changes, which continue to weight remuneration
towards long-term performance and enable variable pay
to be recovered and/or withheld in certain circumstances,
are considered to remain appropriate for a Company that
continues to target the delivery of long-term profitable growth
for shareholders. Challenging performance targets (weighted
towards our key internal measure of financial success, i.e.
Normalised EPS), as summarised in the Annual Report on
Remuneration, will also continue to apply to variable pay in
2015 in order to incentivise management to continue building a
strong core business which delivers sustained earning growth to
underpin our progressive dividend policy.
The key conclusions of this review in relation to executive
directors included:
1. Base salary levels should be revised to better reflect
individuals’ current roles and responsibilities. Full details
of the changes made to base salaries and how these relate
to individuals’ revised roles and responsibilities are set out
on page 87.
2. Annual Variable Pay opportunity is to increase from 100
to 125 per cent of salary for the Chief Executive and the
Group Finance Director. The additional Annual Variable Pay
opportunity has been introduced to incentivise improved
performance in a number of strategic areas that the Board
is targeting for improvement in 2015.
In addition, a toughening of the current approach to part
deferral of Annual Variable Pay earned will take place in
that executives will be required to continue to defer part of
Annual Variable Pay even if the Company’s increased share
ownership guidelines have been met (deferral does not
currently apply once share ownership guidelines have been
met). A full summary of the revisions to Annual Variable Pay
for 2015 is included on pages 80 and 81.
Given the nature of the changes detailed above, and mindful
of current sentiment surrounding executive remuneration, the
Remuneration Committee consulted with the Company’s major
shareholders and the leading shareholder protection bodies
(i.e. the Investment Association (following its merger with ABI
Investment Affairs) and ISS) in relation to the above changes.
The feedback from this consultation exercise was reflected in
the final decisions taken by the Committee (e.g. the revised
share ownership guidelines were set at 200 per cent of salary
as opposed to 150 per cent of salary as originally proposed)
and, where required, the changes are reflected in the revised
Remuneration Policy, set out in detail on pages 76 to 86, for
which we are seeking your support at the AGM.
We believe our new Remuneration Policy achieves this aim and
supports our strategic objectives and trust that you will endorse
it with a vote in favour at the AGM, as the directors intend to
do in respect of their own beneficial holdings.
Keith Ludeman
Chairman of the Remuneration Committee
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REMUNERATION POLICY
In this section we set out our remuneration strategy and policy, how the policy supports this strategy, how the Remuneration
Committee intends to operate the policy, the selection of performance conditions, why we believe they both support the strategy
and are appropriately stretching, together with other relevant information about the directors’ service agreements.
REMUNERATION STRATEGY
Our Company strategy is to build strong core businesses that draw upon our distinctive commercial skills, growing our businesses
in adjacent markets and geographies. For shareholders we aim to deliver above market growth with a strong balance sheet and
market profitability from our portfolio of businesses, supporting a continued progressive dividend policy. The key to delivering our
strategy is the need to retain and motivate stable leadership teams who understand and are able to apply the core skills and control
framework of the business into adjacent markets in order to grow the business.
Our remuneration strategy is underpinned by remuneration packages which are designed to motivate and retain the high performing
people necessary to deliver our strategy. These remuneration packages:
• are simple and transparent, apply some way down the organisation and align with shareholders’ interests;
•
reflect the views of our shareholders, shareholder protection bodies and other stakeholders;
• are designed to incentivise the delivery of above market growth in the short and medium term, without encouraging excessive
risk taking and only deliver maximum rewards for exceptional performance against challenging targets; and
• provide further long-term focus through the reinvestment in, and holding requirement for, Company shares in the Annual Variable
Pay scheme, the holding requirement for Company shares in the Performance Share Plan and the Shareholding Guidelines.
REMUNERATION POLICY
This part of the Directors’ Remuneration Report sets out the remuneration policy for the Company with effect from 12 May 2015,
subject to shareholder approval at the AGM to be held on that day.
The following table summarises the main elements of the executive directors’ remuneration policy for 2015 onwards, the key
features of each element, their purpose and linkage to our strategy. Details of the remuneration arrangements for the non-executive
directors are set out on page 85.
Element of pay
Purpose and link to strategy
How operated in practice (including framework for assessing performance)
Maximum opportunity
Base salary
To recruit and retain
executives of a suitable
calibre for the role and
duties required.
Reflects the market
rate for the individual
and their role.
Reviewed annually with any changes generally taking
effect from 1 July.
Salaries are determined taking into account:
• the experience, responsibility, effectiveness and
market value of the executive;
• the pay and conditions in the workforce;
• pay relativities within the Group;
• broadly the median position in light of remuneration
within other similar companies and the rest of the
Company; and
• affordability, given the profits of the Company.
Normally paid monthly in cash.
There is no prescribed maximum
annual increase. The Committee
is guided by the general increase
for the broader workforce but
recognises that higher increases
may be appropriate where an
individual is promoted, changes
role, where the size, composition
and/or complexity of the Group
changes or where an individual
is materially below market
comparators or is appointed on
a below market salary with the
expectation that his/her salary
will increase with experience
and performance.
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Element of pay
Purpose and link to strategy
How operated in practice (including framework for assessing performance)
Maximum opportunity
Benefits
To provide benefits
commensurate to the
market in which the
Company operates
and/or the market in
which the director is
based and in line with
policies applicable
to all other senior
salaried employees.
Pension
To provide benefits
commensurate to the
market in which the
Company operates.
Car (cash allowance and/or company car) and fuel
(or fuel allowance).
Private medical insurance.
Permanent health insurance.
Life assurance.
Relocation expenses, allowance for disruption
and ongoing expatriate benefits.
Directors’ and officers’ liability insurance.
Reasonable personal use of mobile telephone.
Small tokens with a value not exceeding £1,000 to mark
significant events (e.g. long service, retirement etc).
The value of benefits may vary from
year to year depending on the cost
to the Company.
Additional benefits may be
provided and the range of those
benefits may vary taking into
account market practice, the
relevant circumstances and the
requirements of the executive.
A Company contribution calculated at up to 15% of
base salary for executive directors provided they are
making the maximum 8% employee contribution.
Employer’s defined contribution and/
or pension cash supplement up to a
total maximum of 15% of base salary.
Employees whose pension provision exceeds HMRC
limits are permitted to opt out of making pension
contributions and instead receive the Company
contribution as a non-enhanceable salary supplement.
Employees who elect to take the cash allowance still
benefit from the life cover of four times base salary
provided to members of the pension scheme and
death-in-service cover.
Employees who have not chosen to opt out of making
pension contributions are eligible to participate in
the Company’s “SMART Pensions” arrangement.
SMART Pensions is a salary sacrifice arrangement
set up by the Company providing an option for
employee pension contributions to be met by their
employer following a corresponding sacrifice in their
contractual pay. This scheme affords the Company a
saving in employer’s National Insurance contributions.
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Element of pay
Purpose and link to strategy
How operated in practice (including framework for assessing performance)
Maximum opportunity
Annual
Variable Pay
To incentivise the
achievement of annual
targets, rewarding strong
operational performance
in line with and in excess
of targeted performance
and which promote the
long-term success of
the Company.
Targets are set by the Committee with reference to
stretching targets that are set annually by the Board.
For Variable Pay earned up to 100% of salary, a
majority (if not all) of the Variable Pay will be based
on financial targets and a minority (if at all) of the
Variable Pay may be based on other performance
metrics linked to the business strategy.
For Variable Pay above 100% of salary (i.e. for the
Chief Executive and Group Finance Director), in
order to maintain a common set of targets across
the executive team, supplementary stretching non-
financial targets are applied to the additional Variable
Pay opportunity beyond 100% of salary.
Although Annual Variable Pay is deliverable in cash,
an element of any payment in excess of 25% of basic
salary is required to be invested in Company shares in
accordance with the arrangements stated below:
Maximum opportunity:
125% of basic salary for the Chief
Executive and Group Finance Director
and 100% of basic salary for the
remaining executive directors.
Entry level performance:
No more than 10% of basic salary
in relation to financial targets.
A graduated scale of targets operates
between entry level and maximum
performance.
Where non-financial targets are
set, it may not always be possible
to set a graduated scale of targets
with some elements requiring a
subjective assessment of the level
of performance achieved.
• for the balance of any Annual Variable Pay received
between 25% and 50% of basic salary, 30% of the
net Variable Pay must be invested in Company
shares and 70% may be retained; and
• for the balance of any Annual Variable Pay received
between 50% and 100% of basic salary or, in the
case of the Chief Executive and Group Finance
Director, between 50% and 125% of basic salary,
50% of the net Variable Pay must be invested in
Company shares and 50% may be retained.
Company shares so acquired must be held for three
years and dividends will accrue on deferred shares.
The Committee has the overriding discretion to
adjust the Variable Pay outcome up or down
(subject to the overall maximum set out in the
adjacent column) to ensure the payment is fair
and appropriate in all the circumstances.
The Annual Variable Pay arrangements include
provisions that enable the Committee to recover value
overpaid (clawback) or to withhold future Variable Pay
awards (malus) in the event of misstatement, error or
misconduct for a period of two years after the date
on which a payment is made.
Annual Variable Pay is not pensionable.
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Element of pay
Purpose and link to strategy
How operated in practice (including framework for assessing performance)
Maximum opportunity
Performance
Share Plan
(PSP)
To provide a longer term
incentive to incentivise
the executive directors
to achieving the Group’s
longer term objectives and
promote the long-term
success of the Company.
To provide alignment with
shareholders and provide a
retention tool.
PSP awards may be granted each year to
senior executives.
Awards will be made in the form of nil-cost options.
The awards will usually vest no earlier than the third
anniversary of the date of grant, provided that the
performance conditions have been satisfied over a
three-year period (commencing on 1 January in the
year of the award).
Post-tax vested shares must be retained for at least
a two-year holding period after vesting.
Maximum: 150% of basic salary (at
the date of grant) for the executive
directors, save in exceptional
circumstances in relation to
recruitment or retention where an
award of up to 200% of basic salary
(at the date of grant) may be made.
No more than 25% of any part of
a performance condition can vest
for achieving the threshold
performance level.
Dividends notionally accrue on awards from the date of
award (up to the earlier date of exercise of the nil-cost
option or the conclusion of a holding period of up to
two years from vesting) and an equivalent cash sum
will become payable on settlement to the extent
that the shares ultimately vest.
The PSP includes provisions that enable the Committee
to recover value overpaid on vesting (clawback) or to
withhold future variable pay awards (malus) in the event
of misstatement, error or misconduct for a period of
two years after the date on which an award vests.
Long-term incentive awards vest based on three-year
performance against a challenging range of EPS and,
separately, relative TSR performance targets.
EPS performance targets are set after having due regard
to internal planning and market expectations for the
Company’s performance and relative TSR performance
is measured against an appropriate comparator group.
No more than 25% of each part of an award may vest
for achieving the threshold performance levels with
full vesting for achieving the maximum performance
targets under each element (e.g. upper quartile TSR
performance) with graduated scales operating between
performance points. No awards vest for below threshold
performance levels.
The Committee will review the performance conditions
each year prior to awards being made (e.g. to determine
whether the TSR comparator group continues to remain
appropriate, whether the range of EPS performance
targets remains appropriate and, more generally, in
light of the Company’s long-term strategy and growth
aspirations) and may make appropriate revisions in light
of developments in the Company’s strategy. Should
there be a material change in the proposed performance
conditions (e.g. introducing an additional performance
metric) appropriate dialogue with the Company’s
major shareholders would take place along with a full
explanation in the Annual Report on Remuneration to
support any such change.
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Element of pay
Purpose and link to strategy
How operated in practice (including framework for assessing performance)
Maximum opportunity
All-employee
share schemes
To support and encourage
share ownership by
employees at all levels.
The executive directors are entitled
to participate in both schemes on
the same terms as all other eligible
employees. Maximum opportunity is
the same for all participants as
defined within the terms of the
scheme and prescribed by HMRC.
The Company currently provides two all-employee
HMRC-approved share schemes for its employees, the
Interserve Sharesave Scheme 2009 (the “Sharesave
Scheme”) and the Interserve Share Incentive Plan 2009
(the “SIP”).
Under the Sharesave Scheme, eligible employees
may enter into a savings contract for a minimum
fixed term of three years and at the end of the
savings period they have the option to buy shares
in the Company at an exercise price fixed at the
start of the savings contract.
Under the SIP, eligible employees are offered the
opportunity to invest pre-tax earnings (subject to
HMRC limits per tax year) in Company shares under a
regular monthly share purchase plan or by up to two
lump sum payments per tax year (or a combination of
the two). Shares so purchased are placed in trust. The
shares can be released from the trust to participants
at any time, but income tax and national insurance
contributions are payable on their value should they
be released within five years of their purchase date.
The SIP rules also provide for matching shares and
free shares (up to certain prescribed limits) to be
given to participants.
Dividend payments on SIP shares are reinvested
in dividend shares and must be held in the trust
for three years.
Shareholding
guidelines
Under the Shareholding Guidelines executive directors are expected to build up over time a shareholding equivalent to
200% of their base salary. Shares purchased under the Annual Variable Pay arrangements, the 2002 Executive Share Option
Scheme, vested awards under the PSP (whether or not exercised), the Sharesave Scheme and the SIP also count toward this
limit. Share options, whether or not vested, do not count towards satisfying these Guidelines.
The Remuneration Committee retains the discretion to adjust the requirement to invest Annual Variable Pay in Company
shares and retain share awards on vesting in appropriate circumstances.
Notes to the table
The remuneration packages of the executive directors and senior executives at Group Centre and Support Services were
reviewed in August 2014.
As part of approving the above policy, which includes the amendments explained below when compared against the existing policy,
the Committee also made a number of adjustments to individual executive director salary levels. These are explained on page 87.
In light of the changes to executive directors’ overall remuneration packages, the Committee resolved that during the three-year
remuneration policy period that is expected to run from the 2015 AGM that, absent any significant event, future increases (if any)
are anticipated to be in line with the increases awarded to the UK wider-salaried workforce.
With regards to performance conditions, the Committee will continue to select financial and, if appropriate, non-financial strategic
measures as targets for Annual Variable Pay that are key performance indicators for the business over the short term.
In view of their increased responsibilities, the need to retain and motivate the Chief Executive and Group Finance Director,
comparable market remuneration packages and subject to approval of the new Remuneration Policy, the Committee intends to
increase their maximum Variable Pay potential from 100 per cent of salary to 125 per cent of salary, to incentivise delivery against
a number of the Company’s non-financial key performance indicators, subject to appropriately stretching targets in respect of this
additional 25 per cent. No change in quantum for other executive directors (at 100 per cent of salary) is proposed.
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Tougher recovery and withholding (clawback/malus) and deferral requirements are intended to apply to the Annual Variable Pay
structure in 2015 which will see the recovery period extended in the event of a material misstatement of the annual results within
a two-year period (increased from one) and a requirement to invest a proportion of post-tax Variable Pay in Company shares,
regardless of whether or not the shareholding guidelines have been met.
For the long-term incentives, the Committee will select a combination of measures that provide a good focus on the outcomes of
the Company’s strategy together with sustainable improvements in long-term profitability together with appropriate and demanding
targets in the context of the Company’s trading environment and strategic objectives.
The Committee considers that, for awards made to date, a combination of normalised EPS and TSR for the Executive Board is
the most appropriate measure of performance for awards made under the PSP. The EPS target rewards significant and sustained
increases in value and delivers strong “line of sight”, whilst the TSR performance condition provides balance by rewarding good
relative stock market performance and introduces an element of share price-based discipline to the package. The blend of these
two complementary measures is considered to reduce the risk level of the PSP compared to the position if a single metric applied
to the entire award. No change to this approach is currently envisaged in 2015 and beyond.
The retention and withholding provisions are to be enhanced for future PSP awards so that they also operate for a period of
two years from the relevant receipt date of incentive payments (from the current one-year period). Furthermore, in response
to shareholder feedback during consultation over the changes to executive remuneration for 2015, a two-year holding period
will apply to future PSP awards granted from 2015 to provide even greater alignment between our executives and shareholders
over the long term. In view of this increased holding period, vested but unexercised, PSP awards will be counted towards the
shareholding guidelines.
Given the limited number of direct comparator companies to the Company, the relative TSR peer group is to be broadened from a
small number of our competitors for the 2015 awards so that it comprises the FTSE 250 Index constituents (excluding investment
trusts). Use of a broader TSR peer group is considered to have the potential to provide a keener alignment between performance
and reward over the long term as it limits the potential for the performance of one or two companies to disproportionately impact
the vesting result which had become the case in operating a small bespoke peer group.
There are no performance conditions for the Sharesave Scheme and SIP as they are all-employee share plans aimed at encouraging
wider employee share ownership.
The remuneration policy for the executive directors is designed with regard to the policy for employees across the Group
as a whole. There are some differences in the structure of the remuneration policy for executive directors and other senior
employees, such as the higher Variable Pay maxima for the Chief Executive and Group Finance Director and Variable Pay targets
weighted 70 per cent on divisional and 30 per cent on Group performance, which the Committee believes is necessary to reflect
the different levels of responsibility of employees across the Group. In particular, as remuneration levels overall are higher,
performance-linked variable pay comprises a much higher proportion of remuneration at more senior levels and there is more
of a focus on Group results, rather than business unit or individual performance. This provides a stronger alignment of interest
between senior executives and investors.
Specifically, benefits provided to executive directors (with the provision of a cash allowance and/or company car benefit the element
that is considered significant in value terms and limited to £30,000) are aligned with those provided to senior managers across the
Group, as is participation in the PSP, which is limited to the top 130 or so senior employees. Senior employees below Executive Board
level are provided with lower levels of awards that may only have an EPS-based performance condition.
The Shareholding Guidelines, which are to be increased from the current 100 per cent of base salary to 200 per cent of base salary,
are not applicable other than to the executive directors.
For the avoidance of doubt, in approving this Directors’ Remuneration Policy, authority is given to the Company to honour any
commitments entered into with current or former directors (such as the payment of a pension or the vesting or exercise of past
share awards) that have either been set out in the previously approved remuneration policy or remuneration reports or disclosed
to and approved by shareholders and in respect of outstanding share awards as detailed on pages 95 to 98 of the Annual Report
on Remuneration. Details of any payments to former directors will be set out in the Annual Report on Remuneration as they arise.
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DIRECTORS’ REMUNERATION REPORT
CONTINUED
DISCRETION RETAINED BY THE COMMITTEE
Remuneration payments can only be made if they are consistent
with the approved Remuneration Policy, the relevant plan
rules or are otherwise approved by ordinary resolution of the
members of the Company.
Annual Variable Pay and Long-Term Incentive Plan flexibility
The Committee will operate the Company’s incentive plans
according to their respective rules and consistent with normal
market practice, the Listing Rules and HMRC rules, where
relevant, including flexibility and discretion in a number
of respects and as set out in the respective plan rules. In
particular, but without limitation, the Committee has flexibility
regarding: the testing of a performance condition over a
shortened performance period; how to deal with a change
of control or restructuring of the Group (as set out in more
detail on page 84); determination of a good/bad leaver for
incentive plan purposes; and adjustments required in certain
circumstances (e.g. rights issues, corporate restructuring,
events and special dividends).
£1,270,578
£1,116,824
£1,113,208
£671,684
40%
23%
£766,086
40%
23%
£668,068
40%
23%
£366,824
22%
27%
£420,578
22%
27%
£363,208
22%
27%
100%
55%
33%
100%
55%
33%
100%
55%
33%
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Managing Director,
Equipment Services
Managing Director,
Support Services
Managing Director,
Developments and UK Construction
Assumptions:
The Committee also retains the discretion to:
• Minimum – fixed pay only, based on salary effective
• adjust the targets and/or set different measures and alter
weightings for the Annual Variable Pay arrangements and
PSP, or to remove the effects of “one-off” events in relation
to the PSP, if events occur that cause it to determine that
the metrics are no longer appropriate and amendment
is required so they can achieve their original intended
purpose; and
• waive some or all of the shareholding guidelines or
the requirement to invest Annual Variable Pay in
Company shares and retain share awards on vesting
in exceptional circumstances.
DIRECTORS’ REMUNERATION SCENARIOS
The charts below show how the composition of the executive
directors’ remuneration packages varies at different levels of
performance under the remuneration policy to be implemented
in 2015. A substantial portion of the remuneration packages are
performance related and therefore this is illustrated for three
different performance scenarios: minimum (fixed pay only), on-
target performance and maximum performance.
£2,169,259
£1,284,419
38%
22%
£656,759
27%
32%
£1,420,694
£841,526
22%
27%
38%
32%
£430,694
100%
51%
30%
100%
51%
30%
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Chief Executive
Finance Director
LTIP
Annual Variable Pay
Fixed Pay
1 January 2015 (excluding any mid-year review), 15 per
cent of salary pension contribution (or 15 per cent of
salary contribution in lieu of pension) and benefits
received in the 2014 financial year.
• On-target – minimum plus 50 per cent of the maximum
payout under the Annual Variable Pay scheme, and 65 per
cent PSP vesting.
• Maximum – minimum plus 100 per cent of the maximum
payout under the Annual Variable Pay scheme, and full
PSP vesting.
Dividend equivalent payments provided for under the PSP have
been disregarded and no share price growth assumed for the
purposes of these charts.
SERVICE CONTRACTS AND POLICY
ON PAYMENTS FOR LOSS OF OFFICE
Service contract policy
All newly-appointed executive directors will have contracts
terminable at any time on up to one year’s notice. Under the
terms of the contract, should notice be served by either party,
the executives can continue to receive basic salary, benefits
and pension for the duration of their notice period during which
time the Company may require the individual to continue to
fulfil their current duties or may assign a period of garden leave.
Contracts also contain the ability, at the Company’s discretion,
to make a payment in lieu of notice of up to of one year’s basic
annual salary.
Details of the current executive directors’ service contracts
are summarised on the following page. Each contract has an
indefinite unexpired term and a notice period of one year.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
83
Name
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Date of contract
10 January 2008
30 November 2010
10 January 2008
13 December 2001
1 January 2011
Copies of the service contracts are available for inspection by
shareholders at the AGM. The Committee will continue to keep
under review the terms of executive directors’ service contracts.
The table below summarises the policy on payments to
executive directors for loss of office. The overriding principle
will be to honour contractual remuneration entitlements and
determine on an equitable basis the appropriate treatment
of deferred and performance-linked elements of the package,
taking account of the circumstances.
Payments for loss of office can only be made if they are
consistent with the approved Remuneration Policy or are
otherwise approved by ordinary resolution of the members of
the Company. Failure will not be rewarded.
Element
Salary (after cessation
of employment)
Resignation1
Nil
Good leaver3
Nil
Departure on agreed terms2
For existing directors up to one year’s basic
salary. Newly-appointed executive directors can
continue to receive basic salary for the duration
of their notice period of one year. The Company
will have the discretion to make a payment
in lieu of notice (“PILON”) comprising up to
12 monthly instalments of base salary which
would be mitigated proportionate to income
received through alternative employment.
Pension and benefits
Nil
For existing directors up to one year’s
benefits and pension.
Nil
Annual Variable Pay
Performance Share Plan
Nil if the executive
departs before the
payment date unless
the Committee
determines otherwise.
All awards, including those
which have vested but
are unexercised will lapse
immediately upon cessation
of employment.
For newly-appointed directors up to one
year’s benefits and pension as part of the
PILON as detailed above.
May be payable at the discretion of the
Committee based upon performance and
pro-rated for the proportion of the financial
year worked. No payment will be made in
respect of any period of notice not worked.
Awards will lapse upon cessation of
employment unless the Committee decides
otherwise in which case awards may be
exercised within 12 months of the vesting date.
Where employment ends before the vesting
date, awards may only be exercised to the
extent that the performance conditions have
been satisfied, but will be reduced pro-rata
based upon the period of time after the grant
date and ending on the date of cessation
of employment relative to the three-year
performance period unless the Committee,
acting fairly and reasonably, decides that
such a reduction is inappropriate in any
particular case.
May be payable at the discretion
of the Committee based on
performance pro-rated for the
proportion of the financial year
worked.
Awards may be exercised within
12 months of the vesting date.
Where employment ends before
the vesting date, awards may only
be exercised to the extent that
the performance conditions have
been satisfied, but will be reduced
pro-rata based upon the period
of time after the grant date and
ending on the date of cessation of
employment relative to the three-
year performance period unless
the Committee, acting fairly and
reasonably, decides that such a
reduction is inappropriate in any
particular case.
All-employee share schemes
(Sharesave and SIP)
In accordance with the
scheme rules.
Other payments
Nil
Depending upon circumstances the Committee
may consider payments in respect of any
statutory entitlements, outplacement support
and assistance with legal fees.
Nil
1For example, normal resignation from the Company or termination for cause (e.g. gross misconduct).
2 This may cover a range of circumstances such as business reorganisation, changes in reporting lines, change in need for the role, termination as a result of a
failure to be re-elected at an AGM.
3 For compassionate reasons such as death, injury or disability, retirement with the agreement of the employer. Should a compromise agreement be reached with
an individual, in terms of quantum it will be within the maximum amounts set out above.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
84
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
There are no provisions in executive directors’ service agreements entitling them to terminate their employment or receive damages
in the event of a change in control of the Company. The Annual Variable Pay scheme does not include any provision entitling early or
any payment to be made on a change in control of the Company.
In the event of change of control, PSP awards would be eligible to vest based on (i) the extent to which performance targets had
been met, as assessed by the Committee, over the shortened performance period and (ii) subject to a pro-rata reduction for time
(which the Committee retains discretion to disapply if it considers it appropriate to do so). As an alternative, and in agreement with
an acquiring company, the awards may be replaced with equivalent awards in the acquiring company’s shares.
The Sharesave Scheme provides that if a change in control of the Company occurs, any options may be exercised within a month
(or such longer period as the Board may permit up to a maximum of six months). There are also rollover provisions similar to those
under the PSP explained above.
RECRUITMENT REMUNERATION
In cases where the Company recruits a new executive director, the Committee will follow the policy set out below to determine his/
her ongoing remuneration package. In arriving at a total package and in considering quantum for each element of the package, the
Committee will take into account the skills and experience of the candidate, the market rate for a candidate of that experience as
well as the importance of securing the preferred candidate. The remuneration package for a new executive director would be set in
accordance with the terms of the Company’s approved remuneration policy in force at the time of appointment.
Element
Salary
General policy
Specifics
At a level required to attract the most
appropriate candidate.
Discretion to pay a lower basic salary with increases at a rate above
inflation over two to three years as the new appointee becomes
established in the role.
Pension and benefits
In line with Company policies.
Where appropriate, relocation expenses/arrangements may be provided.
Annual Variable Pay
In line with existing schemes.
Performance
Share Plan
Other share awards
or remuneration1
Maximum opportunity 100% of base salary
or in the case of a Chief Executive or Group
Finance Director, 125% of base salary.
In line with Company policies and PSP rules.
Maximum award up to 200% of basic salary
(at the date of grant) may be made.
The Committee may make an incentive
award to replace remuneration forfeited on
an executive leaving a previous employer,
where to do so would be in the commercial
interests of the Company.
Specific targets could be introduced for an individual where necessary
for the first year of appointment if it is appropriate to do so to reflect
the individual’s responsibilities and the point in the year in which they
joined the Board.
An award may be made in the year of joining or, alternatively, the
award can be delayed until the following year. Targets would be the
same as for other directors.
Awards would, where possible, take into account the awards forfeited
in terms of vesting periods, expected value and performance conditions.
For unvested performance-related awards, awards of broadly similar
quantum (allowing for the impact of any performance targets), with
appropriate performance conditions.
1The Committee may make use of the flexibility provided in the Listing Rules to make such awards if deemed appropriate in terms of replacing forfeited variable pay.
In the case of an internal appointment, any variable pay element awarded in respect of the prior role may be allowed to pay
out according to its terms on grant, adjusted as relevant to take into account the appointment. In addition, any other ongoing
remuneration obligations existing prior to appointment may continue as appropriate.
EXTERNAL DIRECTORSHIPS
The Board is comfortable with the principle of executive directors sitting on another company board as a non-executive in order to
assist with their development, subject to the prior approval of the Chief Executive and the Board. Any fees earned in that capacity
may be retained by the executive director.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
85
TERMS OF APPOINTMENT AND REMUNERATION POLICY FOR NON-EXECUTIVE DIRECTORS
Non-executive directors are appointed initially until the first AGM of the Company following appointment, when they are required
to stand for election by shareholders. Non-executive directors do not have service contracts, they are engaged by letters of
appointment which are terminable upon one month’s notice by either party, without compensation, save for the Group Chairman
whose appointment is terminable upon six months’ notice by either party, without compensation.
The dates of appointment of the non-executive directors are set out below:
Name
Lord Blackwell
L G Cullen
A K Fahy
R J King1
K L Ludeman
N R Salmon1
D A Thorpe2
Date first appointed
1 September 2005
1 October 2005
1 January 2013
1 September 2014
1 January 2011
1 August 2014
1 January 2009
Date last re-elected
13 May 2014
13 May 2014
13 May 2014
n/a
13 May 2014
n/a
13 May 2014
1Russell King and Nick Salmon will be proposed for election by shareholders at the forthcoming AGM on 12 May 2015.
2David Thorpe resigned on 31 August 2014.
SUMMARY OF REMUNERATION POLICY FOR NON-EXECUTIVE DIRECTORS
Element
Fees
Purpose and link to strategy
How operated in practice
To recruit and maintain
non-executives of a suitable
calibre for the role and
duties required.
The Group Chairman’s fee is reviewed by the Committee
(without the Group Chairman present).
The remuneration policy for the non-executive directors, other
than the Group Chairman, is determined by a sub-committee of the
Board comprising the Group Chairman and the executive directors.
Non-executive directors receive a fee for carrying out their
duties, together with additional fees for the Senior Independent
Director and for those non-executive directors who chair
the primary Board committees (i.e. Audit and Remuneration
Committees). Other fees may be introduced if considered
appropriate, for example in the event of exceptional levels of
additional time being required, or new responsibilities being
assigned in response to corporate developments.
The non-executive directors and the Group Chairman do not
currently receive benefits, but the Board retains a discretion to
introduce such benefits if considered appropriate (e.g. paying
reasonable travel expenses incurred undertaking Company business
to keep individuals whole on a net of tax basis). Small tokens with a
value not exceeding £1,000 may be made to mark significant events
(e.g. long service, retirement etc).
The fees of the non-executive directors are determined by the
Board taking into account amounts paid by other similar-sized
listed companies, the time commitment of the individual, role
and responsibilities. Fees are reviewed in detail biennially with
an annual interim review.
Maximum opportunity
There is no prescribed
maximum annual increase.
The Committee is guided
by the general increase in
the non-executive director
market and for the broader
employee population but
on occasions may need to
recognise, for example, an
increase in the scale, scope
or responsibility of the role.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 86
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
CONSIDERATION OF EMPLOYEE VIEWS
Although the Committee does not consult directly with
employees on executive remuneration we do run a biennial
employee survey where employees are able to express their
views on a range of issues including their own remuneration.
The Committee considers the general basic salary increase as
well as pay and conditions for the broader salaried employee
population when determining the annual salary increases for
the executive directors.
The Committee receives an annual report for all employees
whose basic salary is in excess of £150,000 p.a., detailing the
significant elements which make up total remuneration. This
enables the Committee to assess the impact of remuneration
decisions upon the total cost of employment.
CONSIDERATION OF SHAREHOLDER VIEWS
The Committee considers any shareholder feedback received
in relation to the AGM as well as taking into account the
general climate regarding executive pay. This feedback, plus
any additional feedback received during any other shareholder
meetings from time to time, is then considered as part of the
Company’s annual review of remuneration policy.
In view of the proposed adjustments to the executive directors’
base salaries and changes to the Remuneration Policy, the
Committee Chairman and Company Secretary consulted with
eight of the major shareholders who, between them, own
around 37 per cent of the Company as well as the Investment
Association (following its merger with ABI Investment Affairs)
and ISS on the proposed revisions to the Remuneration Policy.
Whilst they were supportive of the proposals there was also
desire amongst some for the executive directors to hold more
Company shares. This has been reflected in the Remuneration
Policy through an increase in the Shareholding Guidelines
from 100 per cent to 200 per cent of annual base salary, the
requirement to continue to purchase shares from a proportion of
any net of tax payments received under the Annual Variable Pay
scheme, and a two-year holding period for any net of tax shares
vesting under the PSP, even after the increased Shareholding
Guidelines have been satisfied.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
87
ANNUAL REPORT ON REMUNERATION
HOW THE DIRECTORS’ REMUNERATION POLICY
WILL BE APPLIED FOR THE YEAR ENDING
31 DECEMBER 2015
A summary of how the Directors’ Remuneration Policy will
be applied during the year ending 31 December 2015 is set
out below.
Salaries for executive directors
Salaries are reviewed annually with increases effective from
July of each year.
The salaries for the executive directors are set out in the
table below:
Name
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Salary as at
1 January 2015
£
Salary as at
1 January 2014
£
Percentage
change
300,000
360,000
340,000
550,000
300,000
277,299
335,465
277,299
465,863
277,299
8.2
7.3
22.6
18.1
8.2
While the Committee is sensitive to the fact that the
percentages of salary adjustments above have the potential
to appear high in a wider market context, the salary increases
were set to take account of the increased scale, breadth and
sophistication of the current business following a period of
transformational growth at Interserve.
As noted in the Remuneration Committee Chairman’s
introductory letter, a combination of organic growth in tandem
with targeted acquisitions (e.g. Advantage Healthcare, Paragon,
TOCO, Adyard, Initial Facilities and esg) have transformed the
footprint of the Group. As the Group has grown, only limited
revisions have taken place to take account of the increased
responsibilities contained within individual roles (e.g. salary
increases since 2008 have largely related to cost of living
focused increases as opposed to reflecting changes within
the Group).
Given the platform for further growth that has now been
established, at a time when there have been material changes
within the leadership teams of our comparator companies,
the Committee considered it appropriate to bring current
salary levels into line with individuals’ current roles and
responsibilities which also required addressing the shortfall in
remuneration that was identified during the Committee’s review
of remuneration vis-à-vis remuneration levels in appropriate
comparator companies. This position has now been achieved
(with effect from 1 July 2014) based on the revised salaries set
out in the table above. The level of salary increases awarded
was informed by market data; however, the Committee’s
primary focus in increasing salaries was to ensure that
appropriate relativities between the executive positions were
achieved in light of their individual responsibilities. The timing
of the salary increases reflected the conclusion of the work
undertaken by the Committee with implementation taking place
following consultation with the Company’s major shareholders
and the leading shareholder protection bodies.
In terms of the salary increases awarded to Adrian Ringrose and
Tim Haywood, their executive responsibilities have increased as
a result of the growth and enhanced breadth of service offering
achieved by the Group over the past three to four years, with
Mr Haywood also now championing the Group’s SustainAbilities
agenda. Bruce Melizan’s role has expanded significantly
following the c50 per cent increase in the size of the Support
Services division following the Initial Facilities acquisition.
Steven Dance champions health and safety within the Group,
a role which has also expanded considerably as a result of
recent acquisitions both in the UK and internationally, and
which previously fell within the remit of David Paterson until
his retirement. Dougie Sutherland’s role includes leadership of
M&A, the significantly expanded front-line services business and
leadership of UK Construction’s operations (which Mr Paterson
occupied until his retirement).
Following the consultation exercise with our major shareholders
in relation to the above salary increases, consideration was
given to the merits of phasing the adjustments to salary over a
number of years. However, in view of the factors noted above,
the Committee took the view that it needed to ensure that the
executive directors’ remuneration was positioned appropriately
at the current time to both retain and motivate the executive
team. This, in the opinion of the Committee, necessitated
adjusting salaries in one step.
Tim Haywood is a non-executive director of Tarsus Group plc for
which he receives a fee of £51,000 per annum. Bruce Melizan is
an unremunerated director of the Safer London Foundation.
Annual Variable Pay
The maximum Annual Variable Pay potential for the year
ending 31 December 2015 will remain at 100 per cent of basic
salary for Steven Dance, Bruce Melizan and Dougie Sutherland.
For Adrian Ringrose and Tim Haywood there is an additional
opportunity to earn up to a further 25 per cent of basic annual
salary for delivery of personal targets in relation to specific
strategic areas which the Board is targeting for 2015.
The targets to apply to Annual Variable Pay earned up to
100 per cent of salary are designed to provide a balance
between incentivising profitable growth, through targeting
improved Normalised EPS (defined as headline EPS adjusted
to exclude IAS 36 Impairment of assets and IAS 39 Financial
instruments and any unbudgeted “one-off” contributions to EPS
which the Committee exercises its discretion to exclude) (up to
80 per cent of the maximum), and the efficient use of capital
employed (up to 20 per cent of maximum).
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 88
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
The EPS targets will operate on a broadly consistent basis to
2014, with performance measured against a challenging sliding
scale of Normalised EPS1 growth targets (10 per cent of salary
is earned for achieving the threshold target through to 100 per
cent of salary for achieving the maximum target). With regard
to the capital-employed targets, these will be measured based
on capital-employed days compared against the Company’s
internal targets (33 per cent of this part of the Variable Pay is
earned for delivering the threshold targeted improvement with
a sliding scale operating through to earning a maximum payment
for achieving the targeted improvements in full).
1 Normalised EPS is Headline EPS adjusted to exclude IAS 36 Impairment
of assets and IAS 39 Financial instruments and any unbudgeted
“one-off” contributions to EPS which the Committee exercises
its discretion to exclude.
Since disclosure in advance of the specific EPS numbers and
capital-employed targets included in these parts of the Annual
Variable Pay scheme are considered commercially sensitive,
disclosure as to our performance against the targets set will
be set out in full retrospectively in the 2015 Annual Report on
Remuneration (subject to any price sensitivity considerations in
respect of the capital-employed targets).
These include:
Position
Metric
Chief
Executive
1. Deliver the Board’s SustainAbilities agenda
(up to 50% of this part of the additional Variable Pay).
Group
Finance
Director
2. Achievement of Group Annual Safety Plan targets
(up to 50% of this part of the additional Variable Pay).
1. Deliver the Board’s SustainAbilities agenda
(up to 50% of this part of the additional Variable Pay).
2. Achievement against personal objectives relating to
improved financial processes and financial management
(up to 50% of this part of the additional Variable Pay).
This additional Variable Pay is to be earned based on clearly
defined targets for each metric. In relation to any payment in
connection with the above targets, the Committee will retain
discretion to reduce these elements of Variable Pay (to zero)
if it considers it appropriate to do so in light of the Company’s
overall financial performance achieved during the year.
In relation to disclosure against the strategic targets noted
above, our expectations are that, as a minimum, commentary
as to the extent of achievement against each objective will be
included or, where possible, full disclosure will be provided
where targets are not considered commercially sensitive in
the 2015 Annual Report on Remuneration.
Performance Share Plan
Awards will be made in 2015 to executive directors over
shares worth 150 per cent of basic salary as at the date of
grant, subject to the following performance conditions:
Earnings per share growth
Normalised EPS1 growth of the Company
over the performance period
Vesting percentage of two-thirds
of shares subject to the award
Less than 18%
18% to 32%
32% to 58%
0%
25% to 65% (pro-rated)
65% to 100% (pro rated)
Greater than 58%
100%
1 Normalised EPS is Headline earnings per share adjusted to reflect growth in
underlying value created by (a) removing the impact of IAS 36 Impairment of
assets and IAS 39 Financial instruments; and (b) recognising or removing “one-
off” events at the judgement of the Committee. For the 2015 awards vesting
in 2018, the Committee intends to exercise discretion such that the award will
reflect the underlying earnings growth, in line with our strategic ambitions.
In setting the above targets, the Committee considered the
Company’s internal planning expectations alongside current
consensus market expectations. Having had due regard to
these factors, the Committee is comfortable that the targets
are appropriately demanding, providing a realistic incentive
at the lower end of the performance range, but with full
vesting requiring exceptional outperformance given the
current commercial environment.
This sliding scale of EPS performance and vesting is shown
graphically below:
100%
80%
60%
40%
20%
d
r
a
w
a
f
o
s
d
r
i
h
t
-
o
w
t
r
o
f
g
n
i
t
s
e
v
e
g
a
t
n
e
c
r
e
P
0%
0%
18%
32%
58%
10%
20%
30%
40%
50%
60%
70%
80%
Adjusted EPS growth over performance period
Growth in normalised EPS will be determined by the Committee
after verifying calculations made internally.
GOVERNANCE
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
89
The Board’s strategy continues to focus on delivering long-
term profitable growth and generating above market long-term
returns to our shareholders. The ongoing use of EPS growth
targets and relative TSR targets is considered to provide
alignment between the Board’s strategy and the executive’s
long-term reward. The targets are weighted towards EPS
performance since this is the key metric targeted internally for
growth and supports our objective of continuing to operate a
progressive dividend policy.
Total shareholder return
Vesting of the other third of an award will be dependent upon
the Company’s performance in terms of TSR, as measured
against the TSR of each company in the FTSE 250, excluding
investment trusts.
Given the limited number of direct comparator companies,
the use of the above broader TSR peer group is considered
to have the potential to provide a keener alignment between
performance and reward over the long term as it limits the
potential for the performance of one or two companies to
disproportionately impact the vesting result which had become
the case in operating a small bespoke peer group.
TSR is calculated as the percentage change in the net return
index from the start to the end of the three-year performance
period commencing on the first day of the 2015 financial
year1. This measures the return to an investor on a holding of
Interserve shares.
The TSR performance conditions are set out in the table below:
TSR ranking of the Company compared to the
Comparator Group over the performance period
Vesting percentage of one-third
of shares subject to the award
Below median ranking
Median ranking (top 50%)
0%
25%
Median to upper quartile ranking
25% to 100% (pro-rated)
Upper quartile ranking (top 25%)
100%
1 The return index at the start of the performance period is the average
of the net return index over the three months preceding the start of the
performance period. The return index at the end of the performance period
is the average of the return index over the last three months of
the performance period.
This sliding scale of TSR performance and vesting is shown
graphically below:
100% vesting at
Upper Quartile
25% vesting at Median
d
r
a
w
a
f
o
d
r
i
h
t
-
e
n
o
r
o
f
g
n
i
t
s
e
v
e
g
a
t
n
e
c
r
e
P
100%
75%
50%
25%
0%
Median
Upper Quartile
TSR ranking of the Company
Non-executive director fees
The fee levels for the non-executive directors for 2015 are set
out in the table below:
Element
Fee effective
1 January 2015
£
Fee effective
1 January 2014
£
Percentage
change
Fee paid to Group Chairman
165,000
150,000
Base fee paid to other
non-executive directors
Supplementary fees:
50,000
45,100
– Senior Independent Director
– Audit Committee Chairman
7,000
10,000
7,000
10,000
– Remuneration
Committee Chairman
10,000
9,000
– Nomination
Committee Chairman
See note1
See note1
10.0
10.9
nil
nil
11.1
n/a
1 The Group Chairman is Chairman of the Nomination Committee and receives
no supplementary fee for chairing this committee.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
90
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
HOW THE REMUNERATION POLICY WAS APPLIED FOR THE YEAR ENDED 31 DECEMBER 2014
This section is audited.
The table below shows the remuneration paid to each director. Further detail is included in the additional tables overleaf.
Remuneration paid to each director
£
Executive directors
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Sub-total
Non-executive directors
Lord Blackwell
L G Cullen
A K Fahy
R J King1
K L Ludeman
N R Salmon2
D A Thorpe3
Sub-total
Former directors
Total
Year
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Salary
& Fees
Taxable
Benefits
Annual
Variable Pay
PSP4/5
Pension
Other
remuneration9
Total
288,650
273,261
347,732
330,579
308,650
273,261
507,931
459,078
288,650
273,261
1,741,613
1,609,440
150,000
143,000
52,100
50,641
55,100
47,846
15,033
–
49,100
44,000
18,792
–
36,067
49,000
376,192
334,487
–
108,310
2,117,805
2,052,237
21,824
20,964
16,694
15,860
29,578
32,931
24,259
23,015
18,208
15,465
110,563
108,235
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,639
110,563
114,874
187,770
162,719
225,324
196,851
212,806
162,719
344,245
273,368
187,770
162,719
1,157,915
958,376
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,157,915
958,376
504,7754
731,1385
610,6554
884,5045
504,7754
731,1385
848,0254
1,228,3175
453,0704
656,2405
2,921,3004
4,231,3375
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
177,0134/10
494,313
3,098,313
4,725,650
32,8996/7
40,9896
43,9866/7
49,5876
46,2976/7
40,9897
76,1906/7
68,8627
43,2976/7
40,9896/8
242,669
241,416
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,461
242,669
254,877
1,679
1,233
1,593
–
1,593
–
–
1,233
–
1,233
4,865
3,699
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,865
3,699
1,037,597
1,230,304
1,245,984
1,477,381
1,103,699
1,241,038
1,800,650
2,053,873
990,995
1,149,907
6,178,925
7,152,503
150,000
143,000
52,100
50,641
55,100
47,846
15,033
–
49,100
44,000
18,792
–
36,067
49,000
376,192
334,487
177,013
622,723
6,732,130
8,109,713
1Russell King was appointed on 1 September 2014.
2Nick Salmon was appointed on 1 August 2014.
3David Thorpe resigned on 31 August 2014.
4 The share price used to calculate the value of shares for the 2012 PSP awards (which will vest on 11 April 2015) was 583.02p, being the three-month average to
31 December 2014. This will be adjusted in the 2015 report to reflect the actual value once the share price on the date of vesting is known. The values above
also include a dividend equivalent of 65.0p per vested share inclusive of the final dividend for 2014 which is subject to shareholder approval at the 2015 AGM.
5 The share price used to calculate the value of shares for the 2011 PSP awards that vested on 20 April 2014 was the market value on that date, being 672.00p. The
values above also include a dividend equivalent payment of 61.0p per vested share. For the amount realised on exercise, please refer to the PSP table on page 95.
6Excludes SMART contributions but includes Company contributions where applicable (see table included in the Directors’ Pension Entitlements section on page 93).
7Includes 15 per cent salary supplement in lieu of pension contributions.
8Includes 15 per cent salary supplement (£27,528) in lieu of pension contributions for the period 1 May to 31 December 2013.
9Gains made on the exercise of options under the Sharesave Scheme (see table on page 98).
10 David Paterson retired on 30 April 2013. He received no payment for loss of office. His 2012 PSP awards have been scaled back in accordance with the rules of
the scheme and with the good leaver provisions set out in the policy for payments for loss of office on page 83.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
91
Additional notes to the directors’ remuneration table
1. Taxable benefits
The table below sets out the constituent elements of the taxable benefits for the executive directors:
Executive director
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Total
Year
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Company car
£
13,631
13,188
10,441
9,961
15,797
15,206
–
–
–
–
39,869
38,355
Cash allowance
in lieu of
company car
£
Fuel benefit
£
Travel
allowance
£
Medical
insurance
£
–
–
–
–
–
–
19,192
19,192
13,896
13,896
33,088
33,088
6,624
6,207
4,684
4,330
1,428
5,372
3,498
2,254
2,743
–
–
–
–
–
10,784
10,784
–
–
–
–
18,977
18,163
10,784
10,784
1,569
1,569
1,569
1,569
1,569
1,569
1,569
1,569
1,569
1,569
7,845
7,845
Total
£
21,824
20,964
16,694
15,860
29,578
32,931
24,259
23,015
18,208
15,465
110,563
108,235
2. Determination of 2014 Annual Variable Pay
In the Circular to Shareholders seeking approval for the Initial Facilities acquisition, the Committee undertook to increase the
Normalised EPS growth required to achieve entry, threshold and on-target performance for the EPS element of awards made
under the Annual Variable Pay scheme should shareholders approve the transaction.
The performance measures were therefore adjusted as set out in the table below:
Required performance
Less than 95% of budgeted Normalised EPS
Between 95% and 100% of budgeted Normalised EPS
Between budgeted Normalised EPS and 135% of budgeted Normalised EPS
Percentage of maximum
Annual Variable Pay award
Pre-transaction target
(Normalised EPS1)
Post-transaction target
(Normalised EPS1)
0%
10% to 50%
50% to 100%
49.1 pence
51.7 pence
69.8 pence
52.3 pence
55.1 pence
69.8 pence
The revised performance targets were adjusted to take into account the planned additional earnings during the 2014 financial
year from the Initial Facilities acquisition. The Committee was comfortable that, following the adjustment, the targets remained
equally challenging.
The Annual Variable Pay for 2014 was determined with reference to performance over the financial year ending 31 December 2014.
The performance measures and targets, as well as performance against them, are set out below:
Metric
Normalised EPS1
Performance target
See above
Actual performance
Maximum annual award
as percentage of salary
Actual annual award
as percentage of salary
58.8 pence per share
(Normalised EPS1 growth of 23.27%)
100%
62.59%
1 Normalised EPS is defined as Headline EPS adjusted to exclude IAS 36 Impairment of assets and IAS 39 Financial instruments and any unbudgeted “one-off”
contributions to EPS which the Committee exercises its discretion to exclude.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 92
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
3. Determination of EPS performance conditions for awards
made under the Performance Share Plan in 2014
In the Circular to Shareholders seeking approval for the Initial
Facilities acquisition, the Committee undertook to increase the
Normalised EPS growth required to achieve the threshold and
on-target performance for the EPS element of awards to be
made to the executive directors under the Performance Share
Plan should the transaction be approved. The revised targets
set out below take into account the Committee’s view on the
additional earnings potential from the acquisition.
Pre-acquisition Normalised
EPS1 growth of the Company
over the performance period
Post-acquisition Normalised
EPS1 growth of the Company
over the performance period
Vesting percentage of
two-thirds of shares
subject to the award
Less than 32%
32% to 83%
Less than 40.46%
40.46% to 83%
Greater than 83%
Greater than 83%
0%
25% to 100%
(pro-rated)
100%
1 Normalised EPS is defined as Headline EPS adjusted to reflect growth in
underlying value created by (a) removing the impact of IAS 36 Impairment of
assets and IAS 39 Financial instruments; and (b) recognising or removing “one
off” events at the judgement of the Committee. For the 2014 awards vesting
in 2017, the Committee intends to exercise discretion such that the awards will
reflect the underlying earnings growth in line with our strategic ambitions.
4. Determination of Performance Share Plan payments for 2014
The analysis below explains how the Performance Share Plan
payments for the performance period ending 31 December 2014
were determined.
The PSP awards granted on 11 April 2012 were based on
performance over the three-year period from 1 January 2012
to 31 December 2014 and were subject to the following
performance conditions:
The EPS Performance Condition for two-thirds of the 2012 Awards
Normalised EPS1 growth of the Company
over the performance period
Vesting percentage of two-thirds
of shares subject to the award
0%
In testing the performance condition, basic EPS was adjusted to
take into account the change from IAS 19 to IAS 19R (pensions)
and for the treatment of exceptional items and intangible
asset amortisation, the majority of which related to the Initial
Facilities acquisition (thus ensuring that the condition was
tested on a consistent basis). Following this adjustment, growth
in Normalised EPS over the three-year performance period for
the 2012 award was 27.6 per cent. Accordingly, 31.34 per cent
of the EPS element of those awards will vest. In making the
adjustment the Committee was comfortable that the degree
of stretch in the original performance target was maintained
in light of the acquisition and the change in the accounting
standard and took comfort from the fact that the same result
had been achieved as if Headline EPS had been used across
the performance period (i.e. the adjustments resulted in the
condition measuring underlying growth in EPS which was the
original intention when the target was set).
The TSR Performance Condition for one-third of the 2012 Awards
This condition is determined by comparing the Company’s TSR
performance to the TSR of each of a defined list of comparator
companies drawn from the Construction and Materials, and
Support Services sectors, comprising Atkins (WS), Babcock
International, Balfour Beatty, Capita Group, Carillion, Costain
Group, Kier Group, May Gurney Integrated Services, MITIE
Group, Morgan Sindall, Mouchel Group, Rentokil Initial, RPS
Group, Serco and WSP Group.
TSR ranking of the Company compared to the
Comparator Group over the performance period
Vesting percentage of one-third
of shares subject to the award
Below median ranking
Median ranking (top 50%)
0%
30%
Median to upper quartile ranking
30% to 100% (pro-rated)
Upper quartile ranking (top 25%)
100%
Growth in TSR was 111.6 per cent over the three-year
performance period, which was in the upper quartile,
meaning that the TSR element of the awards will vest in full.
20% to 50% (pro-rated)
50% to 100% (pro-rated)
The 2012 PSP awards were granted in the form of nil-cost
options, exercisable between 11 April 2015 and 10 April 2017.
100%
Less than 20%
20% to 40%
40% to 60%
Greater than 60%
1 Normalised EPS is defined as basic EPS adjusted to remove the effect of
IAS 36 Impairment of assets and IAS 39 Financial instruments and any return
generated from the sale of the Group’s PFI investments in excess of the
internal rate of return as set by the Board of directors of the Company at the
approval stage and any other items defined by the Committee.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
93
Dougie Sutherland also participated in the Company’s SMART
Bonus arrangement (available to all employees receiving an
annual bonus). The contribution paid by the Company in
respect of his SMART Bonus was £40,000 (2013: £39,680).
Members of the Scheme have the option to pay additional
voluntary contributions (“AVCs”). Neither the contributions nor
the resulting benefits of AVCs are included in the above table.
Non-executive directors’ fees are not pensionable.
Defined Benefit Scheme
Following the benefit changes to the Interserve Pension Scheme,
Adrian Ringrose ceased to accrue any further benefits in the
Defined Benefit section of the Scheme from 31 December 2009.
His accrued pension at that date was £72,337 per annum and
his pension will increase up to the point he draws his benefits
broadly in line with price inflation.
Performance graph
The graph below shows the value, on 31 December 2014, of
£100 invested in Interserve Plc on 31 December 2009 compared
with the value of £100 invested in the companies comprising
the Support Services sector of the FTSE All-Share Index. This
was chosen for comparison because it is considered to be the
relevant benchmark against which to compare our performance.
£
–
s
g
n
i
d
l
o
h
l
a
c
i
t
e
h
t
o
p
y
h
f
o
e
u
l
a
V
£500
£400
£300
£200
£100
£0
2009
Historical TSR Performance
Interserve Plc
FTSE All-Share Support Services
2010
2011
2012
2013
2014
Source: Thomson Reuters Datastream
The 2012 PSP awards will therefore vest as follows:
Executive director
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Number of
shares granted
Number of
shares to lapse
Number of
shares to vest
143,648
173,779
143,648
241,329
128,933
65,753
79,545
65,753
77,895
94,234
77,895
110,465
130,864
59,017
69,916
Dividend
equivalent on
shares to vest1
£
50,632
61,252
50,632
85,062
45,445
1 This includes a final dividend equivalent of 15.5p per share for the financial year
ended 31 December 2014, the corresponding dividend of which is subject to
approval by shareholders at the 2015 AGM. Accordingly, payment of this part of
the dividend equivalent will not be made until after the AGM.
5. Directors’ pension entitlements
Defined Contribution Scheme
As at 31 December 2014, all the executive directors were
deferred members of the Defined Contribution section of the
Interserve Pension Scheme prior to which only Steven Dance
and Dougie Sutherland participated in the Company’s SMART
Pensions arrangement (as detailed on page 77).
The table below shows, for each executive director, the amount
by which their base salaries were reduced and paid by the
Company into their pension scheme (SMART contributions),
together with the total contributions paid by the Company
(including SMART contributions but excluding SMART Bonus
and AVC arrangements).
Executive director
S L Dance1
T P Haywood2
B A Melizan3
A M Ringrose3
D I Sutherland4
Year
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Company
contributions
(excluding SMART
contributions)
£
Total Company
contributions
(including SMART
contributions)
£
SMART
contributions
£
10,399
40,989
8,174
49,587
–
–
–
–
–
2,101
8,786
–
581
–
–
–
–
–
12,500
49,775
8,174
50,168
–
–
–
–
–
13,461
3,963
17,424
1 Steven Dance became a deferred member of the Scheme with effect
from 5 April 2014 and received a 15 per cent salary supplement in lieu
of pension thereafter.
2 Tim Haywood became a deferred member of the Scheme with effect
from 28 February 2014 and received a 15 per cent salary supplement in
lieu of pension thereafter.
3 Bruce Melizan and Adrian Ringrose became deferred members of the Scheme
with effect from 1 January 2012 and 1 April 2012 respectively and received a
15 per cent salary supplement in lieu of pension thereafter.
4 Dougie Sutherland became a deferred member of the scheme with effect
from 5 April 2014 and received a 15 per cent salary supplement in lieu of
pension thereafter.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
94
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
Change in Chief Executive remuneration
The table below provides a summary of the Chief Executive’s
remuneration over the last six years:
2014
2013
2012
2011
2010
2009
1,800 1,969
1,928
1,318
619
1,087
Relative importance of spend on pay
The table below illustrates the change in expenditure by the
Company on remuneration paid to all the employees of the
Group against other significant distributions and payments from
the financial year ending 31 December 2013 compared to the
financial year ending 31 December 2014:
62.59%
59%
100%
100%
30%
98%
54.23% 100%
100%
50%
0%
50%
Overall expenditure on pay
Dividends paid
2014
£million
997.6
33.01
2013
£million
694.6
27.8
Percentage
change
43.62
18.71
Total remuneration
(£000)
Annual Variable Pay
(% of maximum)
PSP vesting
(% of maximum)
Percentage change in Chief Executive’s remuneration
compared to employees
The table below shows the percentage change in the Chief
Executive’s salary, benefits and annual bonus between the
financial years ending 31 December 2013 and 31 December 2014,
compared to the percentage increase for UK Senior Management
(on a per capita basis):
Salary
Chief Executive
Senior Management1
Benefits
Chief Executive
Senior Management1
Annual bonus
Chief Executive
Senior Management1
31 December 2014
Percentage change
18.1
15.1
12.8
10.1
25.9
22.3
1 The comparator group relates to UK Senior Management rather than all Group
employees. We have chosen this group because the Committee believes that it
provides a sufficient comparator group to give a reasonable understanding of
underlying increases based on similar remuneration constituents applicable to
Senior Management whilst reducing the distortion that would otherwise arise
from the changing mix between UK and overseas employees, the increase
during the year in the white-collar salaried workforce resulting from the Initial
Facilities acquisition and the mix of contract wins and losses.
1 Including the final dividend for 2014 of 15.5p per share which is subject to
shareholder approval at the AGM.
Performance Share Plan
The following grants were made to the executive directors
under the PSP during the year:
Executive director
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Number
of shares
61,908
74,893
61,908
104,005
61,908
Face value1
£
End of
performance period
429,642 31 December 2016
519,757 31 December 2016
429,642 31 December 2016
721,795 31 December 2016
429,642 31 December 2016
1 Valued using the share price at the date of grant (13 May 2014), being 694.00p
per share.
Awards were made in the form of nil-cost options equivalent to
150 per cent of base salary, exercisable between 13 May 2017
and 12 May 2019.
The performance conditions attached to these awards are set
out on page 96.
Achievement of the minimum performance over the
performance period would result in 26.66 per cent of the
awards vesting on 13 May 2017 together with the corresponding
dividend equivalent.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
95
The number of awards over shares in the Company (pursuant to the PSP) held by each person who served as an executive director of
the Company during the financial year, is shown below:
Date
granted
Balance as at
1 January
2014
Granted
during
year
Market price
at date
of award
pence
Vested
during
year
Market price
at date
of vesting
pence
Market price
at date
of exercise
pence
Lapsed
during
year
Executive director
261.00
99,746
672.00
671.50
S L Dance
20.04.11
99,746
11.04.12
143,648
09.04.13
85,770
–
–
–
275.80
466.10
275.80
466.10
275.80
466.10
275.80
466.10
275.80
466.10
13.05.14
–
61,908
694.00
T P Haywood
20.04.11
120,669
11.04.12
173,779
09.04.13
103,761
–
–
–
13.05.14
–
74,893
694.00
B A Melizan
20.04.11
99,746
11.04.12
143,648
09.04.13
85,770
–
–
–
13.05.14
–
61,908
694.00
A M Ringrose
20.04.11
167,574
11.04.12
241,329
09.04.13
144,094
–
–
–
13.05.14
– 104,005
694.00
D I Sutherland
20.04.11
89,528
11.04.12
128,933
09.04.13
85,770
–
–
–
13.05.14
–
61,908
694.00
261.00 120,669
672.00
671.50
261.00
99,746
672.00
671.50
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
261.00
89,528
672.00
671.50
Amount
realised on
exercise #
£
730,639
Balance as at
31 December
2014
–
n/a
143,648
n/a
85,770
n/a
61,908
883,900
–
n/a
173,779
n/a
103,761
n/a
74,893
730,639
–
n/a
143,648
n/a
85,770
n/a
61,908
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
n/a
241,329
n/a
144,094
n/a
104,005
655,793
–
n/a
128,933
n/a
85,770
n/a
61,908
Performance
period
01.01.11
– 31.12.131
01.01.12
– 31.12.142
01.01.13
– 31.12.153
01.01.14
– 31.12.164
01.01.11
– 31.12.131
01.01.12
– 31.12.142
01.01.13
– 31.12.153
01.01.14
– 31.12.164
01.01.11
– 31.12.131
01.01.12
– 31.12.142
01.01.13
– 31.12.153
01.01.14
– 31.12.164
01.01.11
– 31.12.131
01.01.12
– 31.12.142
01.01.13
– 31.12.153
01.01.14
– 31.12.164
01.01.11
– 31.12.131
01.01.12
– 31.12.142
01.01.13
– 31.12.153
01.01.14
– 31.12.164
261.00
167,574
672.00
671.50
– 1,227,480
–
# The share price used to calculate the amount realised on exercise was 671.5p, being the closing share price on 22 April 2014, i.e. the date
on which all the executive directors exercised their 2011 awards. This figure also includes a dividend equivalent payment of 61.0p per vested share.
*The maximum number of shares that could be receivable by the executive if the performance conditions set out overleaf are fully met:
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 96
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
1The EPS Performance Condition for the 2011 Awards
Adjusted Headline EPS growth of the Company over the performance period Vesting percentage of 50% of shares subject to the award
Less than 15%
15% to 30%
30% to 50%
Greater than 50%
0%
25% to 50% (pro-rated)
50% to 100% (pro-rated)
100%
The 2011 PSP awards were granted in the form of nil-cost options, exercisable between 20 April 2014 and 19 April 2016.
2The EPS Performance Condition for the 2012 Awards
Normalised EPS growth of the Company over the performance period
Vesting percentage of two-thirds of shares subject to the award
Less than 20%
20% to 40%
40% to 60%
Greater than 60%
0%
20% to 50% (pro-rated)
50% to 100% (pro-rated)
100%
The 2012 PSP awards were granted in the form of nil-cost options, exercisable between 11 April 2015 and 10 April 2017.
3The EPS Performance Condition for the 2013 Awards
Normalised EPS growth of the Company over the performance period
Vesting percentage of two-thirds of shares subject to the award
Less than 49%
49% to 58%
58% to 75%
Greater than 75%
0%
25% to 50% (pro-rated)
50% to 100% (pro-rated)
100%
The 2013 PSP awards were granted in the form of nil-cost options, exercisable between 9 April 2016 and 8 April 2018.
4The EPS Performance Condition for the 2014 Awards
Normalised EPS growth of the Company over the performance period
Vesting percentage of two-thirds of shares subject to the award
Less than 40.46%
40.46% to 83%
Greater than 83%
0%
25% to 100% (pro-rated)
100%
The 2014 PSP awards were granted in the form of nil-cost options, exercisable between 13 May 2017 and 12 May 2019.
These targets were adjusted in respect of the Initial Facilities acquisition. For full details refer to page 92.
1234The TSR Performance Condition
This condition is determined by comparing the Company’s TSR performance to the TSR of each of a defined list of comparator companies
drawn from the Construction and Materials, and Support Services sectors comprising Atkins (WS), Babcock International, Balfour Beatty,
Capita Group, Carillion, Costain Group, Kier Group, May Gurney Integrated Services (not after 2013), MITIE Group, Morgan Sindall, Mouchel
Group (not after 2012), Rentokil Initial, Rok (not after 2011), RPS Group, Serco, Spice (not after 2011) and WSP Group (not after 2012).
TSR ranking of the Company compared to the comparator
group over the performance period
Vesting percentage of 50% of shares subject to the award*
Below median ranking
Median ranking (top 50%)
Median to upper quartile ranking
Upper quartile ranking (top 25%)
0%
30%
30% to 100% (pro-rated)
100%
*Vesting percentage of 50 per cent was replaced by one-third for the 2012, 2013 and 2014 PSP awards.
The awards made in 2011 (measuring performance over the three years to 31 December 2013) vested in full on 20 April 2014 as the
Company’s TSR performance was above the upper quartile (top 25 per cent) TSR performance against the peer group and EPS growth
was greater than 50 per cent over the performance period (actual growth 77.53 per cent, including credit for the realised value from
PFI investments).
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
97
Share options
The number of options over shares in the Company (pursuant to the 2002 Executive Share Option Scheme) held by each person
who served as an executive director of the Company during the financial year, is shown below. All options are fully vested, having
achieved the respective performance conditions in previous financial periods. No further grants will be made under this Scheme.
Executive director
S L Dance
T P Haywood
Date
granted
n/a
n/a
–
–
B A Melizan
14.03.05
75,140
A M Ringrose
14.03.05
150,280
D I Sutherland
n/a
–
Balance as at
1 January
2014
Granted
during
year
Market price
at date
of award
pence
Exercise
price
pence
Exercised
during
year
Market price
at date
of exercise
pence
Lapsed
during
year
Amount
realised on
exercise
£
Balance as at
31 December
2014
–
–
–
–
–
n/a
n/a
n/a
n/a
358.25
359.33
358.25
359.33
n/a
n/a
–
–
–
–
–
n/a
n/a
n/a
n/a
n/a
–
–
–
–
–
n/a
n/a
–
–
–
75,140
n/a 150,280
Exercise
period
n/a
n/a
14.03.08
– 13.03.15
14.03.08
– 13.03.15
n/a
–
n/a
No options were granted during the year (2013: nil). The aggregate gain made on the exercise of options was £nil (2013: £711,673).
The market price of the shares as at 31 December 2014 was 557.50p. The highest and lowest market prices of the shares during the
financial year were 745.00p and 531.50p respectively.
Sharesave Scheme
The following grants were made to the executive directors under the Interserve Sharesave Scheme 2009 during the year:
Executive director
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Number of shares
Exercise price
pence
Face value
£
352
340
352
340
352
340
–
352
511.00
529.00
511.00
529.00
511.00
529.00
n/a
511.00
2,4521
2,0382
2,4521
2,0382
2,4521
2,0382
–
Exercise period
01.06.17 – 30.11.17
01.12.17 – 31.05.18
01.06.17 – 30.11.17
01.12.17 – 31.05.18
01.06.17 – 30.11.17
01.12.17 – 31.05.18
n/a
2,4521
01.06.17 – 30.11.17
1Valued using the share price at the date of grant (9 April 2014), being 696.50p per share.
2Valued using the share price at the date of grant (30 September 2014), being 599.50p per share.
All eligible employees are entitled to apply for options under the Sharesave Scheme. The maximum monthly savings amount is set
annually by the Remuneration Committee within HMRC limits. There are no performance conditions attached to these options.
The difference between the market price on the grant date and the exercise price is that, under the scheme rules, the exercise
price is calculated by taking the average of the mid-market closing share price for the five dealing days immediately preceding the
invitation date less a discount set by the Remuneration Committee of between 0 per cent and a maximum of 20 per cent.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 98
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
The number of options over 10p ordinary shares in the Company (pursuant to the Sharesave Scheme) held by each person who served
as an executive director of the Company during the financial year, is shown below:
Date
granted
Balance as at
1 January
2014
Granted
during
year
Market price
at date
of award
pence
Exercise
price
pence
Exercised
during
year
Market price
at date
of exercise
pence
Lapsed
during
year
Amount
realised on
exercise
£
Balance as at
31 December
2014
Executive director
260.50
231.00
390
661.50
260.50
231.00
390
639.50
260.50
231.00
390
639.50
S L Dance
15.04.11
05.04.12
04.04.13
09.04.14
30.09.14
T P Haywood
15.04.11
05.04.12
04.04.13
09.04.14
30.09.14
B A Melizan
15.04.11
05.04.12
04.04.13
09.04.14
30.09.14
A M Ringrose
05.04.12
D I Sutherland 05.04.12
04.04.13
390
378
226
–
–
390
378
226
–
–
390
378
226
–
–
378
378
226
–
–
–
–
–
–
–
–
–
276.40
238.00
469.50
398.00
352
696.50
511.00
340
599.50
529.00
276.40
238.00
469.50
398.00
352
696.50
511.00
340
599.50
529.00
276.40
238.00
469.50
398.00
352
696.50
511.00
340
599.50
529.00
–
–
–
276.40
238.00
276.40
238.00
469.50
398.00
09.04.14
–
352
696.50
511.00
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,679
–
n/a
n/a
n/a
n/a
378
226
352
340
1,593
–
n/a
n/a
n/a
n/a
378
226
352
340
1,593
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
378
226
352
340
378
378
226
352
Exercise
period
01.07.14
– 31.12.14
01.07.15
– 31.12.15
01.06.16
– 30.11.16
01.06.17
– 30.11.17
01.12.17
– 31.05.18
01.07.14
– 31.12.14
01.07.15
– 31.12.15
01.06.16
– 30.11.16
01.06.17
– 30.11.17
01.12.17
– 31.05.18
01.07.14
– 31.12.14
01.07.15
– 31.12.15
01.06.16
– 30.11.16
01.06.17
– 30.11.17
01.12.17
– 31.05.18
01.07.15
– 31.12.15
01.07.15
– 31.12.15
01.06.16
– 30.11.16
01.06.17
– 30.11.17
–
–
–
–
n/a
n/a
n/a
n/a
–
–
–
–
n/a
n/a
n/a
n/a
–
–
–
–
–
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Shareholding guidelines
Executive directors are expected to build up a holding equivalent to 100 per cent of their base salary over time.
A percentage of the Annual Variable Pay is required to be invested in Company shares and no fewer than 100 per cent of shares net of
taxes following an option exercise or award vesting must be retained until such time as the shareholding guidelines have been met.
Shares purchased under the Annual Variable Pay arrangements, the 2002 Executive Share Option Scheme, the Sharesave Scheme and
the SIP count toward this limit. Share options and awards under the PSP, whether or not vested, do not count towards satisfying the
shareholding guidelines.
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
99
Shareholdings of directors
The beneficial interests of each person who served as a director of the Company during the financial year in the ordinary share
capital of the Company, together with interests held by his connected persons, are shown below, together with details of the extent
to which the executive directors have met the requirement to hold shares to the value of 100 per cent of salary:
Director
Executive directors
S L Dance
T P Haywood
B A Melizan
A M Ringrose
D I Sutherland
Non-executive directors
Lord Blackwell
L G Cullen
A K Fahy
R J King
K L Ludeman
N R Salmon
D A Thorpe
31 December 2014
31 December 2013
31 December 2014
Beneficially
owned
Beneficially
owned
Outstanding
ESOS options
(vested/unvested)
Outstanding
PSP awards
(vested/unvested)
Outstanding
Sharesave options
(vested/unvested)
% shareholding
requirement
(% of salary/fee)
% actual
shareholding
(% of salary/fee)4
101,710
54,143
104,050
434,579
104,467
10,995
12,582
8,000
3,000
4,990
5,000
14,7833
101,383
29,390
– Not counted Not counted
– Not counted Not counted
101,183 Not counted Not counted Not counted
400,809 Not counted Not counted Not counted
98,868
10,000
10,000
–
–1
3,000
–2
12,793
– Not counted Not counted
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
100%
100%
100%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
198%
88%
178%
461%
203%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1As at 1 September 2014, when Russell King was appointed to the Board.
2As at 1 August 2014, when Nick Salmon was appointed to the Board.
3As at 31 August 2014, when David Thorpe retired from the Board.
4Using a share price of 583.02p, being the three-month average to 31 December 2014.
The above figures include shares held in trust pursuant to the Interserve Share Incentive Plan 2009.
Between the year end and the date of this report Steven Dance, Tim Haywood, Adrian Ringrose and Dougie Sutherland have
each purchased additional shares pursuant to the Interserve Share Incentive Plan 2009, as shown below:
S L Dance
T P Haywood
A M Ringrose
D I Sutherland
Date of purchase
15.01.2015
11.02.2015
15.01.2015
11.02.2015
15.01.2015
11.02.2015
15.01.2015
Purchase price
pence
Number of
shares acquired
Beneficial holding as
at 26 February 2015
507.30
544.00
507.30
544.00
507.30
544.00
507.30
25
23
30
28
25
23
1
101,758
54,201
434,627
104,468
There have been no further changes in the shareholdings of the directors who held office at the year end.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 100
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
CONTINUED
OTHER INFORMATION
Dilution limits
Under present dilution limits the Company is permitted to
allocate a rolling ten-year aggregate of up to 10 per cent of its
ordinary share capital (14,391,761 shares) under all its share
schemes. At 31 December 2014 there remained headroom
equivalent to 3,080,359 shares over which options may be
granted under the Company’s share schemes.
It is currently anticipated that all exercises of options and
awards made under the 2002 Executive Share Option Scheme
and the Performance Share Plan will be satisfied by newly
issued shares.
GOVERNANCE AND OPERATION OF THE
REMUNERATION COMMITTEE
Role and membership
The Committee is responsible for determining, on behalf of the
Board, the remuneration of all executive directors, the Group
Chairman and the Company Secretary. The terms of reference
of the Committee are available on the Company’s website at
www.interserve.com and on request.
The Committee’s role is, after consultation with the Group
Chairman and/or the Chief Executive (except when determining
their own remuneration), to set the remuneration policy and
determine the individual remuneration and benefit packages
of the Group Chairman, the Chief Executive and the senior
management team (comprising the executive directors, the
Company Secretary and the other senior executives below
the Board who report to the Chief Executive). This includes
formulating for Board approval long-term incentive plans which
require shareholder consent and overseeing their operation.
The Committee also monitors the terms of service for, and level
and remuneration structure of, other senior management.
The table below lists the members of the Committee who
served during the year and are regarded as independent by the
Board. Their attendance at the meetings of the Committee was
as follows:
The Committee meets as often as is necessary to discharge
its duties and met 12 times during the year ended
31 December 2014. The Chief Executive and Group Finance
Director may be invited to attend meetings as appropriate.
No member of the Committee has any personal financial
interest in the Company (other than as a shareholder), any
conflict of interest arising from cross-directorships, or any
day-to-day involvement in running the business. No individual
is present when matters relating directly to their own
remuneration are discussed.
Advisers
In determining the executive directors’ remuneration, the
Committee consulted with and received recommendations
from Adrian Ringrose, the Chief Executive. The Committee also
received advice from New Bridge Street (“NBS”), a trading name
of Aon Hewitt (a subsidiary of Aon plc), and Trevor Bradbury, the
Company Secretary, which materially assisted the Committee in
relation to the 2014 financial year. Executives are not present
when matters affecting their own remuneration arrangements
are decided.
Aon plc also provides insurance broking services to the Company
though a separate business division to Aon Hewitt. The
Committee has been advised that NBS operates as a distinct
business within the Aon Group and that there is a robust
separation between the business activities and management of
NBS and all other parts of Aon Hewitt and the wider Aon Group.
The Committee is satisfied that these additional services in no
way compromised the objectivity and independence of advice
provided by NBS.
The terms of NBS’s appointment and their performance is
reviewed regularly by the Committee.
NBS meets either on a one-to-one basis with the Committee
Chairman, or with the Company Secretary present, as
necessary, to discuss matters such as topical issues in
remuneration which are of particular relevance to the
Company or if there are specific pieces of work which the
Committee requires to be undertaken.
Name
K L Ludeman
(Committee Chairman from 9 July 2014)
Lord Blackwell
L G Cullen
A K Fahy
R J King1
N R Salmon2
D A Thorpe3
(Committee Chairman until 8 July 2014)
1Russell King was appointed on 1 September 2014.
2Nick Salmon was appointed on 1 August 2014.
3David Thorpe resigned on 31 August 2014.
Number of meetings attended
out of potential maximum
12/12
12/12
12/12
12/12
4/4
5/5
7/8
GOVERNANCE INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
101
The total fee paid to NBS in respect of its services to the Committee during the year was £122,989 (2013: £21,505). These fees
relate to sundry ongoing advice, in line with NBS’s role of providing ongoing support and advice to the Committee over the entire
remuneration year. This included:
• performance monitoring of the TSR element of the Performance Share Plan;
•
review of vesting documentation for the Performance Share Plan;
•
IFRS 2 option valuation;
• assistance with the remuneration review for senior managers, including the executive directors;
• assistance with the drafting of the Directors’ Remuneration Report; and
•
the provision of updates on developments in remuneration practice.
Any fees for major projects would normally be negotiated in advance of such a project being undertaken.
NBS is a signatory to the Remuneration Consultants’ Code of Conduct and has confirmed its compliance with the Code.
Statement of shareholder voting at AGM
At the AGM held on 13 May 2014, the Directors’ Remuneration Policy and the Annual Report on Remuneration received the
following votes from shareholders:
Resolution text
Directors’ Remuneration Policy
Annual Report on Remuneration
Votes for
93,059,430
93,775,951
% for
98.0
98.8
Votes against
% against
Total votes cast
(including votes withheld)
Votes
withheld
1,697,625
975,177
1.8
1.0
94,931,945
94,931,946
174,890
180,818
Shareholder engagement
During the year the Committee consulted with shareholders on the proposed revisions to the remuneration packages of the
executive directors as explained in more detail on page 87 of this report.
APPROVAL
This report was approved by the Board of Directors on 26 February 2015 and signed on its behalf by:
Keith Ludeman
Chairman of the Remuneration Committee
26 February 2015
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 102
INTERSERVE ANNUAL REPORT 2014 GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ RESPONSIBILITY STATEMENT
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(“IFRS”) as adopted by the European Union and Article 4 of the
IAS Regulation and have elected to prepare the parent company
financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (“UK GAAP”) (UK
Accounting Standards and applicable law).
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and parent
company and of their profit or loss for that period.
In preparing the parent company financial statements,
the directors are required to:
•
select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
•
state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the company will
continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
company’s transactions and disclose with reasonable accuracy
at any time the financial position of the parent company and
enable them to ensure that the financial statements comply with
the Companies Act 2006 and Article 4 of the IAS Regulations.
They are also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
statement that comply with that law and those regulations.
The directors confirm that, to the best of their knowledge:
(a) the parent company and Group financial statements in this
Annual Report, which have been prepared in accordance
with UK GAAP and IFRS, respectively, give a true and fair
view of the assets, liabilities, financial position and profit of
the parent company and of the Group taken as a whole;
(b) the management report required by paragraph 4.1.8R of the
FCA’s Disclosure and Transparency Rules (contained in the
Strategic Report and the Directors’ Report) includes a fair
review of the development and performance of the business
and the position of the parent company and the Group taken
as a whole, together with a description of the principal risks
and uncertainties that they face; and
(c) the Annual Report and Financial Statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
Group’s performance, business model and strategy.
In preparing the Group financial statements, International
Accounting Standard 1 requires that the directors:
By order of the Board
• properly select and apply accounting policies;
• present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable
users to understand the impact of particular transactions,
other events and conditions on the entity’s financial position
and financial performance; and
• make an assessment of the Group’s ability to continue as a
going concern.
A M Ringrose
Chief Executive
26 February 2015
T P Haywood
Group Finance Director
GOVERNANCE
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT
103
Independent auditor’s report
to the members of Interserve Plc
Our opinion on the financial statements is unmodified
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at
31 December 2014 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with applicable law and United Kingdom
Accounting Standards (United Kingdom Generally Accepted Accounting Practice); and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards
the Group financial statements, Article 4 of the IAS Regulation.
What we have audited:
Interserve Plc’s financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive
Income, the Consolidated and Parent Company Balance Sheets, the Consolidated Statement of Changes in Equity, the Consolidated
Cash Flow Statement and the related notes.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent
company financial statements is United Kingdom Generally Accepted Accounting Practice.
Our assessment of risk
Without modifying our opinion, we highlight the following matters that are, in our judgement, likely to be most important to users’
understanding of our audit. Our audit procedures relating to these matters were designed in the context of our audit of the Group
financial statements as a whole and not to express an opinion on individual transactions, account balances or disclosures.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
104
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT
Independent auditor’s report continued
Audit risk
Revenue recognition and contract accounting
See note 1 on page 116 and pages 70 and 71 of the Audit
Committee Report.
Revenue is recognised throughout the Group as the fair value of
consideration receivable in respect of provision of services and
construction contracts and the rental and sale of equipment.
Provision is made for expected contract losses as soon as they
are foreseen.
Determining the amount of revenue to be recognised, costs to
complete and assessment of any other costs arising, the impact
of any changes in scope of work, together with the level of
recoverable work-in-progress and receivables requires significant
management judgement and estimates.
We therefore identified revenue recognition and contract
accounting as a significant risk.
Acquisition of Initial Facilities
See note 12 on page 127 and page 71 of the Audit Committee Report.
On 18 March 2014 the Group acquired the facilities services
business of Rentokil Initial Plc for a cash consideration of
£245.7 million. As a result of this acquisition, the Group recorded
intangible assets and goodwill of £87.8 million and £140.3 million
respectively.
Determining the fair value of intangible assets and goodwill
arising from the acquisition required fair-value adjustments
to be made to the net assets acquired and the application
of a valuation model to determine the fair value of the
identifiable intangible assets. The valuation model includes
certain assumptions which are judgemental in nature including
estimates of future revenue, growth rates, customer retention
rates and discount rates.
We therefore identified the determination and valuation of the
intangible assets and goodwill arising from the acquisition as a
significant risk.
How we responded to the risk
Our audit work included, but was not limited to:
•
•
•
•
•
•
•
testing key controls, where applicable, over the recognition
of revenue and the allocation of costs to the contracts,
including those over contract execution, invoicing,
collections, cost approvals and cost allocations;
selecting a sample of contracts in progress determined by
reference to materiality and other risk factors including loss-
making contracts and contracts with aged work-in-progress
and debtor balances and testing of management’s application
of the contractual terms and conditions, recalculating
revenue recognised under the percentage of completion
method based on costs incurred to date (where applicable)
and testing a sample of costs recorded on projects;
challenging management’s assertion relating to the expected
costs to complete by reference to supporting documentation
such as customer certifications, forecast models and
comparing previous cost estimates against actual results and
examining variation and claim agreements;
rationalising revenues against contracted amounts and
reconciled differences to variations that were invoiced
during the period;
testing a sample of revenue items for each stream, covering
both hire and sale revenue, agreeing items selected for
testing through to supporting documentation;
reviewing management’s assessment of forward loss
provisions recorded on longer term contracts, including
challenging management on the judgements inherent
within their contract forecasts, understanding the basis
for claims revenue projections and projected cost savings,
review of historical experience and comparing against
expected outcomes; and
investigating the recovery of trade receivables and work-
in-progress balances, by reference to post-balance sheet
cash collection, certifications and correspondence from
customers, review of subsequent and historical credit notes
and examining the Group’s historical experience of recovery.
Our audit work included, but was not limited to:
•
•
•
•
agreeing purchase consideration to purchase agreements
and bank accounts;
testing the validity of a sample of fair-value adjustments
made to the opening balance sheet and ensuring the
quantum of the adjustments was appropriate;
testing a sample of acquisition and integration-related costs
incurred and ensuring that their accounting treatment and
disclosure was appropriate;
recalculating the valuation of recorded intangible assets,
including the benchmarking of valuation assumptions and
estimates to industry data and independent review by our
own valuation specialists; and
•
re-perform the calculation of goodwill recognised on
acquisition.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT
105
Audit risk
Goodwill impairment review
See note 13 on page 128 and page 71 of the Audit Committee
Report.
The directors are required to make an annual assessment
to determine whether the Group’s goodwill, which stands
at £401.4 million, including £140.3 million from the Initial
acquisition at 31 December 2014, is impaired.
The process for assessing whether an impairment exists
under IAS 36 Impairment of assets is complex. The process of
determining fair value through a value in use calculation, the
forecast cash flows related to cash generating units (CGUs) and
the determination of the appropriate discount rate and other
assumptions to be applied can be highly judgemental and can
significantly impact the results of the impairment review.
We therefore identified the impairment review of goodwill to be
a significant risk.
Defined benefit retirement schemes
See note 30 on pages 146 to 149 and page 71 of the Audit
Committee Report.
The Group has a number of defined benefit pension plans that
provide benefits to a significant number of current and former
employees. At 31 December 2014 the defined benefit pension
scheme net deficit was £4.8 million. The gross value of pension
scheme assets and liabilities which form the net deficit amount
to £920.1 million and £924.9 million respectively.
The measurement of the liabilities in accordance with IAS 19
(Revised) Employee benefits involves significant judgement and
their valuation is subject to complex actuarial assumptions.
Small variations in those actuarial assumptions can lead to a
materially different value of pension liabilities being recognised
within the Group financial statements.
We therefore identified the defined benefit obligation as a
significant risk.
How we responded to the risk
Our audit procedures included, but were not limited to:
•
•
•
•
obtaining management’s assessment of the relevant cash
generating units used in the impairment calculation and
comparing those to our understanding of the business units
and operating structure of the Group and recalculating the
arithmetical accuracy of those calculations;
testing the assumptions utilised in the impairment models,
including growth rates, discount rates and terminal
values. We involved our specialist valuation team to
consider whether the assumptions used were appropriate
to the relevant CGU’s circumstances and where possible,
benchmarked these assumptions against available industry
data;
re-performing the sensitivity analysis performed by
management in respect of the key assumptions such as
discount and growth rates to ensure the assumptions were
not aggressive; and
testing the accuracy of management’s forecasting through a
comparison of budget to actual data and historical variance
trends and reviewing the cash flows for exceptional or
unusual items or assumptions.
Our audit work included, but was not restricted to:
•
•
•
testing the appropriateness of the valuation methodologies
and their inherent actuarial assumptions by benchmarking
key assumptions to available market data such as discount
rates, growth rates and mortality rates. We also utilised the
expertise of our actuarial specialists in order to review the
assumptions used and the calculation methods employed in
the calculation of the obligation;
testing the accuracy of underlying membership data utilised
by the Group’s actuaries for the purpose of calculating the
scheme liabilities by selecting a sample of employees and
agreeing pertinent data such as date of birth, gender and
date of membership to underlying records; and
considering the appropriateness of the accounting
treatment applied to the buy-in contract as described in
note 30 of the financial statements.
Our application of materiality and an overview of the scope of our audit
Materiality
We apply the concept of materiality in planning and performing our audit, in evaluating the effect of any identified misstatements
and in forming our opinion. For the purpose of determining whether the financial statements are free from material misstatement,
we define materiality as the magnitude of a misstatement or an omission from the financial statements or related disclosures
that would make it probable that the judgement of a reasonable person relying on the information would have been changed or
influenced by the misstatement or omission. We also determine a level of performance materiality, which we use to determine the
extent of testing needed, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a whole.
We determined materiality for the Group financial statements as a whole to be £4.0 million, which is approximately 4 per cent of
adjusted profit before tax (excluding exceptional items and amortisation of purchased intangibles), as this is a key performance
measure used by the Board of Directors to report to investors on the financial performance of the Group. We set an underlying
performance materiality threshold of 70 per cent of Group materiality to direct and focus our audit testing. We chose this threshold
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 106
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT
Independent auditor’s report continued
Our application of materiality and an overview of the scope of our audit continued
Materiality continued
based on our assessment of the control environment obtained during our risk assessment procedures. The audits undertaken for
Group reporting purposes, of the components noted below, were carried out to a materiality level that did not exceed our level of
performance materiality.
We agreed with the Audit Committee that we would report to them misstatements above £200,000 identified during our audit, which
represents 5 per cent of materiality. We would report misstatements identified below that amount if there were qualitative factors
that would warrant the attention of the Audit Committee.
Overview of the scope of our audit
Our audit approach was based on a thorough understanding of the Group’s business and is risk-based. An interim visit was conducted
before the year end at all significant components of the Group to complete advance substantive audit procedures and to evaluate
the Group’s internal controls environment including its IT systems. The components of the Group were evaluated by the group audit
team based on a measure of materiality considering each as a percentage of total Group assets, revenues and profit before taxes,
to assess the significance of the component and to determine the planned audit response. For those components that were deemed
significant, either a full scope or targeted audit approach was determined based on their relative materiality to the Group and our
assessment of the audit risk. For significant components requiring a full scope approach we evaluated and tested controls over
the financial reporting systems identified as part of our risk assessment, reviewed the accounts production process and addressed
critical accounting matters. We sought, wherever possible, to rely on the effectiveness of the Group’s internal controls in order to
reduce substantive testing. We then undertook substantive testing on significant transactions and material account balances.
In order to address the audit risks described above as identified during our planning procedures, we performed a full-scope audit of
the consolidated financial statements of the parent company, Interserve Plc, and of the Group’s operations throughout the United
Kingdom. The operations that were subject to full-scope audit procedures make up 90.7 per cent of total revenues. Statutory audits
of subsidiaries are performed to lower materiality where applicable.
While the majority of the operations are located within the United Kingdom, the Group has material operations spanning the globe.
Through an analysis of these operations we determined that targeted audit procedures should be carried out in Oman, Qatar, the
United Arab Emirates, Ireland, Spain, Saudi Arabia, India, Australia, South Africa, New Zealand, Hong Kong, the Philippines and the
United States of America. These targeted procedures addressed the significant risks described above. Those components subjected
to targeted audit procedures comprise 8.6 per cent of total revenues.
In total our full scope and targeted procedures covered 99.3 per cent of total revenues and 95.3 per cent of total profit before tax.
The remaining operations of the Group were subjected to analytical procedures over the balance sheet and income statements of
the related entities with a focus on applicable risks identified above and the significance to the Group’s balances.
Detailed audit instructions were issued to the auditors of the reporting components where a full scope or targeted audit approach
had been identified. The instructions detailed the significant risks that should be addressed through the audit procedures and
indicated certain information required to be reported back to the group audit team. The group audit team performed site visits in
the United Kingdom, Oman, Qatar and the United Arab Emirates, which included a review of the work performed by the component
auditors. Where targeted components outside of the UK were not physically visited a review of working papers was conducted.
The group audit team communicated with all component auditors throughout the planning, fieldwork and concluding stages of the
local audits.
Other reporting required by regulation
Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
•
•
the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006; and
the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT
107
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the International Standards on Accounting (UK and Ireland), we are required to report to you if, in our opinion, information in
the Annual Report is:
• materially inconsistent with the information in the audited financial statements; or
•
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of
performing our audit; or
•
otherwise misleading.
In particular, we are required to report to you if:
• we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they
consider the Annual Report is fair, balanced and understandable; or
•
the Annual Report does not appropriately disclose those matters that were communicated to the Audit Committee which we
consider should have been disclosed.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
•
•
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
•
certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules, we are required to review:
•
•
the directors’ statement, set out on page 47, in relation to going concern; and
the part of the Corporate Governance statement relating to the Company’s compliance with the ten provisions of the UK
Corporate Governance Code specified for our review.
Responsibilities for the financial statements and the audit
What an audit of financial statements involves:
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.
org.uk/auditscopeukprivate.
Our responsibilities and those of the directors:
As explained more fully in the Directors’ Responsibility Statement set out on page 102, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and
express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Who we are reporting to:
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to
state to them in an auditor’s 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 and the Company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.
Simon Lowe
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London, United Kingdom
26 February 2015
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 108
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS CONSOLIdATEd INCOME STATEMENT
Consolidated income statement
for the year ended 31 December 2014
Year ended 31 december 2014
Year ended 31 december 2013
Before
exceptional
items and
amortisation
of acquired
intangible
assets
£million
Exceptional
items and
amortisation
of acquired
intangible
assets
£million
Notes
Before
exceptional
items and
amortisation
of acquired
intangible
assets
£million
Exceptional
items and
amortisation
of acquired
intangible
assets
£million
Total
£million
Continuing operations
Revenue including share of associates and joint ventures
Less: Share of associates and joint ventures
Consolidated revenue
Cost of sales
Gross profit
Administration expenses
Amortisation of acquired intangible assets
Other exceptional items
Total administration expenses
Loss on disposal of property and investments
Operating profit
Share of result of associates and joint ventures
Amortisation of acquired intangible assets
Total share of result of associates and joint ventures
Total operating profit
Investment revenue
Finance costs
Profit before tax
Tax (charge)/credit
Profit for the year
Attributable to:
Equity holders of the parent
Non-controlling interests
Earnings per share
Basic
diluted
3,305.3
(392.3)
2,913.0
(2,583.7)
329.3
(228.7)
–
–
(228.7)
–
100.6
16.6
–
16.6
117.2
5.0
(16.0)
106.2
(18.7)
87.5
83.0
4.5
87.5
2
2
4
5
5
16
4
7
8
9
11
–
–
–
–
–
3,305.3
2,581.9
(392.3)
2,913.0
(389.3)
2,192.6
(2,583.7)
(1,927.0)
329.3
–
(228.7)
(24.4)
(19.8)
265.6
(196.2)
–
–
(272.9)
(196.2)
–
69.4
17.3
–
17.3
86.7
3.6
(9.2)
81.1
(15.0)
66.1
61.3
4.8
66.1
–
56.4
16.6
(0.1)
16.5
72.9
5.0
(16.0)
61.9
(12.0)
49.9
45.4
4.5
49.9
32.2p
31.7p
(24.4)
(19.8)
(44.2)
–
(44.2)
–
(0.1)
(0.1)
(44.3)
–
–
(44.3)
6.7
(37.6)
(37.6)
–
(37.6)
–
–
–
–
–
–
(8.8)
(2.6)
(11.4)
(1.5)
(12.9)
–
(0.1)
(0.1)
(13.0)
–
–
(13.0)
1.9
(11.1)
(11.1)
–
(11.1)
Total
£million
2,581.9
(389.3)
2,192.6
(1,927.0)
265.6
(196.2)
(8.8)
(2.6)
(207.6)
(1.5)
56.5
17.3
(0.1)
17.2
73.7
3.6
(9.2)
68.1
(13.1)
55.0
50.2
4.8
55.0
39.1p
38.2p
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS CONSOLIdATEd STATEMENT OF COMPREhENSIVE INCOME
109
Consolidated statement of comprehensive income
for the year ended 31 December 2014
Profit for the year
Items that will not be reclassified subsequently to profit or loss:
Actuarial (losses)/gains on defined benefit pension schemes
Deferred tax on above items taken directly to equity
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations
Gains on cash flow hedging instruments (excluding joint ventures)
Deferred tax on above items taken directly to equity
Net impact of Items relating to joint-venture entities
Other comprehensive income net of tax
Total comprehensive income
Attributable to:
Equity holders of the parent
Non-controlling interests
Notes
30
9
9
Year ended
31 december
2014
£million
Year ended
31 December
2013
£million
49.9
55.0
(15.7)
3.1
(12.6)
12.8
5.6
(2.0)
11.6
28.0
15.4
65.3
60.7
4.6
65.3
21.3
(7.3)
14.0
(13.0)
0.8
1.3
2.3
(8.6)
5.4
60.4
55.7
4.7
60.4
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 110
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS CONSOLIdATEd BALANCE ShEET
Consolidated balance sheet
at 31 December 2014
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in joint-venture entities
Interests in associated undertakings
Deferred tax asset
Current assets
Assets classified as held for sale
Inventories
Trade and other receivables
Cash and deposits
Total assets
Current liabilities
Bank overdrafts
Trade and other payables
Current tax liabilities
Short-term provisions
Net current assets/(liabilities)
Non-current liabilities
Borrowings
Trade and other payables
Long-term provisions
Retirement benefit obligation
Deferred tax liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Capital redemption reserve
Merger reserve
Hedging and revaluation reserve
Translation reserve
Investment in own shares
Retained earnings
Notes
13
14
15
16/32
16
17
16
18
20
21
21
23
26
21
24
26
30
17
27
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
These financial statements were approved by the Board of Directors on 26 February 2015.
Signed on behalf of the Board of Directors
A M Ringrose
director
T P haywood
director
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
401.4
123.1
195.3
42.7
77.2
-
248.0
38.6
155.9
20.6
73.9
21.0
226.3
39.5
137.8
7.6
76.6
33.5
839.7
558.0
521.3
-
48.6
679.4
82.1
810.1
-
30.7
486.1
79.7
596.5
51.2
24.6
432.0
76.8
584.6
1,649.8
1,154.5
1,105.9
(5.5)
(748.7)
(1.0)
(29.2)
(784.4)
25.7
(344.7)
(14.8)
(19.5)
(4.8)
(2.0)
(385.8)
(1,170.2)
479.6
14.4
115.3
0.1
121.4
19.5
35.0
(3.0)
165.3
468.0
11.6
479.6
(27.4)
(592.3)
(5.3)
(18.1)
(643.1)
(46.6)
(90.0)
(13.5)
(29.9)
(7.7)
-
(141.1)
(784.2)
370.3
12.9
115.0
0.1
49.0
2.4
22.3
(2.9)
161.6
360.4
9.9
370.3
(19.8)
(555.5)
(4.2)
(24.2)
(603.7)
(19.1)
(30.0)
(13.2)
(27.1)
(101.1)
-
(171.4)
(775.1)
330.8
12.7
113.1
0.1
49.0
(0.7)
35.2
(1.4)
116.5
324.5
6.3
330.8
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS CONSOLIdATEd STATEMENT OF ChANGES IN EqUITY
111
Consolidated statement of changes in equity
at 31 December 2014
Share
capital
£million
Share
premium
£million
Capital
redemption
reserve
£million
hedging
and
revaluation
reserve2
£million
Merger
reserve1
£million
Translation
reserve
£million
Investment
in own
shares3
£million
Retained
earnings
£million
Attributable
to equity
holders of
the parent
£million
Non-
controlling
interests
£million
Balance at 1 January 2013
12.7
113.1
0.1
49.0
(0.7)
35.2
(1.4)
116.5
Profit for the year
Other comprehensive
income
Total comprehensive income
Dividends paid
Shares issued
Acquisition
Purchase of Company shares
Company shares used to
settle share-based
payment obligations
Share-based payments
–
–
–
–
–
–
–
–
0.2
1.9
–
–
–
–
–
–
–
–
Transactions with owners
Balance at 31 december 2013
0.2
12.9
1.9
115.0
Profit for the year
Other comprehensive
income
Total comprehensive income
Dividends paid
Shares issued
–
–
–
–
–
–
–
–
1.5
0.3
Purchase of Company shares
Company shares used to
settle share-based
payment obligations
Share-based payments
–
–
–
–
–
–
Transactions with owners
Balance at 31 december 2014
1.5
14.4
0.3
115.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
49.0
–
–
–
–
–
–
–
–
–
0.1
–
–
–
–
72.4
–
–
–
72.4
121.4
–
3.1
3.1
–
–
–
–
–
–
–
2.4
–
17.1
17.1
–
–
–
–
–
–
–
(12.9)
(12.9)
–
–
–
–
–
–
–
22.3
–
12.7
12.7
–
–
–
–
–
–
19.5
35.0
–
–
–
–
–
–
(2.7)
1.2
–
(1.5)
(2.9)
–
–
–
–
–
(1.3)
1.2
–
(0.1)
(3.0)
50.2
15.3
65.5
–
–
–
(0.5)
6.3
(20.4)
161.6
45.4
(14.5)
30.9
(26.2)
(26.2)
Total
£million
330.8
55.0
5.4
60.4
(29.1)
2.1
1.8
(2.7)
0.7
6.3
6.3
4.8
(0.1)
4.7
(2.9)
–
1.8
–
–
–
324.5
50.2
5.5
55.7
2.1
–
(2.7)
0.7
6.3
(19.8)
(1.1)
(20.9)
360.4
45.4
15.3
60.7
9.9
4.5
0.1
4.6
370.3
49.9
15.4
65.3
(31.5)
(31.5)
(2.9)
(34.4)
–
–
74.2
(1.3)
(0.1)
4.4
1.1
4.4
–
–
–
–
74.2
(1.3)
1.1
4.4
(27.2)
46.9
165.3
468.0
(2.9)
11.6
44.0
479.6
On 5 March 2014, 12,897,771 ordinary shares were issued and placed at a price of 580p per share. The net proceeds after costs
were £73.7 million. The placing utilised a structure whereby a special-purpose entity issued redeemable preference shares in
consideration for the receipt of the cash proceeds (net of issue costs) arising from the placing. The Company’s ordinary shares were
issued as consideration for the transfer to it of the shares, which it did not already own, in the special-purpose entity. As a result,
in the opinion of the directors, the placing qualified for merger relief under section 612 of the Companies Act 2006 so that the
£72.4 million excess of the value of the acquired shares in the special-purpose entity over the nominal value of the ordinary shares
issued by the Company was credited to the Company’s merger reserve.
1 The £121.4 million merger reserve represents £16.4 million premium on the shares issued on the acquisition of Robert M. Douglas
Holdings Plc in 1991, £32.6 million premium on the shares issued on the acquisition of MacLellan Group Plc in 2006 and £72.4 million
premium on the shares placed to partially fund the acquisition of Initial Facilities during the period.
2 The hedging and revaluation reserve includes £27.6 million relating to the revaluation of available-for-sale financial assets within
the joint ventures (2013: £6.5 million).
3 The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the How Group,
Bandt and Interserve Employee Benefit Trusts. The market value of these shares at 31 December 2014 was £4.8 million (2013:
£5.3 million).
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 112
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS CONSOLIdATEd CASh FLOw STATEMENT
Consolidated cash flow statement
for the year ended 31 December 2014
Operating activities
Total operating profit
Adjustments for:
Amortisation of acquired intangible assets
Amortisation of capitalised software development
Depreciation of property, plant and equipment
(Profit)/loss on disposal of property and investments
Other non-cash exceptional items
Pension contributions in excess of the income statement charge
Share of results of associates and joint ventures
Charge relating to share-based payments
Gain on disposal of plant and equipment - hire fleet
Gain on disposal of plant and equipment - other
Operating cash flows before movements in working capital
Increase in inventories
Increase in receivables
Increase/(decrease) in payables
Cash generated by operations before changes in hire fleet
Capital expenditure - hire fleet
Proceeds on disposal of plant and equipment - hire fleet
Cash generated by operations
Taxes paid
Net cash from operating activities
Investing activities
Interest received
Dividends received from associates and joint ventures
Proceeds on disposal of plant and equipment - non-hire fleet
Capital expenditure - non-hire fleet
Purchase of businesses
Investment in joint-venture entities
Costs of disposal of investments
Receipt of loan repayment - Investments
Net cash used in investing activities
Financing activities
Interest paid
Dividends paid to equity shareholders
Dividends paid to minority shareholders
Proceeds from issue of shares and exercise of share options
Purchase of own shares
Proceeds from US private placement
Increase in bank loans
Movement in obligations under finance leases
Net cash from financing activities
Year ended
31 december
2014
£million
Year ended
31 December
2013
£million
Notes
72.9
73.7
14
14
15
5
5
29
15
16a
14/15
12
16b
5
16b
10
24.4
3.7
35.6
-
1.4
(18.2)
(16.5)
3.4
(12.1)
(0.1)
94.5
(13.4)
(73.6)
33.7
41.2
(47.0)
16.7
10.9
(10.2)
0.7
4.7
17.8
0.9
(24.9)
(243.7)
(10.4)
-
0.3
8.8
1.9
31.9
1.5
0.5
(18.5)
(17.2)
5.5
(13.4)
–
74.7
(4.5)
(14.6)
(0.6)
55.0
(29.8)
18.0
43.2
(5.7)
37.5
3.5
13.7
0.2
(22.1)
(49.1)
(10.6)
(0.2)
-
(255.3)
(64.6)
(16.0)
(31.5)
(2.9)
75.2
(1.3)
207.2
47.5
(0.1)
278.1
(7.8)
(26.2)
(2.9)
3.3
(2.7)
-
60.0
(0.3)
23.4
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS CONSOLIdATEd CASh FLOw STATEMENT
113
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Effect of foreign exchange rate changes
Cash and cash equivalents at end of period
Cash and cash equivalents comprise
Cash and deposits
Bank overdrafts
Reconciliation of net cash flow to movement in net debt
Net increase/(decrease) in cash and cash equivalents
Proceeds from US private placement
Increase in bank loans
Movement in obligations under finance leases
Change in net debt resulting from cash flows
Effect of foreign exchange rate changes
Movement in net debt during the period
Net cash/(debt) - opening
Net cash/(debt) - closing
Year ended
31 december
2014
£million
Year ended
31 December
2013
£million
Notes
23.5
52.3
0.8
76.6
82.1
(5.5)
76.6
23.5
(207.2)
(47.5)
0.1
(231.1)
0.8
(230.3)
(38.6)
(268.9)
(3.7)
57.0
(1.0)
52.3
79.7
(27.4)
52.3
(3.7)
-
(60.0)
0.3
(63.4)
(1.0)
(64.4)
25.8
(38.6)
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 114
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements
for the year ended 31 December 2014
1. Basis of preparation and accounting policies
Basis of preparation
The Interserve Plc consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) and comply with the IFRS and related interpretations (SIC and IFRIC interpretations) as adopted by the European Union.
(a) Adoption of new and revised standards
In the current year, the following new and revised standards and interpretations have been adopted and affected the amounts reported in
these financial statements:
IFRS 10 Consolidated financial statements
IFRS 11 Joint arrangements
IFRS 12 Disclosures of interests in other entities
IAS 27 Separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Offsetting financial assets and financial liabilities
IAS 39 Novation of derivatives and continuation of hedge accounting
These do not materially impact the Group.
At the date of authorisation of these Group financial statements, the following standards and interpretations were in issue but not yet
effective, and therefore have not been applied in these Group financial statements:
IFRS 9 Financial instruments
The impact of the sections of IFRS 9 currently issued will result in the Group’s project finance interests that are currently treated by the
joint-venture companies as being available-for-sale, being treated as a debt carried at “fair value through profit or loss” or “amortised
cost”. As a result, movements in the fair value will no longer be taken to “Other comprehensive income”.
IFRS 15 Revenue from contracts with customers
The new standard will replace IAS 18 Revenue and IAS 11 Construction contracts. It will become effective for accounting periods on or
after 1 January 2017, at the earliest. In advance of its adoption, the Group will conduct a systematic review of all existing major contracts
to ensure that the impact and effect of the new standard is fully understood, and changes to the current accounting procedures are
highlighted and acted upon.
Except for IFRS 9 and IFRS 15 noted above, the directors do not currently anticipate that the adoption of any other standard and
interpretation that has been issued but is not yet effective will have a material impact on the financial statements of the Group in future
periods.
(b) Critical accounting judgements and key sources of estimation and uncertainty
In the preparation of the consolidated financial statements management makes certain judgements and estimates that impact the
financial statements. While these judgements are continually reviewed the facts and circumstances underlying these judgements may
change resulting in a change to the estimates that could impact the results of the Group. In particular:
Revenue and margin recognition
The policy for revenue recognition on long-term and service contracts is set out in notes 1(d) and (e). Judgements are made on an ongoing
basis with regard to the recoverability of amounts due, liabilities arising and the requirement for forward loss provisions. Regular forecasts
are compiled on the outcomes of these types of contracts, which require assessments and judgements relating to the recovery of pre-
contract costs, changes in work scopes, contract programmes and maintenance liabilities.
PFI financial assets and derivative financial instruments
The Group’s interests in PFI/PPP investments are classified as “available-for-sale” financial assets by the joint-venture entities. The fair
value of these financial assets is measured at each balance sheet date by discounting the future cash flows allocated to the financial asset.
The discount rate used is based on long-term LIBOR plus a margin to reflect the risk associated with each project.
The Group’s PFI/PPP joint-venture and associate companies use derivative financial instruments to manage the interest rate risk to which
the concessions are exposed within their long-term contractual agreements. These derivatives are initially recognised as assets and
liabilities at their fair value and subsequently remeasured at each balance sheet date at their fair value. The fair value of derivatives,
assessed by discounting future cash flows, constantly changes in response to prevailing market conditions.
Measurement of impairment of goodwill and intangible assets
As set out in notes 1(b) and (h) the carrying value of goodwill and intangible assets is reviewed for impairment at least annually. In
determining whether goodwill is impaired an estimation of the value in use of the cash generating unit (CGU) to which the goodwill has
been allocated is required. This calculation of value in use requires estimates to be made relating to the timing and amount of future cash
flows expected from the CGU, and suitable discount rates based on the Group’s weighted average cost of capital adjusted to reflect the
specific economic environment of the relevant CGU.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
115
Retirement benefit obligations
In accordance with IAS 19 Employee benefits, the Group has disclosed in note 30 the assumptions used in calculating the defined benefit
obligations. In the calculation a number of assumptions around future salary increases, increase in pension benefits, mortality rates,
inflation and discount rates have been made. Small changes in these assumptions can lead to significant changes to the overall scheme
liabilities, as disclosed in note 30. Judgement is also exercised in establishing the fair value of retirement benefit assets, most notably
the valuation of the buy-in contract to insure some of the benefits of a subset of the pension membership of the Scheme provided by
the insurer.
Property, plant and equipment
The rental fleet in Equipment Services has a significant carrying value (see note 15). The great majority of equipment in the rental fleet
is depreciated on a straight-line basis to a residual value of zero over 10 years. Asset lives are reviewed regularly in light of technological
change, prospective utilisation and the physical condition of the assets. Due to the transportable nature of the rental fleet, the review for
potential impairment is performed on a global basis.
Carrying value of trade and other receivables
Allowance for doubtful debt and provisions against other receivables, including amounts due on construction contracts and carrying
value of accrued income, are made on a specific basis, based on estimates of irrecoverability determined by market knowledge and
past experience.
Acquisition accounting
A number of judgements and estimates are necessary in establishing the opening net asset position, fair-value adjustments and the value
of intangible assets in respect of businesses acquired. These include estimates of future revenue, growth rates, customer retention rates
and discount rates.
Accounting policies
Interserve Plc (the Company) is a company incorporated in the United Kingdom and bound by the Companies Act 2006. The consolidated
financial statements comprise the Company and its subsidiaries (together referred to as the Group) and the Group’s interest in joint
ventures and associates. These financial statements are presented in pounds sterling which is the currency of the primary economic
environment in which the Group operates. Foreign operations are included in accordance with the policies set out below.
These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.
The financial statements are prepared on a going concern basis. As disclosed on page 47 the directors believe that the Group has adequate
resources to continue in operational existence for the foreseeable future.
The significant accounting policies adopted by the directors are set out below and have been applied consistently in dealing with items
which are considered material to the Group’s financial statements.
(a) Basis of consolidation
The Group financial statements incorporate the financial statements of the Company and entities controlled by the Company (its
subsidiaries). The results, assets and liabilities of associates and joint-venture entities are accounted for under the equity method of
accounting. The results of subsidiaries acquired or disposed of during the year are included from the effective date of acquisition or until
the effective date of disposal respectively.
Non-controlling interests in the net assets of the consolidated subsidiaries are identified separately from the Group’s equity interest
therein. Non-controlling interests consist of those interests at the date of the original business combination and the minority’s share of the
changes in equity since the date of the combination.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Where necessary, adjustments are made to the financial statements of the associates, joint ventures and any newly acquired subsidiaries
to bring their accounting policies into line with those used by the Group. When an entity has an accounting reference date other than
31 December, due to the influence of a co-shareholder or customer requirements, the consolidation includes management accounts,
prepared using these Group accounting policies, drawn up for the year ended 31 December.
Where a Group company is party to a jointly-controlled operation, that company proportionately accounts for its share of the income
and expenditure, assets, liabilities and cash flows on a line-by-line basis. Such arrangements are reported in the consolidated financial
statements on the same basis.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
116
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
1. Basis of preparation and accounting policies continued
(b) Business combinations
Business combinations are accounted for using the acquisition accounting method. The cost of the acquisition is measured at the aggregate
of the fair values, at the date of acquisition, of assets given, liabilities incurred or assumed and equity instruments issued by the Group
in exchange for control of the acquired company. The acquired company’s identifiable assets, liabilities and contingent liabilities are
recognised at their fair value as at the acquisition date. Before the adoption of IFRS 3 (revised), the cost of acquisition included any costs
directly attributable to the business combination. Costs incurred on acquisitions completed since 1 January 2010, the date of adoption of
the revision to IFRS 3, are expensed.
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the
identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment
at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.
On disposal of a subsidiary, associate or jointly-controlled entity, the attributable amount of goodwill is included in the determination of
the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP value at that date, subject
to being subsequently tested for impairment. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated
and is not included in determining any subsequent profit or loss on disposal. Goodwill arising on the acquisition of shares in associated
undertakings is included within investments in associated undertakings.
The interest of minority shareholders in the acquired company is initially measured at the minorities’ proportion of the net fair value of
the assets, liabilities and contingent liabilities recognised.
(c) Foreign currency
Transactions denominated in foreign currency are translated at the rates ruling at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates ruling at that date.
These translation differences are dealt with in the profit for the year.
The financial results and cash flows of foreign subsidiaries, associated undertakings and joint ventures are translated into sterling at the
average rate of exchange for the year. The balance sheets are translated into sterling at the closing rate of exchange, and the difference
arising from the translation of the opening net assets and financial results for the year at the closing rate is taken directly to reserves.
(d) Revenue
Revenue is measured at the fair value of the consideration received or receivable for goods and services provided, net of trade discounts,
value added and similar sales-based taxes, after eliminating revenue within the Group.
Revenue is recognised as follows:
•
•
•
•
Construction contracts - by reference to services performed to date as a percentage of total services to be performed (see note 1(e))
Service contracts – the value of work carried out during the year as services are provided, including amounts not invoiced
Equipment sales – at the time of delivery
Equipment hire – on a straight-line basis over the hire period in accordance with contractual arrangements
(e) Contract accounting
Where the outcome of a contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion
of the contract activity at the balance sheet date (determined by surveys of work performed by quantity surveyors in conjunction with
clients). Where the outcome of a contract cannot be estimated reliably, revenue is only recognised to the extent that it is probable that it
will be recoverable. Profit is only recognised on a construction contract when the final outcome can be assessed with reasonable certainty.
Expected losses are recognised immediately.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
117
(f) Other intangible assets
Intangible assets acquired as part of an acquisition of a business are stated at fair value less accumulated amortisation and any impairment
losses, provided that the fair value can be measured reliably on initial recognition.
Operating software acquired as part of a related item of hardware is capitalised within property, plant and equipment along with
the hardware acquired. Other software licences acquired are capitalised, along with the cost to bring the software into use, within
intangible assets.
Other intangible assets are amortised over their useful economic lives on a straight-line basis, typically between three and ten years.
(g) Property, plant and equipment
(i)
Owned property, plant and equipment - tangible fixed assets are carried at historical cost less any accumulated depreciation and any
impairment losses. Properties in the course of construction are carried at cost less any recognised impairment loss. Depreciation is
charged so as to write off the cost of assets over their expected useful lives.
Depreciation is provided on a straight-line or reducing-balance basis at rates ranging between:
Freehold land
Freehold buildings
Leasehold property
Plant and equipment
Straight line
Nil
2% to 7%
over the period of the lease
10% to 50%
Reducing balance
–
–
–
11.5% to 38%
(ii)
Property, plant and equipment held under finance leases are capitalised and depreciated over their expected useful lives. The
finance charges are allocated over the primary period of the lease in proportion to the capital element outstanding.
(h)
Impairment of tangible and other intangible assets
The Group reviews, at least annually, the carrying amounts of its tangible and intangible assets compared to their recoverable amounts
to determine whether those assets have suffered an impairment loss (see note 13). Where an impairment loss subsequently reverses,
the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying
amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in
prior years.
(i)
Investments
Investments are held at fair value at the balance sheet date. Investments are financial assets and are classified as fair value through the
profit or loss. Gains or losses arising from the changes in fair value are included in the income statement in the period in which they arise.
(j)
Inventories
Inventories are stated at the lower of cost and net realisable value. The cost of inventories is calculated using the weighted average
method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
(k) Borrowing costs
Project-specific finance costs are capitalised until the asset becomes operational. All other borrowing costs are recognised in the income
statement using the effective interest method.
(l) PFI bid costs and other pre-contract costs
In the case of PFI bid costs, on financial close of the project the Group recovers bid costs by charging a fee to the relevant project
company. If the fee exceeds the amount held by the Group as an asset, the excess is credited to the balance sheet as deferred income and
is released to the income statement over the construction and early start-up period. If the agreed fee is less than the amount held by the
Group as an asset, the loss is recognised as soon as it is anticipated.
Other pre-contract costs are recognised as expenses as incurred, except that directly attributable costs are recognised as an asset when
it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows. Virtual certainty of
a contract award is a subjective assessment, but normally arises on appointment as preferred bidder or notification from the prospective
customer of their intent to appoint Interserve.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
118
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
1. Basis of preparation and accounting policies continued
(m) Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
Finance leases are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the
minimum lease payments. Lease payments are apportioned between the finance charges and the reduction of the lease liability so as to
achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement.
Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.
(n) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. The expense relating to any provision is presented in the income statement net of any reimbursement. If the
effect of the time value of money is material, provisions are discounted using an appropriate rate that takes into account the risks specific
to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
(o) Financial instruments
Trade receivables
Trade receivables are initially measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the
income statement where there is objective evidence that the asset is impaired. Trade receivables are financial assets and classified as
loans and receivables.
Cash and deposits
Cash and deposits comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible
to a known amount of cash and are subject to an insignificant risk of changes in value. Cash and deposits are financial assets and are
classified as loans and receivables.
Borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement and
are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Borrowings
are measured at amortised cost.
Trade payables
Trade payables are other financial liabilities initially measured at fair value and subsequently measured at amortised cost using the
effective interest rate method.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
derivative financial instruments and hedge accounting
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
Transactions in derivative financial instruments are for risk management purposes only. The Group uses derivative financial instruments
to hedge its exposure to interest rate and foreign currency risk. To the extent that such instruments are matched to underlying assets or
liabilities, they are accounted for using hedge accounting.
Derivatives are initially recognised at fair value at the date a derivative contract is taken out and subsequently remeasured at fair value
at each balance sheet date. Changes in fair value of derivative instruments that are designated as, and effective as, hedges of future cash
flows and net investments are recognised directly in the other comprehensive income statement. Any ineffective portion is recognised
immediately in the income statement.
Amounts deferred in equity are recycled through the income statement in the same period in which the underlying hedged item is
recognised in the income statement. However, when the transaction that is being hedged results in a non-financial asset or non-financial
liability, the gains and losses previously accumulated in equity are transferred from equity and included in the initial measurement of the
cost of that asset or liability. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised,
or no longer qualifies for hedge accounting. Any cumulative gain or loss on the hedging instrument recognised in equity at that time is
retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, any cumulative gain or loss
recognised in equity is transferred to the income statement for the period.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
119
Changes in fair value of derivative instruments that do not qualify for hedge accounting, or have not been designated as hedges, are
recognised in the income statement as they arise. These derivative instruments are designated as fair value through the profit or loss
(FVTPL).
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their economic risks
and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value.
(p) Share-based payments
The Group has applied the requirements of IFRS 2 Share-based payment.
The Group issues share-based payments to certain employees. The fair value determined at the grant date is expensed on a straight-
line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of an
appropriate valuation model. The Black-Scholes option pricing model has been used to value the share option plans and the Sharesave
Scheme. A stochastic model has been used to value the Performance Share Plan.
(q) PFI projects
Treatment on consolidation
The Group’s investments in PFI jointly-controlled entities (“Joint ventures - PFI Investments”) are accounted for under the equity method.
Treatment in the underlying joint-venture entity
The joint-venture entities have determined the appropriate treatment of the principal assets of, and income streams from, PFI and similar
contracts. The balance of risks and rewards derived from the underlying assets is not borne by the entities, and therefore the asset
provided is accounted for as a financial asset and is classified as available-for-sale.
Income is recognised on PFI projects both as operating revenue and interest income: a proportion of total cash receivable is allocated to
operating revenue by means of a margin on service costs taking account of operational risks, and interest income on the financial asset
is recognised in the income statement using the effective interest method. The residual element is allocated to the amortisation of the
financial asset.
The fair value of the financial asset is measured at each balance sheet date by computing the discounted future value of the cash flow
allocated to the financial asset. Discount rates are determined using long-term interest rates, subject to a floor, plus risk factors specific
to individual projects.
Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity until the asset
is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the
income statement for the period.
(r) Pensions
The Group has both defined benefit and defined contribution pension schemes for the benefit of permanent members of staff. For the
defined benefit schemes the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations
being carried out at each balance sheet date.
Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised directly in equity and presented in
the statement of recognised income and expense.
For defined contribution schemes, the amount recognised in the income statement is equal to the contributions payable to the schemes
during the year.
(s) Taxation
Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or
substantively enacted by the balance sheet date. Deferred tax assets and liabilities are calculated at the rates at which they are likely to
reverse in the tax jurisdiction to which they relate.
Deferred tax is provided in full on temporary differences which arise between the carrying value of an asset or liability and its tax base.
Deferred tax assets are recognised to the extent that it is probable that there will be sufficient profits in the future to enable the assets to
be utilised and reviewed at least annually. Deferred tax liabilities are normally recognised for all taxable temporary differences. Deferred
tax assets and liabilities are not discounted.
Deferred tax is charged/credited to the income statement except to the extent that the underlying asset or liability is credited/charged to
equity in which case the deferred tax follows that treatment to equity.
Deferred 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 they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets
and liabilities on a net basis.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
120
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
1. Basis of preparation and accounting policies continued
(t) Exceptional items
Exceptional items are those that the Group consider to be non-recurring and significant in size or in nature. Exceptional items include:
profit on disposals of PFI investments and related costs; and transaction and integration costs relating to the acquisition of businesses.
(u) Assets classified as held for sale
Assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than
continuing for use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for
immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as
a completed sale within one year from the date of classification.
2. Revenue
An analysis of the Group’s revenue for the year is as follows:
Continuing operations
Provision of services
Revenue from construction contracts
Equipment sales and leasing income
3. Business and geographical segments
(a) Business segments
Revenue including share
of associates and joint
ventures
Consolidated revenue
2014
£million
2013
£million
2014
£million
2013
£million
1,913.3
1,395.3
1,758.8
1,248.8
1,176.3
1,002.2
215.7
184.4
938.5
215.7
759.4
184.4
3,305.3
2,581.9
2,913.0
2,192.6
The Group is organised into four operating divisions, as set out below. Information reported to the Executive Board for the purposes of
resource allocation and assessment of segment performance is based on the products and services provided.
– Support Services: provision of outsourced support services to public- and private-sector clients, both in the UK and internationally.
– Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and internationally.
– Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.
– Investments: transaction structuring, and management of, the Group’s project finance activities. Investments’ segmental figures
represent the Group’s share of the associated special-purpose companies.
Costs of central services, including those relating to managing our PFI investments and central bidding activities, are shown in “Group
Services”.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
121
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction – International
Construction
Equipment Services
Investments
Group Services
Inter-segment elimination
Amortisation of acquired intangible assets
Exceptional items (note 5)
Total operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit for the year
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
Investments
Group Services, goodwill and acquired intangible assets
Net debt
Net assets (excluding non-controlling interests)
Revenue including share
of associates and joint
ventures
Consolidated revenue
Result
2014
£million
2013
£million
2014
£million
2013
£million
1,786.0
1,292.5
1,679.9
1,196.6
157.2
100.5
117.5
57.5
1,943.2
1,393.0
1,797.4
1,254.1
970.7
207.9
802.2
215.9
970.7
802.2
–
–
1,178.6
1,018.1
970.7
802.2
195.5
38.6
8.1
(58.7)
169.6
34.5
7.1
(40.4)
195.5
169.6
–
8.1
–
7.1
(58.7)
(40.4)
3,305.3
2,581.9
2,913.0
2,192.6
2014
£million
81.4
7.4
88.8
15.4
10.8
26.2
26.6
0.8
(25.2)
–
117.2
(24.5)
(19.8)
72.9
5.0
(16.0)
61.9
(12.0)
49.9
2013
£million
56.0
4.1
60.1
14.7
13.1
27.8
20.1
0.8
(22.1)
–
86.7
(8.9)
(4.1)
73.7
3.6
(9.2)
68.1
(13.1)
55.0
Segment assets
Segment liabilities
Net assets/(liabilities)
2014
£million
392.6
89.2
481.8
214.7
50.8
265.5
237.4
42.7
1,027.4
537.2
2013
£million
252.7
71.6
324.3
172.0
48.7
220.7
188.9
20.6
754.5
316.6
1,564.6
1,071.1
2014
£million
2013
£million
(339.9)
(242.2)
(26.6)
(20.7)
(366.5)
(262.9)
2014
£million
52.7
62.6
115.3
2013
£million
10.5
50.9
61.4
(321.9)
(302.5)
(107.2)
(130.5)
-
-
(321.9)
(302.5)
50.8
(56.4)
(47.3)
(37.2)
-
-
(735.7)
(602.6)
(92.0)
(827.7)
(69.5)
(672.1)
190.1
42.7
291.7
445.2
736.9
(268.9)
468.0
48.7
(81.8)
151.7
20.6
151.9
247.1
399.0
(38.6)
360.4
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
122
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
3. Business and geographical segments continued
(a) Business segments continued
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
Investments
Group Services
(b) Geographical segments
depreciation and
amortisation
Additions to property,
plant and equipment and
intangible assets
2014
£million
2013
£million
2014
£million
2013
£million
13.4
3.0
16.4
2.3
–
2.3
20.0
–
38.7
25.1
63.8
10.6
1.1
11.7
2.2
0.1
2.3
19.4
–
33.4
9.3
42.7
21.9
3.8
25.7
2.1
–
2.1
42.5
–
70.3
1.6
71.9
14.0
6.7
20.7
1.6
–
1.6
28.4
–
50.7
1.6
52.3
The Support Services and Construction divisions are located in the United Kingdom and the Middle East. Equipment Services has operations
in all of the geographic segments listed below. Investments is predominantly based in the United Kingdom.
The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services:
United Kingdom
Rest of Europe
Middle East & Africa
Australasia
Far East
Americas
Group Services
Inter-segment elimination
Amortisation of acquired intangible assets
Exceptional items (note 5)
Revenue including
share of associates
and joint ventures
Consolidated
revenue
Total operating
profit
2014
£million
2013
£million
2014
£million
2013
£million
2014
£million
2013
£million
2,779.6
2,145.4
2,634.9
2,015.0
42.5
454.1
31.4
21.3
27.0
8.1
8.1
381.4
40.0
15.8
24.5
7.1
42.5
206.5
31.4
21.3
27.0
8.1
8.1
122.5
40.0
15.8
24.5
7.1
(58.7)
(40.4)
(58.7)
(40.4)
3,305.3
2,581.9
2,913.0
2,192.6
99.6
(0.3)
32.1
5.7
5.8
(0.5)
(25.2)
–
117.2
(24.5)
(19.8)
72.9
73.5
(2.7)
25.5
10.8
2.8
(1.1)
(22.1)
–
86.7
(8.9)
(4.1)
73.7
Included in consolidated revenue above are revenues of approximately £136 million (2013: £126 million) which arose from sales to the
Group’s largest contract customer.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
123
United Kingdom
Rest of Europe
Middle East & Africa
Australasia
Far East
Americas
Group Services, goodwill and acquired intangible assets
Deferred tax asset
4. Profit for the year
Profit for the year has been arrived at after charging/(crediting):
Depreciation of property, plant and equipment:
On owned assets
On assets held under finance leases
Amortisation of capitalised software development
Gain on disposal of plant and equipment - hire fleet
Gain on disposal of plant and equipment - other
Amortisation of acquired intangible assets (subsidiary undertakings)
Amortisation of acquired intangible assets (associated undertakings)
Rentals under operating leases:
Hire of plant and machinery
Other lease rentals
Cost of inventories recognised in cost of sales
Staff costs
Auditors’ remuneration for audit services (see below)
Loss on disposal of property and investments
Other exceptional items
A more detailed analysis of auditors’ remuneration on a worldwide basis is provided below:
Fees payable to the Company's auditors for the audit of the Company's annual accounts
The audit of the Company's subsidiaries pursuant to legislation
Total audit fees
Audit-related assurance services
Other taxation advisory services
Total non-audit fees
Non-current assets
2014
£million
103.2
4.0
2013
£million
62.7
4.7
153.2
134.9
15.7
12.1
24.5
527.0
839.7
–
839.7
13.6
9.5
20.7
290.9
537.0
21.0
558.0
Notes
2014
£million
2013
£million
15
15
14
14
16
6
5
5
35.3
0.3
3.7
(12.1)
(0.1)
24.4
0.1
36.1
28.1
41.4
31.4
0.5
1.9
(13.4)
-
8.8
0.1
32.0
24.0
27.9
997.6
694.6
1.0
-
19.8
0.9
1.5
2.6
2014
£million
2013
£million
0.2
0.8
1.0
0.1
0.1
0.2
0.2
0.7
0.9
0.1
0.1
0.2
Total fees paid to the Company's auditors
1.2
1.1
An explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors is set out
in the Audit Committee Report on page 72.
Deloitte LLP resigned as the Company’s auditors on 13 May 2014, following which Grant Thornton UK LLP were appointed in their place.
Non-audit fees paid to Deloitte LLP for the period 1 January 2014 to 13 May 2014 amounted to £0.1 million.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 124
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
5. Exceptional items
Agreed valuation of transfer to pension scheme
Transaction costs
Disposals
Profit on disposal of PFI assets
Write–down of investment in Indian associate company, SSPDL Interserve Private Limited
Loss on disposal of property and investments
Transaction costs on the acquisition of Initial Facilities and esg
Integration costs on the acquisition of Initial Facilities
Earnout arrangements on the acquisition of Paragon Management UK Ltd
Bonus and share–based payments triggered by the exceptional profits on the disposals of PFI investments above
Other exceptional items
Exceptional items
6. Staff costs
2014
£million
2013
£million
–
–
–
–
–
–
(8.2)
(10.2)
(1.4)
–
(19.8)
55.0
(0.2)
(51.2)
3.6
(5.1)
(1.5)
–
–
(0.5)
(2.1)
(2.6)
(19.8)
(4.1)
The average number of full-time equivalent employees within each division during the year, including executive directors, was:
Support Services
Construction
Equipment Services
Group Services
Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Share-based payments
Other pension costs (see below)
Defined benefit scheme current service costs (note 30)
Other UK - defined contribution
Other overseas - defined contribution
Pension costs
2014
Number
2013
Number
37,040
21,511
2,488
1,321
242
2,463
1,191
218
41,091
25,383
2014
£million
892.7
74.8
3.4
26.7
2013
£million
615.4
47.9
7.8
23.5
997.6
694.6
8.0
17.6
1.1
26.7
7.4
14.9
1.2
23.5
Detailed disclosures of directors’ aggregate and individual remuneration and share-based payments are given in the audited section of the
Directors’ Remuneration Report on pages 90 to 101 and should be regarded as an integral part of this note.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
125
7.
Investment revenue
Bank interest
Interest income from joint-venture investments
Net return on defined benefit pension assets (note 30)
Other interest
8. Finance costs
Borrowings and overdrafts
Net interest cost on pension obligations (note 30)
9. Tax
Current tax – UK
Current tax – overseas
Deferred tax (note 17)
Tax charge for the year
Tax charge before prior period adjustments
Prior period adjustments – charges/(credits)
Profit before tax
Subsidiary undertakings' profit before tax
Loss on disposal of property and investments
Non-tax–deductible transaction costs
Group share of profit after tax of associates and joint ventures
2014
£million
2013
£million
3.3
0.8
0.3
0.6
5.0
2.8
0.6
–
0.2
3.6
2014
£million
(16.0)
–
(16.0)
2013
£million
(7.8)
(1.4)
(9.2)
2014
£million
2013
£million
2.8
4.3
4.9
12.0
11.9
0.1
12.0
53.6
–
(8.2)
16.5
61.9
2.2
5.0
5.9
13.1
14.0
(0.9)
13.1
52.4
(1.5)
–
17.2
68.1
A
A
B
Effective tax, excluding one–offs, on subsidiary profits before tax
A/B
22.4%
25.0%
UK corporation tax is calculated at 21.5% (2013: 23.2%) of the estimated taxable profit for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the relevant jurisdictions.
The total charge for the year can be reconciled to the profit per the income statement as follows:
2014
2013
£million
%
£million
%
Profit before tax
Tax at the UK income tax rate of 21.5% (2013: 23.2%)
Tax effect of expenses not deductible in determining taxable profit
Non-taxable exceptional items
Tax effect of share of results of associates
Effect of overseas tax rates and unrelieved losses
Prior period adjustments
61.9
13.3
1.5
2.8
(3.0)
(2.7)
0.1
21.5%
2.4%
4.5%
(4.8%)
(4.4%)
0.2%
Tax charge and effective tax rate for the year
12.0
19.4%
68.1
15.8
0.7
0.5
(4.0)
1.0
(0.9)
13.1
23.2%
1.0%
0.7%
(5.9%)
1.5%
(1.3%)
19.2%
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 126
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
9. Tax continued
In addition to the income tax charged to the income statement, the following deferred tax charges/(credits) have been recorded directly
to equity in the year:
Tax on actuarial losses/gains on pension liability
Impact of change in corporation tax rate on pension liability
Tax on fair value adjustment on cash flow hedging instruments
Tax on the intrinsic value of share–based payments
Total
10. Dividends
Final dividend for the year ended 31 December 2012
Interim dividend for the year ended 31 December 2013
Final dividend for the year ended 31 December 2013
Interim dividend for the year ended 31 December 2014
Amount recognised as distribution to equity holders in the period
2014
£million
(3.1)
–
–
2.0
(1.1)
2014
£million
–
–
20.8
10.7
31.5
2013
£million
4.3
3.0
0.2
(1.5)
6.0
2013
£million
17.6
8.6
–
–
26.2
dividend
per share
pence
14.1
6.8
14.7
7.5
Proposed final dividend for the year ended 31 December 2014
15.5
22.3
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability
in these financial statements.
11. Earnings per share
Calculation of earnings per share is based on the following data:
Earnings
Net profit attributable to equity holders of the parent (for basic and diluted basic earnings per share)
Adjustments:
Exceptional items
Amortisation of acquired intangible assets
Tax effect of above adjustments
Headline earnings (for headline and diluted headline earnings per share)
Number of shares
Weighted average number of ordinary shares for the purposes of basic and
headline earnings per share
Effect of dilutive potential ordinary shares:
Share options and awards
Weighted average number of ordinary shares for the purposes of diluted basic and
diluted headline earnings per share
2014
£million
45.4
19.8
24.5
(6.7)
83.0
2013
£million
50.2
4.1
8.9
(1.9)
61.3
2014
Number
2013
Number
141,136,892
128,386,396
2,109,620
3,154,762
143,246,512
131,541,158
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
127
Earnings per share
Basic earnings per share
Diluted basic earnings per share
Headline earnings per share
Diluted headline earnings per share
12. Acquisitions
The Group made the following acquisitions in the year:
2014
pence
32.2
31.7
58.8
57.9
2013
pence
39.1
38.2
47.7
46.6
On 18 March 2014 the Group acquired 100% of the facilities services business (“Initial Facilities”) of Rentokil Initial Plc, for a cash
consideration of £245.7 million. The acquisition strengthens the Support Services offering of Interserve, allowing the provision of a
significantly enhanced service offering. The enlarged business offers a full range of services across all contract sizes and to both public-
and private-sector customers.
On 5 December 2014 the Group acquired 100% of the share capital of ESG Holdings Limited (“esg”) for a cash consideration of £25.7 million.
The acquisition strengthens Interserve’s position within the UK and Saudi Arabian skills and training markets. It also provides an increased
presence in the Welfare-to-Work market where we are already active via Interserve Working Futures and Rehab Jobfit.
Preliminary fair value exercises have been performed, as set out below:
Assets acquired
Property, plant and equipment
Intangible assets
Cash balances
Inventories
Trade and other receivables
Trade and other payables
Other liabilities
Net assets
Goodwill
Consideration
Initial
Facilities
£million
6.6
87.8
25.3
3.3
107.7
(96.8)
(28.5)
105.4
140.3
245.7
esg
£million
3.2
19.1
4.5
-
5.2
Total
£million
9.8
106.9
29.8
3.3
112.9
(13.4)
(110.2)
(4.8)
13.8
11.9
25.7
(33.3)
119.2
152.2
271.4
Net cash outflow on acquisitions
220.4
21.2
241.6
The fair value adjustments relate to certain intangible assets and their associated deferred tax charge. These have been separately
identified and recognised using appropriate valuation techniques based on the fair value of forecast future cash flows. The resultant
goodwill from the acquisition represents the future economic benefits arising from assets that are not capable of being individually
identified and separately recognised (for example the knowledge and expertise of the assembled workforce and the operating synergies
that arise from the Group’s strengthened market position). None of the goodwill is expected to be deductible for income tax purposes.
Acquisition-related costs, included in exceptional costs, amounted to £8.2 million (see note 5).
Since acquisition on 18 March 2014, Initial Facilities has contributed £440.4 million to revenue and a £7.9 million loss after exceptional
items. If the business had been acquired on 1 January 2014, it would have contributed revenues of £555.3 million and a loss after
exceptional items of £5.6 million.
Since acquisition on 5 December 2014, esg has contributed £3.4 million in revenue and a £0.3 million loss after exceptional items. If the
business had been acquired on 1 January 2014, it would have contributed revenues of £41.2 million and a loss after exceptional items of
£3.3 million.
A further £2.1 million of cash was paid in the period relating to the 2013 acquisition of Adyard.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 128
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
13. Goodwill
Cost
At 1 January
Additions (note 12)
Exchange movements
At 31 December
Accumulated impairment
At 1 January and 31 December
Carrying amount
At 31 December
2014
£million
2013
£million
308.0
152.2
1.2
286.3
22.1
(0.4)
461.4
308.0
60.0
60.0
401.4
248.0
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit
from that business combination as follows:
At 1 January 2013
Additions
Exchange movements
At 31 December 2013
Additions
Exchange movements
At 31 December 2014
Construction
£million
11.5
0.4
–
11.9
–
–
Support
Services
£million
213.9
21.7
(0.4)
235.2
152.2
1.2
Equipment
Services
£million
0.9
–
–
0.9
–
–
Total
£million
226.3
22.1
(0.4)
248.0
152.2
1.2
11.9
388.6
0.9
401.4
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations
are those regarding the discount rates, cash flows, growth rates and margins during the period. Management estimates discount rates using
pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The revenue growth
rates are based on current Board-approved budgets and forecasts and are extrapolated based on expectations of changes in the market.
The Group produces three-year plans and then projects a further year based on growth rates of 2.5%, followed by a terminal value based
on a perpetuity calculated at a nominal 2.5% growth which does not exceed current market growth rates.
The rates used to discount the future cash flows range from 8.5% for Support Services (2013: 8.5%) to 9.5% for Construction and Equipment
Services (2013: 8.5%) and are based on the Group’s pre-tax weighted average cost of capital.
As part of this annual review a sensitivity analysis was performed on the impairment test of each CGU, including an increase in the
discount rate of up to 2.0%. No impairment in the carrying value of the goodwill in Support Services, Equipment Services or Construction
would occur as a result of adopting this sensitivity.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
129
14. Other intangible assets
Cost
At 1 January 2013
Acquisitions
Additions
Exchange movements
At 31 December 2013
Acquisitions (note 12)
Additions
Exchange movements
At 31 December 2014
Accumulated amortisation
At 1 January 2013
Charge for the year
Exchange movements
At 31 December 2013
Charge for the year
Exchange movements
At 31 December 2014
Carrying amount
At 31 December 2014
At 31 December 2013
At 1 January 2013
Useful lives
Acquired
Computer
software
£million
Customer
relationships
£million
Other
£million
Total
£million
8.4
–
0.2
–
8.6
1.3
5.3
–
67.2
8.0
–
(0.2)
75.0
105.6
–
0.7
1.4
1.7
–
(0.1)
3.0
–
–
–
77.0
9.7
0.2
(0.3)
86.6
106.9
5.3
0.7
15.2
181.3
3.0
199.5
4.4
1.9
–
6.3
3.7
–
10.0
5.2
2.3
4.0
5
years
31.8
8.6
(0.2)
40.2
24.1
0.3
64.6
116.7
34.8
35.4
5-10
years
1.3
0.2
–
1.5
0.3
–
1.8
1.2
1.5
0.1
3-5
years
37.5
10.7
(0.2)
48.0
28.1
0.3
76.4
123.1
38.6
39.5
The useful life and amortisation period of each group of intangible assets varies according to the underlying length of benefit expected to
be received.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 130
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
15. Property, plant and equipment
(a) Movements
Cost
At 1 January 2013
Additions
Acquisition of subsidiaries
Disposals
Exchange differences
At 31 December 2013
Additions
Acquisition of subsidiaries
Disposals
Exchange differences
At 31 December 2014
Accumulated depreciation
At 1 January 2013
Charge for the year
Eliminated on disposals
Exchange differences
At 31 December 2013
Charge for the year
Eliminated on disposals
Exchange differences
At 31 December 2014
Carrying amount
At 31 December 2014
At 31 December 2013
At 1 January 2013
Land and
buildings
£million
hire
fleet
£million
Other
plant and
equipment
£million
18.3
2.4
4.5
(0.5)
(0.9)
23.8
1.6
0.5
(0.4)
0.3
25.8
9.8
1.2
(0.4)
(0.6)
10.0
1.8
(0.3)
0.3
11.8
Total
£million
318.1
52.1
9.8
(30.4)
(14.8)
334.8
66.6
9.8
(25.2)
7.4
224.8
29.8
-
(24.0)
(10.7)
219.9
47.0
-
(18.3)
3.7
75.0
19.9
5.3
(5.9)
(3.2)
91.1
18.0
9.3
(6.5)
3.4
252.3
115.3
393.4
116.1
18.4
(19.3)
(5.0)
110.2
19.6
(13.6)
0.5
116.7
54.4
12.3
(5.4)
(2.6)
58.7
14.2
(6.0)
2.7
69.6
45.7
32.4
20.6
180.3
31.9
(25.1)
(8.2)
178.9
35.6
(19.9)
3.5
198.1
195.3
155.9
137.8
14.0
13.8
8.5
135.6
109.7
108.7
The carrying amount of the Group’s plant and equipment includes an amount of £0.8 million (2013: £1.0 million) in respect of assets held
under finance leases. Details of property, plant and equipment held under finance leases are shown in note 25.
(b) Carrying amount of land and buildings
Freehold:
Land at cost
Buildings at cost less depreciation
Leaseholds under 50 years at cost less depreciation
Total
(c) Future capital expenditure not provided for in the financial statements
Committed
31 december
2014
£million
31 December
2013
£million
3.7
5.6
9.3
4.7
2.7
6.4
9.1
4.7
14.0
13.8
31 december
2014
£million
31 December
2013
£million
3.5
1.8
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
131
16. Interests in associates and joint-venture entities
(a) Results of joint-venture entities and associated undertakings
The aggregate results of joint-venture entities and associated undertakings were as follows:
Revenues
Operating profit
Net interest receivable
Taxation
Profit after tax
Less: Profit after tax attributable to non-Group interests
Profit after tax attributable to the Group
Group amortisation of acquired intangible assets
Contribution to Group total operating profit
Dividends paid to the Group
Retained result for the period attributable to the Group
(b) Joint-venture entities
(i) Results and net assets
Year ended 31 december 2014
Year ended 31 December 2013
Joint
ventures
£million
Associates
£million
172.1
720.9
4.7
0.3
(0.3)
4.7
(2.9)
1.8
-
1.8
(1.4)
0.4
30.1
0.2
1.1
31.4
(16.6)
14.8
(0.1)
14.7
(16.4)
(1.7)
Total
£million
893.0
34.8
0.5
0.8
36.1
(19.5)
16.6
(0.1)
16.5
(17.8)
(1.3)
Joint
ventures
£million
134.1
5.7
(0.8)
(0.9)
4.0
(2.4)
1.6
-
1.6
(1.6)
-
Associates
£million
716.4
31.1
0.4
1.6
33.1
(17.4)
15.7
(0.1)
15.6
(12.1)
3.5
Total
£million
850.5
36.8
(0.4)
0.7
37.1
(19.8)
17.3
(0.1)
17.2
(13.7)
3.5
The aggregate results of joint ventures were as follows:
Year ended 31 december 2014
Year ended 31 December 2013
Revenues
Operating profit
Net interest receivable
Taxation
Profit after tax
Less: Profit after tax attributable to non-Group interests
Profit after tax attributable to the Group
Group amortisation of acquired intangible assets
Contribution to Group total operating profit
Dividends paid to the Group
Retained result for the period attributable to the Group
Support
Services
£million
22.5
2.1
-
-
2.1
(1.1)
1.0
-
1.0
(0.7)
0.3
Investments
£million
Total
£million
Support
Services
£million
Investments
£million
149.6
172.1
22.5
111.6
2.6
0.3
(0.3)
2.6
(1.8)
0.8
-
0.8
(0.7)
0.1
4.7
0.3
(0.3)
4.7
(2.9)
1.8
-
1.8
(1.4)
0.4
1.7
-
(0.4)
1.3
(0.5)
0.8
-
0.8
(1.1)
(0.3)
4.0
(0.8)
(0.5)
2.7
(1.9)
0.8
-
0.8
(0.5)
0.3
Total
£million
134.1
5.7
(0.8)
(0.9)
4.0
(2.4)
1.6
-
1.6
(1.6)
-
There are no significant restrictions on the ability of joint ventures to pay dividends or repay loans if agreed by the shareholders.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
132
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
16. Interests in associates and joint-venture entities continued
(b) Joint-venture entities continued
(i) Results and net assets continued
The net assets of joint-venture entities were as follows:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Less: Net assets attributable to non-Group interests
Net assets attributable to the Group
Goodwill
Acquired intangible assets
Carrying value of net assets and goodwill
Year ended 31 december 2014
Year ended 31 December 2013
Support
Services
£million
0.1
2.2
(2.3)
Investments
£million
266.0
246.0
(29.6)
Total
£million
266.1
248.2
(31.9)
Support
Services
£million
0.2
2.6
(3.3)
Investments
£million
179.1
171.9
(18.0)
Total
£million
179.3
174.5
(21.3)
-
–
–
–
-
-
–
(391.1)
(391.1)
-
(294.6)
(294.6)
91.3
(48.6)
42.7
-
-
91.3
(48.6)
42.7
-
-
(0.5)
0.3
(0.2)
-
-
38.4
(17.6)
20.8
-
-
37.9
(17.3)
20.6
-
-
42.7
42.7
(0.2)
20.8
20.6
The liabilities of the joint-venture entities principally relate to the non-recourse debt within those businesses as part of the construction of
the underlying asset.
(ii) Movements in the year
At 1 January 2013
Acquisitions and advances
Fair value adjustment to financial instruments and derivatives
Share of retained profits
At 31 December 2013
Acquisitions and advances
Repayments to the Group
Fair value adjustment to financial instruments and derivatives
Share of retained profits
At 31 December 2014
Assets held for sale
At 1 January 2013
Disposals
At 31 December 2013
Disposals
At 31 december 2014
Shares
£million
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Loans
£million
7.3
10.6
–
–
17.9
10.4
(0.3)
–
–
28.0
51.2
(51.2)
–
–
–
Share of
reserves
£million
Total
£million
0.3
–
2.4
–
2.7
–
–
11.6
0.4
14.7
–
–
–
–
–
7.6
10.6
2.4
–
20.6
10.4
(0.3)
11.6
0.4
42.7
51.2
(51.2)
–
–
–
Further details of the Group’s investment in PPP/PFI schemes are included in note 32.
At 31 December 2014 the Group had a commitment for additional investment in joint-venture entities of £21.6 million (2013: £13.5 million).
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
133
(c) Associated undertakings
(i) Results and net assets
The aggregate results of the Group’s various associated undertakings were as follows:
Revenues
Operating profit
Net interest receivable
Taxation
Profit after tax
Less: Profit after tax attributable to non-Group interests
Profit after tax attributable to the Group
Group amortisation of acquired intangible assets
Contribution to Group total operating profit
Dividends paid to the Group
Retained result for the period attributable to the Group
Year ended 31 december 2014
Year ended 31 December 2013
Construction
£million
Support
Services
£million
Total
£million
Construction
£million
442.3
278.6
720.9
23.6
0.2
2.1
25.9
(13.7)
12.2
-
12.2
(14.5)
(2.3)
6.5
-
(1.0)
5.5
(2.9)
2.6
(0.1)
2.5
(1.9)
0.6
30.1
0.2
1.1
31.4
(16.6)
14.8
(0.1)
14.7
(16.4)
(1.7)
459.4
23.4
0.4
2.6
26.4
(14.0)
12.4
(0.1)
12.3
(9.4)
2.9
Support
Services
£million
257.0
7.7
-
(1.0)
6.7
(3.4)
3.3
-
3.3
(2.7)
0.6
Total
£million
716.4
31.1
0.4
1.6
33.1
(17.4)
15.7
(0.1)
15.6
(12.1)
3.5
There are no significant restrictions on the ability of associates to pay dividends or repay loans if agreed by the shareholders.
Total net assets of the associated undertakings were as follows:
Year ended 31 december 2014
Year ended 31 December 2013
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Less: Net assets attributable to non-Group interests
Net assets attributable to the Group
Goodwill
Acquired intangible assets
Construction
£million
34.5
373.4
(259.1)
(43.2)
105.6
(56.0)
49.6
1.2
-
(3.7)
46.6
(23.9)
22.7
3.5
0.2
Carrying value of net assets and goodwill
50.8
26.4
(ii) Movements in the year
At 1 January 2013
Write-down of investment
Share of retained profits net of amortisation
Exchange differences
At 31 December 2013
Additions
Share of retained profits net of amortisation
Exchange differences
At 31 december 2014
Support
Services
£million
27.1
71.6
Total
£million
61.6
445.0
Construction
£million
37.7
355.3
Support
Services
£million
26.5
54.5
Total
£million
64.2
409.8
(48.4)
(307.5)
(255.7)
(34.8)
(290.5)
(46.9)
152.2
(79.9)
72.3
4.7
0.2
77.2
(36.2)
101.1
(53.6)
47.5
1.2
-
48.7
(2.7)
43.5
(22.1)
21.4
3.5
0.3
25.2
(38.9)
144.6
(75.7)
68.9
4.7
0.3
73.9
Shares
£million
Loans
£million
Share of
reserves
£million
Total
£million
10.7
(4.8)
-
-
5.9
-
-
-
9.4
(0.5)
-
-
8.9
-
-
-
5.9
8.9
56.5
0.2
3.5
(1.1)
59.1
-
(1.7)
5.0
62.4
76.6
(5.1)
3.5
(1.1)
73.9
-
(1.7)
5.0
77.2
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
134
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
17. Deferred taxation
The following are the major deferred tax assets and (liabilities) recognised by the Group.
At 1 January 2013
(Charge)/credit to income
Acquisition of subsidiaries
(Charge)/credit to equity
Exchange differences
At 31 December 2013
(Charge)/credit to income
Acquisition of subsidiaries
(Charge)/credit to equity
Exchange differences
At 31 december 2014
Retirement
benefit
obligations
£million
Acquired
intangible
assets
£million
Accelerated
capital
allowances
£million
Trading
losses
£million
Other timing
differences
£million
23.6
(6.0)
-
(7.3)
-
10.3
(6.7)
-
3.1
-
6.7
(8.0)
2.5
(0.7)
-
-
(6.2)
4.6
(21.1)
-
-
3.2
1.4
-
-
0.4
5.0
(2.8)
-
-
-
6.0
(3.9)
-
-
-
2.1
(0.4)
-
-
-
(22.7)
2.2
1.7
8.7
0.1
-
1.3
(0.3)
9.8
0.4
1.9
(2.0)
-
10.1
Total
£million
33.5
(5.9)
(0.7)
(6.0)
0.1
21.0
(4.9)
(19.2)
1.1
-
(2.0)
Certain deferred tax assets and liabilities, as shown below, have been offset on the consolidated balance sheet.
Deferred tax liabilities
Deferred tax assets
31 december
2014
£million
31 December
2013
£million
(22.7)
20.7
(2.0)
(6.2)
27.2
21.0
No deferred tax asset has been recognised in respect of certain unused tax losses available for offset against future profits due to the
unpredictability of future profit streams in those businesses. The accumulated tax value of these losses is £7.7 million (2013: £8.3 million)
on gross losses of £38.6 million (2013: £41.4 million).
18. Inventories
Goods held for resale
Materials
19. Construction contracts
Balances related to contracts in progress at the balance sheet date were:
Amounts due from contract customers included in trade and other receivables (note 20)
Amounts due to contract customers included in trade and other payables (note 23)
Contract costs incurred plus recognised profits less recognised losses to date
Less: progress billings
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
40.1
8.5
48.6
27.5
3.2
30.7
24.0
0.6
24.6
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
81.5
(34.0)
47.5
58.2
(35.2)
23.0
50.9
(20.6)
30.3
4,886.1
4,938.6
4,698.0
(4,838.6)
(4,915.6)
(4,667.7)
47.5
23.0
30.3
At 31 December 2014, retentions held by customers for contract work amounted to £36.8 million (2013: £32.6 million) of which £8.9 million
(2013: £7.0 million) is receivable after one year. Advances received were £34.0 million (2013: £35.2 million) of which £nil is repayable after
one year (2013: £nil).
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
135
20. Trade and other receivables
Amounts recoverable from the sale of goods and services
Allowances for doubtful debts
Amounts due from construction contract customers
Retentions
Other receivables
Prepayments and accrued income
Included in the above are the following amounts recoverable after more than one year:
Retentions
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
418.0
(49.2)
368.8
81.5
36.8
26.7
165.6
679.4
290.8
(41.8)
249.0
58.2
32.6
20.1
126.2
486.1
270.1
(30.5)
239.6
50.9
26.0
12.4
103.1
432.0
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
8.9
7.0
4.5
The directors consider that the carrying amount of trade and other receivables approximates their fair value. Trade and other receivables
are included as part of the financial assets.
Average credit period taken on the sale of goods and services is 38 days (2013: 35 days). Allowances for doubtful debt are provided for on a
specific basis, based on estimates of irrecoverability determined by market knowledge and past experience.
Ageing of trade receivables, not impaired but net of allowances for doubtful debt, is as follows:
Not more than one month past due
Between one and three months past due
Between three and six months past due
Greater than six months
Total past due but not impaired
Not past due
Total net receivables
The average age of the receivables past due but not impaired is 78 days (2013: 75 days).
Movement in allowance for doubtful debt is as follows:
Balance at 1 January
Acquisition of new subsidiaries
Amounts written off as uncollectable
Impairment losses recognised in the year
Amounts recovered during the year
Exchange differences
Balance at 31 December
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
65.8
26.0
24.5
17.1
133.4
235.4
368.8
30.8
16.6
14.9
6.3
68.6
180.4
249.0
36.0
14.3
16.6
10.4
77.3
162.3
239.6
2014
£million
2013
£million
41.8
4.2
(23.3)
28.0
(2.6)
1.1
49.2
30.5
1.2
(9.7)
25.3
(3.8)
(1.7)
41.8
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 136
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
21. Cash, deposits and borrowings
Committed borrowing facilities
US Private Placement loan notes
Bank facilities
Total committed borrowing facilities
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
207.2
250.0
457.2
–
250.0
250.0
–
245.0
245.0
On 20 June 2014, the Group announced the successful completion of a US$ 350 million issue of US Private Placement loan notes (“loan
notes”), which have a weighted average maturity length of 10 years. The loan notes attract differing fixed rates of interest depending on
their tenor. This has been swapped to a fixed sterling equivalent of £207.2 million, along with the associated interest payments, with the
use of derivatives that have been designated as cash flow hedges that are held at fair value (see note 22(b)).
The loan notes are in addition to £250 million of committed bank facilities which mature in 2019.
The loan notes are subject to a fixed rate of interest. The majority of the remainder of the Group’s other borrowings bear interest at
floating rates which are set according to published LIBOR rates. The remainder bear interest at rates that are determined by bank base
rates. The Group seeks to control its exposure to changes in interest rates by using interest rate hedges (see note 22(c)).
Cash, deposits and borrowings:
Cash and deposits
Bank overdrafts
Bank loans
US Private Placement loan notes
Finance leases (note 25)
Total borrowings
Net cash/(debt)
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
82.1
79.7
76.8
(5.5)
(137.5)
(207.2)
(350.2)
(0.8)
(27.4)
(90.0)
-
(117.4)
(0.9)
(351.0)
(118.3)
(19.8)
(30.0)
-
(49.8)
(1.2)
(51.0)
(268.9)
(38.6)
25.8
Cash and deposits comprise cash held by the Group and short-term bank deposits that have an original maturity of three months or less.
Deposits receive interest at floating rates related to UK base rates.
Included within cash and deposits is £36.0 million (2013: £21.8 million) which is subject to various constraints on the Group’s ability to
utilise these balances. These constraints relate to amounts held in project bank accounts, amounts held in accounts held in entities subject
to minority interest shareholdings and the regulatory cash funding requirements relating to the Group’s captive insurance company.
Total borrowings are repayable as follows:
On demand or within one year
In the second year
In the third to fifth years inclusive
After more than five years
Less: Amount due for settlement within 12 months
Amount due for settlement after 12 months
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
5.8
0.3
137.7
207.2
351.0
(5.8)
345.2
27.7
0.3
90.3
-
118.3
(27.7)
90.6
20.3
0.3
30.4
-
51.0
(20.3)
30.7
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
137
Amounts are drawn down against facilities on a short-term basis but the ageing of the total amount borrowed is classified according to
the maturity of the facilities. Contractual interest on bank loans, that will accrue between the year end and the date of rollover of the
amounts drawn down, is £0.5 million and is all due for payment within one year (2013: £0.1 million within one year).
The analysis of utilisation of committed bank facilities is as follows:
Drawn facilities:
US Private Placement loan notes
Bank loans
Undrawn facilities within one to two years
Undrawn facilities within more than two years but not more than five years remaining
Total committed borrowing facilities
22. Financial risk management
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
207.2
137.5
-
112.5
457.2
-
90.0
-
160.0
250.0
-
30.0
-
215.0
245.0
Financial assets comprise trade and other receivables (excluding construction contracts, prepaid and accrued income), long-term debtors
and cash and deposits. Financial assets and liabilities have fair values not materially different to the carrying values. Financial liabilities
comprise trade and other payables (excluding construction contracts, accruals, deferred income and other tax and social security), bank
borrowings, finance leases, loan notes, long-term creditors and interest rate hedges.
The Group has the following categories of financial assets and liabilities:
Loans and receivables
Cash and deposits
Trade and other receivables (excluding construction
contracts, prepaid and accrued income)
Currency exchange rate hedge
Total financial assets
31 december 2014
31 December 2013
Other
financial
assets
£million
derivatives
used for
hedging
£million
Total
£million
Other
financial
assets
£million
Derivatives
used for
hedging
£million
82.1
395.5
-
477.6
-
-
5.4
5.4
82.1
79.7
395.5
5.4
483.0
269.1
-
348.8
-
-
-
-
31 december 2014
31 December 2013
Borrowings, overdrafts and finance leases
Loan notes
Other
financial
liabilities
£million
143.8
207.2
Trade and other payables (excluding construction contracts,
accruals, deferred income and other tax and social security)
357.1
Interest rate hedge (non-PFI investments)
Total financial liabilities
-
708.1
derivatives
used for
hedging
£million
-
-
-
0.1
0.1
Total
£million
143.8
207.2
357.1
0.1
708.2
Other
financial
liabilities
£million
118.3
-
297.8
-
416.1
Derivatives
used for
hedging
£million
-
-
-
0.3
0.3
Total
£million
79.7
269.1
-
348.8
Total
£million
118.3
-
297.8
0.3
416.4
Trade and other receivables and trade and other payables are held at amortised cost. The directors consider these values to approximate
their fair values. The interest rate hedges are recorded at fair value at each balance sheet date.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
138
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
22. Financial risk management continued
Financial instruments that are measured subsequent to initial recognition at fair value are grouped into three levels based on the degree to
which the fair value is observable, as defined by IFRS 13:
– Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets and liabilities;
– Level 2 fair value measurements are those derived from inputs, other than quoted prices included within “Level 1”, that are observable
either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
– Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data.
Classification of financial assets/(liabilities) held at fair value according to the definitions set out in IFRS 13:
Level 2
31 december
2014
£million
31 December
2013
£million
5.3
(0.3)
Derivatives used for hedging financial liabilities are considered to be within the grouping referred to as “Level 2”. Their fair values are
calculated based on the valuation models operated by the relevant counterparty bank, based on market interest rates in force on the date
of valuation. The Level 2 financial derivatives are classified within other receivables and other payables.
No financial instruments have been transferred between Levels during the year.
Exposure to credit risk on liquid funds and derivative financial instruments is managed by the Group’s requirement to trade with
counterparties with strong credit ratings as determined by international credit rating agencies. The transactional banking requirements
are met by local banks in each location with significant cash balances being remitted to Group treasury where short-term cash surpluses or
cash not available for use by the Group is deposited with investment grade rated banks.
(a) Currency exposures
Where material trade is transacted in non-local currency, the Company hedges the currency exposure and ordinarily this will be achieved
with forward contracts.
Analysis of financial assets, excluding derivatives used for hedging, by currency:
Sterling
US dollar
Euro
Australian dollar
Dirham
Other
Floating
rates
£million
49.7
6.2
4.1
2.7
6.5
12.9
82.1
31 december 2014
Fixed
rates
£million
Non-interest
bearing
£million
285.8
39.8
9.8
5.0
22.1
33.0
-
-
-
-
-
-
-
Total
£million
335.5
46.0
13.9
7.7
28.6
45.9
395.5
477.6
31 December 2013
Floating
rates
£million
Fixed
rates
£million
Non-interest
bearing
£million
50.6
7.1
10.8
2.1
0.9
8.2
79.7
-
-
-
-
-
-
-
203.5
20.6
1.2
7.7
11.5
24.6
269.1
Total
£million
254.1
27.7
12.0
9.8
12.4
32.8
348.8
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
139
Analysis of financial liabilities, excluding derivatives used for hedging, by currency:
Sterling
US dollar
Euro
Australian dollar
Dirham
Other
Floating
rates
£million
141.3
-
-
-
-
1.7
31 december 2014
Fixed
rates
£million
Non-interest
bearing
£million
0.8
207.2
-
-
-
-
315.5
18.7
2.0
1.9
15.6
3.4
Total
£million
457.6
225.9
2.0
1.9
15.6
5.1
143.0
208.0
357.1
708.1
Floating
rates
£million
115.1
-
-
-
1.2
1.1
117.4
31 December 2013
Fixed
rates
£million
Non-interest
bearing
£million
0.9
-
-
-
-
-
265.3
17.2
1.1
1.3
10.6
2.3
Total
£million
381.3
17.2
1.1
1.3
11.8
3.4
0.9
297.8
416.1
Weighted average interest rates excluding
amortisation of arrangement fees and
bank margin
0.5%
4.8%
0.5%
1.6%
Where the Group has overseas operations, the revenues and costs of the business will typically be denominated in local currency. Gains
and losses arising on retranslation of monetary assets and liabilities that are not denominated in the functional currency of individual
Group companies are recognised in the income statement. The Group enters into forward foreign exchange contracts to manage material
currency exposures that arise on cash flows from sales or purchases not denominated in functional currencies immediately those sales
or purchases are contracted. Taking into account the effect of forward contracts, Group companies did not have a material exposure to
foreign exchange gains or losses on monetary assets and monetary liabilities denominated in foreign currencies at 31 December 2014.
The Group does not hedge anticipated future sales and purchases.
Gains and losses arising on the retranslation of foreign operations’ net assets into the consolidation currency are recognised directly in
equity. The Group does not hedge these translation differences.
The Group’s exposure to fluctuations in exchange rates is shown below where a change in value of foreign currencies against sterling would
have the following impact on the results of the Group.
A 1% change in exchange rates results in:
Change in profit
Change in reserves/net assets
31 december
2014
£million
31 December
2013
£million
0.3
1.6
0.2
1.4
A 1% change in the Qatari rial exchange rate would result in a £0.1 million change in profit and a £0.5 million change in reserves/net assets.
(b) Market price risk – currency exchange rate hedges
The Group seeks to control its exposure to changes in currency rates by using currency rate swaps to limit the impact on the interest
charge in the income statement. Contracts in place at the year end were as follows:
Currency exchange rate hedges
31 december 2014
31 December 2013
Nominal
value
US$ million
85.0
155.0
110.0
350.0
Maturity
2021
2024
2026
Exchange
rate
1.69
1.69
1.69
Nominal
value
US$ million
n/a
Maturity
n/a
Exchange
rate
n/a
The fair value of currency exchange rate hedges at 31 December 2014 is estimated at £5.4 million (2013: n/a). The contracts are designated
as cash flow hedges and to the extent that the hedges are effective hedges, changes in their fair value are recognised directly in equity.
The fair values of the hedge instruments are calculated and provided by respective counterparty banks. No charges have gone through
the income statement in the year (2013: n/a) in respect of changes in the fair value of the hedges. A gain of £5.4 million (2013: n/a) was
booked to other comprehensive income in respect to changes in fair value of the hedges.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
140
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
22. Financial risk management continued
(c) Market price risk – interest rate hedges
The Group seeks to control its exposure to changes in interest rates by using interest rate swaps to limit the impact on the interest charge
in the income statement. Contracts in place at the year end were as follows:
Interest rate swaps
31 december 2014
31 December 2013
Nominal
value
£million
20.0
10.0
Current
Current
Maturity
Strike price
2015
2015
1.50%
1.58%
Current
Current
Nominal
value
£million
20.0
10.0
Maturity
Strike price
2015
2015
1.50%
1.58%
The fair value of interest rate hedges at 31 December 2014 is estimated at (£0.1) million (2013: (£0.3) million). The contracts are designated
as cash flow hedges and to the extent that the hedges are effective hedges, changes in their fair value are recognised directly in equity.
The fair values of the hedge instruments are calculated using computer valuation models operated by counterparty banks. No charges have
gone through the income statement in the year (2013: £nil) in respect of changes in the fair value of the hedges. A gain of £0.2 million
(2013: gain of £0.8 million) was charged through other comprehensive income in respect to changes in fair value of the hedges.
The use of interest rate caps and swaps, where appropriate, diminishes the impact of an interest rate change. The impact of a 1% change
in interest rate to the Group’s results is shown in the table below.
A 1% change in exchange rates results in:
Change in profit
(d) Credit risk
31 december
2014
£million
31 December
2013
£million
1.4
0.9
The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments, which represent the
Group’s maximum exposure to credit risk in relation to financial assets.
The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances
for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic
environment. To manage this risk, credit references are taken and where appropriate parent company guarantees and letters of credit are
sought along with monthly monitoring of age and recoverability of trade receivables.
Apart from receivables due from customers related to HM Government, the Group has no significant concentration of credit risk, with
exposure spread over a number of counterparties and customers.
(e) Liquidity risk
The Group seeks to maintain sufficient facilities to ensure that it has access to funding to meet current and anticipated future funding
requirements determined from budgets and medium-term plans.
The maturity of financial assets and liabilities, with the exception of interest rate hedges above, are discussed in the specific asset and
liability footnotes.
(f) Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns, whilst seeking to optimise
the debt and equity balance, in order to maximise the return to stakeholders. The capital structure of the Group consists of net debt,
which includes cash, deposits and borrowings (note 21), and equity attributable to equity holders of the parent.
The Group has, over recent years, had a policy of progressively increasing dividends paid to shareholders. The Group may adjust the capital
structure of the Group by returning capital to shareholders, issue new shares or sell assets to reduce debt.
The Group is not subject to externally imposed capital requirements but is subject to covenants in its loan agreements which seek to
maintain the level of debt and interest that the Group may take on at serviceable levels by reference to the Group’s earnings which
ultimately limits the amount of debt that the Group can take on.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
141
23. Trade and other payables - amounts falling due within one year
Obligations under finance leases (note 25)
Trade payables
Advances received
Other taxation and social security
Other payables
Accruals and deferred income
24. Trade and other payables - amounts falling due after more than one year
Obligations under finance leases (note 25)
Trade payables
Other payables
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
0.3
278.4
34.0
73.6
63.6
298.8
748.7
0.3
252.5
35.2
37.3
31.5
235.5
592.3
0.5
214.0
20.6
33.8
34.9
251.7
555.5
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
0.5
0.5
13.8
14.8
0.6
0.4
12.5
13.5
0.7
0.6
11.9
13.2
The carrying amount of trade and other payables approximates to their fair value.
The average credit period taken for trade purchases is 52 days (2013: 61 days).
Ageing of amounts payable excluding advances, finance leases, accruals and deferred income is as follows:
Less than one year
Between one and two years
25. Obligations under finance and operating leases
(a) Finance leases
Amounts payable under finance leases:
Within one year
In the second to fifth years inclusive
Less: future finance charges
Present value of lease obligations
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
415.6
14.3
429.9
321.3
12.9
334.2
282.7
12.5
295.2
Minimum
lease payments
Present value
of minimum
lease payments
2014
£million
2013
£million
2014
£million
2013
£million
0.4
0.5
0.9
(0.1)
0.8
0.3
0.7
1.0
(0.1)
0.9
0.3
0.5
0.8
n/a
0.8
0.3
0.6
0.9
n/a
0.9
Certain of the Group’s plant and equipment is held under finance leases. The average lease term is five to six years. For the year ended
31 December 2014 the average effective borrowing rate was 3.0% (2013: 3.2%). Interest rates are fixed at the contract date. All leases are
on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
All finance lease obligations are denominated in sterling.
The carrying amount of the Group’s finance lease obligations approximate their fair value.
The Group’s obligations under finance leases are secured by the lessors’ charges over the leased assets.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
142
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
25. Obligations under finance and operating leases continued
(b) Operating leases
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:
Within one year
In the second to fifth years inclusive
After five years
31 december 2014
31 December 2013
Land and
buildings
£million
12.6
27.3
10.9
50.8
Other
£million
Total
£million
14.8
14.0
-
28.8
27.4
41.3
10.9
79.6
Land and
buildings
£million
12.9
27.7
12.6
53.2
Other
£million
Total
£million
10.6
12.9
0.3
23.8
23.5
40.6
12.9
77.0
The majority of leases of land and buildings are subject to rent reviews at periodic intervals of between three and five years and are based
on market rates.
26. Provisions
At 1 January 2013
Additional provision in the year
Acquisitions
Release
Utilisation of provision
Exchange differences
At 31 December 2013
Additional provision in the year
Acquisitions (note 12)
Release
Utilisation of provision
Exchange differences
At 31 december 2014
Included in current liabilities
Included in non-current liabilities
The impact of discounting is not material.
Contract
provisions
£million
Other
£million
Total
£million
40.5
10.3
-
(10.8)
(5.8)
-
34.2
7.5
12.1
(11.5)
(8.8)
-
33.5
10.8
2.8
3.3
(0.1)
(2.5)
(0.5)
13.8
2.7
1.9
(1.5)
(2.0)
0.3
15.2
51.3
13.1
3.3
(10.9)
(8.3)
(0.5)
48.0
10.2
14.0
(13.0)
(10.8)
0.3
48.7
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
29.2
19.5
48.7
18.1
29.9
48.0
24.2
27.1
51.3
Contract provisions include costs of site clearance, remedial costs and other contractual provisions. These are expected to be utilised on
final settlement of the relevant contracts.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
143
27. Share capital
Issued and fully paid:
31 december
2014
£million
31 December
2013
£million
31 December
2012
£million
143,917,617 ordinary shares of 10p each (2013: 129,053,768 ordinary shares of 10p each)
14.4
12.9
12.7
At 1 January 2014
Share awards issued in 2013
At 31 December 2013
Equity placing
Share awards issued in 2014
At 31 December 2014
Shares
thousands
Share capital
£million
126,846.9
2,206.8
129,053.7
12,897.8
1,966.1
143,917.6
12.7
0.2
12.9
1.3
0.2
14.4
12,897,771 ordinary shares, being 9.99% of the existing share capital, were issued at 580.0p on 5 March 2014 via an equity placing, raising
gross proceeds of £74.8 million to partially fund the acquisition of Initial Facilities (see note 12).
Awards were granted during the year as indicated below. Exercise and vesting details are stated in the Directors’ Remuneration Report on
pages 94 to 98. Outstanding options and awards over shares in the Company at 31 December 2014 were as follows:
(a) Executive share option scheme
(b) Performance Share Plan
(c) Sharesave Scheme
31 december 2014
31 December 2013
Subscription
price per 10p
share
Number of
beneficiaries
including
directors
Number of
shares
Number of
beneficiaries
including
directors
Number of
shares
date of grant
26 May 2004
253.25p
14 March 2005
359.33p
-
8
-
342,042
342,042
3
10
71,000
375,744
446,744
20 April 2011
11 April 2012
9 April 2013
13 May 2014
27 May 2014
Nil
Nil
Nil
Nil
Nil
7
107,413
59 1,957,437
96 2,492,832
100 2,547,448
96 1,508,872
100 1,541,431
121 1,432,377
2
15,828
5,557,322
-
-
-
-
6,046,316
14 May 2010
214.50p
15 April 2011
231.00p
-
4
-
1,326
5
2,030
717
273,468
5 April 2012
238.00p
939
345,388
1,088
399,058
4 April 2013
398.00p
1,324
292,318
1,572
345,945
9 April 2014
511.00p
2,157
667,222
30 September 2014
529.00p
2,117
626,248
-
-
-
-
1,932,502
1,020,501
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 144
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
28. Contingent liabilities
The Company and its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of
business. Appropriate provision has been made in these accounts for all material uninsured liabilities resulting from proceedings that are,
in the opinion of the directors, likely to materialise.
The Company and certain subsidiary undertakings have, in the normal course of business, given performance guarantees and provided
indemnities to third parties in relation to performance bonds and other contract-related guarantees. These relate to the Group’s own
contracts and to the Group’s share of the contractual obligations of certain joint ventures and associated undertakings. The Group acts as
guarantor for the following:
Joint ventures and associates
Borrowings
Bonds and guarantees
29. Share-based payments
Under the Group’s share-based incentive schemes the following expense was charged:
Performance Share Plan
Sharesave Scheme
Total charge
Cash settled
Equity settled
Total charge
(a) Executive share option scheme
Maximum guarantee
Amounts utilised
2014
£million
2013
£million
2014
£million
2013
£million
16.2
205.1
221.3
13.6
177.0
190.6
0.6
115.9
116.5
0.3
102.0
102.3
2014
£million
2013
£million
3.0
0.4
3.4
0.5
2.9
3.4
5.4
0.1
5.5
0.6
4.9
5.5
The executive share option scheme provides for a grant price equal to the average quoted market price of the Group’s shares on the date
of grant. The vesting period was generally three to four years. If the options remain unexercised after a period of 10 years from the date
of grant, the options lapse. Furthermore, options are normally forfeited if the employee leaves the Group before the options vest.
Options granted since 7 November 2002:
Outstanding at beginning of period
Exercised during the period
Lapsed during the period
Outstanding and exercisable at the end of the period
2014
2013
weighted
average
exercise
price
£
Options
number
Options
number
446,744
(104,702)
3.42
2.87
1,104,727
(642,429)
-
-
(15,554)
342,042
3.59
446,744
Weighted
average
exercise
price
£
3.16
2.97
3.59
3.42
The average share price during the year was £6.25. The outstanding options at the end of the period have an exercise price of £3.59 and
have a remaining contractual life of 0.2 years.
The inputs to the Black-Scholes models in respect of the grants up to 2005 are set out in the 2010 Annual Report and Financial Statements.
There have been no grants under these schemes since 2005.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
145
(b) Performance Share Plan
The Performance Share Plan is a “free” share award with an effective exercise price of £nil. For certain participants, one-third of their
award is subject to a Total Shareholder Return (TSR) performance condition with performance compared to a comparator group. All
awards are subject to an Earnings per Share (EPS) performance condition. The performance period is three years. Further details of these
conditions are set out in the Directors’ Remuneration Report on page 96. Awards are normally forfeited if the employee leaves the Group
before the awards vest.
Outstanding at beginning of period
Granted during the period
Exercised during the period
Lapsed during the period
Outstanding at the end of the period
Exercisable at the end of the period
2014
Awards
number
2013
Awards
number
6,046,316
6,140,423
1,487,285
1,546,315
(1,753,963)
(1,564,400)
(222,316)
(76,022)
5,557,322
6,046,316
107,413
-
The remaining weighted average contractual life is 3.1 years (2013: 1.5 years).
The Group engaged external consultants to calculate the fair value of these awards at the date of grant. The valuation model used to
calculate the fair value of the awards granted under this plan was a stochastic valuation model, the inputs of which are detailed below:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
Average fair value of award per share
(c) Sharesave Scheme
2014
grants
2013
grants
2012
grants
694.0p
466.1p
275.8p
0p
0p
0p
23.1%
26.4%
33.0%
3 years
3 years
3 years
1.1%
0.0%
0.3%
0.0%
0.5%
0.0%
462.5p
348.6p
220.0p
The Sharesave Scheme is an all-employee HMRC-approved share scheme. The scheme involves employees saving a set amount from their
salary for a period of three years. At the end of the three-year period the employee is offered the opportunity to purchase shares based
on the amount saved at an option price set at the start of the period. The option price for the 2012, 2013 and 2014 grants was set at a 20%
discount of the average share price over five days’ trading prior to the offer date of the scheme.
Outstanding at beginning of period
Granted during the period
Exercised during the period
Lapsed during the period
Outstanding at the end of the period
2014
2013
weighted
average
exercise
price
£
2.90
5.19
2.35
3.76
4.51
Options
number
1,155,913
363,839
(344,377)
(154,874)
1,020,501
Weighted
average
exercise
price
£
2.24
3.98
2.08
2.29
2.90
Options
number
1,020,501
1,347,926
(273,733)
(162,192)
1,932,502
Exercisable at the end of the period
1,326
2.31
2,030
2.14
The outstanding options at the end of the period had a weighted average exercise price of £4.51 (2013: £2.90) and had a remaining
weighted average contractual life of 2.6 years (2013: 1.5 years).
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
146
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
29. Share-based payments
29. Share-based payments continued
(c) Sharesave Scheme continued
The inputs into the Black-Scholes model are as follows:
Share price at date of grant
Exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
Fair value of award per share
2014
grants
646.5p
520.3p
23.2%
2013
grants
469.5p
398.0p
27.2%
2012
grants
276.4p
238.0p
32.4%
3 years
3 years
3 years
0.7%
4.9%
0.9%
6.3%
1.3%
7.6%
113.5p
72.5p
45.5p
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years. The
expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise
restrictions and behavioural considerations.
30. Defined benefit retirement schemes
The principal pension schemes within the Group have been valued for the purposes of IAS 19 Employee benefits. For each of these pension
schemes valuation information has been updated by Lane Clark & Peacock LLP, qualified independent actuaries, to take account of the
requirements of IAS 19 in order to assess the liabilities of the various schemes as at 31 December 2014.
Actuarial gains and losses are recognised in full in the period in which they occur. As permitted by IAS 19, actuarial gains and losses are
recognised outside profit or loss and presented in other comprehensive income. The liability recognised in the balance sheet represents
the present value of the various defined benefit obligations, as reduced by the fair value of plan assets. The cost of providing benefits is
determined using the Projected Unit Credit Method.
The Group contributes to various defined benefit pension schemes in the UK and overseas. By far the most significant arrangement is
the Interserve Pension Scheme in the UK, where benefits are generally related to service and final salary. The Group operates a defined
contribution plan for new hires, with membership of the defined benefit arrangements only permitted when specific contract terms
require defined benefit provision. Contributions to the defined contribution arrangements are in addition to those set out below and are
charged directly to profit and loss.
The current funding target for the Group’s defined benefit schemes is to maintain assets equal to the value of the accrued benefits
based on projected salaries (where relevant). The regulatory framework in the UK requires the Trustees and Group to agree upon the
assumptions underlying the funding target, and then to agree upon the necessary contributions required to recover any deficit at the
valuation date. There is a risk to the Group that adverse experience could lead to a requirement for the Group to make considerable
contributions to recover any deficit.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
147
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation. The assumptions
shown are in relation to the Interserve Pension Scheme, which represents 92% of the total defined benefit obligation. The life expectancy
assumptions shown relate to the vast majority of the membership of that scheme. Alternative assumptions have been used for the less
material arrangements where the specific nature of those schemes deems it appropriate to do so. The weighted average duration of the
expected benefit payments for the schemes is around 17 years.
Significant actuarial assumptions
Retail price inflation
Discount rate
Post-retirement mortality (expectancy of life in years)
Male currently aged 65
Female currently aged 65
Male aged 65 in 20 years' time
Female aged 65 in 20 years' time
Other related actuarial assumptions
Consumer price index
Pension increases in payment:
LPI/RPI
Fixed 5%
3% or RPI if higher (capped at 5%)
General salary increases
2014
2013
2012
3.10% pa
3.60% pa
3.40% pa
4.50% pa
3.00% pa
4.40% pa
87.5
89.5
89.3
91.0
87.4
89.4
89.2
90.9
87.3
89.3
89.1
90.9
2.10% pa
2.40% pa
2.30% pa
3.00%/3.10% pa
3.30%/3.40% pa
2.90%/3.00% pa
5.00% pa
3.60% pa
5.00% pa
3.70% pa
5.00% pa
3.50% pa
2.10-2.60% pa
2.40-2.90% pa
2.30-2.80% pa
The amount included in the balance sheet arising from the Group’s obligations in respect of the various pension schemes is as follows:
Present value of defined benefit obligation
Fair value of schemes' assets
Liability recognised in the balance sheet
2014
£million
924.9
(920.1)
4.8
2013
£million
826.9
(819.2)
2012
£million
799.3
2011
£million
695.0
2010
£million
642.3
(698.2)
(638.8)
(590.8)
7.7
101.1
56.2
51.5
The change in the net liabilities recognised in the balance sheet is comprised as follows:
Opening net liability
Expense charges to profit and loss
Amount recognised outside profit and loss
Employer contributions
Closing net liability
Sensitivity to significant actuarial assumptions
Price inflation
Discount rate
Post retirement mortality (expectancy of life in years)
2014
£million
7.7
9.2
15.7
(27.8)
4.8
2013
£million
101.1
10.7
(21.3)
(82.8)
7.7
Indicative change in defined
benefit obligation
Sensitivity
2014
£million
2013
£million
+/0.5% pa
+/0.5% pa
1 year increase
+/-55
+/-73
+30
+/-50
+/-67
+25
The sensitivities shown above reflect only the change in the assessed defined benefit obligation. In practice any movement in assumptions
is likely to be accompanied by a partially offsetting change in asset values, and the corresponding overall impact on the net liability is
therefore likely to be lower than the amounts above.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 148
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
30. Defined benefit retirement
schemes
30. Defined benefit retirement schemes continued
The amounts recognised in the income statement are as follows:
Employer’s part of current service cost
Administration costs
Bulk transfer
Net interest (income)/expense
Total expense recognised in the income statement
2014
£million
2013
£million
8.0
1.6
(0.1)
(0.3)
9.2
7.4
1.9
-
1.4
10.7
The current service cost and administration costs are included within operating profit. The interest cost is included within financing costs.
The current allocation of the schemes’ assets is as follows:
Equities (quoted)
Alternative investments (primarily unquoted)
Property (unquoted)
Insurance policies (unquoted)
Government bonds (quoted)
Corporate bonds (quoted)
Infrastructure (unquoted)
Cash and other (primarily unquoted)
Total
31 december 2014
31 December 2013
31 December 2012
Current
allocation
Fair value
£million
Current
allocation
Fair value
£million
Current
allocation
Fair value
£million
21%
13%
4%
40%
11%
0%
10%
1%
190.7
120.7
37.4
371.6
96.8
2.7
90.0
10.2
17%
14%
3%
1%
22%
21%
15%
7%
100%
920.1
100%
140.8
114.1
25.5
10.1
179.6
171.9
122.5
54.7
819.2
17%
14%
3%
1%
24%
25%
9%
7%
100%
115.5
94.6
23.5
9.4
169.6
175.0
64.5
46.1
698.2
The cash item includes the profit or loss on the Interserve Pension Scheme’s investment in equity futures. As a result of this investment
the Group has additional exposure to £109.4 million of equity performance as at 31 December 2014 (2013: £99.5 million). Around 70% of the
Group’s direct equity investments are in relation to UK equities (2013: 81%). Holdings in Government bonds are predominantly index-linked.
Alternative investments include diversified growth funds, fund of hedge funds and emerging market multi-asset funds (primarily unquoted).
During 2014 the Trustee of the Interserve Pension Scheme entered a buy-in contract to insure some of the benefits of a subset of the pension
membership of the Scheme. The policy has been valued as the replacement cost at the accounting date, as provided by the insurer,
with the exception of a proportion of the policy (around 3%) which precisely matches the corresponding member benefits. This small
matching element has been valued at the same amount as the defined benefit obligation in respect of the matched benefits. Overall,
this buy-in contract protects the Group from risks associated with approximately 35% of the Scheme’s defined benefit obligation.
The infrastructure holding is predominantly the portfolio of PFI investments transferred by Interserve Plc to the Interserve Pension Scheme
in November 2009 and January 2013. The schemes have not directly invested in any of the Group’s other financial instruments nor in other
assets or properties used by the Group.
A reconciliation of the present value of the defined benefit obligation is as follows:
Opening defined benefit obligation
Employer’s part of current service cost
Interest cost
Contributions by schemes' participants
Actuarial loss/(gain) due to:
Changes in financial assumptions
Changes in demographic assumptions
Experience on defined benefit obligations
Benefits paid
Bulk transfers
Closing defined benefit obligation
2014
£million
826.9
8.0
36.4
0.4
95.4
1.2
(9.5)
(36.4)
2.5
924.9
2013
£million
799.3
7.4
34.3
0.4
11.2
6.9
1.2
(34.0)
0.2
826.9
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
149
A reconciliation of the fair value of the schemes’ assets is as follows:
Opening fair value of the schemes' assets
Interest on schemes' assets
Actual return on schemes' assets less interest on schemes' assets
Contributions by the employer
Contributions by schemes' participants
Benefits paid
Administration costs
Bulk transfers
Closing fair value of the schemes' assets
2014
£million
819.2
36.7
71.4
27.8
0.4
2013
£million
698.2
32.9
40.6
82.8
0.4
(36.4)
(34.0)
(1.6)
2.6
(1.9)
0.2
920.1
819.2
Based on current contribution rates and payroll, the Group expects to contribute £25.1 million to the various defined benefit arrangements
during 2015. This includes deficit contributions to the Interserve Pension Scheme of £12.9 million.
The Group has assessed that no further liability arises under IFRIC 14 IAS 19 - The limit on a defined benefit asset, minimum funding
requirements and their interaction on the basis that the scheme rules allow the Company an unconditional right to refunds assuming the
gradual settlement of plan liabilities over time until all members have left the scheme.
31. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note. Transactions between the Group and its associates are disclosed below.
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
Joint-venture entities
Associates
Sales of goods
and services
Purchases of goods
and services
Amounts due from
related parties
Amounts owed to
related parties
2014
£million
2.5
137.6
2013
£million
1.2
127.6
2014
£million
-
0.8
2013
£million
-
1.0
2014
£million
0.4
21.2
2013
£million
0.1
32.2
2014
£million
-
0.5
2013
£million
-
16.2
Sales and purchases of goods and services to related parties were made on normal trading terms.
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received in respect of the
outstanding balances. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.
Key management personnel are considered to be the directors of Interserve Plc. Dividends totalling £0.2 million (2013: £0.1 million) were
paid in the year in respect of ordinary shares held by the Company’s directors. Other amounts paid to key management personnel are given
in the audited section of the Directors’ Remuneration Report on pages 90 to 101.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 150
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
32. Investments in joint ventures – arrangements
The composition of investment in joint ventures can be summarised as follows:
(a) PFI/PPP arrangements that have reached financial close at 31 December 2014 include:
Interserve services
dates
design/build
Operate
£million
Status
Awarded
operational
end
%
£million
whole-life
value
Fully
Contract
Share of equity/
sub-debt
Total
capital
required
£million
Contract
Custodial
Addiewell Prison
yes
yes
73
operational mid-2006
late 2008
2033
170
145
operational mid-2012 mid-2014
construction
Q3 2014
100
construction
Q2 2013
43
construction
Q4 2014
2039
2042
2045
2042
-
-
-
Central/local government
West Yorkshire Police
Derby Waste
health
Alder Hey Hospital
Scottish National
Blood Transfusion
yes
yes
yes
yes
yes
yes
yes
yes
Invested to date
Shares
Loans
Remaining commitment
33
50
50
20
50
2.9
100.0
4.0
17.5
112.5
190.8
3.3
200.0
43.0
1.6
29.3
-
10.2
19.1
29.3
Interserve’s share of the capital commitments of the joint ventures above amounts to £67.6 million (2013: £26.4 million).
(b) Non-PFI/PPP arrangements:
Contract
description
Haymarket
Rehab Jobfit
Property development venture in central Edinburgh
Employment-related support services to the Department for
Work and Pensions
Invested to date
Shares
Loans
Remaining commitment
Share of equity/
sub-debt
%
£million
50/100
21.3
49/n/a
-
21.3
-
17.8
3.5
21.3
Interserve’s share of the capital commitments of the joint ventures above amounts to £3.5 million (2013: £7.9 million).
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
151
33. Reconciliation of non-statutory measures
The Group uses a number of key performance indicators to monitor the performance of its business.
This note reconciles these key performance indicators to individual lines in the financial statements.
(a) Headline pre-tax profit
Profit before tax
Adjusted for:
Amortisation of acquired intangible assets
Share of associates amortisation of acquired intangible assets
Exceptional items
Headline pre-tax profit
(b) Operating cash flow
Cash generated by operations
Adjusted for:
Pension contributions in excess of income statement charge
Other exceptional items cash impact
Proceeds on disposal of plant and equipment - non-hire fleet
Capital expenditure - non-hire fleet
Operating cash flow
(c) Free cash flow
Operating cash flow
Adjusted for:
Pension contributions in excess of income statement charge
Taxes paid
Dividends received from associates and joint ventures
Interest received
Interest paid
Effect of foreign exchange rate change
Free cash flow
(d) Operating cash conversion
Operating cash flow
Operating profit, before exceptional items and amortisation of acquired intangible assets
Full-year operating cash conversion
Three-year rolling operating cash flow
Three-year rolling operating profit, before exceptional items and amortisation of acquired
intangible assets
Operating cash conversion, three-year rolling average
2014
£million
61.9
24.4
0.1
19.8
106.2
2013
£million
68.1
8.8
0.1
4.1
81.1
2012
£million
179.8
6.0
0.4
(110.9)
75.3
2014
£million
10.9
2013
£million
43.2
2012
£million
33.7
18.2
18.4
0.9
(24.9)
23.5
18.5
2.1
0.2
(22.1)
41.9
28.8
4.0
1.8
(10.7)
57.6
2014
£million
23.5
2013
£million
41.9
2012
£million
57.6
(18.2)
(10.2)
17.8
4.7
(16.0)
0.8
2.4
2014
£million
23.5
100.6
23.4%
(18.5)
(5.7)
13.7
3.5
(7.8)
(1.0)
26.1
(28.8)
(10.7)
19.8
8.4
(9.6)
(0.2)
36.5
2013
£million
41.9
69.4
2012
£million
57.6
53.0
60.4%
108.7%
123.0
163.6
165.8
223.0
55.2%
165.8
98.7%
137.6
120.5%
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
152
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE CONSOLIdATEd FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
33. Reconciliation of non-statutory measures continued
(e) Gross operating cash conversion
Operating cash flow
Dividends received from associates and joint ventures
Gross operating cash flow
2014
£million
23.5
17.8
41.3
2013
£million
2012
£million
41.9
13.7
55.6
57.6
19.8
77.4
Operating profit, before exceptional items and amortisation of acquired intangible assets
100.6
69.4
53.0
Share of results of associates and joint ventures, before exceptional items and amortisation of acquired
intangible assets
Total operating profit, before exceptional items and amortisation of acquired intangible assets
16.6
117.2
17.3
86.7
25.4
78.4
Full-year gross operating cash conversion
35.2%
64.1%
98.7%
Three-year rolling gross operating cash flow
Three-year rolling total operating profit before exceptional items and amortisation of acquired
intangible assets
Gross operating cash conversion, three-year rolling average
174.3
217.7
238.3
282.3
61.7%
236.4
92.1%
221.9
107.4%
(f) Gross revenue
Consolidated revenue
Share of revenues of associates and joint ventures
Gross revenue
(g) Operating margins
Total operating profit before exceptional items and amortisation of acquired intangible assets
Gross revenue
Total operating margin
2014
£million
2013
£million
2012
£million
2,913.0
2,192.6
1,958.4
392.3
389.3
411.2
3,305.3
2,581.9
2,369.6
2014
£million
117.2
2013
£million
86.7
2012
£million
78.4
3,305.3
2,581.9
2,369.9
3.5%
3.4%
3.3%
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS COMPANy bALANCE ShEET
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS COMPANy bALANCE ShEET
153
153
Company balance sheet
Company balance sheet
at 31 December 2014
at 31 December 2014
Fixed assets
Tangible fixed assets
Interests in associated undertakings
Investments
Investments in subsidiary undertakings
Current assets
Debtors:
Due within one year
Due after one year
Cash at bank and in hand
Creditors: amounts falling due within one year
Bank overdrafts and loans
Trade creditors
Other creditors
Short-term provisions
Net current assets/(liabilities)
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Other creditors
Long-term provisions
Net assets
Capital and reserves
Called-up share capital
Share premium account
Capital redemption reserve
Acquisition reserve
Profit and loss account
Shareholders’ funds
These financial statements were approved by the Board of Directors on 26 February 2015.
Signed on behalf of the Board of Directors
A M Ringrose
Director
Company number: 00088456
T P haywood
Director
Notes
2014
£million
2013
£million
E
F
G
H
I
I
J
K
L
K
N
O
O
O
O
P
4.2
2.7
0.3
463.9
471.1
154.3
3.4
27.6
185.3
3.7
2.7
0.3
463.9
470.6
127.1
5.8
23.7
156.6
(122.1)
(136.3)
(0.4)
(60.4)
(0.2)
(0.3)
(95.4)
(0.1)
(183.1)
(232.1)
2.2
473.3
(6.5)
(0.2)
(75.5)
395.1
(6.5)
-
466.6
388.6
14.4
115.3
0.1
180.9
155.9
466.6
12.9
115.0
0.1
108.5
152.1
388.6
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT
154
154
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
Notes to the Company financial statements
Notes to the Company financial statements
for the year ended 31 December 2014
for the year ended 31 December 2014
A) Accounting policies
The financial statements have been prepared in accordance with applicable United Kingdom law and accounting standards. The accounting
policies have been applied consistently throughout the year and the previous year.
The particular policies adopted by the directors are described below.
Going concern
The directors have made enquiries and have a reasonable expectation that the Company has adequate resources to continue in existence
for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.
Basis of accounting
These financial statements have been prepared in accordance with the historical cost convention.
Foreign currency
Transactions denominated in foreign currency are translated at the rates ruling at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are translated at the rates ruling at that date. These translation
differences are dealt with in the profit for the year.
Property, plant and equipment
Tangible fixed assets are carried at cost less any accumulated depreciation and any impairment losses. Depreciation is provided on a
straight-line basis at rates ranging between:
Freehold land
Freehold buildings
Leasehold property
Computer hardware
Computer software
Furniture and office equipment
Plant and equipment
Nil
2%
Over period of lease
33.3%
33.3%
33.3%
10% to 20%
The costs of operating leases are charged to the profit and loss account as they accrue.
Provisions
Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that
an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, the reimbursement is recognised as
a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income
statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using an appropriate
rate that takes into account the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of
time is recognised as a finance cost.
Investments
Investments are stated at cost less provision for any impairment in value.
Pensions
The Company operates a pension scheme for the benefit of permanent members of staff, the Interserve Pension Scheme. This contains
defined benefit and defined contribution pension sections. The Company also set up a new defined contribution section of the Interserve
Pension Scheme with effect from 1 November 2002. Actuarial valuations of the Interserve Pension Scheme are carried out every three
years.
For the purposes of FRS 17 Retirement benefits, the Company is unable to identify its share of the underlying assets and liabilities in
the main Group Scheme, the Interserve Pension Scheme, on a consistent and reasonable basis. Therefore, the Company will account for
contributions to the scheme as if it were a defined contribution scheme. Note 30 to the Annual Report and Financial Statements of the
Group sets out details of the IAS 19 net pension liability of £4.8 million for the Company (2013: £7.7 million).
For defined contribution schemes, the amount recognised in the profit and loss account is equal to the contributions payable to the
schemes during the year.
The defined benefit scheme was closed on 31 December 2009 with the exception of passport members. All non-passport members
transferred to the defined contribution scheme as at 1 January 2010.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
155
Taxation
Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to
pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise
from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included
in the financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there
is no commitment to sell the asset, or on unremitted earnings of subsidiaries or associates where there is no commitment to remit these
earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred
tax assets and liabilities are not discounted.
Financial instruments
Debtors
Debtors are measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement
where there is objective evidence that the asset is impaired.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, demand deposits and other short-term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement and
are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Creditors
Creditors are measured at fair value.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedge accounting
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Company becomes a party to the contractual
provisions of the instrument. Transactions in derivative financial instruments are for risk management purposes only. The Company uses
derivative financial instruments to hedge its exposure to interest rate and foreign currency risk. To the extent that such instruments
are matched to underlying assets or liabilities, they are accounted for using hedge accounting. Derivatives are initially recognised at fair
value at the date a derivative contract is taken out and subsequently remeasured at fair value at each balance sheet date. Changes in fair
value of derivative instruments that are designated as, and effective as, hedges of future cash flows and net investments are recognised
directly in the other income statement. Any ineffective portion is recognised immediately in the income statement. Amounts deferred in
equity are recycled through the income statement in the same period in which the underlying hedged item is recognised in the income
statement. However, when the transaction that is being hedged results in a non-financial asset or non-financial liability, the gains and
losses previously accumulated in equity are transferred from equity and included in the initial measurement of the cost of that asset or
liability. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies
for hedge accounting. Any cumulative gain or loss on the hedging instrument recognised in equity at that time is retained in equity until
the forecast transaction occurs. If a hedged transaction is no longer expected to occur, any cumulative gain or loss recognised in equity is
transferred to the income statement for the period.
Changes in fair value of derivative instruments that do not qualify for hedge accounting, or have not been designated as hedges, are
recognised in the income statement as they arise. These derivative instruments are designated as fair value through the profit or loss.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their economic risks
and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value.
Share-based payments
The Company has applied the requirements of FRS 20 Share-based payment. In accordance with the transitional provisions, FRS 20 has
been applied to all grants of equity instruments after November 2002 that were unvested as at January 2004. The Company issues share-
based payments to certain employees of the Group headed by the Company. The fair value determined at the grant date is expensed on
a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. Fair value for grants
pre-2006 was measured by the use of the Black-Scholes model and subsequently a stochastic model was used. Note 29 to the Annual
Report and Financial Statements of the Group sets out details of the share-based payments. The total value of equity-settled share-based
payments is credited to the profit and loss reserve of the Company. Share-based payments to employees of subsidiaries of the Company
are recharged to the relevant employer and the recharged income is credited to the profit and loss account of the Company.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 156
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
Notes to the Company financial statements continued
A) Accounting policies continued
Exemptions
The Company’s financial statements are included in the Interserve Plc consolidated financial statements for the year ended
31 December 2014. As permitted by section 408 of the Companies Act 2006, the Company has not presented its own profit and loss
account. The Company has also taken advantage of the exemption from presenting a cash flow statement under the terms of FRS 1
Cash flow statements. The Company is also exempt under the terms of FRS 8 Related party disclosures from disclosing transactions
with other wholly-owned members of the Interserve Group. The Interserve Plc consolidated financial statements for the year ended
31 December 2014 contain financial instrument disclosures which comply with FRS 29 Financial instruments: disclosures. The Company has
therefore taken advantage of the exemption in FRS 29 not to present separate financial instrument disclosures for the Company.
B) Profit for the year
Interserve Plc reported a profit after taxation for the financial year ended 31 December 2014 of £33.3 million (2013: 12.1 million).
The auditors’ remuneration for audit services to the Company was £0.2 million (2013: £0.1 million).
C) Employees
The average number of persons employed, being full-time equivalents, by the Company during the year, including directors, was 153
(2013: 130).
The costs incurred in respect of these employees were:
Wages and salaries
Social security costs
Share-based payments
Pension costs
Share-based payments to employees of the Company
Share-based payments to employees of subsidiaries
Group share-based payment charge
Cash settled
Equity settled
Group share-based payment charge
Directors’ remuneration
2014
£million
10.9
1.2
2.7
0.7
15.5
2014
£million
2.7
0.7
3.4
0.5
2.9
3.4
2013
£million
9.4
0.8
3.0
0.7
13.9
2013
£million
2.8
2.7
5.5
0.6
4.9
5.5
Detailed disclosures of directors’ aggregated individual remuneration and share-based payments included in the above analysis are given in
the audited section of the Directors’ Remuneration Report on pages 90 to 101 and should be regarded as an integral part of this note.
D) Dividends
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 December 2013 of 14.7p (2012: 14.1p) per share
Interim dividend for the year ended 31 December 2014 of 7.5p (2013: 6.8p) per share
Proposed final dividend for the year ended 31 December 2014 of 15.5p per share
2014
£million
2013
£million
20.8
10.7
31.5
22.3
17.9
8.7
26.6
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability
in these financial statements.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
157
E) Tangible fixed assets
(a) Movement during the year
Cost
At 1 January 2014
Additions
Disposals
At 31 December 2014
Depreciation
At 1 January 2014
Charge in year
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
(b) Land and buildings
Net book value of land and buildings
Freehold:
Land at cost
Buildings at cost less depreciation
Leaseholds over 50 years at cost less depreciation
Total
(c) Operating leases
The Company had annual commitments under non-cancellable operating leases that expire as follows:
Land and
buildings
£million
Other
£million
Total
£million
4.4
1.1
(0.1)
5.4
2.2
0.1
2.3
3.1
2.2
4.9
0.4
-
5.3
3.4
0.8
4.2
1.1
1.5
9.3
1.5
(0.1)
10.7
5.6
0.9
6.5
4.2
3.7
2014
£million
2013
£million
2.0
-
2.0
1.1
3.1
1.0
-
1.0
1.2
2.2
Within one year
Within two to five years
After five years
Land and buildings
Other
2014
£million
2013
£million
2014
£million
2013
£million
-
-
1.1
1.1
0.3
-
1.1
1.4
0.1
0.1
-
0.2
0.1
0.1
-
0.2
The majority of leases of land and buildings are subject to rent reviews at periodic intervals of between three and five years.
F)
Investment in associate undertakings
Investment
2014
£million
2.7
2013
£million
2.7
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 158
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
Notes to the Company financial statements continued
G)
Investments
Bonds
The Company invested £250,000 in Allia bonds during the year ended 31 December 2013.
H)
Investments in subsidiary undertakings
Cost
At 1 January 2014
Disposals
At 31 December 2014
Provisions
At 1 January 2014
Disposals
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
Details of principal group undertakings are given on pages 161 to 165, which form part of these financial statements.
The Company liquidated Interserve Deutschland GmbH on 4 August 2014.
I) Debtors
Amounts falling due within one year:
Trade debtors
Amounts owed by subsidiary undertakings
Corporation tax
Prepayments and accrued income
Amounts falling due after more than one year:
Deferred taxation (note M)
J) Other creditors
Amounts owed to subsidiary undertakings
Other creditors
Accruals and deferred income
2014
£million
0.3
2013
£million
0.3
Shares
at cost
£million
483.8
(6.4)
477.4
19.9
(6.4)
13.5
463.9
463.9
2014
£million
2013
£million
0.1
143.1
8.1
3.0
0.1
120.6
4.2
2.2
154.3
127.1
3.4
3.4
5.8
5.8
2014
£million
2013
£million
1.1
51.2
8.1
60.4
65.2
22.0
8.2
95.4
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
159
K) Provisions
At 1 January
Additions
Provision utilisation
At 31 December
Included in current liabilities
Included in non-current liabilities
L) Other creditors – amounts falling due after more than one year
Other creditors
M) Deferred taxation asset
Movement in year
At 1 January
Provided in the year
Utilised in the year
At 31 December
The source of the balance on deferred tax account is as follows:
Accelerated capital allowances
Other timing differences
At 31 December
N) Share capital
Allotted and fully paid
2014
£million
2013
£million
(0.1)
(0.4)
0.1
(0.4)
(0.2)
(0.2)
(0.2)
-
0.1
(0.1)
(0.1)
-
2014
£million
6.5
2013
£million
6.5
2014
£million
2013
£million
5.8
-
(2.4)
3.4
-
3.4
3.4
4.3
1.5
-
5.8
-
5.8
5.8
2014
£million
2013
£million
143,917,617 ordinary shares of 10p each (2013: 129,053,768 ordinary shares of 10p each)
14.4
12.9
Awards were granted during the year as indicated in note 27 to the Annual Report and Financial Statements of the Group.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 160
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES TO ThE COMPANy FINANCIAL STATEMENTS
Notes to the Company financial statements continued
O) Reserves
At 1 January 2014
Profit for the financial year (note B)
Shares issued
Dividends paid (note D)
Fair value adjustment
Investment in own shares
Deferred tax on items taken directly to equity
Company shares used to settle share-based payments
Share-based payments
At 31 December 2014
Share
premium
£million
115.0
-
0.3
-
-
-
-
-
Capital
redemption
reserve
£million
Acquisition
reserve
£million
Profit and
loss reserve
£million
0.1
108.5
-
-
-
-
-
-
-
-
72.4
-
-
-
-
-
Total
£million
375.7
33.3
72.7
152.1
33.3
-
(31.5)
(31.5)
0.2
(1.3)
(2.0)
0.7
4.4
0.2
(1.3)
(2.0)
0.7
4.4
115.3
0.1
180.9
155.9
452.2
A gain of £0.2 million (2013: £0.6 million) was recorded in the profit and loss reserve in respect of changes in the fair value of interest rate
hedges.
P) Reconciliation of movement in shareholders’ funds
Profit for the financial year attributable to the members of Interserve Plc
Dividends
Shares issued
Share-based payments
Company shares used to settle share-based payments
Deferred tax on items taken directly to equity
Investment in own shares
Fair value adjustments on hedging
Net increase to shareholders’ funds
Shareholders’ funds at 31 December 2013
Shareholders’ funds at 31 December 2014
Q) Contingent liabilities
£million
33.3
(31.5)
1.8
74.2
4.4
0.7
(2.0)
(1.3)
0.2
78.0
388.6
466.6
At 31 December 2014, there were guarantees given in the ordinary course of business of the Company. The Company has given guarantees
covering bank overdrafts in its subsidiary and associated undertakings. At 31 December 2014, these amounted to £2.2 million (2013:
£2.6 million). The Company has provided a guarantee to the Interserve Pension Scheme for future contributions due from subsidiary
undertakings amounting to £250.0 million (2013: £250.0 million) in respect of the past funding deficit. In addition, contributions will also
be payable in respect of future service benefits.
The Company has given guarantees in respect of borrowing and guarantee facilities made available to joint-venture and associated
undertakings for sums not exceeding £13.7 million (2013: £11.3 million) in respect of borrowings and £171.4 million (2013: £145.2 million)
in respect of guarantees. At 31 December 2014, £0.6 million (2013: £0.3 million) had been utilised in borrowings and £98.1 million (2013:
£89.4 million) in guarantees.
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS PRINCIPAL GROUP UNDERTAKINGS
161
The principal subsidiaries, associated undertakings, jointly-controlled entities and jointly-controlled operations of the Group listed below
are those that, in the opinion of the directors, principally affect the figures shown in the financial statements as at 31 December 2014. A full
list of Group companies will be annexed to the next annual return of Interserve Plc. Except where shown:
(a)
the principal operations of each company are conducted in its country of incorporation or registration;
(b)
(c)
the shareholdings of all subsidiaries relate to ordinary share capital and are equivalent to the percentage of voting rights held by
the Group;
the equity capital of all subsidiaries, associated undertakings, jointly-controlled entities and jointly-controlled operations are held by
subsidiary undertakings of Interserve Plc;
(d)
the accounting reference date is 31 December; and
(e)
the consolidated financial statements include the results for the twelve months to 31 December even if the accounting reference date
is different.
Principal activities
Country of
incorporation or
registration
Group
holding
(A) Principal subsidiaries
Support Services
Adyard Abu Dhabi LLC
ESG Holdings Ltd
First Security (Guards) Ltd1
Engineering, fabrication works, marine repairs and
other related works for the oil and gas industry,
both offshore and onshore
United Arab Emirates
100%
Provision of education, apprenticeship and
skills services
England
100%
Provision of a range of security manpower and
associated support services
England & Wales
100%
Interserve Catering Services Ltd
Provision of catering services
England & Wales
Interserve Centro Especial de Empleo, SL
Supply of labour for Spanish contracts
Spain
Interserve (Defence) Ltd
Property and facilities management services to the
Ministry of Defence and other clients in the defence
sector
England & Wales
100%
100%
100%
Interserve Environmental Services Ltd
Provision of asbestos services relating to surveying,
record management and removal of asbestos materials
England & Wales
100%
Interserve (Facilities Management) Ltd
Facilities management services to a range of clients in
the public and private sectors
England & Wales
100%
Interserve (Facilities Services-Slough) Ltd2 3
Provision of comprehensive management and
maintenance services to Slough Borough Council
England & Wales
100%
Interservefm Ltd4
Holding company
England & Wales
Interserve FS (UK) Ltd
Provision of contract cleaning and related services
England & Wales
Interserve Healthcare Ltd
Provision of healthcare services at home through the
delivery of care packages, as well as the supply of
nurses and care staff to establishments such as NHS
hospital trusts and care homes
England & Wales
100%
100%
100%
Principal subsidiaries, associated undertakings, jointly‑controlled entities and jointly‑controlled operations OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 162
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS PRINCIPAL GROUP UNDERTAKINGS
(A) Principal subsidiaries continued
Support Services continued
Interserve Industrial Services Ltd
Principal activities
Country of
incorporation or
registration
Group
holding
Industrial support services, including thermal
insulation, access scaffolding, engineering construction
and project management
England & Wales
100%
Interserve Integrated Services Ltd
Management and provision of support services to
industrial, commercial and public sectors
England & Wales
100%
Interserve International Equipment Ltd
Rental of plant and machinery used in the
construction industry
Mauritius
85%
Interserve Technical Services Ltd
Provision of mechanical and electrical engineering
services
England & Wales
100%
Interserve Working Futures Ltd
Provision of placement, training and development for
jobseekers and employers
England & Wales
100%
Knightsbridge Guarding Ltd
Provision of manned guarding security services to
office buildings
England & Wales
100%
Landmarc Support Services Ltd2
Provision of management services to the Ministry of
Defence Army Training Estate
England & Wales
51%
MacLellan International Ltd
Facilities management services
England & Wales
Modus FM Ltd
Maintenance and facilities management services
England & Wales
Phoenix Fire Services Ltd
Purple Futures LLP5
Design, supply, installation, maintenance and service
of fire suppression and detection systems
England & Wales
Operation of probation and rehabilitation services
through five CRCs in conjunction with Addaction
Social Enterprises Ltd, Shelter, Third Sector Consortia
Management LLP and People Potential Possibilities
England & Wales
80%
The Oman Construction Company LLC
Contract transport services, pipeline construction and
general maintenance services to the oil and gas industry
Sultanate of Oman
85%
Translimp Contract Services, SA
Supply of labour for Spanish contracts
Spain
100%
Construction
Interserve Construction Ltd
Interserve Engineering Services Ltd
Creation of sustainable solutions for the built
environment and delivery of these built assets and
infrastructure primarily via PFI, frameworks and other
long-term customer alliances
Design, installation and commissioning of mechanical,
electrical and public-health-building engineering
services
England & Wales
100%
England & Wales
100%
Paragon Management UK Ltd
Fitting out and refurbishment of offices and other
buildings
England & Wales
100%
100%
100%
100%
Principal subsidiaries, associated undertakings, jointly‑controlled entities and jointly‑controlled operations continued INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS PRINCIPAL GROUP UNDERTAKINGS
163
Principal activities
Equipment Services
Rapid Metal Developments (Australia) Pty Ltd
Equipment hire and sales
Rapid Metal Developments (NZ) Ltd
Equipment hire and sales
RMD Kwikform (Al Maha) Qatar WLL6
Equipment hire and sales
RMD Kwikform Chile SA
Equipment hire and sales
RMD Kwikform Hong Kong Ltd7
Equipment hire and sales
RMD Kwikform Ltd
Equipment hire and sales
Country of
incorporation or
registration
Group
holding
Australia
New Zealand
Qatar
Chile
Hong Kong SAR
England & Wales
100%
100%
49%
100%
100%
100%
RMD Kwikform Middle East LLC8
Equipment hire and sales
Emirate of Sharjah
49%
RMD Kwikform North America Inc
Equipment hire and sales
USA
100%
RMD Kwikform Oman LLC
Equipment hire and sales
Sultanate of Oman
70%
RMD Kwikform Philippines, Inc7
Equipment hire and sales
RMD Kwikform Saudi Arabia LLC
Equipment hire and sales
RMD Kwikform (South Africa)
(Proprietary) Ltd
Group Services
Equipment hire and sales
Philippines
Kingdom of
Saudi Arabia
Republic of
South Africa
Interserve Finance Ltd
Group funding entity
England & Wales
Interserve Finance (Switzerland) Sàrl
Intra-group financing company
Switzerland
Interserve Group Holdings Ltd7
Holding company
Interserve Holdings Ltd
Holding company
Interserve Insurance Company Ltd
Insurance
Interserve Investments Ltd
Holding company
England & Wales
England & Wales
Guernsey
England & Wales
100%
100%
100%
100%
100%
100%
100%
100%
100%
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 164
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS PRINCIPAL GROUP UNDERTAKINGS
Principal activities
Country of
incorporation or
registration
Issued
share capital
Group
holding
(B) Associated undertakings
Support Services
Khansaheb Group LLC
Madina Group WLL
Facilities management and
maintenance services
United Arab
Emirates
3,000 shares of
1,000 UAE Dirhams
Fabrication, engineering and
maintenance solutions for the oil, gas
and petrochemical industries, both on
and off shore
Qatar
1,000 shares of
1,000 Qatari Riyals
Construction
Douglas OHI LLC
Civil engineering and building
Sultanate of Oman 100,000 shares of
Gulf Contracting Co WLL
Civil engineering, building and
maintenance services
How United Services WLL
Installation, testing and commissioning
of building services; maintenance and
facilities services
Qatar
Qatar
10 Omani Rials
1,000 shares of
1,000 Qatari Riyals
9,000 shares of
1,000 Qatari Riyals
Khansaheb Civil Engineering LLC
Khansaheb Hussain LLC
Civil engineering, building and
maintenance services
Civil engineering, building and
maintenance services
United Arab
Emirates
United Arab
Emirates
11,000 shares of
1,000 UAE Dirhams
1,000 shares of
1,000 UAE Dirhams
49%
49%
49%
49%
49%
45%
49%
Principal activities
Address of principal
place(s) of business
Group
holding
(C) Jointly-controlled entities
Jointly-controlled entities are where strategic and operating decisions of an incorporated joint venture require unanimous consent of the
parties sharing control.
Support Services
PriDE (SERP) Ltd2
Rehab Jobfit LLP
Estate management services under
the Ministry of Defence South East
Regional Prime Contract
Employment-related support services
to the Department for Work and
Pensions
Aldershot, Hampshire, England
Twyford, Reading, England
Sussex Estates and Facilities LLP9
Provision of facilities management
services to the University of Sussex
Falmer, East Sussex, England
50%
49%
35%
Principal subsidiaries, associated undertakings, jointly‑controlled entities and jointly‑controlled operations continued
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS PRINCIPAL GROUP UNDERTAKINGS
165
Principal activities
Address of principal
place(s) of business
Investments
Addiewell Prison Ltd2
Design, build, finance and operation
of Addiewell Prison
HMP Addiewell, West Lothian, Scotland
Alder Hey (Special Purpose Vehicle)
Ltd2
Design, build, finance and operation
of a Children’s Health Park at
Alder Hey Hospital, Liverpool
Alder Hey Hospital, Liverpool, England
Group
holding
33%
20%
Edinburgh Haymarket Developments
Ltd
Finance, construction and
development of retail, hotel, car
parking and office accommodation
The Haymarket, Edinburgh, Scotland
50%
Resource Recovery Solutions
(Derbyshire) Ltd2
Construction and operation of a new
waste treatment facility in Derby
Derby, England
50%
Heriot-Watt Research Park, Edinburgh, Scotland 50%
Seacole National Centre Ltd
West Yorkshire PFI Operational
Training & Accommodation Ltd2
Construction and maintenance of a
new National Centre of Excellence
for the Scottish National Blood
Transfusion Service
Design, build, finance and operation
of two new divisional headquarters,
custody suites and a specialist
operational training facility for the
West Yorkshire Police Authority
Elland Road, Leeds, England;
Havertop Lane, Normanton, Wakefield,
England;
Carr Gate, Wakefield, England
(D) Jointly-controlled operations
Construction
KMI Plus Water Joint Venture
KMI Water Joint Venture
Water project framework for
United Utilities
Water project framework for
United Utilities
Wigan, Lancashire, England
Wigan, Lancashire, England
50%
31%
33%
Notes:
1 Issued share capital consists of 200 ‘A’ deferred shares of 50 pence each, 99,800 ‘B’ deferred shares of 50 pence each and 200 ordinary
shares of 1 pence each.
2 Accounting reference date is 31 March.
3 Issued share capital consists of 100 ordinary shares of £1 each and 100 deferred shares of £1 each.
4 Issued share capital consists of 15,000,000 redeemable ordinary shares of £1 each, 6,158 ordinary shares of 1 US cent each and 2 deferred
shares of £1 each.
5 Accounting reference date is 31 October.
6 The Group has the right to appoint and remove the General Manager giving it control over the strategic and operating decisions of the
company. It is therefore consolidated as a subsidiary undertaking. Issued share capital consists of 200 shares of 1,000 Qatari Riyals each.
7 Shareholding held directly by Interserve Plc.
8 The Group has the right to appoint the Manager and thus exercises control over the strategic and operating decisions of the company. It is
therefore consolidated as a subsidiary undertaking. Issued share capital consists of 500 shares of 1,000 UAE Dirhams each.
9 Accounting reference date is 31 July.
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 166
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS FIVE-YEAR ANALYSIS
FIVE-YEAR ANALYSIS
Five-year analysis
(unaudited)
Revenue including share of associates and joint ventures
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
Investments
Group Services
Inter-segment elimination
Consolidated revenue
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
Group Services
Inter-segment elimination
Headline profit
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
Investments
Group Services
Total operating profit
Investment revenue
Finance costs
Earnings per share, pence
Basic EPS
Headline EPS
Dividend per share, pence
Interim
Final
2014
£million
2013
£million
2012
£million
2011
£million
2010
£million
1,786.0
157.2
1,292.5
100.5
1,215.4
31.3
1,069.6
25.9
1,098.7
23.7
1,943.2
1,393.0
1,246.7
1,095.5
1,122.4
970.7
207.9
802.2
215.9
1,178.6
1,018.1
195.5
38.6
8.1
(58.7)
169.6
34.5
7.1
(40.4)
737.2
201.6
938.8
167.5
81.0
-
(64.4)
731.1
223.7
954.8
154.3
160.2
-
(45.2)
754.3
239.2
993.5
139.9
106.6
-
(47.0)
3,305.3
2,581.9
2,369.6
2,319.6
2,315.4
1,679.9
117.5
1,196.6
57.5
1,797.4
1,254.1
1,118.1
-
1,118.1
1,007.3
-
1,024.8
-
1,007.3
1,024.8
970.7
-
970.7
195.5
8.1
(58.7)
802.2
-
802.2
169.6
7.1
(40.4)
737.2
-
737.2
167.5
-
(64.4)
731.1
-
731.1
154.3
-
(45.2)
754.3
-
754.3
139.9
-
(47.0)
2,913.0
2,192.6
1,958.4
1,847.5
1,872.0
81.4
7.4
88.8
15.4
10.8
26.2
26.6
0.8
(25.2)
117.2
5.0
(16.0)
106.2
56.0
4.1
60.1
14.7
13.1
27.8
20.1
0.8
(22.1)
86.7
3.6
(9.2)
81.1
44.3
3.7
48.0
14.6
14.3
28.9
16.0
6.6
(21.1)
78.4
8.4
(11.5)
75.3
32.2
58.8
39.1
47.7
130.0
45.3
7.5
15.5
6.8
14.7
6.4
14.1
36.4
3.6
40.0
18.0
16.6
34.6
13.6
6.0
(22.9)
71.3
5.7
(9.7)
67.3
42.7
46.1
6.0
13.0
25.1
3.4
28.5
24.5
22.8
47.3
14.4
4.2
(22.2)
72.2
3.8
(10.8)
65.2
37.0
40.3
5.6
12.4
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS FIVE-YEAR ANALYSIS
167167
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT2014 £million2013 £million2012 £million2011 £million2010 £millionBalance sheetIntangible assets524.5286.6 265.8 221.2 228.3 Property, plant and equipment195.3155.9 137.8 139.7 149.0 Interests in joint ventures42.720.6 7.6 103.3 60.1 Interests in associated undertakings77.2 73.9 76.6 77.2 61.7 Deferred tax asset-21.0 33.5 23.4 16.5 Non-current assets839.7558.0 521.3 564.8 515.6 Assets held for sale- - 51.2 - - Inventories48.630.7 24.6 22.2 19.6 Trade and other receivables679.4486.1 432.0 380.1 386.1 Cash and deposits82.179.7 76.8 46.1 67.6 Bank overdrafts and loans(5.5)(27.4)(19.8)(19.3)(35.2)Trade and other payables(749.7)(597.6)(559.7)(498.6)(496.7)Short-term provisions(29.2)(18.1)(24.2)(28.7)(20.2)Net current assets/(liabilities)25.7(46.6)(19.1)(98.2)(78.8)Bank loans(344.7)(90.0)(30.0)(70.0)(85.0)Trade and other payables(14.8)(13.5)(13.2)(13.3)(15.8)Long-term provisions(19.5)(29.9)(27.1)(26.3)(26.9)Deferred tax liability(2.0)----Retirement benefit obligation(4.8)(7.7)(101.1)(56.2)(51.5)Non-current liablilites(385.8)(141.1)(171.4)(165.8)(179.2)Net assets479.6370.3 330.8 300.8 257.6 Cash flowOperating cash flows before movements in working capital94.574.7 39.5 35.6 31.6 Movement in working capital(53.3)(19.7)0.2 9.5 (21.5)Changes in hire fleet(30.3)(11.8)(6.0)3.0 15.1 Taxes paid(10.2)(5.7)(10.7)(3.2)(6.3)Net cash from operating activities0.737.5 23.0 44.9 18.9 Acquisitions and investments (253.8)(59.9)63.0 (19.3)(32.6)Net capital expenditure - non-hire fleet(24.0)(21.9)(8.9)(8.5)(5.6)Dividends from joint ventures and associates17.8 13.7 19.8 20.6 32.1 Interest received4.7 3.5 8.4 4.4 3.8 Net cash used in investing activities(255.3)(64.6)82.3 (2.8)(2.3)Interest paid(16.0)(7.8)(9.6)(6.7)(6.4)Dividends paid(34.4)(29.1)(27.0)(25.5)(24.8)Other (including share issues)73.9 0.6 1.5 - (2.2)Net cash used in financing activities excluding debt23.5(36.3)(35.1)(32.2)(33.4)Effect of foreign exchange0.8(1.0)(0.2)(0.3)0.3 Movement in net debt(230.3)(64.4)70.0 9.6 (16.5)Closing net cash/(debt)(268.9)(38.6)25.8 (44.2)(53.8)FIVE-YEAR ANALYSIS 168
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS SHAREHOLDER INFORMATION
Financial calendar 2015
Final results announcement for the year ended 31 December 2014
Publication of Annual Report and Financial Statements
Annual General Meeting
Final dividend payable (record date 7 April 2015)
Half-year results announcement for the six months ended 30 June 2015
Publication of Half-Year Report
Interim dividend payable
26 February 2015
30 March 2015
12 May 2015
20 May 2015
12 August 2015
Late August 2015
October 2015
The Company will keep under review the appropriateness of issuing other trading updates to the market during the course of the year.
Share price
As at 31 December 2014
Lowest for the year ended 31 December 2014
Highest for year ended 31 December 2014
The current price of the Company’s shares is available on the Company’s website at www.interserve.com.
Analysis of registered shareholdings
Notifiable interests
Banks, institutions and nominees
Private shareholders
Total as at 26 February 2015
Shareholder services
Holders
Shares
Number
3
1,197
3,309
4,509
%
0.07
26.54
73.39
100.00
Number
36,479,931
98,527,021
8,910,665
143,917,617
557.5p
531.5p
745.0p
%
25.35
68.46
6.19
100.00
Capita is our registrar and they offer many services to make managing your shareholding easier and more efficient:
(a) Share Portal
The Share Portal is a secure online site where you can manage your shareholding quickly and easily. You can:
• View your holding and get an indicative valuation
• Change your address
• Elect to receive shareholder communications by email rather than by post
• View your dividend payment history
• Make dividend payment choices
• Register your proxy voting instruction
Just visit www.capitashareportal.com. All you need is your investor code, which can be found on your share certificate or your dividend tax
voucher.
(b) Customer Support Centre
Alternatively, you can contact Capita’s Customer Support Centre which is available to answer any queries you have in relation to your
shareholding:
shareholderenquiries@capita.co.uk
By email:
By phone: +44 (0)20 8639 3399 (lines are open 9.00am to 5.30pm, Monday to Friday)
By post:
Shareholder Administration, Capita Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU
Shareholder information
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS SHAREHOLDER INFORMATION
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OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT(c) Sign up to electronic communicationsBy signing up to receive your shareholder communications by email, you will help us to save paper and receive your shareholder information quickly and securely. Registering for electronic communications is very straightforward. Just visit www.capitashareportal.com. All you need is your investor code, which can be found on your share certificate or your dividend tax voucher.(d) Dividend payment options• Re-invest your dividends Capita’s Dividend Re-investment Plan is a convenient way to build up your shareholding by using your cash dividends to purchase additional shares. The plan is provided by Capita IRG Trustees Limited which is authorised and regulated by the Financial Conduct Authority. For more information and an application pack please call +44 (0)20 8639 3402 (lines are open from 9am to 5.30pm, Monday to Friday). Alternatively you can email shares@capita.co.uk or log on to www.capitashareportal.com (click on ‘Reinvest your dividends’ and follow the onscreen instructions).The value of shares and income from them can fall as well as rise and you may not recover the amount of money you invest. Past performance should not be seen as indicative of future performance. This arrangement should be considered as part of a diversified portfolio.• Elect to have your dividends paid direct into your bank account This means that:• your dividend reaches your bank account on the payment date;• it is more secure – cheques can sometimes get lost in the post; and• you don’t have the inconvenience of depositing a cheque and waiting for it to clear.You can sign up for this service by logging on to www.capitashareportal.com (click on ‘Dividends’ and follow the onscreen instructions) or by contacting the Customer Support Centre.• Choose to receive your next dividend in your local currency Capita has partnered with Deutsche Bank to provide you with a service that will convert your sterling dividends into your local currency at a competitive rate. You can choose to receive payment directly into your bank account, or alternatively, you can be sent a currency draft. For further information contact Capita on +44 (0)20 8639 3405 (lines are open 9.00am to 5.30pm, Monday to Friday) or by email – ips@capita.co.uk. (e) Buy and sell sharesA quick and easy way to buy and sell shares is provided by Capita Asset Services. There is no need to pre-register and there are no complicated application forms to fill in. You can also access a wealth of stock market news and information free of charge. For further information on this service, or to buy and sell shares, visit www.capitadeal.com or call +44 (0)20 3367 2686 (lines are open 8.00am to 4.30pm, Monday to Friday).This is not a recommendation to buy and sell shares and this service may not be suitable for all shareholders. The price of shares can go down as well as up and you are not guaranteed to get back the amount you originally invested. Terms, conditions and risks apply. Capita Asset Services is a trading name of Capita IRG Trustees Limited which is authorised and regulated by the Financial Conduct Authority. This service is only available to private shareholders resident in the EEA, the Channel Islands and the Isle of Man.Share registration and associated services are provided by Capita Registrars Limited (registered in England, No.2605568). Regulated services are provided by Capita IRG Trustees Limited (registered in England, No.2729260). The registered office of each of these companies is The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.Donate your shares to charityIf you have only a small number of shares which are uneconomical to sell, you may wish to donate them to charity free of charge through ShareGift (Registered Charity 1052686). Find out more at www.sharegift.org.uk or by telephoning +44 (0)20 7930 3737. 170
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS SHAREHOLDER INFORMATION
Beneficial owners of shares with ‘‘information rights’’
Please note that beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights
under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to
the Company’s Registrar, Capita Asset Services, or to the Company directly.
Capital gains tax/capitalisation changes
The market value of the Company’s shares as at 31 March 1982 for the purpose of capital gains tax was 16.67p per share. This has been adjusted
to take account of all capitalisation changes to 26 February 2015, as indicated below, other than the rights issue in 1986 (one new share for
every three existing shares at 140p per share).
22 June 1982
-
sub-division of each £1 share into four shares of 25p; bonus issue of two new 25p shares for each £1 share held;
10 June 1983
- bonus issue of one new share of 25p for every four shares held; and
31 October 1997
-
share split of five new 10p shares for every two 25p shares held.
Beware of share fraud
in recent years many companies have become aware that their shareholders have received unsolicited telephone calls or correspondence
concerning investment matters. These are typically from overseas-based ‘‘brokers’’ who target UK shareholders offering to sell them what
often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as “boiler rooms”. The
“brokers” can be very persistent and extremely persuasive. Shareholders are advised to be very wary of any unsolicited advice, offers to buy
shares at a discount or offers of free reports into the Company.
You can find out more information on how share fraud works and how to avoid it on the Financial Conduct Authority website at
www.fca.org.uk/scams. You can also call the FCA Consumer Helpline on 0800 111 6768.
Details of all share dealing facilities that the Company endorses are detailed above.
Please note that any electronic address provided in this document to communicate with the Company may not be used for any purpose other
than that expressly stated.
Shareholder information
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES
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Notes
OVERVIEW GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT 172
INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS NOTES
Notes
Notes INTERSERVE ANNUAL REPORT 2014 OVERVIEW DELIVERING SHAREHOLDER VALUE
DELIVERING SHAREHOLDER VALUE
TO REDEFINE THE FUTURE FOR PEOPLE AND PLACES
• TAKE PRIDE IN WHAT YOU DO
• EVERYONE HAS A VOICE
• BRING BETTER TO LIFE
• DO THE RIGHT THING
Create places that
benefit people
Deliver public service
in the public interest
Build more skills and
more opportunities
Generate a positive environmental
impact
Achieve
sustainable growth
OUR STRATEGY
OPERATIONS
AT A GLANCE
OUR BUSINESS
MODEL
OUR MODEL
IN ACTION
WHERE WE
OPERATE
PROTECTING OUR
BUSINESS
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SOCIAL VALUE MAPPING
BUILDING QATAR’S BIGGEST
MALL AT DOHA FESTIVAL CITY
DLR CONTRACT ADDS TO
TRANSPORT SECTOR GROWTH
BUILDING ADVANCED MEDICAL
AND TESTING FACILITIES
PARAGON FITS OUT MARKEL’S
‘WALKIE TALKIE’ LONDON OFFICE
COMMUNITY
CENTRE
READ THE STORY ON PAGE
34
READ THE STORY ON PAGE
26
READ THE STORY ON PAGE
22
READ THE STORY ON PAGE
25
READ THE STORY ON PAGE
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This Annual Report was printed in the UK by CPI Colour Limited,
using vegetable based inks. The printer and paper mill are
accredited with ISO 14001 Environmental management Systems
and are Forest Stewardship Council chain-of-custody registered.
The paper is 100% recycled, produced from de-inked post consumer
waste. The silk laminate used on the outer cover is bio-degradable.
®
Designed and produced by
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REGISTERED OFFICE
Interserve Plc
Interserve House Ruscombe Park Twyford
Reading Berkshire RG10 9JU
T. +44 (0)118 932 0123 F. +44 (0)118 932 0206
E. info@interserve.com
www.interserve.com
ingenuity at work
ANNUAL REPORT 2014
INTERSERVE ANNUAL REPORT 2014 OVERVIEW 2014 IN SUMMARY
OVERVIEW
2014 IN SUMMARY
INTRODUCTION
“ 2014 WAS A LANDMARK YEAR FOR THE
BUSINESS IN WHICH WE ADVANCED
OUR STRATEGY AND DELIVERED
35 PER CENT OPERATING PROFIT
GROWTH DESPITE CHALLENGING
CONDITIONS IN MANY OF OUR
MARKETS. WE MADE TWO STRATEGIC
ACQUISITIONS (INITIAL FACILITIES AND
PERFORMANCE
OPERATIONAL REVIEW
ESG), EACH OF WHICH DEEPENED OUR
PRESENCE IN CORE OUTSOURCING
MARKETS. OUR FOCUS ON PROVIDING
HIGH QUALITY SERVICES TO BOTH NEW
AND EXISTING CLIENTS RESULTED IN
STRONG WORK WINNING DURING THE
YEAR, WITH OUR FUTURE WORKLOAD
RISING 26 PER CENT TO £8.1 BILLION.”
ADRIAN RINGROSE CHIEF EXECUTIVE
CONTENTS
OVERVIEW
HIGHLIGHTS
DELIVERING SHAREHOLDER VALUE
CHAIRMAN’S STATEMENT
STRATEGIC REPORT
OUR STRATEGY
OPERATIONS AT A GLANCE
OUR BUSINESS MODEL
OUR MODEL IN ACTION
WHERE WE OPERATE
PROTECTING OUR BUSINESS
PRINCIPAL RISKS AND UNCERTAINTIES
SUSTAINABILITY REVIEW
FINANCIAL REVIEW
GOVERNANCE
DIRECTORS
ADVISERS
DIRECTORS’ REPORT
CORPORATE GOVERNANCE
AUDIT COMMITTEE REPORT
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ RESPONSIBILITY STATEMENT 102
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
COMPANY FINANCIAL STATEMENTS
NOTES TO THE COMPANY
FINANCIAL STATEMENTS
PRINCIPAL GROUP UNDERTAKINGS
FIVE-YEAR ANALYSIS
SHAREHOLDER INFORMATION
01
01
02
04
06
08
10
12
14
18
20
30
32
42
48
51
52
60
68
74
103
108
114
153
154
161
166
168
FOR FURTHER
INVESTOR INFORMATION:
www.interserve.com/investors
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